Show Me the Money!

To be sure, the President expressed his ire at how "irresponsible" the moguls were in granting these bonuses, and averred that "now is not the time" for payouts of such largesse. But did he call on them to return the money either to the shareholders or the government? Did he express his intent to empower appropriate Federal officials to recover the money or, absent the statutory existence of such governmental powers, call for suitable legislation to cure the problem? The answer is no.

This is hardly surprising. It has not been uncommon in American history for political leaders to denounce the malfeasance of the commanding heights of finance and then shrink from the consequences. Theodore Roosevelt excoriated malefactors of great wealth and burnished his image as a champion of the little guy (while at the same time he was secure in the knowledge that his friends at the Morgan bank would not take such rodomontade too seriously). His cousin Franklin also vowed to chase the money changers from the temple, although nothing concrete came of that. Other denouncers of plutocrats like William Jennings Bryan were frankly understood to be gadflies with no chance of accomplishing anything.

Such bombast, hollow as it has been, at least demonstrated a consciousness that abuse of public trust by our domestic plutocracy is a political problem. But during the last three decades, even such pro forma utterances as FDR's are few in number. Far more common has been a chorus of paeans by Bush pere et fils, Gingrich, Armey, DeLay, Boehner et al., to the universal genius of the American entrepreneur by dint of whose inspiration we are all so prosperous.

Even now, as the dominoes tumble from Wall Street to Wasilla, the voices of the Horatio Alger myth are not completely stilled. Rudy Giuliani, ever eager to be of assistance to the money center institutions of his home town, declared that the taxpayer-subsidized bonuses of Wall Street are necessary because the purchase of luxury goods trickles down to the retail economy of New York! [1]

Notwithstanding the cheery malevolence of Giuliani and his fellow travelers, the rapidly souring public mood suggests that this sort of rhetorical façade cannot be maintained forever. The Obama broadside, loaded with blank ammunition though it may have been, indicates a turning point.

Some have suggested that that financial institutions participating in the Troubled Asset Relief Program (TARP) bailout should be required to write so-called "clawback" provisions that either set aside a portion of compensation budgeted for bonus payments or revoke the payment entirely. Others point out that the statute creating TARP already authorized the Secretary of the Treasury to establish regulations that would recoup unconscionable bonuses (the fact that nothing happened suggests that former Secretary of the Treasury Paulson was either negligent or malfeasant in his treatment of his Wall Street friends — an unsurprising revelation). [2]

One other possibility is the invocation of disgorgement as a civil remedy, i.e., the injured parties (taxpayers, shareholders, et al.) may force the Wall Street malefactors through court action to disgorge, or pay back with interest, their ill-gotten gains. This method has its merits, but it must be pursued in court by a party with standing to sue.

A key consideration in applying either regulation or civil action is the factor of time: the regulations must be written (and presumably get a tacit sign-off from glacial Congress), and civil actions take time to be completed. In the latter case we may also be sure that the executives of the targeted institutions will use further tranches of the shareholders' money to defend themselves against the very shareholders whose wrongfully diminished assets were the cause of the civil action in the first place. [3] In either case, delay will result in further dissipation of the $18.4 billion, either in the form of yachts, Maybach automobiles and the like, or in the transfer of the funds to safe havens like Liechtenstein.

Fortunately, a remedy lies at hand which does not require laborious and time-consuming regulation writing, log-rolling with Congressional committees, or the deliberate speed of the civil suit process. The Racketeer Influenced and Corrupt Organizations Act (RICO, 18 U.S.C. § 1961). Adopted in 1970 primarily to fight ongoing criminal conspiracies such as the Mafia, RICO would seem ideally suited to obtain restitution from criminals who use computerized trading models and complex transactions [4] rather than a .45 to fleece the public.

Under the RICO statute, a target may have his funds "arrested," as if the cold cash were an animate person. There are numerous instances of perfectly innocent citizens who found the need, for a variety of reasons, to carry a large sum of cash, but who ran afoul of RICO (not to mention various drug and terrorist statutes) at an airport or some other venue, and had their cash confiscated. Thus it fell to the target to litigate to have his money returned.

Applying RICO to Wall Street would not be without precedent. Michael Milken was indicted pursuant to the RICO statute, and his employer, Drexel Burnham, was threatened with similar treatment if it did not at least plead no contest to lesser offenses.

If President Obama wishes to prove that his words were not mere rhetorical flummery, he and the FBI have the tools to bring low the exalted, provide restitution both financial and moral to the public, and set a deterrent example against future misdeeds.


* Werther is the pen name of a Northern Virginia-based defense analyst.

[1] CNN.

[2] Bloomberg.

[3] It should also be understood that it has become more difficult to lodge a shareholder suit against company executives because in 1995 Congress passed (over then-President Clinton's veto) the Securities Litigation Reform Act, a little-noted but very significant milestone on the road to the present kleptocracy that is Wall Street. It was one element of Newt Gingrich's so-called Contract with America.

[4] Just as the thousands of movie and TV dramas are said to boil down to seven basic plots, financial fraud, in our opinion, reduces to just two fundamental categories: the pyramid or Ponzi scheme, whereby earlier investors are paid off by newer investors (think Bernard Madoff); and the complex transaction, whereby an alleged investment vehicle is sliced, diced, and abstracted to the second, third, or nth degree, sold through intermediaries, subtracted from the balance sheet, and generally treated in a fashion that makes it impossible for shareholders and regulators to follow. Some frauds are composed of a combination of the two methods.