Where’s Warren?


Where is Senator Elizabeth Warren when we need her? Senator Warren — whose main mode of political operation is grandstanding during financial-oversight hearings — recently browbeat some feckless Treasury officials over the HSBC money-laundering case. HSBC was fined just under $2 billion in the settlement, but that was not enough for the crusading Senator Warren: She wanted to see bankers led off in leg irons. “Your company pays a fine,” she said, “and you go home and sleep in your own bed at night — every single individual associated with this — and I just think that’s fundamentally wrong.”

I am inclined to agree with Senator Warren in the case of HSBC. Somebody over there belongs in a prison cell, and possibly in stocks. When Larry Kudlow put the question to his bipartisan panel a while back, nobody, left or right, seemed to think that Senator Warren was being unfair to the bank. It was a rare moment of bipartisan agreement.

So I am hoping that Senator Warren will join me in asking: Why haven’t the powers that be in the ailing state of Illinois been dragged off to the hoosegow? Or at least given a $2 billion fine, as HSBC was?

The state of Illinois is a criminal enterprise engaged in securities fraud. Illinois this week became only the second state in history to be charged with fraud by the Securities and Exchange Commission. As I reported back in 2010, the state of Illinois is habitually underfunding its public-employee pensions, placing the state government’s finances in an ever more precarious state. And the Illinois government systematically misled the public about the state of its finances in order to allow it to keep selling bonds to witless investors. As the SEC puts it: “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”

Illinois is hardly alone in this. New Jersey was charged with fraud on precisely the same grounds — lying to investors about its pensions. Former prosecutor Kevin James, in the course of his campaign for mayor of Los Angeles, went so far as to compile a dossier on the city’s finances and file a complaint with the SEC. Shortly after the municipal bankruptcy of our friends in San Bernardino, America’s worst-governed city, the SEC came calling, asking the city authorities to be sure to hang onto bond documents and communications with underwriters, and by all means to forgo putting them in the shredder.

As Senator Warren put it in a different context: “They did it over and over and over again, across a period of years. And they were caught doing it, warned not to do it, and kept right on doing it.”

It is time to put some lying, defrauding bureaucrats in prison.

The U.S. municipal-bond market is enormous: between $3.5 trillion and $4 trillion, or about a quarter of GDP. It is a sensitive market: Most municipal debt is held by individuals, including a great many easily spooked older investors, but a great deal is held by banks and other financial institutions. A meltdown in that market — one possible result of widespread fraud — could bring down banks and investment companies along with cities and states, and decimate retirement savings across the fruited plain.

It is, in other words, a situation that cries out for an example to be made of wrongdoers.

But Illinois did not even get a fine — just a settlement in which it agrees to mend the error of its ways. Why is that? A cynic might be tempted to think that, because all this governmental book-cooking helps the authorities in Springfield and elsewhere keep their public-sector unions fat and happy — which in turn helps keep Democratic campaign coffers full — the Obama administration may be taking it a little easy on the president’s friends and colleagues back home in Illinois. Maybe it’s political self-interest. Maybe it’s laziness. I would not rule out haplessness or stupidity, either. But I cannot help noticing: Illinois, New Jersey, California — they have something in common politically, no?

It is a very bad thing when private-sector bankers commit crimes. It is a much more serious thing when government commits crimes, because criminal governments undermine the entire enterprise of law enforcement, weakening our institutions and thereby interfering with the operation of markets. If you are a victim of fraud in Illinois, to whom do you take your complaint? To a state that is itself guilty of fraud? That is a serious problem in a free society.

Senator Warren has been working hard to build credibility on these issues, and her baby was the new federal Consumer Financial Protection Bureau. Perhaps she could reach into that organization for some advice on how to proceed with the case of the state-organized fraud in Illinois. But if she does, she should probably forgo the counsel of Anthony Gibbs. Who is he? He is the former executive vice president of legal compliance . . . at HSBC. Of course he now works at the Consumer Financial Protection Bureau. Where else would he work?

— Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near and It’s Going to Be Awesome, will be published in May. 


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