"Occupy Wall Street:" A Protest Against Fraud?

October 2011

By Peter Goldmann, CFE

The so-called "Occupy Wall Street" movement has been mostly ridiculed by political conservatives, and less-than-enthusiastically embraced by liberals. On the one hand, the protest spotlights some key aspects of fraud in the financial markets that auditors, law enforcement officials, regulators and others should find interesting. However, as many critics have noted, the demonstrators have no clear set of demands or reasons for doing what they're doing.

In February of last year, I wrote in this space about the Financial Crisis Inquiry Commission's (FCIC) diligent but generally unnoticed work -- having resulted in little more than a partisan split on the causes of the financial crisis, and no unified call for action against the massive and widespread fraud that the Commission did find to have preceded the meltdown in the housing, securities and derivatives markets.

The Commission did produce a 576-page report which included some useful exposure of the role of rampant mortgage fraud in bringing about the financial crisis. It also questioned the business practices of the three securities rating agencies in assessing the creditworthiness of some of the most risky securities on the market -- several of which were backed by highly fraudulent mortgages.

Since then, however, the problem of executive fraud and mismanagement that contributed to the onset of the worst financial crisis since the 1930s has continued to simmer just beneath the surface of politics as usual. While the Dodd-Frank Act attempted to establish regulatory checks that would reduce the risk of another major financial meltdown, its primary accomplishment has been a deadening weight of compliance on financial institutions -- including those that played by the rules throughout the period of financial precariousness.

Protest on Wall Street
Now we have thousands of mostly 20-something protesters gathering on Wall Street, in Chicago, in Boston and even as far away as Cologne, Germany. They may not know it, but they have, for the first time since 2008, brought financial wrongdoing into the public spotlight -- something the FCIC should have done, but didn't... and a task at which Congress as a whole has also failed miserably.

This, of course, may be no coincidence. It is an age-old truism that Wall Street and Washington are politically and financially joined at the hip -- whether average Americans like it or not. Jonathan Zimmerman of the Christian Science Monitor wrote: "The 'Occupy Wall Street' protesters aren't extremists on the fringe. They reflect the frustrations of large swaths of American society. By taking aim at corporate greed and corruption, they embody a venerable tradition of American populism with roots back to Jefferson."

Yet, the nebulousness of their demands and declarations suggest that the kids clogging traffic in downtown Manhattan have no clue about Dodd-Frank, the Volcker Rule, mortgage fraud, insider trading or any of the numerous other complex components that made up the underbelly of Wall Street deceit and dishonesty leading up to the financial crisis. Thanks to the media, though, the attention generated by the "occupiers" may actually exert some much-needed pressure on the country's financial institutions to clean up their act.

The Widening Wealth Gap
Despite their hazily articulated railing against big banks, a common theme of many of the participants' grievances seems to be targeted at the growing gulf in financial well-being between rich and not-rich.

This is a far cry from accusing the banks of having committed fraud, but some of the leaderless movement's statements have suggested that the "take no prisoners" practices of the financial world have breached ethical boundaries and left middle-class Americans struggling to make ends meet in the process.

For those who dismiss the demonstrators as irresponsible youngsters with nothing better to do than try to get on TV, it should be noted that some pretty responsible and well respected pundits are taking the protest seriously.

For example, New York Times columnist Nicholas Kristof wrote on October 1: "We've seen that inadequately regulated, too-big-to-fail banks can undermine the public interest rather than serve it -- and in the last few years, banks got away with murder. It's infuriating to see bankers who were rescued by taxpayers now moan about regulations intended to prevent the next bail-out."

Kristof goes on to encourage the protesters to solidify their demands by insisting on reforms such as "adopting the Volcker Rule to limit banks' ability to engage in risky and speculative investments."

Though somewhat watered-down since its original conception, this rule was initially intended to reduce the chance that banks would engage in the kind of risky investing that resulted in creation of grossly deceptive and complex derivatives that were then marketed with tactics of questionable ethical virtue to institutions such as pension funds that are now reeling from drastic plunges in the net value of their portfolios.

Additionally, a European equivalent of the Volcker rule just might have prevented the massive frauds at UBS and Societe Generale, which cost both of those bastions of international finance billions in losses and incalculable amounts of reputational capital.

The problem with "Occupy Wall Street" is that as it continues to sustain vitality, it still lacks a clear purpose. If a leader of the movement were to emerge -- ideally one with substantial experience on Wall Street -- far more credibility might be afforded the movement. More importantly, far more focus on one of the underlying causes of the economic and financial mess we're in -- namely fraud -- would get the attention it so richly deserves from a grassroots initiative... and which might reinforce the efforts of professional fraud-fighters in a surprisingly powerful way.

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