7 Things About Prosecuting Wall Street You Wanted to Know (But Were Too Depressed to Ask)
President Obama's Justice Department, under the direction of Attorney General Eric Holder, hasn't indicted a single bank executive for the massive Wall Street crime wave that devastated the economy. The regulatory reform which followed the 2008 crisis wasn't nearly enough, and yet Republicans are trying to weaken even that.
And just this week there were several news stories about bank crime. What do they mean? Why haven't any bankers gone to jail? What's going on in this country?
Here are seven things about Wall Street crime and Washington "justice" you might have wanted to know, but were probably too depressed to ask. It's true that there's a shortage of justice where bankers are concerned. But don't get depressed. Get serious - about demanding change.
1. Why did Holder say mega-banks are "too big to jail"?
Attorney General Holder recently said the Justice Department can't indict too-big-to-fail banks because it would endanger the nation's, and possible the world's, economy. Those comments were misleading at best, because Holder doesn't offer any plausible reason not to indict individual bank executives at those institutions.
Criminal indictments against bankers are necessary -- both for the cause of justice, and the safety of our economy. And yet no bank executives have faced criminal prosecution.
Why did Holder make these comments? It's called misdirection. It gets everybody thinking about one question -- Why aren't they indicting banks? -- so they won't think about a more important question: Why aren't they indicting bankers?
2. If hurting 'too big to fail' banks is such a concern, why did the Justice Department and the SEC just sue Bank of America? By some measures it's the biggest mega-bank of them all.
The latest lawsuit against Bank of America describes massive, systematic, and very deliberate fraud against investors who backed residential mortgage-backed securities (RMBS). Those investors included many pension funds, like the one that serves Detroit's retirees. There's evidence BofA bankers knowingly sold securities in which up to 40 percent of the mortgages failed to meet underwriting standards. That's against the law.
Shareholders bear the costs and the consequences of these suits, which are directed against the banks as institutions -- even when the suit in question involves fraud against the shareholders themselves. That means the executives who profit from criminal behavior have absolutely no reason not to commit those crimes again and again and again -- which, as the record shows, is exactly what they have been doing.
Suits like these do not endanger the institution being sued. The amounts of money involved -- $850 million, in this case -- sound large. But they're negligible when compared to the revenue at America's bloated mega-banks.
The Justice Department's indictment says things like this: "The Offering Documents contained untrue statements of material fact and omitted to state other material facts required to be disclosed that misled investors." Note the use of the passive voice: The indictment doesn't say "Defendants A through E published untrue statements..."
For the first statement to be true, the second statement must also be true. But to hear the Justice Department tell it, it's as if these frauds committed themselves. Its pattern has been: Sue the bank, but only for amounts it can easily pay. And never hold the individuals who committed the fraud personally responsible.
3. Why sue Bank of America at all, if they're in the banks' pockets?
Here we're getting into the realm of speculation. But Washington officials have multiple constituencies, presumably including wronged investors who want restitution of some kind.
They presumably want to make sure the banks' exposure is kept manageable -- from the bank's perspective -- but don't want to anger the investors any more than necessary.
4. The Justice Department has said it's too hard to get convictions in financial fraud cases. Is that true?
The longer answer to this question is:
More than 1,000 people were convicted after the much smaller savings and loan scandal of the 1980s. These are the words of law and economics professor William K. Black Jr., who was a regulator during that period:
"In the Savings and Loans crisis, which was 1/70th the size of this crisis, our agency made over 10,000 criminal referrals that resulted in the conviction on felony grounds of over 1,000 elites in what were designated as major cases."
It wasn't "too hard" to get a conviction then. But then, in those days they were trying.
It wasn't hard to get convictions against low-level employees of GE Capital were last year, on very complex charges involving bid-rigging fraud against municipalities.
That indictment -- United States of America v. Carollo, Goldberg and Grimm -- wasn't brought by the President's much-touted Mortgage Fraud Task Force, which has yet to produce any criminal indictments. Instead it was successfully prosecuted by local US attorneys.
A rare courtroom victory against Goldman Sachs was achieved just last week. Needless to say, it was not against a Goldman executive, but against a relatively junior employee, trader "Fab" Tourre. It was not a criminal prosecution, but a civil case. And the verdict was won by the SEC, not the Justice Department.
5. Why don't they want to indict bank executives?
Again, we're dealing in speculation. But it isn't hard to come up with a guess. Both Attorney General Holder and his recently departed No. 2, Lanny Breuer, had high-priced jobs defending Wall Street bank executives. Breuer has already cashed out and gone back to Covington & Burling, Holder's once (and future?) firm, with a special title and position created especially for him.
As for elected officials, let's face it: Bank executives write very big campaign checks. They also hobnob with powerful politicians. When JPMorgan Chase CEO Jamie Dimon testified before the Senate Banking Committee earlier this year about the "London Whale" scandal, only two of the senators facing him had not received campaign contributions from his bank. Dimon was also called "Obama's Favorite Banker" for a while.
Another executive with a large financial operation, GE's Jeffrey Immelt, was named head of the President's 'Jobs Council.' Immelt was responsible for GE Capital while those municipalities were being criminally defrauded in the case which became United States of America v. Carollo, Goldberg and Grimm.
6. Why are they saying that the SEC's "winding down" its fraud investigations?
The Wall Street Journal ran an article today called "SEC's Hunt for Crisis-Era Wrongdoing Loses Steam." The article says that "securities regulators are quietly winding down some of their highest-profile investigations related to the crisis."
The SEC's pursuit of lawbreaking Wall Streeters had "steam"? Who knew?
One possible, and flippant, answer to this question: They got "Fab" Tourre. Their work here is done.
Another, more serious answer -- the one the SEC prefer -- is that the impending statute of limitations makes it more difficult to keep pursuing pre-2008 misdeeds. There's some truth in that, although it underscores the bitter perception that the Justice Department and SEC chose to "run out the clock" on Wall Street's crimes.
There is, however, some research being conducted into useful legal avenues that still may be open under national and/or New York state law. Negotiators in civil cases are also able to demand leadership changes, admissions of wrongdoing, and personal liability. They just haven't done it.
There is no indication that Federal authorities have an appetite for either route, however.
7. What can we do about it?
Don't get depressed; get busy. Let elected officials, from the president on down, know that you want:
A full investigation of Wall Street crimes.
Expanded powers for the Consumer Financial Protection Bureau.
A reinstatement of Glass-Steagall and the breakup of too-big-to-fail banks.
A rejection of the Republicans' lunatic plans to take already-inadequate bank regulations and weaken or eliminate them.
No more deals where banks "neither admit nor deny wrongdoing."
You can also let them know that bankers sould personally pay for their misdeeds -- with their money, their reputations, and their jobs.
Lastly, you can demand new leadership at the Department of Justice -- leadership that takes the word "Justice" a little more seriously when it comes to Wall Street.
UPDATE: Shortly after this was published a headline appeared on The Huffington Post which read "Criminal Investigation for JPMorgan." The accompanying story by Shahien Nasipour says that the bank disclosed that it was under investigation as required by law in its quarterly filings. "The Justice Department told JPMorgan in May," says the story, "that prosecutors had 'preliminarily concluded' that the bank violated civil securities laws related to mortgage securities it packaged and sold from 2005 to 2007."
The New York Times website provides additional additional detail regarding the investigations, noting that "the civil division of the United States attorney's office for the Eastern District of California" - not that much-vaunted Mortgage Fraud Task Force - "has 'preliminarily concluded' that JPMorgan flouted federal laws ..."
That's a civil, not criminal, investigation. Add the Times: "The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage."
In other words, there's no indication that any bankers will face prosecution in the foreseeable future. If that changes we'll let you know.