I frequently disagree with Megan McArdle, but her WikiLeaks post yesterday on struck me as simply delusional. The basic argument: megabank financiers haven’t committed any crimes, because if they had, we’d already know about it. There’s a kind of efficient-market-hypothesis ring to this, and like the efficient-market-hypothesis, it has no basis in reality. As a result of this reasoning, McArdle doesn’t think that the upcoming WikiLeaks release of bank documents will spark much in the way of criminal prosecutions. Here’s Megan:
Prosecutors have been trawling through their internal documents pretty heavily, looking for something that might help them run for higher office make a case against malfeasant bankers. They haven’t found much, which is why one of their most high profile cases fell apart. You can decide for yourself whether this is because there was no criminal activity, or because bankers have had a decade of prosecutorial aggression to learn not to write anything down.
This is just wrong. Prosecutors are not trawling heavily through the internal documents of major banks. Most prosecutors aren’t white-collar crime experts, much less financial crime experts. To nail a bank, they need help from federal banking regulators. And while the SEC has slightly stepped up its enforcement game, it isn’t recommending cases for prosecution. Literally. It has recommended a grand total of zero cases for prosecution against big banks and their executives—even though the SEC itself believes that banking executives have committed some truly egregious crimes.
How do we know? From the SEC’s civil fraud suits. In finance, criminal fraud is essentially identical to civil fraud—you just need more evidence for a criminal conviction than you do to win a civil lawsuit. The SEC has brought civil cases against Goldman Sachs, Citigroup, Bank of America and Barclays and settled them all with slap-on-the-wrist zealotry. The Bear Stearns hedge fund case that McArdle links to is small potatoes compared to the accusation the SEC levied against Citigroup: lying to its shareholders about billions of dollars in subprime exposure at the height of the subprime meltdown. The penalty for Citi CFO Gary Crittenden was $100,000—roughly one-half of one percent of his $19.4 million pay in 2007.
The SEC is not alone in its inaction. As of March 3, 2010 bank regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision have also failed to recommend a single case for criminal prosecution.
And what happens when regulators actually do turn over cases to the Justice Department? Well, the banks get away with it anyway. Wachovia got caught laundering $380 billion in Mexican drug money, a clear violation of federal law. But what happened to Wachovia? A “deferred prosecution agreement” in which the too-big-to-fail behemoth escaped indictment in exchange for a $160 million fine. No individual is currently being prosecuted in the case. And the U.N. thinks that several other major banks were doing the exact same thing in 2008 as liquidity dried up.
We’ve also had congressional hearings on Lehman Brothers’ Repo 105 scam, mortgage fraud at Washington Mutual, a damning ProPublica investigation into self-dealing in the CDO market, and Felix Salmon’s discovery of abuses in mortgage bond due diligence and disclosure. How can anybody stare at these cases and really, truly believe that banks just never actually committed any crimes? After the savings and loan crisis, more than 1,100 bankers went to jail for financial crime. Can anybody seriously believe that after a crisis several orders of magnitude greater, no major banks or their executives engaged in criminal fraud? Apparently McArdle can.
What’s more, the Government Accountability Office says that bank regulators weren’t even looking at the foreclosure process until this fall, when massive frauds began to be uncovered. If regulators aren’t even looking, they can’t recommend cases to prosecutors.
So essentially, McArdle has assumed away the problem, and in order to do so, she’s ignored dozens of major financial headlines from the past couple of years. For a financial blogger, that’s a case of massive self-delusion.
Sure, prosecutors can make a name for themselves by going after big banks. But they can also have their careers and personal lives totally destroyed by doing so. Sometimes aggressive prosecutors end up like Eliot Spitzer. Just as often, they end up like Eliot Spitzer. It’s much, much safer to target individuals and institutions with less political and economic clout than a major bank or its executives.
None of this proves that WikiLeaks has a set of smoking guns that will take down Bank of America. They might, and they might not. But to believe that a political system almost entirely captured by Big Finance has performed rigorous criminal investigations into Big Finance is ferociously naive.