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A Corrupted State: Wall Street on Trial breaks new ground by deconstructing the systemic flaws inherent in the model itself. It reveals that the 'rotten apple'.
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Eisinger describes the demise of Arthur Andersen as a turning point. With plenty of encouragement from high-end lobbyists, a new orthodoxy soon took hold that some corporations were so colossal—and so instrumental to the national economy—that even filing criminal charges against them would be reckless. In , Eric Holder, then the Attorney General, acknowledged that decades of deregulation and mergers had left the U.

Prosecutors came to rely instead on a type of deal, known as a deferred-prosecution agreement, in which the company would acknowledge wrongdoing, pay a fine, and pledge to improve its corporate culture. From to , the Department of Justice entered into more than four hundred of these arrangements. Having spent a trillion dollars to bail out the banks in and , the federal government may have been loath to jeopardize the fortunes of those banks by prosecuting them just a few years later.

But fears of collateral consequences also inhibited the administration of justice in more run-of-the-mill instances of criminal money laundering.

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Some officials in the Department of Justice wanted to indict HSBC, according to e-mails unearthed by a subsequent congressional investigation. When James Comey took over as the U.

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Attorney for the Southern District of New York, in , Eisinger tells us, he summoned his young prosecutors for a pep talk. For graduates of top law schools, a job as a federal prosecutor is a brass ring, and the Southern District of New York, which has jurisdiction over Wall Street, is the most selective office of them all. But Comey, with his trademark altar-boy probity, had a surprise for them. Most people who go to law school are risk-averse types. Once they become prosecutors, they are invested with extraordinary powers.

In a world of limited public resources and unlimited wrongdoing, prosecutors make decisions every day about who should be charged and tried, who should be allowed to plead, and who should be let go. This is the front line of criminal justice, and decisions are made unilaterally, with no review by a judge. You might suppose that the glory of convicting a blue-chip C. But taking such a case to trial entails serious risk. In contemporary corporations, the decision-making process is so diffuse that it can be difficult to establish criminal culpability beyond a reasonable doubt.

In the United Brands case, Eli Black directly authorized the bribe, but these days the precise author of corporate wrongdoing is seldom so clear. Even after a provision in the Sarbanes-Oxley Act, of , began requiring C. How do you explicate such transactions—and prove criminal intent—to a jury?

Even with an airtight case, going to trial is always a gamble. Lose a white-collar criminal trial and you become a symbol of prosecutorial overreach. You might even set back the cause of corporate accountability. The deferred-prosecution agreement, by contrast, is a sure thing.

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Companies will happily enter into such an agreement, and even pay an enormous fine, if it means avoiding prosecution. But the enormous settlements may or may not reflect that they could actually prove the case. Many agreements acknowledge criminal conduct by the corporation but do not name a single executive or officer who was responsible. White-collar crime is not the only area in which prosecutors show reluctance to risk a trial. By the time Comey issued his Chickenshit Club admonition, a deeper shift in the administration of justice was already under way.

Faced with the challenges of entrusting any criminal case to a jury, prosecutors were increasingly skipping trial altogether, negotiating a plea bargain instead. Defendants can be risk-averse, too. Offered the choice between, say, pleading guilty and serving three to five years, or going to trial and serving ten if convicted, many opt for the former.

But, as with corporate deferred-prosecution agreements, these arrangements grant prosecutors a victory without testing their evidence in court. My colleague and friend, Bronagh Hinds, was an exceptionally patient sounding board. Her enthusiasm and words of wisdom are gratefully acknowledged. Trevor Newsom and Sir George Bain have been exceptionally supportive of the need to emphasize the governance component of corporate governance. Transparency International has been very supportive of the project from the beginning. I am particularly grateful to Jeremy Pope for his unwavering belief in the need to focus on systems, not actors.

At Wiley, Rachel Wilkie confidently broke all production timescales to put the book into print in record time. As an editor, she has proved invaluable.

Bruce Shuttlewood at Originator was a pleasure to work with, polishing the text and inserting late additions with professional ease. As every author will testify, professional support alone is not enough to ensure the transformation from idea to completed project. Friends and family once again provided me with unrivalled encouragement. Michael Scallon provided an endless supply of anecdotes and an unforgettable time in New York, awakening old memories and providing wise counsel. Peter Blake instilled a fascination for the world of finance that has paid dividends.

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Both Peter and Mary Blake provided encouragement at every juncture. But this book would not have been possible at all without the forbearance of my long-suffering wife, Darina. Yet again, she had to put up with my shouts from the study that I would be finished shortly. That we both knew that it would be hours, days, weeks and months before normal life resumed is testament to her patience.

To her, and my beautiful children, Jack and Elise, I owe the greatest debt. Introduction: The corruption cycle The malaise in the capital markets is not merely the result of venal personalities — although there are many in this story — but also of a system that allows for full expression of those characteristics. Looking beyond the undoubted greed exhibited by corrupted actors, the book critically examines the structural imbalances within the contemporary American regulatory framework, the reasons for the failure of federal oversight and the long-term political implications of the erosion of confidence.

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  • If, as argued, the corruption of the market — and the political structure that underpins it — has systemic flaws, then the corrective action needed to restore confidence necessitates a far more radical approach than that conceived or articulated by Republican and Democrat alike. As the list of those implicated moves out of the boardroom in concentric circles to indict the operation of the entire business and political model, this task has become imperative.

    Unless the extent of the crisis is identified, codified and explained, the search for solutions will be compromised from the start. In the absence of paradigmatic change, while optical illusion will provide the appearance of reform, the underlying fundamentals will remain intact, awaiting another bull market to unleash a further speculative orgy with equally dangerous consequences. Across the world the lesson is clear: just as too much governmental interference leads to dysfunctional economies, left to its own devices the market is incapable of adequate self-regulation.

    The selling of state assets in much of Europe throughout the s and early s spawned a privatization wave that has failed to provide compelling evidence that the market alone offers better services than public utilities. Deregulation and decentralization in former planned economies, particularly Russia, without an adequate institutional framework has resulted in a skewed market, which served merely to legitimize organized crime. The corporatization of communism in China has also failed to improve the efficiency of former state-owned industries, in large measure because of a failure to allow market forces to work because wider societal needs preclude the allowance of bankruptcy.

    While the triggers for the collapse in each jurisdiction differ, a common failing has been an imbalance in the wider corporate governance structure. Now, the exposure of that shortcoming has migrated to the United States with devastating effect. Off-balance sheet loans, accounting irregularities and deliberate misleading of investors were dysfunctions not simply confined to emerging markets.

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    The most advanced financial system in the world is not, in itself, an antidote to the corrosive effects of deregulation ceded on terms conducive to the corporate interests that controlled it. Centred on an excessive, and ultimately misguided, belief in the efficacy of the market, the economic and political roots of the crisis lie in the deregulation policies adopted in the Reagan era.

    In the United States, indicative of how far the power relationships had changed was the decision to repeal Depression era legislation without simultaneously updating the regulatory framework to take due cognizance of the newly designed complex financial architecture. The traditional banking sector sought to enhance its position by tying commercial lending to the utilization of its nascent investment services; by contrast the traditional investment banks sought to replace commercial lending with debt financed by equity. Both methods carried inherent risks of abuse.