Tuesday, April 27, 2010
THE GOLDMAN SACHS CASE Part II: "The Crucible" James S. Henry
Whatever the ultimate legal merits of the SEC's case against Goldman Sachs -- and those appear to me to be questionable at best --
its most important contributions are being made right now. They are not judicial, but political.
(1) If anyone needs the benefit of the new "financial literacy" program proposed by S.3217, Senator Dodd's proposed financial reform bill, it is the US Senate. Many members of the Senate -- and by extension, the House -- don't seem to understand very basic things about the structure and role of private capital markets, finance, and business economics, let alone global competition. In the world's largest capitalist economy, this level of ignorance on behalf of our political elite is really mind-boggling.
(2) After 18 months of intensive investigation, the US Senate's Permanent Subcommittee on Investigations and the SEC have not so far been able to find anything that is clearly illegal to pin on Goldman Sachs.
(3) On the other hand, on the secondary trading side of Goldman's business, Goldman traders clearly have "market maker" ethics, not investment adviser ethics. They've grown accustomed simply to providing market liquidity for whatever securities clients happen to want -- or can be persuaded to want, even if Goldman is taking opposite positions at the very same time in the very same securities.
For example, regardless of what Goldman's own sales people felt about the terrible quality of the synthetic CDOs they were selling in 2007 -- including many securities packaged out of "stated income" mortgages -- they continued to sell anything for which there was a current price.
Goldman's trader culture simply doesn't buy the notion that market
makers have any "duty to serve the best interests of their clients. In competitive world, this amoral culture may well be essential to being a successful "market maker," and Goldman is one of the most successful secondary traders in the world However, if we expect some higher standard of behavior toward clients, this is likely to require new rules; Goldman will never get there on its own.
Of course, in a highly competitive global market, any such rnew ules might just cause this entire business to move offshore, to London, Hong Kong, Singapore, or any number of other offshore financial centers.
(4) With great respect to Michael Lewis, the notion that Goldman Sachs engaged in a hugely profitable "big short" in 2007-2008, in the sense of secretly betting systematically against the same securities that it was underwriting for its clients, is easily overstated. Goldman's investment portfolio in mortgage securities turned negative in early 2007, was net short all year long in 2007, and at times had up to $13 billion of gross shorts, the bank's net profits from all this shorting that year was $500 mllion to $1 billion. The following year, 2008, its mortgage portfolio lost $1.8 billion
(5) There appears to be enormous pent-up rage and ressentiment in the country at large, right now, driven by the financial crisis, the slow recovery, high unemployment, and the loss of homes and pensions, on the one hand, and the widespread perception that banks not only created the crisis, but have also profited immensely from it. Most people may not know a CDO from a dustpan, but there is a very disturbing tendency to seek scapegoats, dividing the world into villains and victims. Ironically, the most obvious targets include companies like Goldman Sachs, one of our most successful, better-managed, if trader-ridden companies.
(7) On the other hand, these other major private banks, plus Lehman Brothers and Bear Stearns, were by far the largest players in the private mortgage market. If they had followed Goldman's risk management, accounting, disclosure, and leverage practices, the worst of this crisis might well have been avoided. Indeed, it appears that one reason these generally much larger firms did not adopt such practices was because -- unlike Goldman -- they genuinely believed they were "too big to fail."
(8) Going forward, the real problem with Goldman market was not, by and large, illegal behavior, but an excess of perfectly legal behavior that may well be socially unproductive and way under-regulated. Especially in a world where other countries have fallen behind in the move to update their financial regulations, dealing with this problem will require much more than lawsuits and investigative hearings.
IN THE DARK TRUNKS...
Today's hearings probably came as close to fireworks as investment banking and "structured finance" ever gets. In one corner there was Goldman Sach's slightly shaken, but still-unbent CEO Lloyd C. Blankfein (Harvard '75/ HLS '78).
There was also Blankfein's articulate, amiable life-time Goldman employee David Viniar (HBS '80); the now-notorious, side-lined 31-year old Goldman VP Fabrice P. (aka "fabulous Fab") Tourre (Stanford M.S. '01), architect of the particular "synthetic CDO" at the heart of the SEC case; and several other past and present stars from the "devil bank's" specialists in mortgage banking.
Ring-side support for the Goldman front line was provided by a hand-picked team of very high-priced trainer/coaches. This included former Democratic House Speaker Richard Gephardt, former Reagan Chief of Staff Ken Duberstein, and Janice O'Connell (aka "Puerta Giratoria"), a former key aid to Senator Dodd.
Senator Dodd, the retiring Chair of the Senate Banking Committee, has been working since November on S.3217, an epic 1600-page bill that Senate Republicans (with perhaps a little help from Fed staffers who opposed the bill) have just prevented from coming to a vote.
Of course Goldman has also hired Obama's own former chief counsel Gregory Craig as a key member of its defense team.
Once taken seriously as a "liberal" Democratic Presidential candidate, Gephardt has gone the way of all flesh, and is now completely preoccupied with serving such worthy clients as Peabody Energy, the world's largest private coal company; NAPEO, an association of "professional employer organizations" that is trying to dis-intermediate what little remains of labor rights for outsourced workers; UnitedHealthCare, a stalwart opponent of the "public option" in health care reform; and of course, Goldman Sachs, which has also employed the prosaic Missourian to pitch the (really insidious) idea of "infrastructure privatization" all over the country to cash-strapped state and local governments.IN THE WHITE TRUNKS..
In the other corner is the aging heavyweight champion from Michigan. Senator Levin (Harvard Law '59), is a low-key but tenacious warrior, with a mean-right hook; Goldman would do well not to underestimate him. He's a veteran critic, investigator, and opponent of global financial chicanery, dirty banks, and tax havens -- except perhaps when it comes to GM's captive leasing shells and re-insurance companies in the Cayman Islands and Bermuda (Heh, even a Dem's gotta eat!)
Sen. Levin is backed up by several knowledgeable, tough cross-examiners, especially Democratic Sen. Kaufman of Delaware and Republican Senator Collins of Maine. On the other hand, Republican Senators McCain and Sen Tom Coburn were a bit more "understanding" of Goldman's basic amoral attitude toward market-making.
In handicapping this contest, some observers predicted that the best and brightest from our nation's leading investment bank would basically roll over the "old folks" from the Senate.
In the first few hours, however, it quickly became clear that the bankers were a little under-prepared for the Senators' often-times impatient, hard-nosed tone, especially from former Prosecutor Levin, Collins, and Kaufman.
Nor were they prepared for the widespread, if perhaps naive and even "Midwestern" view that there was just something fundamentally wrong with the lines Goldman drew between pure "market-making" and providing investment advice.
For example, Sen. Levin was a real rat terrier on the question of whether it was ethical for Goldman market-makers in 2007 to be aggressively pushing clients like Bear Stearns to buy a CDO security called "Timberwolf" that Goldman's own internal analysts had called "shitty." Meanwhile, Goldman's ABS group was shorting Bear by buying puts. The panel of five present or former Goldman executives had trouble recognizing that there was any problem at all -- given the fact that, from a legal standpoint, Goldman had fully informed these clients about the risks they were taking.
For another $2 billion "Hudson" CDO deal that Goldman sold from its inventory, the firm's own sales people characterized the product as "junk," and indicated that more sophisticated customers might not buy it. Yet, according to Senator Levin, Goldman's selling documents for a portion of the sale characterized the deal as one where Goldman's interests and the client's interests were "aligned" because Goldman retained an equity interest in the Hudson package. In Senator Levin's view, this "retention" was misleading, simply because Goldman took time to sell down its position.
On the question of the Abacus transaction at the core of the SEC law suit, Sen. Levin was able to establish that the Goldman's Tourre never told the German bank that invested in the deal that John Paulson, the hedge fund manager who helped choose the portfolio, although he claimed to have told portfolio selection manager ACA. Oddly enough, from what we heard about other "raw deals" today for the first time, this now appears to have been perhaps the weakest deal for SEC to attack.
Similarly, Senator Collins pressed a group of Goldman securities "market-makers" very hard about whether or not they felt they had a "duty" to work in the "best interests of their clients." The responses she received indicated that these Goldman executives, while insisting on the organization's high ethical standards, also simply "did not get" the point that there might be some higher ethical, let alone legal, duties to clients, for pure market makers, beyond just providing them with legally-required disclosure.
Senator Levin claimed that these hearings have been in the works for more than a year. He says that it is just sheer coincidence that they are occurring soon after the SEC decided to file its case by a narrow 3-2 party lines vote, and right when Senator Dodd's reform bill just happens to be on the verge of being introduced.
Other sources indicate that Levin's investigation had been scheduled to continue through May, and that it was abruptly rescheduled after the SEC vote.
Furthermore, for someone who is supposedly holding hearings to gather facts and find out what was really went on, Senator Levin had already formed quite a few strong opinions prior to hearing from any witnesses -- as shown in his latest press release.
But so what? Even if he's was a little simplistic, filled with anti-bank animus, and eager to portray the financial crisis as a kind of morality play, and even if there's no big payoff other than the theatrics, it was definitely kind of fun to watch the "show trial" -- finally see someone asking big bankers tough questions under oath. After all, regardless of what "caused" the financial crisis and its interminable aftermath, it is pretty clear who is paying for it -- and it is certainly was neither these Senators nor the bankers in the dock.
( Stay tuned for Part III, which takes a closer look the Goldman Sachs case in light of these hearings, and consider the broader question of other "big bank" roles in the crisis.)
(c) JSHenry, SubmergingMarkets (2010)
Thursday, April 22, 2010
THE GOLDMAN SACHS CASE Part I: "Clowns to the Left of Me" James S. Henry
Well, we no longer have to worry only about corrupt bankers in Kyrgystan. Ever since the Goldman Sachs case erupted last week, there's been plenty of fresh banker blood in the water right here at home, with scores of financial pundits, professors-cum-prosecutors, and political piranha swirling around the wounded giants in the banking industry as if they were a herd of cattle crossing a tributary on the upper Rio Negro.
This feeding frenzy was precipitated by last Friday's surprising SEC announcement of civil fraud charges against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.
Despite -- or more likely because of -- Goldman Sach's relatively clean track record and illustrious credentials, many commentators have assumed a certain Madame Defarge pose, reigning down censure and derision from the penultimate rungs of
their mobile moral pedestals.
Over the weekend, for example, Huffington featured a
half dozen vituperative columns on the subject, including a Vanity Fair contributing editor's feverish claim that the whole affair was somehow
deeply connected to one high-level
Wall Street marriage, and
host's denunciation of Goldman for refusing to appear on his show --
his show ! There was also a plea from Madame Ariana for criminal
In fact, this is a case where, as we'll see in Part III, the SEC's civil charges against Goldman Sachs are not only highly debatable, but largely beside the point.
Meanwhile, Bob Kuttner, another Huffy perennial, and one of our most prolific popularizers of conventional liberal dogma, asserted that Goldman demonstrates conclusively that Wall Street en tout is nothing but an on-going criminal enterprise, up to its eyeballs in outright fraud.
In a lurch toward financial Ludditism, Bob figuratively placed his hands on his hips, stomped his feet, and demanded nothing less than a "radical simplification of the
financial system" -- leaving it to the reader's imagination to determine just what the hell that means.
Will we still be permitted to use ATMs, checking accounts and paper currency, or will we all soon have to return to wampum beads and n-party barter?
Elsewhere, the Daily Beast published a de facto job application from Harvard Law's Prof. Alan Dershowitz -- otherwise well known in the legal profession as "He whose key clients are either fabulously wealthy or innocent."
Prof. Dershowitz argues -- quite rightly -- that Goldman' behavior, while no doubt
morally reprehensible, was also by no means clearly illegal. On the other hand, he also says the law is so vague that hedge fund investor Paulson might even be charged with conspiracy to commit fraud.
Well, ok -- except for the article's faint suggestion that for a modest fee, our country's finest criminal lawyer may just be available to help explain all this to a judge -- and also to argue that "only a tiny fraction of investment bankers who abuse their clients actually commit murder."
Finally, there is the omni-present, virtually unavoidable Simon Johnson, a Peterson Institute Fellow, MIT B-school prof, book author, "public intellectual," and "contributing business editor" at Huffington.
This week has been Prof. Johnson's heure de gloire, and he is living it to the fullest.
All week long he could be found at all hours on nearly every cable news channel and web site, pitching his own increasingly Puritanical, if not neo-Manichean views of the banking crisis and Goldman's role in it.
At first, Prof. Johnson merely expressed
delight that the US had finally reached its "Pecora moment" --
referring to the 1933-34 US
Senate investigation of Wall Street that, indeed, makes the modest
$8 million Angelides
like a California '68 love-in.
But by mid-week he'd had moved on to a much harsher assessment.
Not only is Goldman guilty as sin, but hedge fund investor John Paulson, one of the key parties to the Goldman transaction, deserves to be "banned for life" from the securities industry. If necessary, Johnson says, the US Congress should even pass an ex post facto bill of attainder!
He may therefore not be aware that the US Constitution (Article 1, Section 9) has explicitly prohibited both ex post facto laws and bills of attainder (legislative decrees that punish a single individual or group without trial) ever since 1788.
Just this month, a US federal district court in New York struck down Congressional sanctions that singled out ACORN, the community organizing group on precisely these grounds. The case is now on appeal.
Indeed, even in the UK, there have been no bills of attainder since 1798.
Despite Prof. Johnson's limited grasp of US or even UK law, and his Draconian appetites, I've actually grown rather fond of him lately -- or at least more understanding.
This is partly because since he left
the IMF in September 2008, he's apparently had a kind of road-to-Damacus epiphany.
He now realizes, as if for the first time, the enormous carnage that has been inflicted by a comparative handful of giant global banks, as well as the huge potential rewards of decrying these outrages from the roof tops.
But that 1+ year was more than enough time for him to leave a lasting impression at the IMF.
He is still fondly remembered at the IMF not
only for having entirely
missed the 2007-08 mortgage crisis even as it was unfolding, but also for deciding in
July 2008, less than 3 months before the entire global financial system nearly collapsed, to sharply increase
the IMF's growth forecast for both 2008 and 2009.
That was just one month before the otherwise-feckless Bush SEC initiated the 18-month investigation of Goldman Sachs that ultimately led to last week's charges.
If and when the Goldman Sachs case ever comes to trial, therefore, it may be interesting for Goldman's attorneys -- perhaps Prof. Dershowitz -- to consider calling Prof. Johnson as a witness for the defense.
After all, he probably qualifies as an expert on the heart-rending experience of just how difficult it was even for highly-trained experts to have clear peripheral vision, much less perfect foresight, back in the heady days of the real estate boom.
In Prof. Johnson's case, these included IMF senior management, executive directors, and a myriad of country officials who were all pressuring the IMF to inflate its forecasts back in 2008, just as housing markets and financial markets were beginning to crumble.
In July 2008, on Prof. Johnson's watch, they temporarily prevailed.
From this angle, the IMF Chief Economist's role might even be compared to that of a certain young Goldman Sachs VP.
Even in the dark days ahead, therefore, Goldman Sachs execs have at least a few consolations.
First, they can remind themselves that there were very damn few heroes in this sordid tale -- journalists, politicians, public intellectuals, and economists included.
Indeed, Brooklyn-born investor John Paulson may turn out to have been, if not quite a "hero," at least one of the few relatively straightforward and consistent players in the lot.
At least in his own investing, he consistently opposed the systematic distortions about the housing miracle and the exaggerate forecasts -- dare one say frauds? -- that institutions the US Treasury, the Federal Reserve, and Prof. Johnson's own IMF employed in the final stage of the real estate bubble, in a failed attempt to achieve a 'soft landing.'
Second, while it may be hard for us to imagine, things might actually have turned out a whole lot worse.
Goldman Sachs might well have relied on Prof.
Johnson's sophisticated, bullish forecasts rather than on John Paulson's intuitive short-side skepticism.
How much money would Goldman's clients, investors, and the rest of us have lost then?
© JSH, SubmergingMarkets, 2010.
Thursday, April 01, 2010
ORDINARY INJUSTICE Even Beyond Guantanamo, Rendition, and Torture, the US Criminal (In)Justice System Is a National Disgrace James S. Henry
In the modern-day “Law and Order”/ Perry Mason made-for-TV version of this story, the US is still viewed by many as having, in author Amy Bach’s words, “the world’s finest criminal justice system.”
Certainly this is the preferred self-image when, as it is wont to do, the US criticizes the quality of criminal justice in other countries.
Juries take their independence seriously and fight tooth and claw for the
truth; parole officers and prison wardens are all deeply committed to “correction.”
Public defenders are not only thoroughly informed about the latest nuances of criminal law, but also work tirelessly to insure that each and every defendant has his day in court.
Her new book, the product of seven years of first-hand research in the bowels of the state and local court systems of New York, George, Mississippi, and Chicago, focuses on “ordinary injustice” -- the routine failure of judges, prosecutors, and defense attorneys as a community to deliver on the Constitution’s basic promises.
Tocqueville was not alone in his naivete'. Initially, the sheer amount of attention given to criminal justice in the US Constitution as well as state constitutions led many observers to expect that the US really might be distinctive.
Indeed, criminal rights are the subject of Article I’s explicit reiteration of habeas corpus, plus four of the first ten amendments (known collectively as the “Bill of Rights”), and their extension to states and non-citizens by the XIV th Amendment.
Of course legal scholars have long been aware of serious gaps between theory and practice with respect to such rights. But the gaps have usually been regarded as exceptions.
Many of the exceptions have occurred in times of war or perceived security threats – for example, the Sedition Acts of
1798 and 1918, the World War II internment of Japanese-Americans, the frequent persecution of labor unions, civil rights workers, and Left wing dissidents from the 1880s right up through the 1970s, the 2001
Patriot Act, the NSA's illegal spying program, and the systematic mistreatment of "enemy combatants" at Guantanamo and elsewhere.
Other exceptions have involved the application of "Jim Crow justice” to native Americans, Afro-Americans, and other minorities.
Overall, however, most legal scholars have treated these episodes as abnormal deviations. In the long run, the system as a whole is supposedly always improving, always trying to do the right thing.
On this theory, the US Constitution and the courts that interpret it are a kind of homeostatic machine, with built-in stabilizers that eventually prevent any serious rights violations from becoming permanent.
THE REALITY: FAST-FOOD JUSTICE
Ccritics on the Left have long maintained that in practice, no such automatic stabilizers exist. From this perspective, securing human rights is not ever accomplished once and for all, but requires a constant, repetitive struggle.
It is also conceivable that "path dependency" and "feedback loops" in the legal system may be destabilizing. The erosion of rights in one period may increase the chance that rights continue to erode later on.
Critics of the conventional view have also argued that rich people and poor people – including the indigent defendants who now account for about 70 to 90 percent of all felony cases – essentially confront two very different US criminal justice systems, especially in state and local courts.
Only a tiny fraction
Only a tiny fractionof mainly affluent criminal defendants ever receive full-blown Perry Mason/ Alan Derschowitz-type adversarial trials -- and even there, as Harvey Silverglate's recent book emphasizes, even the affluent still face the hazards of vague statutes and prosecutorial zeal.
Meanwhile, 90 percent of criminal defendants soon learn the hard way that their nominal "rights" consist of one brief collect call from a jail cell, followed by a tango with an alliance of police, prosecutors, and public defenders whose shared objective is to talk them into pleading guilty.
As Clarence Darrow said in his 1902 address to the inmates at the Cook County Jail, “First and foremost, people are sent to jail because they are poor.” And as the American Bar Association -- not usually aligned with wild-eyed radicals -- reiterated in 2004, “The indigent defense system in the US remains in a state of crisis.”
This pervasive “fast food”/ assembly-line plea bargain system is hardly new, although it has recently become a much greater problem than ever before because of soaring rates of incarceration in the US, as we'll see below.
DETAILS FROM THE FRONT
In doing so, she tackles one of the main challenges that confronts any investigator who seeks to understand how the criminal justice system really works. This is the fact that “ordinary injustice,” while pervasive, is very hard to observe without detailed, painstaking field work.
For example, in her book we meet a Troy New York city judge who routinely fails to inform
defendants in his court of their rights to counsel, imposes $50,000 bails for $27
thefts and $25,000 bails for loitering, and enters guilty pleas for defendants
without even bothering to tell them.
✔ We meet a Georgia public defender who runs a “meet’ em, greet’em, and plead ‘em” shop that delivers just 4 trials in 1500 cases, with guilty pleas entered in more than half of these cases without any lawyer present or any witnesses interviewed.
We meet Mississippi prosecutors who are so
concerned about their win/loss records and reelections that they simply “disappear” all the
harder-to-prosecute cases from their files.
✔ We meet a Chicago prosecutor who allows two iinnocent young people to sit in jail for 19 years before he finally works up the gumption to examine the relevant DNA evidence. This new evidence not only cleared them, but it also helped to disclose a much larger police conspiracy.
✔ Ms. Bach also reminds us of the unbelievable 2001 case before
the Fifth Circuit Court of Appeals (Texas) where the court labored hard to overrule a
lower court decision that would have permitted a defendant on trial for his
life to receive the death sentence, despite the
fact that his attorney had been fast asleep through much of the trial.
Amy Bach’s book is more than just a series of such horror stories, however. By doing painstaking legal anthropology in multiple locations, she's been able to go beyond the limits of the typical one-off journalistic expose about the courts. (See, for example, A, B, and C.)
Bach's focus is on identifying recurrent patterns of misbehavior. These patterns were unfortunately not “exceptional” at all, but routine and widespread.
Most important, her research underscores the
fact that ordinary injustice is
not just due to isolated “bad apples.” There is a system at work here. Indeed, injustice thrives on a culture
of tolerance for illegal practices cultivated in whole communities of lawyers, judges,
and police over many years. This
culture, and the “fast food” plea bargaining that it
facilitates, are at the root of
all her cases.
Unfortunately Ms. Bach offers no real solutions to the problems that she has described so well. She ends up leaning rather heavily on a fond hope that “new metrics” will be developed to measure how well individual courts actually deliver “justice” -- sort of the legal equivalent of "No Child Left Behind."
There may be something to this. But in my experience, metrics, whether in education or judicial policy, are the last refuge of the policy wonk. They will undoubtedly be a long time coming. This is partly because of budget constraints. But it is also because if the metrics are really worth a damn, they will provoke stiff resistance from the very same bureaucratic interests that Ms. Bach had to overcome in her own research.
Pending the dawn of this brave new world of metrics, I suspect that we will just have to depend on a handful of dedicated lawyers, investigative journalists, and creative legal scholars like Ms. Bach to keep an eye on the courts, root out what’s really going on, and insist that all of the rights we have on paper and take for granted are still around when we really need them.
So where does “ordinary
injustice” come from, and what can we do about it? Fundamentally, as noted, the kind
of ordinary injustice described by Ms. Bach basically exists because of the
“fast food” plea bargaining system. But as she also recognizes, it would be a waste of time to outlaw this directly. This is
because the plea bargaining treadmill basically derives from the unsuccessful attempt to reconcile
several deeply-inconsistent public demands.
First, 9/11, the war on terror and GWB notwithstanding, most Americans still fundamentally believe in freedom. Most of us still want to preserve the Bill of Rights -- at least on paper.
Second, we all want to save money – especially in these times. Implementing the full-blown version of the adversarial trials in every case would be very costly. While taxpayers value human rights, they’re not all frothing to pay a whole lot for them. This is partly just because at any given point in time their value is a little abstract -- like health insurance before you become ill.
Of course the truth is that the “fast food” system is anything but cheap. The entire system – courts, prisons and police – now costs US taxpayers over $250 billion a year. That figure has been growing like Topsy – it is now at least three times the 1990 level.
Over 80 percent of
these costs are born by the hard-pressed state and local governments. Most of the funds are digested by police
and prisons; courts only account
for about one fifth. Even so, it is far from clear that ordinary taxpayers –
most of whom never expect to see the inside of a criminal court or jailhouse themselves -- would be willing to pay
anything more to help defend the poor
or curb ordinary injustice.
Third, what US taxpayers do care about, at least until now, is “fighting crime,” especially drug-related and lower-level street crime. Ever since the 1970s, these have been the fastest growing contributors to system-wide criminal justice costs.
For many taxpayers, under the influence of thirty years of campaign propaganda from the “war on drugs” industry and “tough-on-street crime” politicians, this has usually been reduced to “lock ‘em up and throw away the key, as fast as possible.”
the US has the highest per capita
incarceration rate in the world. It is 754 per 100,000, higher than
Russia (610), Cuba (531), Iran (223), and China (119), let alone developed countries like the
UK (152), Canada (116), France (96), Germany (88), and Japan (63).
This policy appears to be driven in part by the political benefits of so-called "prison gerrymandering," which permits prisoners to be counted as residents of the places where prisons are located, rather than where they come from, for purposes of allocating legislative seats.
Indeed, southern states like Louisiana (1138), Georgia (1021), Texas (976), Mississippi (955), Oklahoma (919), Alabama (890), Florida (835), and South Carolina (830) have distinguished themselves with even higher rates -- by far the highest rates of incarceration in the world.
This policy appears to be driven in part by the political benefits of so-called "prison gerrymandering," which permits prisoners to be counted as residents of the places where prisons are located, rather than where they come from, for purposes of allocating legislative seats.
This alone helps to explain the fact that annual cost of all US prisons now exceeds $80 billion a year. Indeed, the annual cost of warehousing prisoners in California and New York prisons is at least $50,000 per year per prisoner – much more than the cost of providing them with full time jobs outside! In addition, in the US, there are over 9 million former prisoners who are now outside prison. More than 5.1 million others remain under supervision, on parole or probation.
All told, the US now has more than 11.3 million
past and present inmates. This is
the world’s largest domestic criminal population, an incredible 23.5
percent of all current prisoners in the world. No doubt the sheer scale of our “criminal industry
experience curve” gives us
at least one clear national
competitive advantage -- in crime.
Indeed, because of our propensity to throw people in jail regardless of what becomes of them there, we now account for over a third of the entire world’s living past and present prisoners. Not surprisingly, this also affords us by far the most costly judicial and corrections systems that the world has ever seen.
For all these costly
incarcerations, despite the vast sums and short-cuts associated with processing
all of these millions through the pipeline as rapidly as possible, there is not
one speck of evidence that this system has contributed one Greek drachma to
falling crime or safer streets.
Indeed, the best evidence is just the opposite. Over two-thirds of US offenders who are released from prison are likely to be re-arrested within three years. Reactionary voices may argue that this just shows we should hold more of them longer, a sure recipe for system bankruptcy. What it really shows is the complete lack of any real “correction” or retraining in most US prisons. The system that the entire criminal justice machine works so hard to get people into as fast as possible has become the world’s largest training ground for serial offenders.
In short, if we really want to understand the roots of "ordinary injustice," as well as the intense pressure that each and every player in the US criminal justice system feels to cut corners and slash costs each and every day, we need to look no further than this self-perpetuating failed prison state-within-a-state.
After all, this particular failed state already has a total population of current inmates and former inmates under supervision that is greater than Somalia’s!