Ten Years On, Financial Crisis Perpetrators Never Faced Justice
A decade has passed since the onset of the financial crisis, leading to the Great Recession, after major banks and investment firms built a Jenga tower of exceedingly complex transactions. These financiers, investors, and executives knew that the house of exotic instruments could fail and — if it did — the consequences would be calamitous. Warren Buffett warned in 2003 that derivatives were akin to “weapons of mass destruction.”
“The rapidly growing trade in derivatives poses a ‘mega-catastrophic’ risk for the economy,” the BBC reported, quoting Buffett as saying, “Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers.”
Jesse Eisinger, a reporter for the public-interest site ProPublica, wrote a book that appeared two months ago named after a famous speech that was given by James Comey, then a US Attorney at the Southern District of New York, in 2002. Comey addressed a new batch of prosecutors then, asking, “Who here has never had an acquittal or a hung jury?”
Eisinger notes that all of the “go-getters and résumé builders in the office were ready. ... Hands shot up. ‘Me and my friends have a name for you guys,’ Comey said, looking around the room. ... ‘You are members of what we like to call the Chickenshit Club.’”
“If it’s a good case and the evidence supports it, you must bring it,” Comey told his troops. “I know it can get crazy in court. You feel stressed when the judge is pounding on you. When that happens, you can all take a deep breath. I don’t want any of you to make an argument you don’t believe in. I want you to believe that you are doing the right thing. Make the right decisions for the right reasons.”
Eisinger’s book condemns the Department of Justice for its failure to go after the financial malefactors who got away with conspiracy to commit grand larceny and fraud against the public, for which most people — currently, nearly 80 percent of Americans are living paycheck-to-paycheck — continue to pay the price while not a single senior-ranking executive has gone to jail for criminal activity.
Eisinger covered what was going on while working as a reporter for the Wall Street Journal, writing about investor foresight, the “backward business” of short-selling, and serious problems “emerging” in August 2006 with mortgage debt. At the beginning of 2007, the “giant pool of money” constituting derivatives reached $70 trillion. The subprime market, which was valued at $1.3 trillion, began to collapse.
“Since 2001,” Eisinger writes, “more than 250 federal prosecutions have involved large corporations.”
These include some of the biggest names in corporate America: AIG, Google, JPMorgan Chase, and Pfizer among them. The majority of these have been negotiated deals, not indictments. From 2002 through the fall of 2016, the Justice Department entered into 419 such settlements, called deferred prosecutions and non prosecution agreements, with corporations. There had been just 18 in the preceding ten years. ... In 2016 the Department of Justice brought the lowest number of white-collar cases against individuals in twenty years, on track for just 6,200 cases, down more than 40 percent from 1996.
By August 2007, the mortgage market was in full-blown crisis. Robin Blackburn, currently a professor at the New School for Social Research, observed at the time that “mortgage-backed securities were difficult to sell and those based on subprime mortgages could scarcely be given away.” Earlier in the year, FDIC chair Sheila Bair spoke about the mounting risk to the financial system, declaring, “We don’t know whether, or when, the risk inputs will become reliable. We don’t know whether the level of minimum capital requirements will be sufficient.”
The web of speculative bets began to unravel in October. Citigroup started “a string of major bank writedowns,” along with Bank of America and JPMorgan Chase, who cobbled together $80 billion for more liquidity — a plan abandoned two months later. Federal Reserve Board governor Randall Kroszner addressed the Consumer Bankers Association the next month, announcing that “borrowers with mortgages ‘under water’ ... may be tempted to walk away from their loans.”
By April 2014, “prosecutors in Washington and New York” had “met with regulators about how to criminally punish banks without putting them out of business and damaging the economy,” according to the New York Times. Not to criminally punish individual executives, of course. Eric Holder, when he was part of the Clinton-era Justice Department, wrote a 1999 memo titled “Bringing Criminal Charges Against Corporations,” which became known as the “collateral consequences” document, warning that systemic risk may inhibit prosecution due to the fear that the economy may be endangered if big banks are prosecuted for their crimes.
Five years ago, Lanny Breuer, then the Assistant Attorney General, announced, “In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders.” This ginned up “fear for the fragility of the system,” Eisinger observes, which “dominated the political discourse and tormented Department of Justice officials.” Under President Obama, he notes, “Aside from a few speeches, the White House took little concrete action on the prosecution of white-collar crime.”
The current president of the United States, Eisinger writes, “closed his campaign by hinting poisonously about a cabal of global bankers rigging the system.” Moreover, the “Republican platform called for breaking up the big banks by returning to the Glass-Steagall Act, the Depression-era law that split commercial banking from investment banking,” but “no sooner had” the president “taken office then he rushed to stuff members of that cabal into his White House and cabinet. He and the Goldman Sachs alumni who advised him moved within days of taking office to unravel Dodd-Frank and loosen restrictions on corporations generally.”
Eisinger’s overview of what went wrong, and why, helps to illuminate the reasons the federal government has not cracked down on the culprits behind the largest swindle in American history, whose effects continually remain as potent as ever.