With Liberty and Justice for Some (14 page)

Starkman’s skepticism on the one-year anniversary of the crisis was well founded. Another year later, nothing had changed. There were still no criminal investigations, let alone prosecutions, of Wall Street criminals for the massive fraud that had been perpetrated on the nation. In October 2010, the
New York Times
columnist Frank Rich noted this lack of legal accountability.

Those responsible have plundered with impunity and kept their ill-gotten gains.
Inside Job
examined numerous Wall Street executives who, as the film put it, “destroyed their own companies and plunged the world into crisis” only to “walk away from the wreckage with their fortunes intact.” One of the film’s chief villains is Robert Rubin, the former Clinton treasury secretary and Goldman CEO, who made hundreds of millions of dollars at Citigroup while playing a central role in spawning the crisis. Today, Rubin’s riches are undiminished, and he continues to exert vast influence over America’s economic policies through the placement of his acolytes in the highest financial positions in the Obama administration.

It is true that there have been occasional sporadic efforts to create the appearance of accountability. However, they are so impotent, so inconsequential, that they actually serve to underscore the full-scale immunity enjoyed by the owners of our government. The Justice Department, for example, has initiated some civil actions against a few Wall Street executives, but the resulting fines are so insignificant in the scheme of their fortunes that they barely cause a dent.

For instance, in October 2010, Angelo Mozilo, the former CEO of Countrywide, settled charges brought against him by the Securities and Exchange Commission. The SEC had alleged that, among other things, Mozilo had fraudulently concealed enormous risks in the company’s subprime business from investors. While aggressively lauding the virtues of Countrywide’s financial instruments to the investing public, he was privately acknowledging how dubious they were. In one e-mail about the company’s subprime packages, he wrote, “In all my years in the business, I have never seen a more toxic product”; in another, he derided those products as “poison.” Government officials have repeatedly pointed to the Mozilo case as proof that they are serious about cracking down on Wall Street criminals. To settle all charges, Mozilo agreed to a fine of $67 million, with almost one-third of that to be paid by Countrywide.

That may seem like a substantial amount until one considers that Mozilo collected more than half a billion dollars in the prior eight years as he presided over a massive fraud. Now, the seventy-one-year-old retired executive will not spend a day in jail, and nothing prevents him from enjoying the rest of the enormous fortune he compiled. The notion that Mozilo—one of the financial world’s most egregious offenders—has been subjected to meaningful accountability does not even pass the laugh test. Yet in February 2011, the DOJ announced that it was closing its file on Mozilo without bringing any criminal charges.

A similar travesty occurred in November 2009, when the government settled a major fraud suit brought by the SEC against JPMorgan Chase. The SEC alleged that the bank had made secret payments to close friends of politicians in Jefferson County, Alabama, in the amount of 8 million dollars. In exchange for that $8 million, JPMorgan was allegedly allowed to play the primary role in providing $3 billion worth of refinancing to the county, using instruments so dubious and toxic that they eventually helped push the county to the brink of bankruptcy. Covert tape recordings of JPMorgan executives captured them talking about the local officials who would “get free money from us” and how they needed to “pay off people” who had influence in the county. Ultimately, one local politician was convicted of felonies for taking bribes and was sent to prison. But nothing of the sort happened to the principals at JPMorgan. Instead, the firm simply settled a civil suit brought by the SEC, without any admission of wrongdoing.

The JPMorgan settlement included a fine in the hefty-sounding amount of $722 million. Most of that, however, was accounted for by the firm’s agreement to waive fees that the bankrupt county owed to the investment bank but likely would not have been able to pay anyway. The actual amount JPMorgan paid was $75 million, which the company can easily justify as merely the cost of doing business. It pays a fine that’s tiny relative to the scale of the enterprise, admits no wrongdoing, all is forgotten, and it simply moves on to the next venture. Such was the outcome in Alabama even though the SEC had set forth multiple details to support its claim that JPMorgan executives had executed a pay-for-play scheme involving both politicians and other firms participating in the deal.

Hailed as “aggressive enforcement” by DOJ press releases, such proceedings are actually the opposite. They create the illusion of accountability while enabling scheming elites to commit crimes with impunity.

In mid-2009, this illusion was momentarily shattered when the U.S. government repeatedly tried to pressure a federal judge to approve an inexcusably lenient settlement with Bank of America. The SEC complaint charged that the Bank of America, when it was planning to acquire Merrill Lynch (with substantial bailout help from taxpayers) shortly before Merrill’s failure, had failed to disclose to its shareholders the fact that BoA had agreed to give Merrill’s executives billions of dollars in bonus payments. Had BoA shareholders known that their company was going to grant billions to the very people who had steered Merrill Lynch to disaster, it is quite possible that they would not have approved the acquisition. But they never had a chance to make that decision because BoA executives had simply—and illegally—omitted any mention of those bonus agreements when the acquisition was being discussed.

The SEC wanted to settle all charges for a minuscule fine of $33 million, to be paid not by the defrauding BoA executives but by the company. (Although corporate executives are typically shielded from liability when acting on behalf of their employers, they can be held personally liable for outright fraud.) In an unusual act, Judge Jed Rakoff rejected the proposed settlement as inadequate, noting that the fraudulent concealment was a matter of “justice and morality” that “suggests a rather cynical relationship between the parties.” He demanded that the fines be paid by “the individuals who were responsible,” and rejected the executives’ claim—now common among political and financial elites when they are caught committing crimes—that they were not guilty because their lawyers had approved their act. “It would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel,” the judge noted disapprovingly.

Only when substantially more money was added to the settlement did Judge Rakoff approve it, though he noted that he was doing so “reluctantly”; even the revised settlement, he said, was “half-baked justice at best” in light of the conduct of BoA executives. Because the new settlement met the minimal legal requirements, however, Rakoff had no choice but to sign off on it.

Judge Rakoff’s action, while shining a light on how the government shields corporate criminals while pretending to hold them accountable, is exceedingly rare. He is known for being a particularly aggressive jurist in these matters. Typically, such arrangements are simply rubber-stamped by the courts, and corporate executives thereby enjoy virtually complete immunity even when they are caught engaging in the most egregious criminal acts. Notably, as Bloomberg reported, the fines collected by the SEC for the fiscal year ending 2008 were the lowest since the beginning of the decade.

Evidence of Criminality Ignored

The immunity enjoyed by financial elites in America is particularly striking when compared to other nations’ responses to financial crises. In Iceland, for instance, not only have numerous bank officials been criminally investigated and charged, but, as Jurist news service reported in September 2010, “An Icelandic parliamentary commission…recommended that the country’s former prime minister be tried for negligence” for his role in the country’s 2008 financial crisis. Indeed, the subpoena-empowered commission conducted a thorough and very public investigation into the events leading to Iceland’s crisis and then published a 274-page report—which, among other things, accuses the former prime minister of having been aware of the underlying crisis but purposely refraining from taking action to stop it. Based on those findings, the commission’s report urges that the former prime minister be “tried and punished” for the role he played.

There is little doubt that a corresponding culpability exists in the American political establishment. Still, holding political leaders legally accountable is virtually unimaginable in the United States today, and the same is true for financial leaders.

Criminally prosecuting Wall Street executives and firms for their role in the financial crisis would not be a simple task. At issue are complex transactions, dispersed throughout multiple large institutions, and carried out under a deliberately vague and permissive legal regime. Indeed, in his 2003 condemnation of derivative instruments, Warren Buffet candidly acknowledged that the complexity of these transactions meant that neither he nor anyone else truly understood their value, impact, or interrelationships. Real investigations would require substantial time and resources and would encounter legitimate obstacles.

That said, large-scale criminality clearly played a major role in engendering the crisis. Even without subpoena power and other instruments of compulsion, many experts and commentators have compellingly documented numerous clear acts of illegality. Professor Bill Black comprehensively examined public documents to demonstrate that only “willful blindness” among lenders and credit ratings agencies would have led them to tout and endorse financial instruments that were essentially worthless. Yet virtually none of this evidence has even been meaningfully examined by the authorities, let alone pursued by prosecutors. As
Newsweek
’s Michael Hirsh lamented two years after the crisis, speaking about the role played by credit agencies: “One of the most distressing things about the current financial scandal is that there has been no…reckoning against the firms that were supposed to be watching the system for the investment public.”

This “no-accountability” approach is of course just a slightly altered variant of the mentality that led to the pardon of Nixon and the subsequent granting of immunity to powerful political criminals. Likewise familiar is the rationale now routinely invoked to justify the lack of prosecutions of financial elites: given their importance, it is vital that we not disrupt their efforts and actions by bothering them with investigations for their crimes. As Hirsh wrote about the prospects of prosecuting the credit agencies: “The government is simply too afraid to let that happen. Like many of the big banks, the ratings agencies have been deemed too big or important to the system to fail.”

In her book
ECONned
, Yves Smith—who spent much of her career on Wall Street, including a stint at Goldman—extensively details the fraudulent accounting practices that preceded the downfall of Lehman Brothers and other banks. As she notes, “What went on at Lehman and AIG, as well as the chicanery in the CDO [collateralized debt obligation] business, by any sensible standard is criminal.” Smith points out in particular the proliferation of the kind of pay-for-play that was exposed in the JPMorgan/Jefferson County case discussed earlier in this chapter.

Perhaps the most notable argument for clear-cut lawbreaking as the cause of the financial crisis came from a very unlikely source: the longtime Federal Reserve chairman Alan Greenspan, who spent much of his career demanding fewer and fewer regulatory restraints on Wall Street. In the wake of the economic collapse, Greenspan admitted that he had been wrong to oppose increased regulations, telling a House committee, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” and acknowledging that the crisis had exposed a “flaw” in his free-market ideology. But, after spending decades insisting that fraud was not a real problem on Wall Street, Greenspan also argued that much of the problem was due not to lax regulations but to outright criminality.

When even a longtime Wall Street servant such as Alan Greenspan admits that a substantial cause of the financial crisis was “just plain fraud,” the almost complete absence of criminal consequences is clearly an extraordinary injustice.