It is the 5th anniversary of the collapse of Lehman, AIG, and the GSEs. At this time 5 years ago, my assumption was that by today, legions of people would have already been prosecuted for their financial crimes.

That never happened.

I want to open the floor to discuss 3 very specific things:

1. What actual crimes were committed by banking executives, and who should have been prosecuted ? I want very specific examples of criminality, fraud, (include statutes if you know them) etc.

2. How successful would a decent prosecutor have been in obtaining convictions?

3.  Why wasn’t anyone prosecuted? Aside from cowardice, what were the true reasons?

I have m own ideas and theories; if we get enough details, I will flesh it out into a WaPo column.

~~~

What say ye?

Category: Bailouts, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Open Thread: Who Should Have Been Prosecuted ?”

  1. RW says:

    I’ll have to do some dredging for specific instances to make sure I have my facts straight but one thing I can state immediately and categorically: The kind of systematic investigative work that was done during and after other episodes of widespread fraud such as the S&L debacle was NOT done this time.

    A lot of somebodies in putative positions of responsibility were either unable or forbidden or unwilling to look.

    Even assuming DA’s were more willing to prosecute than frankly many appeared to be this time around, it’s damned hard to do that in the absence of referrals.

  2. Frilton Miedman says:

    1. Fraud, gross professional negligence, at the expense of hundreds of millions of livelihoods, bank exec’s and their traders made, and still make, ridiculously disproportionate salaries that should legally be considered “ill gotten” and clawed back.

    (Interesting, Congress voted to cut food stamps today to offset that fiscal loss)

    2. In light of exposed internal Emails by ratings company employee’s who were often fired for speaking out, there’s adequate proof of misconduct & investment fraud, they knowingly misrepresented packaged CDO’s of sub-primes as triple A, despite their own analysts protests.

    3. Banks own our government, any representative or regulator that dares cross them is out of a job next election cycle or blacklisted from future employment.

    Citizens United – Bribery is free speech, a criminal isn’t a criminal if he has enough money.

  3. slowkarma says:

    I think you have to separate the general concept of “wrong-doing” from “criminality.” There are all kinds of things that people do that are wrong that don’t necessarily cross over into criminality — and there are lots of probable criminal acts that don’t cross over into prosecutable crimes. Prosecutors have to show specific intent and a specific act — and a lot of this financial wrong-doing was embedded in bureaucratic procedures that were followed by people who didn’t either design the procedure or perhaps understand the implications of it, so how do you prosecute him/her? And would you only prosecute the guy who was dong it when the whole thing went south, or would you go after all those people who’d been doing it for years, but got out before the music stopped?

    For example, I knew a guy who sat in his house in Palm Springs at the height of the mortgage blowout, who played golf (with me) in the morning and then, in the afternoon, bought mortgages on behalf of a big bank, just sitting there with his laptop, buying them for someone else to bundle into securities. So he had one piece of it, the bundler guy had another piece, the people who were writing the liars loans had another piece, and the people at the bottom who were taking out the loans had another, and the bankers who were selling the securities had another piece. It was all wrong, but who do you prosecute? Lots of the people who were doing this thought the whole deal was better then sliced bread, and everybody was going to be rich and it’d go on forever…they were wrong, but were they criminals? They had no intent to be criminal.

    Here’s one thing to think about, one piece of evidence, that I read in one of the post-apocalypse books: one of the major figures in one of the major collapses was playing in a bridge tournament in Kentucky or Tennessee (?) and wouldn’t leave the tournament to fly back to New York when the whole thing was coming apart, apparently because he had no awareness that the whole thing was *about* to come apart. And he didn’t just do it out of pig-headedness or arrogance — his lack of awareness cost him personally tens and maybe hundreds of millions of dollars. How do you prosecute him? And for what? Being stupid? Isn’t that every American’s right? He had no intent to blow up the system, but he nearly did.

  4. Stock Soup says:

    Henry Paulson, former CEO of Goldman Sachs and Secretary of the Treasury.

    While he was Treasury Secretary the government bailed out AIG so they could pay their creditors, many of whom were large banks in the US. Who was AIG’s largest creditor? Goldman Sachs. Who received the largest portion of the AIG funds? Goldman Sachs. Was Goldman Sachs at risk of failing? Not to my knowledge.

    Our taxes, Goldman Sachs pockets.

    • sparkylab says:

      I find it more than coincidental that he has popped back up into the public eye just when we are at the 5 year mark. I seem to remember that 5 years was the respective statute of limitations for these types of crimes.

  5. gregory barton says:

    1. Fraud, according to English common law, is not only the willful intention to deceive but the reckless disregard of one’s duty. The rating agencies and anyone with a fiduciary duty who certified packages of loans without researching the soundness of each loan were, according to this definition, guilty of fraud.

    The same principle would appear to hold in the US: “The Ninth Circuit has held reckless disregard for truth or falsity to be sufficient to sustain a conviction for securities fraud. See United States v. Farris, 614 F.2d 634, 638 (9th Cir.80)” See these Model Jury Instructions for some more interesting definitions: http://www3.ce9.uscourts.gov/web/sdocuments.nsf/0/c7c57c3133fadedf8825774300606a78?OpenDocument)). You could fill in the blanks for the rating agencies.

    The representation that a package of junk becomes AAA merely by virtue of its packaging is, surely, fraudulent. That the practice became ubiquitous doesn’t change the fact that it was fraudulent.

    2. Being an Australian lawyer, I can’t comment on the likely success of a prosecution in the US. But the conduct of the rating agencies as described in Michael Lewis’s, The Big Short, would have been hard to defend on a charge of fraud according to the principles discussed above.

    3. Why not? This is the big mystery. It is also the greatest failure of the aftermath of the financial crisis. Never mind all of the talk of ‘structural reforms’ to prevent a recurrence of the crisis. The structure was already in place to prosecute those guilty of fraud. The successful prosecution of those involved in fraudulent practices would have done more to restore confidence than changing capital reserve requirements and other regulatory tinkering.

    • KDawg says:

      This guy nails it. Most others here keep saying that these people didn’t know this or that.

      Well, they didn’t know, because they didn’t want to know. It’s called deniability. Thankfully, some courts recognize it for what it is: Fraud.

  6. Petey Wheatstraw says:

    If only I had the power to subpoena.

    For the average person, “proving” the crime is impossible — kind of like proving La Cosa Nostra, exists. Nonetheless, the bodies keep piling up, and people are afraid to talk about it. People with broken hands and cigarette burns all over the neighborhood. All we see are the shadows.

    Another apt analogy is that it doesn’t take a licensed physician to tell when someone who is obviously dead, is, in fact, dead.

    As your post earlier today pointed out, JPM has paid almost $8B in fines. For what? Incompetence? Honest mistakes?

    That said, the tangential “proof” (using the prudent man standard, if nothing else), would involve everything surrounding MERS, liar loans, forgery, perjury, subornation of perjury, collusion (assessors and ratings agencies), failure to conduct due diligence, fiduciary negligence, theft by deception, fraudulent conveyance, and a host of other strings that could be followed.

    Why aren’t the prosecuted? Prosecutors and the law enforcement bureaucracy are not independent — they are assigned cases. No assignation, no investigation, no prosecution. The government has been captured. They a full blown subsidiary of moneyed interests. There is also the fact that the Executive cannot be compelled, by any current law, to execute the law.

  7. Concerned Neighbour says:

    Who should have been prosecuted? Anyone who broke the law, starting with the most egregious cases. The excuses used for not doing so (it would be too expensive, we may not win, we don’t want to destabilize – read cause the S&P 500 to drop 0.01% – the financial markets) are pitiful and will lead to more criminal behavior down the road. It’s despicable to hear leaders and senior staff of enforcement organizations bandy these excuses about when explaining their inability or unwillingness to seek justice.

  8. chartist says:

    S&P over the CDO ratings debacle. I believe this is where the famous email originated where one analyst said to another that I hope we are on a beach somewhere when this blows up.

  9. flocktard says:

    I would think that the billions of dollars in “putback” mortgages to the major (and minor) banks by the GSEs should have been enough to prosecute, all by itself. It’s one thing to claim a firm may have had sloppy underwriting controls and endure a fine. But the evidence shows this was systematic underwriting fraud designed to conceal the reckless nature of this process, which was done deliberately. Some of the most destructive business people in the country, like these folks at New Century Finance, got off with fines and a five year bar from serving on any board of directors (now elapsed, of course) http://en.wikipedia.org/wiki/New_Century#Financial_difficulties.2C_bankruptcy_and_criminal_investigation

    How these people escaped prison time despite the litany of CRIMINAL complaints the SEC had arrayed against them is a mystery.

  10. rd says:

    As a professional who has to personally stamp documents, the notary public violations were egregious. These are state statutes for the actual misuse of the notary public seal but would then have rolled into federal fraud felonies for falsified documents. The misuse would have been easy to prove and the state stautes are very clear on the matter.

    These would have been very useful to a real prosecutor because they would have used the people on the floor doing the notary public abuse to unzipper the fraud up the ladder. Prosecutors could have used immunity for the actual mis-stamping by the peons in exchange for testimony on who ordered it and worked their way up the food chain. The discovery from this process would have opened up rampant bad documentation of home loans that could have led all over the place. But if you don’t turn the lights on in the kitchen at night, you will never see the roaches so the deliberate lack of discovery on the part of Holder and many state AGs is a crime by itself.

    Similarly, the lack of or incorrect records in county clerks offices on who actually owns the mortgages would have been a major problem in many states if pursued since the property transfers and mortgage recording are almost always done under state law. Since this was deliberately done as a strategy to cut costs at the highest levels in mortgage origination and servicing firms as they relied on MERS, prosecutors could have had a field day with how badly the MBS’s were set-up and serviced. It will not surprise me if courts are sorting out ownership and title records on residential real estate for a couple of decades after this debacle.

    • rd says:

      As to the why – I think it is largely a general unwillingness to believe that people in suits commit serious crimes, especially when you have had lunch with them at the club.

      This was coupled with the mistaken belief that saving the system required saving the individuals who were blowing up the system in order to get “stability”. Giving up one’s fundamental principles to achieve short-term stability leads to long-term instability.

      Leaving the perpetrators in charge just emboldens them to continue and potentially even do it bigger and better next time. We had a dot.com bubble, a housing bubble, and a “financial innovation” bubble in a decade. In many cases, it has been the same players, just moving onto creating or allowing a new crisis. We are probably now seeing a worldwide debt bubble that will leave ripple effects when it pops. I think historians will look back at the current period and call it the “Age of Bubbles”.

  11. howardoark says:

    Spitzer was elected governor of NY based on prosecuting bankers (always popular with the voters) and if he could have kept his dick in his pants might have been president. So, I think it’s naive to think prosecutors wouldn’t have gone after Fuld and his ilk if they could have – and dare Obama to fire them if he didn’t like it. I think the prosecutors were faced with an insurmountable dilemma. They could get as many convictions on the small fry as they wanted, but would be faced with too many prosecutions to avoid accusations of selective prosecution (why this $9/hr employee and not those other 50; why this mortgage liar and not those 2,000). And, if they didn’t start at the top, the public would have rightly seen it as scapegoating some lower middle class chump while the Goldman Sachs managers partied in the Hamptons. It is unbelievable that no one at the ratings agencies has been prosecuted.

    • rd says:

      I think people have watched enough crime shows on TV to buy into the concept of cutting deals with the people on the floor to get the guy at the top. I don’t believe it would have been a PR problem, as long as they weren’t just prosecuting the little guys.

  12. Gaucho says:

    1. Bankers are aggressive salesmen that push the envelope as much as they are allowed to by rating agencies and regulators. Bank executives should have been fired, their banks nationalized (AIG style) and their stock holdings wiped out along with other shareholders’. That would have made it.
    2. No. It was a scheme of overly aggressive risk taking fueled by a wicked comp structure and all in the eyes of the regulators. With some exceptions, I think in most cases, it was gross negligence rather than fraud
    3. I’m more concerned about regulators and the poor role they played before, during and after the crisis. Regulators are the only ones that can draw the line on the sand and stop the bankers. With some exceptions, there is a combination of ignorance, being ill-prepared and twisted incentives given that some expect to end up in the private sector one day. I still don’t get why Geithner was named Treasury Secretary. He clearly looked the other way before the crisis and he did not push for tough measures after the crisis.
    Even Hank Paulson showed deep ignorance when he let Lehman Bros unraveled. He clearly did not understand that financial institutions are interconnected as opposed to other industries. And he was conveniently wrong blaming the GSEs instead of the private sector in the subprime crisis. And he we probably committed borderline fraud when him and Bernanke converted GS and MS in bank holding companies in two days.

  13. DTouche says:

    Prosecute the players that run the most reliable and scalable political campaign donation machinery ever invented?

    Surely you jest.

  14. DF says:

    Why hasn’t anyone been prosecuted? That’s easy. Logistically, the odds of persuading a jury of something is beyond a reasonable doubt is too tough for a number of reasons:

    Most people don’t think in terms of numbers.

    I found most of this stuff hard to understand unless I have all the numbers in front of me. Part of the problem is the shifting meanings of words like subprime, prime, CDO, et cetera. Internal AIG memos referred to the CDO tranches they insured as negative basis trades, and for a long time I didn’t know WTF they were referring to. Imagine being uninitiated in this stuff and listening silently to lawyers going off into tangents. I know when I was in school my mind would drift off.

    Way too many moving parts, and a lot of Orwellian verbiage. Try explaining a super senior AAA tranche of a multisector ABS mezzanine CDO with PAUG CDS referencing ABX constituents.

    It’s never what they say or do, it’s always what they don’t say or don’t do. I’m sure you know as well as anyone that willful blindness is not a defense. But it’s very easy to muddy the waters. And it’s very hard to build a case against someone for not doing something.

    Executives never say what’s really going on; they speak in code.

    Have you ever read the depositions of these guys? They are very adept at sowing confusion. Scan Brian Moynihan’s deposition

    and you’ll see what I mean. I’m not suggesting that Moynihan is a criminal, but the techniques he used at used by many others.

    Angel Mozilo did not know what “verified income” is. The President of Moody’s never knew what an SIV was, notwithstanding the fact that SIVs triggered the 2007 Panic, and the first AAA ever to default was an SIV.

    You don’t have to deny anything, you just need to say I’m not sure about that. Paolo Pellegrini was unsure what CDO stood for.

    People in high places know how to avoid leaving fingerprints. Hank Paulson, Donald Rumsfeld and Dick Cheney never used email.

    Companies go through empty formalities that belie the underlying substance of transactions. There are sham presentations and sham committees for sham transactions. Think of the rating agencies. Or JPM’s internal investigation into the London whale.

    I don’t know if you saw The Wire, but I often think of that show in that the organized crime structure for drugs seems so similar to that for institutionalized mortgage fraud. The Ameriquest sales agents were like the guys standing on the street corners, Roland Arnall was like Stringer Bell, who got out of The Game (lending fraud) when Greenspan raised interest rates and the refinancing boom was over, and the rating agencies were the crooked cops who rigged the system to provide the crooks deniability.

    The regulatory agencies are in triage mode; they have limited resources and are consistently fighting monkey wrenches thrown by Darrell Issa.

    David

  15. A. Cy Lum says:

    If one were to “walk the cat back” how far into the past would it lead? 90s repeals, Reagan, Fed creation… A deeply partisan entangled web bearing little useful fruit, except, perhaps financial case studies from the 1930s (but I suspect 1920s dodgy dealings were legal because Glass and other laws were reactive).

    Therefore I would begin with the right’s battlecry, “Deregulation!” The premise being that free markets are a self-regulating organism. An interesting premise crying out for study, psychological group-think, systemic results, chaos theory, parents with their toddlers’ experiences…

    Who, then, were the market’s own sieve/regulators? I submit that it was the rating agencies. The rubbish coming in, bundled, raw, whatever should have been assayed according to its value/risk, by their very own proven methodologies assigned a grade, somewhat based on their own reputation, then caveat emptor.. Successful prosecution, including fines, life-time professional bans and prison, here ultimately may make the markets prudently self-regulating.

    So, a series of criminal investigations there is a start. Where it leads is everywhere else, everywhere.

    However, without public outrage, where’s the will to enforce, what’s the career path consequences, litigation timeline and cost, threats of economic collapse (arguably extortion).

    I see the Mother of all Mulligans.

    A. Cy Lum

    PS Sarc stock tip: Slater & Gordon Ltd. SGH:ASX.
    PPS Oddly, I enjoy seeing JPM’s growing — at shareholders’ expense — cost of doing business numbers: http://www.ritholtz.com/blog/2013/09/jpm-fines-8b/
    PPPS By using the past tense in the title of this thread are you suggesting this exercise is moot?

    .

    .

  16. msaroff says:

    If we include Sarbox violations, all of them, starting with John Corzine.

  17. bobmitchell says:

    Steven Friedman

    http://www.newyorkfed.org/aboutthefed/orgchart/board/friedman.html

    Dead to rights on insider trading. But don’t worry, he’s retiring, soon?

    “New York Fed Chairman’s Ties to Goldman Raise Questions WSJ”

    http://online.wsj.com/article/BT-CO-20130404-712602.html

  18. DF says:

    http://www.today.com/id/26958893/

    9/29/08 after defeating bailout package, Darrell Issa to Chris Matthews : “Hank Paulson, I don’t know him well, but I know enough he’s not a banker, he’s comparatively a day trader.”

  19. Non Sequor says:

    The most effective liars believe their own lies. Believing your own lies also tends to be a successful defense. How do you prosecute in those circumstances?

  20. Petey Wheatstraw says:

    Forgot to mention (and in light of my earlier wish to have the power of subpoena):

    FOLLOW. THE. MONEY.

  21. Arequipa01 says:

    Within less than a week of the publication of Spitzer’s op-ed in the Washington Post, the Bush regime had broken him over their knee- for the ‘crime’ of speaking the truth. What he had the temerity to point out was that the pumping of the housing bubble was a policy being pushed by the executive branch. This policy was designed to generate a GDP expansion by ‘juicing’ the housing sector of the economy in order to cover up the damage done to the economy by the unprecedented step of launching two wars and lowering taxes (mostly on the beleaguered rich, brings a tear to my eye).
    There haven’t been and there won’t be any prosecutions of anyone at the heart of this massive control fraud because the government won’t prosecute itself.

    Michael Burry gave a very serious warning in a commencement speech at USC or UCLA in which he explicitly stated that one could no longer trust our society’s leaders. So, while any interesting exercise, this line of questioning is futile, Mr. Rithotlz. And you know it.

  22. milbank says:

    I have always wondered how John Paulsen was not indicted for cospiracy to defraud with Goldman in Abacus scam perpetrated on Goldman’s clients. I’m not pa lawyer but, it sure looked to me like Goldman and Paulsen conspired to mislead based on Paulsen’s reputation and what his part in that fund was about and then use the “you’re a sophisticated investor. You should have known better” defense to get away with that type of finess con. Nonetheless, Abacus seemed like a deliberate mislead to me by both GS and Paulsen.

  23. uzer says:

    1. At a minimum, fraud. William K. Black (Bill) calls it Control Fraud.

    2. Ask Bill. He has written on this numerous times. The S&L fraud netted over 1,000 convictions.

    3. Obama is a Fr$ud.

  24. trailhead says:

    If memory serves, in congressional hearings Dimon, Blankfein, et al., were heard to utter phrases like, “We never thought the price of real estate could go down.”

    Excluding the remote possibility that someone could rise to top of the largest financial institutions in the world without having grasped that all assets fluctuate in price, this would appear to be a straightforward example of perjury.

    It ain’t much, but it’s place to start.

  25. Alex says:

    Angelo Mozillo. There is just no way he was clean. I would first go after some of his leutenants and then corner Mozillo with the outcome from the plea bargaining. I would be so intent on it, that I would insist on full cooperation from Bank of America or I would start roasting current executives as well. I think with a bit of rock turning, we would find Mozillo broke a raft of laws.

    But sadly, he had already greased too many important people, so they let him walk to prevent embarrassment.

  26. Bill Fawell says:

    No One is Above the Law: 3.11.08 a date of infamy you probably never heard of . . . until now.

    The Objective: To punish those guilty of financial crimes against the nation, because it is not only just and right, it will discourage future transgressions by those brought to justice, and any future criminals who believe that crime pays.

    Criminals don’t always look the part, but those individuals who attended, profited, or aided and abetted the March 11th, 2008 luncheon at the Federal Reserve Bank in New York City hosted by Tim Geithner and Ben Bernanke need to all be indicted for RICO violations, and that’s just the tip of the iceberg.

    But the tip may well suffice.

    The anti-crime bill, RICO, the abbreviation for Racketeering, Influence, & Corrupt Organizations (Act) makes it a federal crime for any group of people or organization to meet regularly in order to operate and maintain an on going criminal operation.

    When questioned about the 3.11.08 meeting that kicked off the run on Bear Stearns and the Crash of 2008 with the leaders of Wall Street, B. Bernanke replied that it was a just another meeting he and Geithner regularly held with Wall Street, but never held with Main Street.

    In other words, it was part of an ongoing criminal operation involving the Federal Reserve Bank, the heads of Wall Street, and as the Crash of 2008 developed, the titular head of the U.S. Treasury Department, one Mr. Hank Paulson.

    Additionally, the results from the abbreviated and under funded Congressional Financial Crisis Inquiry Commission (FCIC) Report on Wall Street’s financial crisis of 2008 identified criminal actions by more than 100 and less than 1000 individuals from Wall Street to Washington and points unknown.

    All of America has the right to know who these people are, what they did, and how the Department of InJustice is going continue the investigation and who will be indicted.

    The administration can ignore it all, but a new Congress can convene a special prosecutor if the administration fails to move forward and carry out its duties. This may make more sense because with the U.S. Treasury involvement, the administration is potentially part of the defense, and the Department of InJustice being part of the Executive Branch and therefore part of the administration, the conflict of interest may be so great as to preclude them from acting as the federal government’s prosecutor in this case.

    The administration should be aware that they can be prosecuted if they conspire to obstruct justice, and that if necessary, elected officials of the administration can be impeached.

    But until 2012, you can bet that there will not be a release of any or all of the names and it will quietly be swept away because it reaches too far and would threaten the whole corrupt and slimy rule of America’s Kleptocratic Elite.

    It’s no longer the rants of the mentally ill and disillusioned.

    It is real, it is our government, and it is completely out of control.

    “Come and Get Me Ya Dirty Rats!” Jimmy Cagney, actor

    These people simply can’t walk away with money in their pockets. Wall Street needs to learn that laws will be enforced and penalties will be handed down. The U.S. Department of InJustice goes after penny ante, white collar banking crimes and lets the 2B2Jail take a free ride. A thorough investigation of the financially engineered economic disaster 2008 must be followed up relentlessly.

    Crime does pay in America and it has got to stop. It’s what has turned us into a common Banana Republic and destroys our credibility overseas. The addiction of 1%’s and 2B2Fail banks to the Federal Reserve Banks printing presses are killing America. The addiction must end, it is the only way America can right her Ship of State.

    Further prosecutions of the mountain of fraud inflicted upon America during the real estate bubble of 2000 to 2007 must also be reasonably pursued. Those who participated in the Sub-Prime Mortgage Liar Loan Scams, need to be prosecuted and if found guilty, made to atone for their crimes. If we allow these people to continue on not only will they repeat their violations if given the chance, others will want to emulate them.

    That is the history of ignoring crime. If it pays, it will be repeated.