Running for re-election, President Barack Obama frequently blames Wall Street and the deep financial crisis it caused for the underperforming economy. He doesn’t advertise that no major honcho of finance has been jailed under his watch for the mess, however.
The lack of a high-profile arrest and trial is all the more surprising given that Obama has tried to stain his Republican rival, former Massachusetts Gov. Mitt Romney, as a creature of Wall Street.
Past financial crises have always had antagonist. The savings and loan crisis of the late 1980s had banker Charles Keating. The CEO of collapsed energy trader Enron, Kenneth Lay, became the face behind a drive to revamp accounting laws in 2002. Both men were prosecuted for and convicted of financial crimes.
In the aftermath of the financial crisis of 2007-08 and the subsequent Great Recession, there’ve been plenty of scapegoats but no important actor fitted for pinstripes.
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Why not? There’s no single compelling answer to that question.
“Some people (in regulatory agencies) believe that the folks at the Treasury and the Fed felt that pursuing chief executive officers would delay the economic recovery and continue to destabilize the financial system,” said John Coffee, a Columbia University law professor who frequently testifies before Congress on securities law. “They had that point of view. Whether they had any influence over the Department of Justice is very uncertain.”
Those agencies don’t have prosecutorial powers.. The Federal Reserve declined to comment. The Treasury Department pointed to comments Aug. 1 by Secretary Timothy Geithner in which he said, “It’s very important to our country in the broader challenge of trying to restore trust and confidence in the financial system of having an enforcement response that’s very powerful and credible. That’s very fundamentally important. “
The Justice Department, which receives prosecution referrals from the Securities and Exchange Commission and other agencies, refuted any assertion that prosecutors have backed off.
“We follow the facts and the law in our investigations. Prosecuting financial fraud and protecting the integrity of our banking system have been and will continue to be a top priority for the Department of Justice,” Michael Bresnick, the director of the Justice-led Financial Fraud Enforcement Task Force, said in a statement to McClatchy. “If we uncover evidence of fraud or other illegal conduct, we will pursue that conduct aggressively.”
The agency and the SEC, which have several open investigations into alleged misdeeds that helped bring on the financial crisis, have aggressively pursued insider trading and Ponzi schemes, which have proved to be easier prosecutions.
The Justice Department said it had convicted more than 19,000 defendants for financial fraud from October 2007 through this June. Those prosecutions resulted in more than $185 billion in civil and criminal forfeitures.
For all those numbers, however, no major Wall Street actor involved in the root causes of the crisis has gone to jail.
An insider who’s worked for the prosecution and the defense in post-financial crisis prosecutions said there was great expectation that the Obama administration would prosecute Wall Street crime more aggressively than its predecessor did. It didn’t happen, in part because the government was trying to rescue banks and resolve the issue of toxic assets threatening the health of the financial system.
“I think there was an attitude that they’re going to go slow, because if they’re going to rescue them, why are they going to prosecute them, too? I think that sort of leaked down from the top,” said the insider, who spoke only on the condition of anonymity because his position prohibits open discussion of the subject. “I think that it’s changed recently. . . . It’s late in coming.”
One reason for delay, the insider continued, is that there wasn’t a long institutional history built up from previous cases. And there simply weren’t the resources devoted to white-collar crime.
“It’s catch-up from a slow start, so there is a fair way to go. Memories don’t get stronger with time, they get weaker,” he said.
That’s of little comfort to ordinary Americans who are perplexed about the lack of prosecutions. When a McClatchy reporter appeared on a San Francisco talk show recently to discuss the issue, listeners to “Your Call,” a public radio show on KALW, fired off angry emails.
“We have a totally corrupt system – Congress, the judiciary, the executive, the press! These guys are sickening. I spit on them. Get some decent unbiased non-gutless reporters on your show!” one listener wrote.
Said another, “What the failure to bring charges tells me is: What’s criminal in the U.S. is what’s legal! And why would that be? Conflicts of interest between legislators and the financial industry.”
The tone of the emails suggests anger boiling over. The show’s host, Rose Aguilar, senses that citizens are drawing a line that connects Wall Street and Washington.
“They’re so angry because they know the system is rigged. . . . They want to know why no one is being held accountable for this,” she said.
Aguilar pointed to California’s overcrowded prison system, where minor offenses such as marijuana possession are prosecuted while what critics view as widespread financial fraud during the housing crisis goes largely unpunished.
“Why has no one been held accountable? I think what feeds into it is the poverty rate is increasing, inequality is increasing, people are having a hell of a time finding a decent paying job with benefits, and they connect the dots,” she said.
Not that long ago, then-New York Attorney General Eliot Spitzer aggressively pursued misdeeds on Wall Street, riding the effort to the governor’s mansion in 2007 before it all dissolved a year later in a tryst with a prostitute. Spitzer took on insurance giants, investment banks and even the compensation package for the then-head of the New York Stock Exchange.
“I would think the public would be happy if you had someone like an Eliot Spitzer today trying to indict senior investment bank officials. The public would be sympathetic to a Spitzer-like campaign of that sort,” Coffee said.
Another explanation for the lack of high-level prosecutions is that some high-profile cases have backfired on the government.
The most dramatic involved two traders in a hedge fund run by now-defunct investment bank Bear Stearns. The email evidence that federal prosecutors presented seemed like a slam-dunk conviction but the jury exonerated Ralph Cioffi and Matthew Tannin in late 2009. They’d been handcuffed and paraded in front of TV cameras in June 2008.
Similarly, in a closely watched civil case, a jury on July 31 rejected arguments by the SEC and cleared Brian Stoker, a midlevel mortgage-investment executive for Citigroup, of misleading investors in a $1 billion complex bond.
“They didn’t have to show proof beyond a reasonable doubt. And basically the jury was not sympathetic with bringing a case against an individual who was essentially a lower-level functionary,” Coffee said.
In essence, the jury thought the prosecution should have reached higher up, he said.
“The problem is there is a great deal of organizational distance between the chief executive officer and the chief financial officer and people 10 levels down in the organization who may have been loading up portfolios with toxic mortgages and betting against them,” he said of the difficulty in prosecuting.
In the aftermath of the financial crisis, many potential villains have cut deals and avoided prosecution:
– Wells Fargo agreed in July to pay $175 million to settle with the Department of Justice over allegations that it had funneled minority borrowers into subprime loans in the housing boom that brought on the financial crisis. A month later, Wells Fargo settled with the SEC for $6.5 million for allegedly failing to properly disclose risks to investors about now-toxic mortgage bonds, a sum that amounts to a slap on the wrist.
– Investment bank Morgan Stanley settled in August for the small sum of $5 million a complaint from the Justice Department that alleged the Wall Street bank had used the complex financial instruments called derivatives to benefit from price-fixing in the electricity market.
– Bank of America agreed last year to pay investors $20 billion for mortgages that were pooled into complex bonds and later exploded on the investors who were holding them. Then the Charlotte, N.C.-based bank settled a suit brought by the Justice Department for $135 million last December. The agency alleged that Countrywide, a lender bought by Bank of America, had routinely discriminated against African-Americans and Latinos in mortgage lending during the crisis years.
– JPMorgan Chase, the nation’s healthiest bank, agreed in June 2011 to pay $153.6 million to settle with the SEC over allegations that it had misled investors about complex bonds tied to the U.S. housing market. A month later the bank settled with the SEC for $228 million over alleged bid-rigging in auctions of municipal bonds.
– Goldman Sachs was the subject of hearings by the Financial Crisis Inquiry Commission and the Senate Permanent Subcommittee on Investigations. Goldman settled with the SEC in 2010 for $550 million, agreeing to revamp its practices while neither admitting nor denying that it had misled investors about complex mortgage bonds that it was selling and also betting against. This past August, the Justice Department quietly closed its probe of Goldman without charges.