Forget Al Capone — Today’s Racketeers are on Wall Street

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This post first appeared in Too Much.

What crimes did Al Capone, the notorious 1920s crime boss, have his henchmen commit? Did Capone’s thugs go around robbing convenience stores? Did they burglarize homes? Or lurk in the shadows and mug innocent passersby?

None of the above. Capone and his fellow kingpins of “organized crime” left high-risk, low-return illegality to the lowlife. Kingpins like Capone ran rackets instead. They sold “protection.” They loan-sharked. Most lucratively of all, they bootlegged outlawed alcohol.

Rackets like these guaranteed returns both steady and steep. Capone at one point was clearing $100,000 a week.

Racketeering, of course, is still going strong. But the getup of our contemporary racketeers has changed somewhat. Our most highly compensated racketeers today don’t wear fedoras. They fill power suits. Our top racketeers these days don’t run from the law. They run Wall Street.

Most of us imbibed our first inkling of this Wall Street racketeering after the economy melted down in 2008.

We soon learned that America’s biggest banks had been nurturing systematic fraud for years, bankrolling mortgage operations that thrived on phony appraisals and “liar’s loans,” then slicing and dicing the resulting junk mortgages into exotic securities they marketed, for exorbitant fees, to unwary investors.

Eventually, this whole house of marked cards collapsed, and millions of families lost most everything they had. But taxpayer bailouts would keep Wall Street flush — and searching for new twists on old rackets.

This summer’s headlines have put these new rackets front and center. Just last week the federal Consumer Financial Protection Bureau informed us that mortgage fraud has outlasted the settlement deal that 49 states reached with banks in 2012. That settlement put in place obligations that banks, as New York’s top prosecutor charges, have “flagrantly violated.”

But this summer’s most riveting big-bank racket doesn’t revolve around financial industry paper. This racket impacts things we can actually touch and feel, like the beer cans millions of Americans will be holding next week at Labor Day picnics.

We need some background here: Generations ago, champions of the public interest battled to keep America’s banks from operating non-banking businesses. They sought to both protect depositors and prevent banks from manipulating their “financial might to gain an unfair advantage over competitors.”

By the 1960s, lawmakers had put into effect a variety of regulations that kept banks restricted to banking. But these restrictions would start eroding as deregulation — and America’s plutocratic restoration — started gaining serious momentum in the 1980s.

Then in 2003 the dam broke. The Federal Reserve Board, as one expert analyst told a Senate hearing last month, “razed the walls between deposits and commerce” and allowed Citigroup to buy up a nonfinancial business. In 2005, another Fed waiver let JPMorgan Chase enter the physical commodities business.

In short order, Wall Street’s biggest banks had essentially won a green light to rush into “mining, processing, transporting, storing, and trading a wide range of vitally important physical commodities.”

No bank rushed more boldly than Goldman Sachs. Three years ago this Wall Street giant bought up a string of 27 aluminum warehouses around Detroit. Industrial users of aluminum use warehouses like these to store, until their factories need it, the metal they buy on the global market.

Before Goldman’s entry into the commodity business, aluminum warehouses would deliver metal to end-users in a timely fashion, typically about six weeks.

With Goldman in charge, that timeliness started slipping, all the way to 16 months. Beverage companies and other manufacturers found themselves paying huge additional storage fees — to Goldman — for the added time.

In 2011, angry Coca-Cola officials formally complained to the metal industry’s global self-regulatory body, the London Metals Exchange. Coke charged that Goldman had “intentionally created” a warehouse bottleneck to drive up the global price of aluminum and cash out on speculative windfalls.

The Metals Exchange, a private body with bankers among its decision makers, feigned deep concern and then doubled the amount of metal that warehouses must ship out daily.

Goldman never missed a beat. The bank, to meet the new rule, simply started shipping aluminum bars from one of its warehouses around Detroit to another.

“Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses,” the New York Times reported last month. “Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.”

The Times estimates that this “merry-go-round of metal” has cost consumers about $5 billion over the past three years. In 2012, Goldman’s top five execs together took home $92 million.

Wall Street’s leap into commodities has, over recent years, gone well beyond aluminum. Last December, the Securities and Exchange Commission gave a big-bank syndicate the green light to buy up and warehouse up to 80 percent of the world’s copper.

Similar big-bank rackets are running in oil, wheat, cotton, and coffee, notes reporter David Kocieniewski, bringing “billions in profits to investment banks like Goldman, JPMorgan Chase, and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer, or buy a cellphone.”

All sorts of federal agencies are now investigating the various banking rackets that have so far this year hit the headlines. JPMorgan Chase alone, the Washington Post reports, “is staring down six separate investigations by the Justice Department, four by the Securities and Exchange Commission, and three by the Commodity Futures Trading Commission.”

But the penalties exacted on the big banks so far have been ridiculously slight.

One example: Earlier this summer, the Federal Energy Regulatory Commission penalized JPMorgan for parlaying control over a dozen California power plants into a scheme that defrauded consumers out of $125 million. JPMorgan now has to pay back the $125 million, plus another $285 million.

This $285 million — one day’s net revenue for JPMorgan — doesn’t make for much of a deterrent, observes Los Angeles Times analyst Michael Hiltzik.

“If you could steal $125 million, with the only downside being that if you got caught you might have to give the money back and lose a single day’s income,” he asks, “would you give it a go?”

The Federal Reserve Board has the power to undo the deregulation that has opened the door to big-bank control over nonfinancial commerce. Indeed, several key waivers that the Fed has handed out to major bank holding companies, unless renewed, will expire next month.

In Senate testimony last month, Joshua Rosner, a managing director of the research firm Graham Fisher &; Company, called on the Fed to make a regulatory about-face.

We’re entering a new Gilded Age, Rosner warned, “where the fruits of all are enjoyed by a few.”

Al Capone liked things that way. Racketeers always do.

Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, is the editor of Too Much and writes widely about inequality. His latest book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970.
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  • Tom Allport

    Pizzigati for President !

  • GMA

    At least all these outrageous crony privileges are now being discussed openly. About time!

  • Anonymous

    Perhaps only the TarSands industry and wrongs of KeystoneXL rise above this to corrupt most of the Canadian and U.S. governments based on a comprehensive look not yet looked at. jmo

  • Walrus51

    This is absolutely so true. Somehow, our society has degraded to the point where being a pirate and sucking money out of the legitimate economy gets rewarded and never punished. Left unchecked, we are on a trajectory of destruction.

  • Medicalquack

    Today it’s a different deal with technology with banks using math that hide and adjust risk for more more flowery picture. If you have never watched the documentary, “Quants, the Alchemists of Wall Street” do it. Here’s the link as the form Goldman and other quants tell you exactly how they do it. I try to spread the word as best I an and I used to program so please attention to folks like me that know the mechanics of how this works. A layman can get this as the video is not too complex.

    If you want more I have a collection of videos that explain more on how this works and the one from Charlie Siefe at NYU is excellent and will make you think and turn into a skeptic relative to all the reports and marketing you read today, it’s all about context. The collection is Called “Algo Duping 101″ and the result is the Attack of the Killer Algorithms…a lot of flawed data out there.

  • Bill Pieper

    An overwhelming majority of Americans – at least those who are paying any attention – are in full agreement with this perspective, but so what? Nothing will be done. Any individual or institution with any power or authority to apply rule of law (or common sense) to financial markets have been bought or co-opted by these criminal overlords. No one inside the system (DC, Wall Street, media, etc.) with power to make changes, has any incentive at all to alter the status quo. This “game” has made them rich or given them the status they crave (or promises to do so when they leave “public” service).

    The American sheeple are quite content to be lead to slaughter as long as they can root for millionaires playing children’s games on TV and eat mediocre food that slowly kills them.

    And, if someday the plebes get wise and actually try to take their nation back? No problem, the oligarchs have goon squads of hyper-militarized police (Thanks “Homeland” Security!) in every corner of the country to lock up (or disappear) anyone who refuses to submit to their rule. They are not hiring Sheriff Andy Taylor of Mayberry to fill those ranks. The American Sturmabteilung units attract the sadists, sociopaths and assorted violent mouthbreathers just itching to crack “dirty hippy” skulls and put to use the skills freshly honed in the assorted battle zones of the empire.

    I once assumed that once the entire world has been thoroughly drained of wealth and everything that sustains it, these Armani-clad bloodsuckers would retire to their lairs in Paraguay (reminiscent of Nazi war criminals after WWII). But apparently they prefer instead to gobble up what remains of the public commons and taxpayer funded infrastructure so that they might continue to collect rents and transform absolutely everything, everyone, every social interaction into a commodity, an investment, or some tool of commerce (the true American religion).

    The republic is now a pathocracy. Congratulations and welcome to The Hunger Games.

  • cgmcle

    Your viewpoint is so pessimistic, so cynical, so desperate, so vitriolic — and so true. I like the term “pathocracy” — a small number of psychopaths now own the country and have made it their own. Meanwhile, a large segment of the US population has neither the desire nor the capacity to understand what is going on, let alone to do something about it. Indeed, the legion of zombie minions applauds the success of their lords.

  • Anonymous

    The repeal of Glass Seagal & the stripping the regulatory power from the commodities commission run by Brooksley Borne was the 2 big green lights that enabled this to happen. Now they are fighting any reinstatement via Dodd-Frank.. Al Greenspan stated the market would regulate itself.. REALLY

  • Anonymous

    The Federal Reserve is a private entity. It is run by the big bankers and they certainly won’t deregulate.

  • Anonymous

    so true – no capacity to understand because the education system has been decimated by the very students who should be thankful for a free education. Most could careless and the disrupt classes with their bullying so that other life in terror of going to school. No one can learn in such an environment. In the mean time, problem solving skills are not even being taught.

  • Anonymous

    This is SO disturbing, and shocking. I am not a financial wiz or an economist; I am a school nurse with a husband who is retired. We have two kids in college. What does someone like me do about something this big and crass and repulsive? Shouldn’t bilking the consumer be illegal? Isn’t some regulatory law being broken?

  • Anonymous

    Big article recently about our home town bank, the Bank of America. Seems the bank has been committing fraud, selling investment instruments that were largely worthless. The details escape me, mainly because I no longer care, so I have trouble reading these articles about fraudulent banks all the way through.
    I concluded some time ago that global banks should be considered part of the world’s largest organized crime ring. They make the Mafia look like little kid hucksters. So, when a bank is taken to court by the SEC or anyone man enough to confront them, it gladdens my heart. I wonder how many people are now trying to figure out how to survive their retirement, now that the Bank has made their retirement investments worthless?
    So, what should we do about such things?
    Well, I for one like to consider going back to something Judge Tony (aka Scalia) made possible. Tony asserted, and got his right wing buddies to approve, the premise that corporations are persons. So, why is that important? Well, it occurs to me that, if the Bank of America, was defrauding other folks (including other corporate folks), then the Bank of America itself should be held accountable, as part of a conspiracy. So, not only can the Bank officers be brought to judgment, but the Bank itself can also be brought to judgment. And what do I mean by “brought to judgment”? Well, let’s suppose the charges against the Bank and its officers holds up in court and that the Bank is found guilty of fraud—a felony I believe. So, what’s such a felony worth in prison time? Well, let’s say 5-10 years in a federal penitentiary.
    I am thinking that, since Corporations are now persons, that the corporation and its officers should be sentenced to actual prison time. So, let’s say the Bank of America gets a 5-10 year sentence in some federal prison (I so wish that Alcatraz were still open). That means that a cell would be reserved for the Bank—mainly I guess its formal charter or its certificate as a corporation, placed carefully in a nice box and placed carefully on the bed. And, the Bank as a person could of course no longer operate as a corporation, so the bank would essentially close for 5-10 years. Now we would have to make some provision for ordinary folks to remove their money and assets from the bank prior to executing the sentence. Then the Bank (its papers of incorporation) would be placed in that box and locked away for 5-10 years. After the Bank had demonstrated that it could behave, maybe it would be granted probation and allowed to resume banking, assuming of course anyone still cared.
    Now that would be an adequate payment for wrongdoing. Perhaps it might even make other global bankers a bit more cautious about their current plans to screw the public once again. AP Giannini would be so proud.
    Just a thought.

  • Anonymous

    You should look into all the feverish construction activity going on in Cushing Oklahoma, pipeline capital of the world, where crude oil prices are set. All those brand new huge tank farms aren’t owned by or needed by the oil companies. They’re being built by speculators and financial institutions from all over the world. Have a group of investors? We’ll build you your own tank for storing crude.

  • Anonymous

    The extreme right wing overlords in this nation understood that their pathetic agenda has no resonance with the people – yet they also understand the power of propaganda – a whole people can be turned against their own interests and against themselves by the clever use of propaganda.

    Since the days of Reagan we have seen a massive growth of “shock jocks” like Limbaugh, Beck, Savage, Hannity and their ilk – all use vitriol and appeal to the lowest and basest human frailties and emotions – all were initially financed by powerful interests.

    Then of course we see the arrival of FOX news a 24/7 propaganda machine that would make Goebbels envious and that shames the old Soviet PRAVDA.

    The most conservative states, Alabama, Mississippi etc. are also the poorest and the most dependent on federal aid – yet their know-nothing bible thumping, slum dwelling denizens speak firmly “againt’ de Gummit” and for “freedom”; even as their children play in garbage.

  • tom spalding

    Unyoked oxen destroyer of fences. This metaphor is stronger. than spreadsheets.

  • Anonymous

    “…The Federal Reserve Board has the power to undo the deregulation that
    has opened the door to big-bank control over nonfinancial commerce….”
    And our President is on the very brink of nominating for the head of that board the same guy who championed “deregulation” as the salvation of the system just over a decade ago.
    Incestuous barons of banks and government MUST be the first ones up against the wall when the revolution comes.

  • DavidW

    Capone had a point when he complained that the bankers were bigger crooks and that he was just a simple businessman.

  • DavidW

    Our elected officials are supposed to execute the will of the people. We, the people are so polarized that we are the ones to blame and the “banksters” are taking full advantage of that.

    We have an option, we can take their market share away from them by building our own local community enterprises and rely much less on these national fraudsters.

    We have the nucleus in place with the credit unions, food co-ops, and the like to build an economy around that encourages a cooperative ownership foundation. Ownership is where the power in the monetary economy is built upon. We have to as individuals own much more of the assets of this country to bottleneck the income distribution that seems to flow to the rich in the kinds of “royalties” they get paid.

    Look up HR 2437 creating jobs through cooperative development as a start. Google – Rochdale Pioneers 1844 to view the history of the cooperative movement that was built upon previous failures and a relied on some lessons from failed utopian villages of Robert Owen.

    We can each start by finding our local Co-ops and investing in them and them patronizing them.

  • William Falberg

    28th Amendment (aka Corporate Firewall Amendment)
    Corporations are not persons and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:
    1, prohibitions against any corporation;
    a, owning another corporation,
    b, becoming economically indispensable or monopolistic, or
    c, otherwise distorting the general economy;
    2, prohibitions against any form of intervention in the affairs of government by means of;
    a, congressional lobbying
    b, electoral sponsorship or advocacy
    c, educational sponsorship or publication
    d, media news reporting
    3, provisions for;
    a, the auditing of standardized, current, and transparent account books
    b, closing the FRB and the establishment of state-owned banks
    c, civil and criminal penalties to be suffered by corporate executives et al for violation of the terms of a corporate charter.
    Optional: (or possible 29th amendment)
    The 16th Amendment to the United States Constitution is hereby repealed and Congress shall re-write the U.S. Code to reflect the changes embodied herein.
    (While we’re at it, we could also repeal the 17th amendment)
    Direct link:

  • Anonymous

    Be careful – If this were to pass, the Labor Unions would no longer be able conduct their money laundering operation for the Democratic Party, and you’d have to start getting your voter base to contribute to your election campaigns. As if they had any money.

  • Bill Pieper

    It is not the extreme right wing that has done the most damage to the rule of law in financial matters and the wholesale disregard of basic constitutionally guaranteed civil liberties. While their views are, for the most part, unworkable at best, and clearly bent toward racism and plutocracy, at least they make little attempt to hide their true, albeit ugly agenda.
    No, by far the worst damage has come from the actions or inactions of the so-called “left” in the US. Look at the history. Repeal of the common sense regulation of Banking Act of 1933 (Glass-Steagall) and NAFTA all happened under Clinton at the behest of Robert Reuben and his crew of financial terrorists (Larry Summers, Tim Geithner, Alan Greenspan et al).
    When the Bush/Cheney regime trounced what remained of the Constitution, Democrats did nothing to stop any of the most reprehensible legislation of the rubber stamp GOP Congress, even though there was much they could have done if they cared at all about the collective future of their constituents and the nation. There was however, considerable uproar among the fairweather civil libertarians of the “left” who did indeed protest and probably were successful in limiting the damage. Most of these same people of what is laughably called the left, have been silent during the most egregious violations of civil liberties in the current administration. Only after the revelations of Edward Snowden have some of them finally begun to raise the meekest of objections. Looking at what we know, and have known for at least two years, when it comes to disregard for the rule of law and reinforcement of the notion of the imperial presidency, the Obama administration has doubled down on the worst behaviors of the previous administration.
    Just as it took Nixon to go to China, it take a Democrat to trounce civil liberties and further empower the corporatocracy.
    You can blame the dittoheads and tea party, but understand that their purpose is precisely to make you angry, give you someone to blame, and distract you, while both “conservatives” and “liberals” plunder the treasury, strengthen the warfare-welfare economy and destroy what remains of the middle class. Both political parties are cooperating, whether or not that is the intention of all members, in creating a modern form of feudalism in the US and the entire world. Partisan warfare is simply a divide and conquer tactic of the oligarchy. People need to understand this.

  • LibelFreeZone

    “…because it does have some muscle and is there to protect the interests of the rest of us.”

    You’ve got to be kidding.

  • LibelFreeZone

    Bank of America: Too Crooked to Fail — Read it ‘n weep.

  • LibelFreeZone

    Another loony librul. What else is new?

  • Anonymous

    I think you mean that big bidness is legalized mafia . . .