Double Standards Galore

I happened to be flying on American Airlines the morning after the company declared bankruptcy. Exactly nothing bad happened to my flight. Nobody passed the hat to buy aviation fuel. The flight attendants offered the same dismal snacks. It was business as usual.

American will get to stiff its creditors, its employees, its pensioners, and sail happily onward, not even required to replace its managers. Chapter 11 filings are standard operating procedure when necessary in corporate America. In its full-page ads promising no disruption of service, American managed to avoid even the word "bankruptcy."

Meanwhile, millions of underwater homeowners are denied the protections of bankruptcy laws. Like American Airlines, they would love to get out from under crushing debts and begin again. But the law is much tougher on them.

If only homeowners were airlines.

Welcome to the age of the double standard.

After more than a decade of business lobbying, in 2005 bankruptcy laws were revised to tilt against consumers. The financial lobby contended that the bankruptcy option was leading consumers to abuse credit cards. No sooner was the law passed than banks redoubled their efforts to peddle high-interest rate credit cards and sub-prime mortgages to people with bad credit ratings.

Want another one? In late November, the parent company of Massey Energy, whose extreme negligence killed 29 miners in West Virginia, agreed to pay a $209 million fine that includes damages to families, but no personal penalties for executives.

Meanwhile, more than 200,000 small time drug users who didn’t kill anybody are doing hard prison time.

In the trial, 18 top Massey executives took the Fifth Amendment. Astonishingly, the mine safety act classifies even negligent safety violations that cause industrial homicide as misdemeanors. You can imagine what kind of political influence it took to get that law.

Though it hasn’t been widely reported, a federal grand jury is still sitting; Massey’s director of security at the Upper Big Branch Mine, Hughie Elbert Stover, has been convicted of lying to the FBI, though sentencing is being postponed until February, presumably to encourage the man to implicate higher ups.

In principle, criminal charges against Massey senior executives are still possible. But that will take far more prosecutorial nerve than we’ve seen lately. Keep an eye on that grand jury to see if any more criminal charges are filed. Think of it as the canary in the coal mine, so to speak

Or still another one: US District Judge Jed Rakoff recently refused to approve a proposed settlement by the Securities and Exchange Commission (SEC) with Citigroup. Citi created securities backed by sub-prime loans, expressly in order to bet against them, while assuring purchasers that the investments were sound.

The SEC negotiated a civil fine of $285 million, with no admission of wrongdoing. Instead of top executives facing criminal charges, Citi shareholders take the loss. Judge Rakoff called the settlement “neither fair, not adequate, nor in the public interest.”

But the SEC has appealed that ruling. The SEC and the Justice Department have little appetite for personal criminal prosecution of financial felons. So a revised settlement could conceivably cost Citi more money, but nobody will do time. Unless of course they were also caught shoplifting.

The SEC, however, has mounted civil suits against the former presidents of Fannie Mae and Freddie Mac for allegedly misleading investors, while not getting personal with any of the top people at the Wall Street banks that actually crashed the economy with wildly fraudulent subprime deceptions. That’s just perfect, for it comports with the Wall Street storyline that Fannie and Freddie did it. In fact, despite some wrongdoing, Fannie and Freddie were very late to the party. Subprime securitization was invented and perfected by the big banks.

One more: Former US senator and New Jersey Governor Jon Corzine used customer money as collateral for highly leveraged bets that his company, MF Global, made on shaky European sovereign bonds. When the bets went bad, hundreds of millions in customer money went missing.

As a Senate hearing last Tuesday revealed, this use of collateral was legal as long as certain limits were observed. The Commodity Futures Trading Commission last summer tried to make the gambit illegal, but lobbying from Corzine and others kept it legal. Belatedly, after the harm was done, the Commission last week voted 5-0 to ban the practice.

Corzine could still be prosecuted under the securities laws for failing to disclose serious risks of loss. But typically the Justice Department goes after one-off con-artists like Bernard Madoff, rather than prosecuting financiers whose scams are all too mainstream.

Considering these stories, you can appreciate why the Occupy theme of the one percent versus the 99 percent has such resonance. It’s one standard for big guys, another for everyone else—because the imbalance in economic power translates into unbalanced political influence, to rig the rules.

The old English rhyme was never truer than today:

The law locks the man or woman
Who steals the goose from off the common
But leaves the greater villain loose
Who steals the common from the goose.

(Editor's note: A shorter version of this piece ran in the Boston Globe.)

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