If Obama Had Prosecuted Goldman Sachs' Brain Trust, We Wouldn't Be Plagued by Them Again in Trump's Cabinet

In September of this year Massachusetts Senator Elizabeth Warren sent a letter to Michael E. Horowitz, the Inspector General of the Department of Justice, requesting an investigation into why the Obama administration failed to prosecute any Wall Street executives after the financial crash. Warren's letter pointed to findings by Financial Crisis Inquiry Commission (FCIC), which had provided the Justice Department with 25 cases for potential prosecution. The department neglected to take on any of these cases.

Warren's letter was sent prior to the election, but it's an issue that should resonate with the public even more now that Trump has been elected. Goldman Sachs, one of the major symbols of the crash, has enjoyed a mammoth influence on Washington for years, but its footprint is poised to grow even larger if a couple of notable Trump nominees are confirmed. Gary Cohn, the longtime COO of the finance company, will become director of the National Economic Council; Goldman partner Steven Mnuchin might become secretary of the treasury and former Goldman investment banker Steve Bannon has already become Trump's chief strategist and senior counselor.

While many chalk up President Obama's lack of action to business-as-usual in Washington, United States history features notable crackdowns after vast financial scandals. After the crash of 1929, the head of the New York Stock Exchange went to jail and the savings-and-loan scandals of the 1980s produced over 1,000 prosecutions. The reasons behind inaction certainly transcend Obama (who received more money from Goldman Sachs during his first presidential campaign than any other donor) and point to a deep, systemic problem. After spending a year talking to the players involved, Jesse Eisenger wrote about the lack of convictions for the New York Times Magazine in 2014:

Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic. During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime. The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms.

The numbers certainly add up. According to a report on the Justice Department's own data, white-collar prosecutions are at a 20-year low. “The decline in federal white-collar crime prosecutions does not necessarily indicate there has been a decline in white-collar crime,” the report's authors point out, “Rather, it may reflect shifting enforcement policies by each of the administrations and the various agencies.”

Those shifting enforcement policies (the "critical changes" as Eisenger called them) are exacerbated by the revolving door between the financial industry and those taxed with policing it. In his 2011 Rolling Stonepiece, "Why Isn't Wall Street in Jail?" Matt Taibbi shares a story from SEC investigator Gary Aguirre:

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats.

Perhaps the best symbol of Aguirre's insight could be found with the former Attorney General himself. After leaving the Justice Department, Eric Holder rejoined his old law firm, Covington & Burling, which welcomes a number of clients Holder declined to prosecute.

Would someone like Steve Mnuchin even be available to nominate if Obama had made any kind of effort to change this culture? In a comprehensive New Republicprofile on Mnuchin, David Dayen goes beyond some of the more well-known Mnuchin controversies (his career with Goldman Sachs, his connection to the Bernie Madoff scandal and his suspicious departure from a Hollywood production company that tanked) and zeroes in on Mnuchin's time as chairman of OneWest Bank, a noted foreclosure machine that regularly dispossessed the homes of senior citizens and people of color.

In a Nation piece that also details foreclosure frauds of Trump's secretary of commerce pick Wilbur Ross, Dayen explains how Mnuchin's bank purchased predatory lender IndyMac, along with its thousands of failing mortgages. Mnuchin cut a deal with the FDIC to protect the bank from losses, so the FDIC lost $13 billion on the foreclosed homes while OneWest turned $3 billion in profit. As Dayen describes it:

What that meant for homeowners was they were rubble to be plowed so Mnuchin could profit. Borrowers got few options to modify loans, as OneWest dashed to foreclosure. The bank pursued all of the tricks of the era—servicer-driven defaults (where servicing companies tell homeowners they must miss payments to get help, and when they do, they move to foreclose), dual tracking (when servicers negotiate modifications and pursue foreclosures at the same time), and more. Activists ended up on this guy’s lawn demanding that the foreclosures stop.

Politico recently reported that OneWest once foreclosed on the house of a 90-year-old Florida woman, Ossie Lofton, because of a 27-cent error. Lofton had taken out a reverse mortgage and a subsidiary of OneWest sent the woman a bill for $423.30. Lofton mailed the bank $423 and then a separate check for 3 cents, not realizing the actual difference was 30 cents. Donald Trump's treasury secretary nominee and his partners then filed for foreclosure on Lofton's house in 2014—because of the missing 27 cents.

Trump's appointment of Gary Cohn will not require Senate approval, despite the fact he'll be the chief strategist in developing economic policy, and this is probably a good thing for the president-elect. A Senate confirmation would mean lawmakers would be allowed to bring up the two years leading up to the financial crash when Cohn was co-president of Goldman Sachs.

In 2009, McClatchy's Greg Gordon reported on those years and demonstrated how the "Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting."

To avoid a conflict of interest, Cohn will have to sell his shares at Goldman Sachs. Bloomberg reports that they're worth about $210 million and that he'll be able to defer any capital gains taxes from the sale.

In April of this year the Justice Department announced that Goldman Sachs would pay out over $5 billion in a settlement connected to its sale of residential mortgage backed securities, echoing Eisenger's point about the department looking to reach settlements rather than prison sentences. "This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail," declared the statement.

It seems evident that Goldman Sachs will be able to bounce back from this punishment.