David Cay Johnston

By David Cay Johnston

The views expressed are his own.

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

While the United States has one of the most effective tax regimes, especially for on-the-books wage earners and pensioners, and one of the smallest underground or shadow economies, it has the largest amount of tax evasion measured in dollars.

Murphy’s report covers 145 countries that generated $61.7 trillion of gross product, 98.2 percent of the world total. The 145 countries had only 61.7 percent of world population, a reminder of how poor the more than 2.7 billion people in the other 90 countries are.

Murphy estimates U.S. tax evasion at $337.3 billion, 10.7 percent of the global figure and close enough to the official Internal Revenue Service tax gap estimates to be credible.

The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.

WHY NO PROSECUTIONS?

Another sort of financial crime was discussed when Steve Kroft, interviewing Obama for CBS’s “60 Minutes,” cited a poll showing that 42 percent of Americans believe Obama’s policies favor Wall Street. Kroft said he suspects that is because “there’s not been any prosecutions, criminal prosecutions, of people on Wall Street.”

Obama deftly avoided the issue. “Some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

Shame on Kroft for not following up with the obvious question: “Where are the prosecutions of those who did commit crimes, Mr. President?”

There is no need for new laws to rein in fraud, the evidence of which is pervasive, reported in detail by our savviest journalists, thoroughly documented in academic reports and in all manner of official government reviews.

Obama then ever so subtly shifted gears, telling Kroft “and that’s why we put in place the toughest financial reform package since FDR and the Great Depression. And that law is not yet fully implemented…”

Obama’s words neatly conflated two separate issues.

One is atrocious business judgment that should have wiped out the wealth of those who invested in the speculative derivatives casinos. That might have restored Wall Street as a home to investment houses that marshaled capital for productive investments.

The other issue is fraud.

Juries often fail to grasp arcane regulations. A crime so complex that it takes a prosecutor a day for her opening argument invites reasonable doubt. But fraud is something juries do get. Show a jury falsified records and bald-faced lies in disclosure documents, then toss in testimony from insiders who pointed out the wrongdoing only to be told to shut up — or who got fired — and convictions follow.

A GROWTH INDUSTRY

We know this because during the savings and loan crisis two decades ago juries convicted in more than three thousand cases, including more than a thousand major felony cases committed by senior insiders.

The man most responsible for those convictions was Bill Black, a federal banking regulatory lawyer at the time who now teaches about white-collar crime as a professor at the University of Missouri-Kansas City law school.

So has Obama or his Justice Department sought Black’s advice? “No,” Black told me.

Instead Obama leans on Treasury Secretary Timothy Geithner, who was worse than a sightless sheriff when he presided over the Federal Reserve in New York. Geithner not only failed to stop the looting, he actually shut down investigators who were onto the frauds because he said he worried that the institutions he was supposed to regulate were too fragile to withstand scrutiny.

The worst part of this is that the statements of the leading Republicans seeking to succeed Obama, a Democrat, make clear they have no interest in putting Wall Street criminals behind bars either.

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.

The author is a Reuters columnist. The opinions expressed are his own.

KANSAS CITY, Mo. –  The U.S. politician-businessman that Congress put in charge of determining the reasons for the 2008 financial crisis has a sobering message for us: “It’s going to happen again.”

Phil Angelides, the real estate developer and former California state treasurer who chaired the Financial Crisis Inquiry Commission, said on Friday that “all across the marketplace the warning signs were there” of a coming disaster but the mechanisms and political will to stop it were not.

He and I both spoke at a University of Missouri-Kansas City Law School symposium on the financial crisis and the commission set up to examine it.

Angelides warned of a recurring economic nightmare unless Congress and the next president start paying attention to the facts and stop listening to the people who caused, profited from or failed to detect the crisis.

While Wall Street and laissez faire Republicans have attacked the commission’s final report — all 22 footnoted chapters of it — Angelides boasted that not one fact had been proven wrong.

Statements from the leading Republican presidential candidates, as well as the tepid actions of President Barack Obama, show an active interest not in fixing the problems, but rather in enabling Wall Street to go on doing business pretty much as it chooses.

SQUELCHED OR IGNORED

For months now, a canard has gained popular currency through mere repetition: no one could have seen the meltdown coming.

The commission’s report shows that a number of people did see what was coming but they were squelched or ignored. Clear back in 1998, four months before the Long-Term Capital Management collapse, Brooksley Born, then chairwoman of the Commodity Futures Trading Commission, wrote a paper predicting that disaster would flow from the unregulated sale of derivatives. Congress responded by making sure derivatives were not regulated.

Then there were the internal reports at failed mortgage banker Countrywide Financial, which warned there was little-to-no hope that many borrowers would ever repay. Freddie Mac and Fannie Mae tried to resist these shaky mortgages, but they had to keep taking them after Countrywide founder Angelo Mozilo applied political pressure.

In early 2004, after detecting a mortgage bubble in the data, I wrote two pieces for the New York Times warning of the problems. If a mere journalist who was not even reporting on real estate could discern the problem, what excuse was there for those whose job it was to monitor the situation?

Wendy Edelberg, who was the commission’s executive director, said on Friday that “while you can never predict all panics, the flip side is this crisis was caused by human actions and was avoidable.”

She showed with hard numbers that, contrary to the nonsense being peddled by Wall Street and the politicians it finances, the meltdown was a Wall Street creation.

Edelberg presented charts showing that loan delinquencies “were lower by an order of magnitude” for government-sponsored Fannie and Freddie than for Wall Street’s mortgage-backed securities. Delinquencies at one point were 15 percent for Fannie and Freddie versus 40 percent for Wall Street.

Edelberg also outlined who bought the obviously bad loans. No one did.

She compared the bad loans to soup with so much fat no one wants it, so it is put in the refrigerator. Once the mixture chills the fat rises to the top and is skimmed off.

EXCESS FAT

By 2006 more than 80 percent of the sure-to-fail loans were inside collateralized debt obligations that were being repackaged and resold like so much excess fat. “No one was actually buying the risk,” she said. “It was just being recycled.”

This is exactly what Washington politicians in both political parties, with their eye on donations from Wall Street, do not want to hear.

One of the best proofs of official lack of interest in learning the facts is the size of the commission budget Congress authorized: $9.8 million.

That is a tiny fraction of the $175 million spent investigating the Space Shuttle Challenger disaster in 1986, and that was in 1980s dollars. It is less than a quarter of what Kenneth Starr spent investigating President Bill Clinton‘s dalliance with an intern.

And then there is the official hostility to the commission. When the report was issued in January, Representative Darrell Issa, a California Republican and one of the richest self-made men in Congress, mounted an investigation.

Angelides characterized the move as a search for just one email showing the inquiry was motivated by ideology rather than truth-seeking. Issa came up dry, but his message was loud and clear: don’t mess with Wall Street.

What the commission’s report has shown is that leaving Wall Street alone will ensure a future of continuing panics, to the detriment of everyone who is not part of Wall Street.