No financial executives have gone to jail, despite an overwhelming body of evidence indicating that a group of organized “banker gangs” conducted a widespread Wall Street crime wave that made them rich and while throwing millions into poverty. The Justice Department’s failure to act against these bankers is matched only by its declining credibility — a problem it only makes worse whenever it tries to defend itself.
An interview with an outgoing Justice official in today’s Wall Street Journal is merely the latest in a sad parade of weak excuses and implausible arguments, and it comes on the heels of Justice Department official Lanny Breuer’s poor 60 Minutes showing this week on the same topic.
Stop. Just stop. If nobody at Justice can get the job done, it’s time for the Administration to bring in a whole new team and start again. Did everybody in the banking business break the law? No. Very few did. But some of the ones that did appear to be very well-placed, and if they’re not punished they’ll do it again and again.
The credibility problem with Holder’s (and Obama’s) Justice Department doesn’t just stem from its failure to act, or even from its inability to offer a plausible explanation for its inaction. The real problem comes from its history of misleading, misdirecting, and deceiving the public about its efforts.
Its “Interagency Task Force” against lending fraud with a lot of fanfare, for example, turned out to be vaporware, a small-time operation that targeted two-bit grifters and petty crime rings but avoided any investigation of big-bank systemic fraud. Not that the operation was a total failure: The SEC charged a psychic with fraud! (I say the psychic shoulda seen it coming.)
The Justice Department boasted about another operation, too, one with the all-too-ironic name “Operation Broken Trust.” As with the “Interagency Task Force,” we were told that “Broken Trust” was a coordinated Justice Department effort to track down bad guys. And like the Task Force, “Trust” ignored the real crimes on Wall Street while triumphantly listing enough colorful small-time crooks to mount a summer-stock production of Oliver.
But, while both operations were deceptively packaged, Broken Trust was worse. How much worse? The fair-minded Columbia Journalism Review called its roundup of articles on the topic “Obama Administration’s Financial Fraud Stunt Backfires.” The laundry list of cases named as “Broken Trust” successes included some that were initiated before it was even created. Some were underway before Barack Obama even became President.
“Trust” was a brazen attempt to hoodwink the public — nothing more.
Today’s interview, by ex-Justice Department (now SEC) official David Cardona, trots out the usual excuses to explain his department’s record of failure:
It’s too hard to educate juries enough to bring bank fraud convictions. And yet earlier, possibly harder-working, Justice Department officials won more than 1,000 convictions under a “left-wing” President named Ronald Reagan.
Investigators were “rattled” by the failure to win convictions in a 2009 case involving Bear Stearns officials. That case may have been ill-chosen; the judge was hostile and suppressed a key piece of evidence; prosecutors were out-lawyered; and financial fraudsters are frequently convicted in subsequent trials (think Tyco International), which the Justice Department never pursued in this case.
Besides, who gives up on investigating crimes that may have brought down the entire financial system because they lost one case?
Bank crimes are “better left to regulators.” The SEC is the regulator on this beat, and its cushy deals have created a flood of repeat offenses by serial financial criminals. As Barry Ritholtz noted while posting this chart or serial bank offenders, “Bank of America and Citigroup are tied for the lead (six repeat violations), while Merrill Lynch and UBS share 3rd and 4th place (five apiece).”
There are 51 total repeat offenses on the chart by banks that, thanks to the SEC, “neither admitting nor denied wrongdoing” – before promptly continuing to do the things they neither admitted nor denied doing. It is this record which Mr. Cardona is citing when he says regulators have done a “fine job.”
The only excuses Mr. Cardona didn’t use were “My dog ate the indictment” and “I left the subpoena in my other pants.”
Banker Gangs Gone Wild
Under the Sarbanes-Oxley law, every bank CEO and CFO in the country must certify under penalty of law that her or his corporation’s financials are in good shape. They must also state that they personally have put adequate financial controls in place. Why have none of them been prosecuted, despite overwhelming evidence that so many of them broke this law?
Let’s take a look at some of the Banker Gangs who got away:
The “Walking Dead” Gang: Eaglesham notes that a mortgage executive named Lee Farkas is the most prominent executive convicted to date (needless to say, Farkas wasn’t with a big Wall Street bank). Farkas was convicted of deceiving investors by propping up an already-dead mortgage fund. Think of it as a financial Weekend at Bernie’s maneuver.
We’re told that convictions like Farkas’s are easy, to Wall Street crimes are harder to bring to court. Yet Farkas’s actions bear more than a little resemblance to those of JPMorgan Chase, Credit Suisse, and Morgan Stanley when they propped up a similarly “dead” mortgage fund in Pennsylvania. If prosecutors were able to get a criminal conviction for Farkas, why does the Justice Department expect us to believe juries couldn’t do the same thing with these banks?
The Light-Bulb Gang: An investigation into GE Capital stock fraud (See “In the Dark“) identified specific individuals who had provided misleading information to investors, so investigators and observers were stunned when the company was only hit with a mild SEC fine (paid for by some of the same defrauded investigators) and no criminal charges were filed. The company had already been permitted to reconstitute itself as a bank so it would win TARP funds.
Oh, wait. There was one sentence for a GE executive: CEO Jeffrey Immelt is currently serving a term as the head of President Obama’s “Jobs Commission.”
The Mortgage Monte Gang: We reviewed more than 200 pages of internal documentation, technical information, and even training videos for MERS, the banks’ mortgage database system, and found it well-designed for illegally transferring mortgages and avoiding local taxes and filing requirements.
MERS is an electronic three-card monte system for banks, designed to make sure homeowners and authorities never know which “ball” is hiding the real owner of a loan. Why hasn’t there been a criminal investigation of MERS?
The Countrywide/Bank of America Gang: Why wasn’t Countrywide’s Senior Vice President for fraud investigation ever questioned by investigators, as reported this week on 60 Minutes? Former Senior Vice President Eileen Foster says she uncovered widespread fraud within Countrywide and tried to present that information to investigators. She also says she was discouraged from speaking to investigators by Bank of America, which purchased Countrywide. That suggests even more criminal activity within one of one of the country’s largest banks. Yet she was never interviewed. Why?
The Citi Slicker Gang: Why didn’t the charges raised by former Citigroup exec Richard Bowen result in a criminal investigation? Bowen demonstrated pretty conclusively that he gave senior Citi execs enough information to know that they were making false representations in Sarbanes-Oxley documents and to investors. (DId it have anything to the fact that former Treasury Secretary Robert Rubin was involved?)
The My-Old-Gang Gang: Why weren’t there any indictments stemming from the collapse at AIG, where I worked as a middle-level manager for years? There were at least two promising targets of investigation: The executives who participated in a 2007 call with investors and signed financial statements that were released on December 5 of that year; and the accounting firm which certified that AIG’s books were in good shape.
Cardona attempts to paint the picture of a Justice Department filled with enthusiasm, optimism, and energy as it set about investigating Wall Street. As Cardona tells it, the team only came to realize over a three-year period that their hopes were going to be dashed and their task was impossible. Only when this zesty crowd of can-do guys and gals realized that their efforts were all for naught did they decide to turn the job over to somebody with an even more impressive track record than their own.
What’s the solution, according to Cardona? Here’s a hint: Judge Jed Rakoff became a national hero by refusing an SEC settlement with Citigroup and demanding a trial last week after what he described as that agency’s “contrivances.” Judges have been furious about the SEC’s cushy deals for a long time (see here and here.)
Now the Justice leadership wants to convince us that it’s done everything that anyone could possibly do to catch bank fraudsters, but that it must now sorrowfully and reluctantly quit the field.
So who is the Justice Department suggesting should take the lead on Wall Street criminality? If you guessed “the SEC,” go to the head of the line. The Justice Department, we’re told, has decided that enforcing the law on Wall Street is “best left to the regulators.”
It’s true that bankers will continue to go free if the SEC officially takes the lead. But on the plus side: Psychics, beware!
If the Justice Department really believed it had been doing a smart and aggressive job of investigating banker fraud, there are lots of tough but fair and friendly reporters it could have chosen to get the story out. The Journal is where bank-friendly types go for a softball interview.
Jean Eaglesham, who wrote today’s story, is an especially telling choice on Justice’s part. Eaglesham may be a fine reporter, but she wears her biases on her sleeve.She’s already written articles with the premise that it’s all but impossible to convict bankers (see “Challenges in Chasing Fraud“), and it couldn’t have hurt that she also mocked Dodd/Frank’s new requirements, which are the bane of lazy regulators and investigators. Here’s a sample:
“What is 20 times taller than the Statue of Liberty, 15 times longer than “Moby Dick” and would take the average reader more than a month to read, even if you hunkered down with it for 40 hours a week? The answer: The growing paper trail formed by the Dodd-Frank law.”
It’s true that Dodd/Frank regulations can lead to a lot of paperwork for too-big-to-fail banks, but there’s an easy solution to that problem: Break ’em up. It’s what the law should have done in the first place.
Eaglesham’s Dodd/Frank piece also sympathetically conveyed SEC chief Mary Shapiro’s complaints about her new responsibilities in the same article – “We’re (already) stretched awfully thin”– so she couldn’t have looked like a safer choice for a Justice Department that’s afraid of tough questions.
Closing the Books
Has the Justice Department stopped even pretending to investigate banker crime? From today’s Journal article: “Mr. Cardona’s former position (coordinating national financial fraud investigations for the FBI) hasn’t been filled yet, according to a spokesman.”
It’s great that the President has started to sound like Teddy Roosevelt. But he’s going to have to stop handling bank crime like Herbert Hoover to convince voters he means it.
Here are the kinds of questions we should be asking the Justice Department: When you heard about the Pennsylvania “dead mortgage fund” case, did you subpoena email accounts for executives at JPMorgan Chase and Morgan Stanley? When you saw the evidence on AIG, did you put its executives and accountants under oath? When you saw the evidence that people at GE Capital may have cooked the books, did you indict some lower-level employees and start sweating them?
Like those it has failed to pursue, the Justice Department is “neither admitting nor denying wrongdoing.” That means it’s not likely to change, either. The country deserves action to stop Wall Street crime. If it takes a new team at the Justice Department to make that happen, then the country deserves that too.