A Banker Can't Get Arrested in This Town

The Justice Department and the Securities and Exchange Commission have broad powers to root out and punish financial fraud. The Interagency Financial Fraud Task Force, formed last November, is an Obama-era innovation that enhances the government's ability to track down financial criminals. As we look back on the last two years' revelations about Wall Street misbehavior, then, it seems reasonable to ask the question:

What's a banker gotta do to get arrested in this town?

We're not talking about the "show up with your attorney and we'll work out a settlement" kind of arrest, either. We mean the pull-them-from-the-boardroom, handcuff-wearing, hands-on-the-police-car perp walk sort of arrest. Enforcement actions seem few and far between, and when they do come around the settlement is usually far too small to deter future crime.

Headlines last week announced the arrest of software entrepreneurs the Wyly Brothers who, according to the SEC, netted more than $550 million through various forms of securities fraud. General Electric was charged with "bringing good things to life" for some Iraqi officials in the form of fat bribes. Stories say that Office Depot may be close to settling with the SEC on a variety of charges. Dell and its senior executives were charged with failing to disclose material facts to investors. (Write your own "Dude, you're getting a Dell" joke; I'm too busy.)

But a review of 49 charges brought this year by the SEC shows that the majority of their targets were "ABB" -- "anybody but bankers" -- and that only eight charges were directly related to the fraud that trashed the economy. Most of those eight charges involved bit players, and penalties for the two major fraudsters involved were so light that they gave would-be malefactors no good reason to change their evil ways.

Here's a sampling of SEC charges filed this year: A father/son accounting team was charged with insider trading. Italian and Dutch companies bribed some Nigerians and a telecommunications company slipped a mordida or two to Chinese officials. Some Canadians fraudulently touted penny stocks on Facebook and Twitter. A Florida retirement benefits firm skimmed some funds. Some guys were busted for an affinity fraud and Ponzi scheme targeting African American and Caribbean investors in New York City.

The SEC even charged a psychic with fraud after he claimed he could predict what would happen in the stock market. (Of course he was a fraud! A real psychic would've known they were investigating him and left town.)

It's all good stuff, well worth doing. But what about the bankers that shattered the economy? The SEC's enforcement division trumpeted its supposedly record settlement with Goldman Sachs. (It wasn't a record. AIG's was larger. So was Michael Milken's, in inflation-adjusted dollars.) The Goldman settlement amounted to 5% of what it paid out in bonuses the previous year, which isn't likely to discourage similar behavior in the future.

Then there's Citigroup. As Zach Carter points out, a $40 billion subprime lie led to exactly zero criminal indictments. The financial penalty was even lighter. CFO Gary Crittenden was fined $100,000, for example, after taking home $19.4 million during the year the wrongdoing took place. That's one-half of one percent of his income.

Would you rob somebody if you knew that, in the unlikely event you got caught, you'd only pay a nickel for every hundred bucks you took? Many people would -- and lots of 'em work on Wall Street.

The SEC has the ability to refer many of these charges to the Department of Justice for criminal prosecution, and agencies are encouraged to share information. But Justice has been notably close-mouthed about its investigations of Wall Street. It didn't say anything at all when it chose not to indict anyone for actions related to AIG's Financial Products division, the unit whose wrongdoing triggered a worldwide recession. AIG paid more than $1.6 billion in overall settlements, including $80 million to settle criminal charges against the Financial Products division in 2004. Goldman Sachs paid $550 million in settlements, Citi concealed $40 billion in subprime debt. Yet there have been no criminal indictments in either the Goldman, Citi, or Financial Products cases.

What does the government have to do to prove it's serious about financial crimes -- arrest Martha Stewart again?

Consider AIG: It didn't just pay millions to settle criminal charges against the Financial Products division. It did so with the threat of "deferred prosecution" should the same players act up again. And yet the head of that division told investors over and over that his division's practices were safe and even "money good" (as sound as cash.) Senior executives of the company signed off on investor and SEC documents, although Cassano reportedly refused to allow an independent auditor to thoroughly review his division's books.

It's illegal for executives communicating with the SEC or investors to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made... not misleading." Yet the Justice Department declined to prosecute in the AIG case. It made no public statement at the time and refused to explain its decision. (Word got out through Cassano's lawyers, who said they had been notified by DoJ that there would be no prosecution.) Now reports suggest that the Justice Department has received another referral, this time regarding possible criminality at Goldman.

Criminology 101 courses explain "deterrence theory." If the likelihood of punishment is low and the penalty when caught is less than the reward for the crime, the crimes will go on ... and on ... and on. Why haven't there been more criminal prosecutions on Wall Street? Cynics may say that "all politicians are in Wall Street's pocket," but there's another possible explanation. It can be found in Michael Smith's Bloomberg article about bank complicity in laundering drug money:

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

"There's no capacity to regulate or punish them because they're too big to be threatened with failure," Blum says.

Something like that may be at work here. That may explain why only minor players from the hedge fund and investment worlds have been charged by the SEC, and why perp walks are so conspicuously absent. The authorities may be reluctant to risk destabilizing a shaky economy, afraid to do anything that causes investors to lose confidence.

The Interagency Task Force is a smart innovation. The financial reform bill has increased the SEC's ability to investigate and punish wrongdoing. But authorities are playing with fire if they remain gun-shy about criminal prosecutions. An economy where financial criminals go unpunished can't earn confidence. Without effective deterrence, our financial system will be a disaster waiting to happen... again.


Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."