I can tell you, just from forty thousand feet, that some of the most damaging behavior on Wall Street, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we have to change the laws.
==President Barack Obama, in 2011
Financial crimes are not victimless crimes. Subprime mortgage fraud affected the financial solvency of thousands of municipalities and pension funds. Many an American is paying higher taxes or facing retirement without a pension because of criminal activity on Wall Street.
Fraud is not necessarily something that is subtle or mysterious. When someone misrepresents the value of what they sell, when they falsify financial documents, when they pledge the same collateral to several different lenders, you don’t need a law degree to understand that this is a crime.
Matt Taibbi, in his new book, The Divide, has a chapter about how all these things were done by Lehman Brothers, yet nobody in Lehman has ever been prosecuted.
Why don’t we prosecute financial crime? Part of the reason is social. Crooked Wall Street bankers come from the same social class as judges.
It is hard for judges to imagine people who might be their friends and neighbors as criminals, or to throw them into prison with violent common criminals. But there are other, systemic reasons as well.
One is the doctrine of “collateral consequences,” first promulagated in a memo by Eric Holder, while a low-level Justice Department in the Clinton administration. It is the principle that when deciding whether to prosecute corporations, you should take into consideration the side effects on innocent employees and the economy as a whole.
As an example, the accounting firm of Arthur Anderson Inc. was charged criminally by the Bush administration for helping Enron falsify its books. Immediately afterward the company collapsed, and 28,000 jobs people, most of whom had done nothing wrong, were thrown out work. That was sad, but the blame rests not with prosecutors, but with the dishonest Anderson management.
The solution to such cases, it seems to Taibbi and also to me, is to prosecute individuals and not the corporation. Justice would be served, the corporation itself would continue to exist and innocent individuals would not suffer. Anyhow if a company really is too big to prosecute without damage to the economy as a whole, that is a reason to enforce the anti-trust laws and break it up.
Attorney-General Eric Holder and other members of the Obama administration don’t do this. They content themselves with levying billion-dollar fines, which seem large to people like me and probably you, but are really small in relation to the overall size of the companies. Prison is the real deterrent, and nobody in the “criminal rich class” (Theodore Roosevelt’s words) goes to prison anymore.
Another deterrent to prosecution, Taibbi says, is the fact that the largest companies have the best legal talent, and it is possible to have a good case and still lose by making some minor mistake. The Obama administration is highly risk-averse and concentrates on cases they are sure they can win, which cases against smaller companies. This is an explicit policy. Taibbi quotes a Justice Department memo to this effect.
The problem is not only that rich criminals go free. It is that honest bankers and financiers are penalized. In a well-ordered capitalist system, the purpose of banking and finance is to turn savings into capital, to be invested in ways that contribute to the wealth and well-being of individuals and society as a whole.
Instead of rescuing banks and investment firms from the follies and crimes of their managers, the government should indict criminals for their crimes, liquidate failed companies instead of bailing them out, and sell their assets at bargain rates to firms with honest and competent management.
But, as Taibbi wrote, the problem is not just leniency for high-level crime. It is the contrast between the administration of justice to people at the top of society and those at the bottom. This will be the subject of my next post.