You may have missed this news story while preparing for the holidays. Jed S. Rakoff, a Federal Judge, wrote an article which appeared in the New York Review of Books: The Financial Crisis; Why Have No High-Level Executives Been Prosecuted? If you haven't, I strongly encourage you to read it.
In his article, Rakoff put forth three reasons why the U.S. Justice Department has not prosecuted bank executives for fraud; even though the government has successfully prosecuted individual bankers before:
"But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past fifty years or so in bringing to justice even the highest-level figures..."
Some of the history of successful prosecution of high-level bank executives:
"... in the 1970s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken... in the 1980s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than eight hundred individuals, right up to Charles Keating... the widespread accounting frauds of the 1990s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected CEO as Jeffrey Skilling and Bernie Ebbers."
While banks have been prosecuted and fined for fraud recently, no executives have been prosecuted. This blog covered several instances, including fines levied upon and paid by JPMorgan bank. I found these comments by Rakoff informative:
"... before 2001, the FBI had more than one thousand agents assigned to investigating financial frauds, but after September 11 many of these agents were shifted to antiterrorism work. Who can argue with that? Yet the result was that, by 2007 or so, there were only 120 agents reviewing the more than 50,000 reports of mortgage fraud filed by the banks..."
About oversight failures by the U.S. Securities and Exchange Commission (SEC):
"...at the very time the financial crisis was breaking, the SEC was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes... as Professor John Coffee of Columbia Law School has repeatedly documented, Ponzi schemes and misallocation-of-asset cases have been the primary focus of the SEC since 2009, while cases involving fraud in the sale of mortgage-backed securities have been much less frequent... moreover, the SEC has been hard hit by budget limitations..."
About the role of the U.S. government:
"... had a part in creating the conditions that encouraged the approval of dubious mortgages. Even before the start of the housing boom, it was the government, in the form of Congress, that repealed the Glass-Steagall Act, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the SEC but also of such diverse banking overseers as the Office of Thrift Supervision and the Office of the Comptroller of the Currency, both in the Treasury Department..."
When I hear politicians say they, a) want smaller government, b) want less regulation, and c) oppose reinstatement of Glass-Steagall, it makes me wonder if these politicians are happy with a marketplace with continual banking fraud, and implicitly authorize more. The Volcker Rule would correct much of this, but the banks oppose it.
In an interview published by Real News, William K. Black, an economics and law professor at the University of Missouri Kansas City, discussed Rakoff's statements. Black said:
"... Judge Rakoff is a judge that hears many cases involving sophisticated financial frauds and has a background in prosecuting. And he excoriates the Department of Justice for the failure to prosecute the elite individuals that the Department of Justice says drove the frauds that drove much of the crisis. And he goes through the excuses that the Justice Department has offered for failing to prosecute, and he says that each of them makes no sense... this is an extraordinary thing for a judge to do. He hasn't violated any of the judicial canons. He hasn't talked about any pending cases. He's made sure to keep it in policy terms. But he points out that these cases can be prosecuted and that they should be prosecuted as a matter of justice if the Department of Justice believes what it says in its complaints, and that you will not get effective deterrence unless and until you prosecute the elite individuals..."
CNBC reported this about why Rakoff wrote the article:
"... Rakoff said he wrote the article because he was puzzled by what he called "seeming inconsistencies," with some parts of the government—such as the independent Financial Crisis Inquiry Commission—concluding that there was fraud, while the Justice Department has so far declined to prosecute top Wall Street executives."
I applaud Rakoff for sharing his views. It needed to be said. It needs to be discussed. Bank executives must be prosecuted. About the effectiveness of fines to prevent banking abuses, former Secretary of Labor Robert Reich said in September 2013 on Twitter.com:
"Fines effective only if risk of being caught x probability of being prosecuted x amount of fine > profits to be made."