The current trial in Federal Claims Court in the district of New York between 89-year-old Hank Greenberg, former head of A.I.G. and the US Treasury, Timothy Geithner, et al, may, or may not, answer some questions about Government Bailouts in the last credit debacle. Whatever the outcome it is very doubtful if any testimony will provide an answer to the biggest question of all. Why is it that, with all the shenanigans laid bare, (AIG, Countrywide, Lehman et al) that not a single individual has been charged with criminal malfeasance. Good question, especially in the light of many examples of prosecutorial excess in past cases of reckless business behavior and fraud.
I recently read an exert from a PBS “Frontline” interview with William Black former bank regulator, following the collapse of the S&L Banks in the 1980s. According to now Professor Black, the political nature of the failure and rescue of local Thrift Institutions, gave rise to the formation of numerous Government Task Forces ( a political answer to absolve presently elected officials). These hastily convened bodies resulted in referrals of some 1100 cases to various Justice Departments and over 800 convictions, and resulting jail sentences.
interestingly most of these convictions dealt with reckless lending practices, as opposed to the folly of borrowing short-term money to fund long-term fixed interest rate loans. (the real cause of the demise of the S&Ls)
Compare this to the ‘Liars Loans’ made by Banks and other agents under the Community Re-Investment Act for sub-prime mortgages, that are estimated to have been 90% fraudulent. These players were certainly not ‘too big to jail’ So why have they escaped the righteous indignation of prosecutors?
My guess would be an unstated conspiracy of the employers (the banks acting as agents for Freddie may and Freddie mac) to refrain from referring known cases of malfeasance to the FBI or the SEC. Many of these banks were small regional players where even the threat of scandal could bring the house down and cause even more problems for the New York Fed and Treasury. I would also guess that the numbers would be staggering in that prosecution of the little guys could well exceed the capacity of the 2300 member Department of Justice.
So what about the big Fish? like the President of Countrywide, or the Head of Financial Products for AIG. It was these people, along with their immediate subordinates, all making insane amounts of money,who were responsible for assuring the rating agencies that the bundles of sub-prime mortgages should remain rated triple A. It beggars credulity that no one in the whole chain of command knew of the precarious nature of the beats they were creating.
I believe the answer to this conundrum is a lot more complicated and relates to the whole nature of prosecution of white-collar crime in the US. It’s mostly all about egos and politics rather than the justice and the law. (there is lots of law but vwey little justice)
Some recent examples. Enron, the energy giant built on a house of cards and questionable accounting. The depth of righteous indignation shown by prosecutors in Huston is breath-taking. In order to get to the big wigs, Ken Lay et al, they reached out and successfully extradited the ‘Natwest Three’ low level bankers from the UK for a non crime in their own country, and brow beat them into a plea bargain and jail terms in the US. ( a quite extraordinary tale “the Natwest Three” told by David Bermingham one of the three bankers involved). Or how about the case of the infamous Marc Rich, founder of trading giant Glencore in Switzerland. Here Federal Prosecutors indited a citizen of Switzerland and Israel (he had renounced his US Citizenship) for tax evasion (a very dubious claim normally settled by civil litigation) and trading with the enemy Iran ( a non crime in his own country). Extradition attempts having failed federal marshals tried, without success, to have him kidnapped and returned to the US. Even more controversial Marc Rich was pardoned for non proved crimes by President Bill Clinton on his last day in office. Another incredible tale told by Daniel Ammann is his book “The Secret Lives of Marc Rich”
The common theme in all this is politics rather than justice with lots of congressman and ambitious persecutors along with a compliant press baying at the heels of the accused.
Finally there may well be another factor in play, and this is the sheer complicated nature of crimes in business that make a successful outcome of a trial a very dubious proposition. The 2012 case of “the London Whale” and J.P. Morgan Chase is a prime example. The sheer size of the numbers staggers the imagination. The ‘Whale’ a fellow by the name of Bruno Itsil, a non US Citizen working out of the London Office of the Bank, apparently managed to lose $6.2 billion trading in complicated derivatives that were supposed to mitigate the risks involved with Credit Default Swaps (the same ones that caused the $180 billion bailout of AIG) Jammie Dimon, the rock star President of the giant bank, did not have a clue how much his trader had lost, or how he lost it . (So whats’ a billion) So Bruno’s boss has been allowed to beat hasty retreat and Bruno himself has apparently escaped prosecution. Meanwhile other scapegoats are being sought, no doubt for lesser crimes such as lying to bank regulators.
The thought of trying to get FBI agents up to speed on the complexities of financial derivatives reminds me of the keystone cops madly rushing around after the bad guys, without a clue as to what is going on. So I think the problem may be around for a while.