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Ghost banks

from David Ruccio

It’s been more than seven years and yet we’re still haunted by the spectacular crash that took place on Wall Street.

The big banks have been fined but no one, at least at or near the top, has been prosecuted let alone gone to jail.

The question is, why?

We know why the Eric Holder and the Justice Department didn’t go after the top executives: they were afraid of undermining the fragile recovery.

What about the Securities and Exchange Commission (which, remember, was set up during the first Great Depression to stem the fraud and abuses on Wall Street)?

We now know, thanks to Jesse Eisinger (based on a treasure-trove of internal documents and emails released by James A. Kidney, a now-retired SEC lawyer) that in the summer of 2009 lawyers at the SEC were preparing to bring charges against senior executives at Goldman Sachs (over a deal known as Abacus) but they never took the case to trial.

He thought that the staff had assembled enough evidence to support charging individuals. At the very least, he felt, the agency should continue to investigate more senior executives at Goldman and John Paulson & Co., the hedge fund run by John Paulson that made about a billion dollars from the Abacus deal. In his view, the SEC staff was more worried about the effect the case would have on Wall Street executives, a fear that deepened when he read an email from Reid Muoio, the head of the SEC’s team looking into complex mortgage securities. Muoio, who had worked at the agency for years, told colleagues that he had seen the “devasting [sic] impact our little ol’ civil actions reap on real people more often than I care to remember. It is the least favorite part of the job. Most of our civil defendants are good people who have done one bad thing.” This attitude agitated Kidney, and he felt that it held his agency back from pursuing the people who made the decisions that led to the financial collapse.

While the SEC, as well as federal prosecutors, eventually wrenched billions of dollars from the big banks, a vexing question remains: Why did no top bankers go to prison? Some have pointed out that statutes weren’t strong enough in some areas and resources were scarce, and while there is truth in those arguments, subtler reasons were also at play. During a year spent researching for a book on this subject, I’ve come across case after case in which regulators were reluctant to use the laws and resources available to them. Members of the public don’t have a full sense of the issue because they rarely get to see how such decisions are made inside government agencies.

Goldman ended up paying a fine of $550 million in 2010, and agree to another $5-billion fine in a separate case with the Justice Department earlier this month. But no Goldman executive has ever been brought up on charges.

Kidney’s own view is that

the SEC, its chairman at the time, Mary Schapiro, and the leadership of the Division of Enforcement were more interested in a quick public relations hit than in pursuing a thorough investigation of Goldman, Bank of America, Citibank, JP Morgan and other large Wall Street firms.

Although the emails and documents I produced to Pro Publica stemming from my role as the designated (later replaced) trial attorney for the Division of Enforcement are excruciatingly boring to all but the most dedicated securities lawyer, even a lay person can observe that the Division of Enforcement was more anxious to publicize a quick lawsuit than to follow the trail of clues as far up the chain-of-command at Goldman as the evidence warranted.  Serious consideration also never was given to fraud theories in any of the Big Bank cases stemming from the Great Recession that would better tell the story of how investors were defrauded and who was responsible, due either to dereliction or design.

All of which gives lie to the idea that the Obama administration has been tough on Wall Street. According to Kidney,

The large fines obtained by the Department of Justice, while a short-term pinch, are simply a cost of doing business.  Relying on fines to penalize rich Wall Street banks, which, after all, specialize in making money and do it well, if not always honestly, is like fining Campbell Soup in chicken broth.  It costs something, but doesn’t change anything in the way of operations or personnel.

Despite billions in fines representing many more billions in fraud, the enforcement agencies of the United States have been unable to find anyone responsible criminally or civilly for this huge business misconduct other than a janitor or two at the lowest rung of the companies.  Nor have they sought to impose systemic changes to these banks to prevent similar frauds from happening again.

Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible.  They are ghost companies.

And that’s why we’re still haunted, more than seven years later, by the crash of 2008.

  1. April 25, 2016 at 4:51 am

    From my own experience I have some thoughts on why Goldman Sacks, etc.’s executives and traders were not prosecuted criminally. Money is the easiest thing for such companies to come up with. They buy their way out of dozens of situations each year. But when all is said and done the companies continue to operate (with a few notable exceptions such as Lehman Brothers). But unlike civil prosecutions or regulatory hearings the course criminal cases will take and the ultimate and multiple consequences are unclear. While the executives and many of the traders appeared culpable criminally to bring such charges and complete a trial is a long and potentially devastating process for the nation. As Gerald Ford said the pardon for President Nixon was to save the nation, not Nixon. The consequences of putting a US President in prison cannot be predicted, but one can imagine that the nation would not be made stronger by such an imprisonment or the trial that produced it. Similarly the consequences for the nation (and for the world for that matter) of destroying Wall Street Banks and trading floors via criminal trials also cannot be predicted. The nation could have emerged stronger and more committed than ever to controlling economic corruption. Or, the nation could have sunk into a long and uncontrollable loss of faith in its institutions, leaders, and the future. This is why in my view lots of money was taken from the Banks but no criminal charges were pursued.

    • blocke the
      April 25, 2016 at 9:07 am

      For this blog what we need to know is the role that the theory and practice of economics played in this scenario. If the answer is that the role of economics is negligible, then how can we justify the existence of economics as a discipline? If the answer is that economics in its conceptionalizations cannot even deal with real world senarios, then what has to be done to economics as a discipline to make it germane. And so forth.

      • April 25, 2016 at 8:14 pm

        The concepts most often brought up in the many meetings on such questions I attended over the years were competition and public welfare. The first was mostly used to justify not taking action beyond regulatory punishments since the conclusion was that actions beyond this would harm “competition” within the US economy and also the way the country was perceived internationally. No one I talked with ever gave any sort of detailed definition of competition. The second was also used to justify limiting actions to regulatory fixes. First, going further might frighten not only the public but many business leaders, and thus lead to product price increases or the slowing of economic growth. Second, most regulators feel an obligation to protect the public, even from themselves. They considered not creating a long and drawn out hearing and trial process as part of protecting the public. As a Commissioner put it once, “No one benefits from a public soap opera.”

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