ABSTRACT: As Attorney General Eric Holder leaves office, one of his legacies will be his Department of Justice’s (DOJ) treatment of the major banks and financial corporations. Of particular note is the failure to prosecute any of the senior officers at the banks and financial corporations that caused the 2008 financial collapse. Bill Black calls this “the greatest strategic failure in the history of the Department of Justice.” This lack of prosecution leaves the management in place at these huge corporations. When dishonest people and their illegal activity produce success, they and their organizations have a competitive advantage. As a result, their bad ethics drive good ethics out of the market place.
In the Savings and Loan Crisis of the 1980s and 1990s, over 1,000 bankers were convicted of criminal activity, even though this crisis was less than one-tenth the size of the 2008 crisis. The civil fines and penalties that the financial corporations have paid for their fraudulent activities that caused the 2008 crash were not sufficiently large to put a real dent in their multi-billion dollar revenues and profitability. Furthermore, the costs of these fines and penalties were not borne by the senior executives, but by the shareholders and the taxpayers (given that they typically were deducted from revenue as a cost of doing business and therefore reduced profits and taxes on them). The executives got to keep all their compensation and bonuses, despite their being based on profits generated from illegal activity.
The lack of criminal prosecutions is even more astounding when one looks at the repeated engagement in illegal activity that was widespread among this handful of very large financial corporations and the collusion among them.
The relationship between Wall St. and our federal government, including regulators and legislators, is built on campaign contributions, lobbyists, and the revolving door. This cozy relationship serves Wall Street’s interests rather than the public interest and will be hard to break. Bill Black says to Bill Moyers, “there’s never going to be a decisive victory against power and money and finance. We have to fight. Every generation has to engage in this struggle.”
FULL POST: As Attorney General Eric Holder leaves office, one of his legacies will be his Department of Justice’s (DOJ) treatment of the major banks and financial corporations. Of particular note is the failure to prosecute any of the senior officers at the banks and financial corporations that caused the 2008 financial collapse. In addition, the fines and penalties paid by these huge corporations, although large in dollar amounts, were not large enough to have any meaningful effect.
Bill Black calls this “the greatest strategic failure in the history of the Department of Justice.” He should know. He is the author of The Best Way to Rob a Bank is to Own One and was a bank regulator intimately involved with the Savings and Loan crisis of the 1980s and 1990s. [1] He recently appeared on Bill Moyers’ TV show and this post summarizes their conversation. [2]
The lack of prosecution of the financial corporations’ senior officers leaves them in charge of these huge corporations. Furthermore, they now know that there are no bad consequences for them for massive fraud and repeated illegal behavior. When dishonest people and their illegal activity produce success, they and their organizations have a competitive advantage. As a result, their bad ethics drive good ethics out of the market place. Enforcement of the rule of law is essential to protecting not just consumers, but also to incentivizing honest and ethical people and behavior. Prosecuting the executives of banks and financial institutions that engaged in massive fraud and illegal activity would have important, positive effects on accountability and deterrence.
In the Savings and Loan Crisis of the 1980s and 1990s, President George H.W. Bush and his administration were committed to cleaning up the mess they inherited. As a result, over 1,000 bankers were convicted of criminal activity, even though this crisis was less than one-tenth the size of the 2008 crisis. Among other things, this ensured that these individuals would never lead a financial institution again because of their criminal records.
President Obama and his administration focused instead on ensuring the stability of the huge financial corporations. They avoided prosecutions of individuals even though it is unlikely that such prosecutions would have had much impact on the corporations. Many members of the Obama administration, including Holder and Treasury Secretary Geithner, had come to the administration through the revolving door from the industry or roles where they had close relationships with the industry. In addition, President Obama received very large amounts in campaign contributions from Wall Street, with JP Morgan Chase CEO Jamie Dimon as a leading contributor and fundraiser. Many people believe that without this big money from Wall Street Obama would have lost the primary to Hillary Clinton or that he might have lost the final election to John McCain.
The civil fines and penalties that the financial corporations have paid for their fraudulent activities that caused the 2008 crash were not sufficiently large to put a real dent in their multi-billion dollar revenues and profitability. This is consistent with the Obama administration’s overall approach of putting the stability of these corporations first. Furthermore, the costs of these fines and penalties were not borne by the senior executives, but by the shareholders and the taxpayers (given that they typically were deducted from revenue as a cost of doing business and therefore reduced profits and taxes on them). The executives got to keep all their compensation and bonuses, despite their being based on profits generated from illegal activity. Moreover, the civil settlements did not prohibit these financial corporations from continuing to engage in the lines of business where they had engaged in fraudulent and illegal activity. The settlements either explicitly or implicitly granted all the senior executives immunity from prosecution, ensuring that lower level executives’ testimony against senior executives could not be leveraged through individual offers of immunity or leniency for cooperation with prosecutors (as was done in the Enron case, for example).
The lack of criminal prosecutions is even more astounding when one looks at the repeated engagement in illegal activity that was widespread among this handful of very large financial corporations, and the fact that the illegal activities often required collusion among them. Over the last 10 years, these illegal activities have included:
- Encouraging home owners to take on fraudulently underwritten and financially unviable mortgages
- Knowingly selling those toxic mortgages to investors (including Fannie Mae and Freddie Mac) while fraudulently vouching for their quality
- Fraudulently foreclosing on hundreds of thousands of home owners
- Rigging the Libor interest rate that is used to price trillions of dollars of securities
- Rigging bond prices and the underwriting of the issuing of bonds, and
- Laundering money for viciously violent drug cartels, terrorist groups, and countries that had been officially banned from financial transactions as state sponsors of terrorism
The relationship between Wall St. and our federal government, including regulators and legislators, is built on campaign contributions, lobbyists, and the revolving door. This cozy relationship serves Wall Street’s interests rather than the public interest and will be hard to break, especially given the Supreme Court’s Citizens United and other decisions that allow huge amounts of money from corporations and their wealthy senior executives to flow into our political campaigns. Bill Black says to Bill Moyers, “there’s never going to be a decisive victory against power and money and finance. We have to fight. Every generation has to engage in this struggle.” The corporations live forever and their thirst for profits will never stop. Therefore, they will continually work to subvert our democracy and its laws to serve their interests unless we and our elected representatives are continually vigilant and fight back.
[1] William K. Black was formerly the litigation director of the Federal Home Loan Bank Board from 1984 to 1986, deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987, senior vice president and general counsel of the Federal Home Loan Bank of San Francisco from 1987 to 1989, and senior deputy chief counsel of the Office of Thrift Supervision.
[2] Moyers, B., with Black, W.K., 10/3/14, “Too Big to Jail?” Moyers and Company (http://billmoyers.com/episode/full-show-big-jail/)
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