Four years ago on September 15, the New York investment bank Lehman Brothers declared bankruptcy and the financial collapse of 2008 began. The economic meltdown wiped out more than $11bn of personal wealth in the US, threw millions out of work, and has already resulted in the foreclosure of more than 10 million homes.
Americans across the political spectrum believe that financial executives should have gone to jail for the practices that led to the collapse, but there have been no significant prosecutions. People & Power investigates why Wall Street has not been held accountable for crimes connected to the deepest recession since the Great Depression.
Two government bodies looked into the causes of the meltdown, the Financial Crisis Inquiry Commission and the US Senate’s Permanent Subcommittee on Investigations. Both made criminal referrals to the Department of Justice.
But the Department did not prosecute executives from mortgage lenders and banks like Washington Mutual, Countrywide, Deutsch Bank and Goldman Sachs for mortgage origination and securitisation practices that were a focus of the panels’ work.
Byron Georgiou, who served on the Financial Crisis Inquiry Commission, says it is “a demonstration of a lack of accountability that is really quite unique in American history”.
Chris Swecker, a former assistant FBI director in charge of the Criminal Investigative Division, thinks that the Justice Department has been “timid in approaching prosecutions,” and finds it “puzzling”.
In order to hold Wall Street accountable, he says: “You have to resource the agencies appropriately, and that really and truly has not been done.”
As an assistant FBI director back in 2004, Swecker took the unusual step of issuing a public warning about an epidemic of mortgage fraud in the US his agents had uncovered that he feared could lead to economic calamity. The FBI warning went unheeded by bankers who were bundling up high-risk loans and selling them on Wall Street.
Swecker says: “That’s where we start to talk about criminal intent and fraud is knowing full well that there was fraud going on and just turning your back on it and saying, alright, we’re going to package this stuff up anyway and we’re going to sell it anyway.”
Swecker believes that the Justice Department is reluctant to pursue a criminal prosecution unless it is a “slam-dunk” after losing a case in 2009 in which two Bear Stearns hedge fund managers were acquitted of charges that they misled investors about the health of a hedge fund that invested in mortgage-backed securities.
He says the Justice Department has not allocated the resources necessary to prosecuting financial crimes, and that prosecutors are reluctant to go up “against $1,000-an-hour defence attorneys”. Swecker also thinks the fact that US Attorney General Eric Holder and Criminal Division Chief Lanny Bruer were white-collar defence attorneys has also had an impact, creating more of a “defence mindset” at the top of the Department that discourages prosecution.
In the late 1980s and 1990s, the US went through a Savings and Loan scandal that cost taxpayers $150bn. The deregulation of the industry enabled bank executives to play fast and loose with federally insured deposits, and led to widespread fraud.
William Black, who played a central role as a senior financial regulator in prosecuting bank executives for fraud during the Savings and Loan crisis, says the impact of the 2008 meltdown “is roughly 70 times larger”.
According to Black, we should be seeing an effort to hold financial executives accountable “that is absolutely unparalleled in US history. Instead you are seeing an effort that is considerably smaller than the effort made in the Savings and Loan crisis”.
Black, an expert in white collar crime, argues that prosecutors do not understand the connection between the 2008 meltdown and a crime called “accounting control fraud” in which executives who control a company loot it and become rich. Black says “mortgage fraud hyperinflated the housing bubble” that was a main cause of the economic crisis.
So-called liars loans, home mortgages banks made without requiring borrowers to provide income verification, grew by 500 per cent between 2003 and 2006, becoming almost the most common form of home loan in the US.
Liars loans were the perfect ammunition for accounting control fraud, enabling lenders to make up whatever income was needed for a loan to appear safe so that it can be sold into the secondary market for packaging in mortgage-backed securities. The banks grew like crazy by making terrible loans, and executives walked away with millions because of modern compensation structures.
“That’s why we say the best way to rob a bank is to own one or control one,” Black says. There was fraud all along the chain, from their origination so banks could grow, to sales on Wall Street, Black argues, because once you have got liars loans, “all the sales after that have to hide their terrible quality or nobody is going to buy them”.
The Senate Subcommittee on Investigations paid particular attention to transactions by Wall Street banks in the late 2006 and early 2007 period. That is when mortgage defaults spiked and financial executives realised that they faced huge losses if they did not unload their inventories of mortgage-backed securities.
In 2010 public hearings, Senator Carl Levin, the chairman of the Senate Subcommittee, took Goldman Sachs CEO Lloyd Blankfein to task for selling mortgage-backed securities to investors that traders inside the firm called crap, and for betting that they would fail at the same time by taking a short position against the mortgage-backed securities investors.
In August, the Justice Department dropped its criminal investigation of Goldman Sachs, Barack Obama’s top corporate donor in 2008.
Sheila Krumholz of the Center for Responsive Politics, which tracks campaign expenditures and lobbying expenditures, says it is hard not to associate “the incredible clout that Goldman Sachs wields in Washington with decisions that favour their interests”.
Krumholz says it is both the money and the connections – the financial industry has spent more than $5bn on lobbying and campaign contributions to both Democrats and Republicans in the last decade. And the revolving door means that government officials find it difficult to view the leaders of companies where they have worked or have friends “as being capable of criminal acts”.
Former Securities and Exchange Commission investigator Gary Aguirre argues that the main reason there have been no prosecutions is because of the revolving door.
Regulators are reluctant to pursue cases that could cost them a private sector job with a starting salary of $2m – 10 times their salary with the government.
“If you are a team player and these cases don’t get brought,” he says, “then maybe there’ll be room for you at one of the big law firms or Goldman, or one of the big banks.”
Steve Bartlett, the CEO of the Financial Services Roundtable, a trade association that represents 100 top financial companies in the US, thinks the Securities and Exchange Commission has done a good job to “identify what went wrong and correct it”. The reason there have been no prosecutions, he says, is because there was no criminal wrong-doing, “it’s as simple as that”.
Occupy Wall Street activists have been strategising about how to force the issue of prosecuting financial executives onto the 2012 electoral agenda.
“It’s so clearly something the American public wants to know about,” says Alexis Goldstein, who used to work in finance in New York.
Akshat Tewary of the working group, Occupy the SEC, says the failure to prosecute executives in connection with the meltdown “undermines the legitimacy of our government”.
Both are concerned that the statute of limitations for prosecution of federal securities laws, which is six years, could run out without Wall Street being held accountable for the meltdown.
So is Chris Swecker, who believes a major initiative needs to be launched quickly for crimes connected to the 2008 collapse.
“We’re in a tough spot,” he says, “where essentially some very bad actors are going to skate if we don’t put that effort out.”
Black sees no chance that a Mitt Romney administration would be more aggressive than that of Obama in prosecuting financial executives. Romney has already raised more than twice as much from Wall Street as Obama.
Both candidates are avoiding the prosecution issue, but Black thinks it needs to be high on the electoral agenda of both parties.
“If elite financial bankers can continue to get away with these kinds of frauds that lead to catastrophic losses and make you wealthy as the CEO simultaneously,” he says, “then they’ll keep doing it, and they’ll do it bigger.”
By Bob Abeshouse