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Tuesday, April 27, 2010

THE GOLDMAN SACHS CASE
Part II: "The Crucible"
James S. Henry


Salem Whatever the ultimate legal merits of the SEC's case against Goldman Sachs -- and those appear to me to be questionable at best --  6a00d83455f15269e20133ecfd9a4b970b-580wi its most important contributions are being made right now. They are not judicial, but political. 

'Lord knows I've been about as critical as one can possibly be of Wall Street banks, as well as of unfettered free marktets. (See, for example, a, b, and c.)

However, after listing to today's  showdown hearings before  US Senator Carl M. Levin's Permanent Investigations Subcommittee,  I'm convinced that:

(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.

Blankfein2 (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 Goldmanlevinshorts 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.

Tourre2 (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.

(6) Compared to other major US banks, Goldman Sachs' role in the credit derivatives market, the mortgage Levin market, and bank lending in general, as well as in the roots of the most recent crisis, was minor at best. Indeed, compared with the more than $240 billion of past due/non-performing mortgage loans now on the books of the "big four" banks,  the sums involved even in Goldman's most questionable deals were trivial. Why the US Senate and the SEC decided to focus so heavily on Goldman, as compared with Citi, Bank of America, JP Morgan, and Wells Fargo, is an interesting political-economic puzzle.  

(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...

Images Today's hearings probably came as close to fireworks  as investment banking and "structured finance"  ever gets.  In one corner there was 6a00d83455f15269e20134802d29fd970c-580wi 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.  

Apparently not pressent was Goldman's President and COO,  Gary D. Cohn (American U, 'whenever)  (aka "Aeolus,"). Perhaps he had flown to Athens to arrange more  cosmetic "dirty debt swaps"  for Greece,   

Article-0-092B46B6000005DC-273_233x423Ring-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 Duberst225px-Gary_D._Cohn_-_World_Economic_Forum_Annual_Meeting_Davos_2010ein, 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.

Hedge-fund-managers-xmas-card

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 coursImages-2e, 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 Carl_enron 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. 

FIRST ROUND

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.

Panel 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.

LEVIN DOG

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" CLevin2DO 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.

CONTEXT

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 -Anti_banker_small- 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)

April 27, 2010 at 07:35 AM | Permalink | Comments (1)

Thursday, April 22, 2010

THE GOLDMAN SACHS CASE
Part I: "Clowns to the Left of Me"
James S. Henry


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Goldman Defense PDF

Monty_python_witch Bankers_1294271c 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 chargesKillerfish against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.     

Despite6a00d8341c652b53ef0120a8704c30970b-120wi -- 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 an MSNBC host's denunciation of Goldman 356323163v_225x225_Front_padToSquare-truefor refusing to appear on his show -- his show ! There was also a plea from Madame Ariana for criminal charges.

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.  

Kuttner 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?    56

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."  

THE RECKONING

0506-fmi_m_0 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 Commission look 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,Newalqaida 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!

Piranha-eat-cows-1 Now of course Prof. Johnson hails from the UK.

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

MATERIAL OMISSIONS

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.

356509241v_225x225_Front_padToSquare-true One of only nine "former IMF Chief Economists" who still walk amongst us,  Prof. Johnson may have only served in that post briefly,  from March 2007 until September 2008. 

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 356322446v_225x225_Front_padToSquare-true 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.

John-Paulson He may also be able to instruct the jury on the fine arts of concealing what one really believes  in order to reconcile the divergent interests of multiple clients. 

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. 

CONSOLATIONS

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.




April 22, 2010 at 06:43 AM | Permalink | Comments (3)

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

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CRIMAMERICACHART (click on graph to expand)

In 1840, Tocqueville, otherwise usually an astute observer of American society, proclaimed that “there is no 8968 country where criminal justice is administered with more kindness than in the US.” 

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 Bachs 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.

 In this sanguine view, US prosecutors, police, investigators, and judges leave no stones unturned to see that crimes are punished, justice is done, and the  US Constitution is respected.

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.  

MainAmy_BachRachel_Gracie Fortunately, Ms. Bach, a young New York attorney and law professor,  has provided a compelling, well-researched antidote to this conventional fairy tale. 

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.

EXCEPTIONS?

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.

StoryIndeed, 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 of 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.”

Gat_0000_0001_0_img0083  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

 The special merit of Ms. Bach’s book  is that she takes such pat generalizations  about “ordinary injustice” down from the shelf  and brings them to life with a series of extraordinary case studies.

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.

 As Ms. Bach emphasizes,  this lack of transparency also prevents the public from being able to tell  just what they are getting for the hundreds of billions of  taxes  spent on the criminal justice system --  as well as  how the courts are doing with respect to delivering what is supposed to be their key product – justice. 

 One immediate benefit of Ms. Bach's field work is a rich trove of amazing real world stories about how the system actually works.

 ✔   For example,  in her book we meet a Troy New York city judge who routinely fails to inform defendants in his court Blindjustice 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.  

PATTERNS

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.

Prison 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.

ROOT CAUSES

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 theCrowdedPrisons 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 result is that today, in the US, the number of inmates in our local jails and state and federal prisons is at an all-time high: over 2.3 million, 6.8 times the number in 1974.

This means 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).


  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.

090823-prison-hmed-11a.hmedium 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 Justice2 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!

 

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April 1, 2010 at 04:36 AM | Permalink | Comments (1)