A last-ditch effort by federal and state law enforcement authorities to hold Wall Street accountable for nearly bringing down the U.S. economy is unlikely to lead to any criminal charges against big bank executives, according to a source close to the investigation.
Barring a "hail mary pass," said the source, who spoke on the condition of anonymity because the investigation is still ongoing, the members of a task force President Barack Obama formed in January to investigate fraud in the residential mortgage bond industry will instead most likely bring civil lawsuits against some of the banks involved, though it isn't clear when these cases might come.
That means any penalties for those accused of fraud or other misconduct would be measured in dollars, not jail terms.
A spokesman for New York Attorney General Eric Schneiderman, a co-head of the task force and the driving force behind its formation, declined to comment.
Adora Andy, a Department of Justice spokeswoman, said in a statement that "all appropriate remedies, civil and criminal, are on the table."
"As always, if working group members uncover evidence of fraud or other illegal conduct, we will pursue such conduct aggressively," Andy said.
The subprime mortgage bubble popped more than five years ago, triggering a full-fledged economic meltdown. Since then, the question confronting regulators and government prosecutors has been whether the banks that drove the market's expansion simply made terrible business decisions, or committed fraud in order to reap short-term profits.
The Securities and Exchange Commission, in a number of civil lawsuits, has alleged the latter (as a regulatory agency, the SEC cannot bring criminal suits). But with the exception of one failed case against Bear Stearns in 2009, the Department of Justice, which historically would lead any criminal effort, has declined to criminally prosecute those who created the financial instruments built out of toxic mortgage loans.
By pooling investigative resources, it was hoped that the Justice Department, the SEC and a handful of state attorneys general, led by Schneiderman, could accomplish what the agencies had mostly failed to deliver on their own: a sense of justice, however fuzzily defined.
But from the start, the task force -- officially, the Residential Mortgage-Backed Securities Working Group -- has been dogged by critics questioning the seriousness of the effort, and by concerns that the legal timeframe in which investigators must bring cases is coming to a close.
Civil cases, if and when they are filed, could lead to large financial penalties and possibly aid for struggling homeowners. Yet it seems unlikely that such a result will satisfy those whose anger sparked the Occupy Wall Street movement, or even many middle-class Americans who may wonder how, in contrast to other financial crises, this one could end with none of the people who seemingly helped orchestrate it behind bars.
"Without accountability, the unending parade of megabank scandals will inevitably continue," Neil Barofsky, the former watchdog over the $700 billion bank bailout fund and a frequent critic of the Obama administration's response to the financial crisis, recently told The Huffington Post.
How and why the government chose this path will be the subject of debate for years to come. Some say prosecutors lacked resources. Others assert that the complexity of the financial transactions makes it virtually impossible to prove criminal intent in court, where prosecutors must convince a jury of guilt "beyond a reasonable doubt." In a civil action, by contrast, the bar is lower: jurors need only conclude that "a preponderance of evidence" indicates guilt.
One former prosecutor said a simpler human dimension may also be preventing government lawyers from filing criminal charges: the basic fear of losing a big case.
"Losing has a chilling effect, because no one wants to take a spin like that and come out on the short end," said Cliff Stricklin, a former prosecutor who worked on the Enron task force and also successfully prosecuted Qwest Communications chief executive Joseph Nacchio for accounting fraud. (Nacchio is currently serving a seven-year sentence in a federal prison.)
"[Losing a case] makes you wonder if there was indeed a crime, and if so, how you go about proving it," Stricklin said. "It is a signal to the public that either the government is jumping to conclusions or isn't competent."
CATASTROPHE OR CRIME?
Mary Jo White, a former U.S. attorney for the Southern District of New York, adheres mostly to the view that the financial crisis was a catastrophe, but not a crime. Now a prominent defense attorney at the law firm Debevoise & Plimpton, White said she thinks calls from some quarters for more criminal prosecutions are unwarranted.
"The financial crisis was so expensive and so many people were injured that one's instinct is to think that there must have been massive wrongdoing from the top on down," she said.
But criminal cases must be built on compelling evidence, not suppositions, and evidence of broad-based misconduct that would rise to that level doesn't exist, White said.
"I don't think the criticism is fair," White said.
William Black, a law professor at the University of Missouri-Kansas City and a prominent former bank regulator, is in the camp that thinks prosecutors have missed a massive opportunity.
"They don't get the whole concept of looting," he said.
Black, who worked with prosecutors to develop some of the 1,100 criminal cases that emerged from the Savings & Loan crisis of the late 1980s and early 1990s, said that Wall Street accounting fraud flows from a simple recipe: grow by buying high-interest loans, leverage the business by borrowing lots of money and keep next to nothing in reserve against losses.
"You are mathematically guaranteed to report record profits," he said.
But those profits are based on a fiction, he said, one that costs investors when the bank collapses -- and in some cases, can cost taxpayers too.
Financial firms like Goldman Sachs profited tremendously by purchasing loans described widely in the industry as "liar's loans," Black said. These loans were made without the borrower having to prove income, or even that he or she had a job.
"It makes no sense that an honest lender would ever make liar's loans," he said. Nor does it make sense that a sophisticated bank like Goldman, which runs an entire business based on the ability to calculate risk, would purchase such dangerous loans without knowing that they were toxic, he said.
Indeed, the Financial Crisis Inquiry Commission produced evidence last year which suggests that Goldman Sachs traders knew these investments were more dangerous than they were letting on to their customers. Internally, they characterized offerings as "junk" and "monstrosities" even as they offloaded the mortgage bonds onto investors, according to the report.
The SEC came to the same conclusion when investigating whether the bank had misled investors about a product known as Abacus. That probe led to a $550 million settlement in 2010.
The SEC has won $2.2 billion in penalties stemming from financial crisis-related cases, though it has been dogged by complaints -- most notably from federal judge Jed Rakoff -- that its fines are too small and that it doesn't target individuals often enough. An SEC spokesman declined comment.
Still, the agency's efforts to pursue financial crisis fraud far outstrip those of the Justice Department.
The government's lone criminal case related to the creation of complex mortgage investments came in 2009, when a federal jury declined to convict two former Bear Stearns hedge fund managers accused of lying to investors about the soundness of the securities they were selling.
Last month, the Justice Department announced that it had dropped a probe of Goldman Sachs, launched after the Senate’s Permanent Subcommittee on Investigations found that the bank sold investments "in ways that created conflicts of interest with the firm’s clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients.”
There was "not a viable basis" to bring criminal charges against the bank or its employees, the Justice Department said in a statement explaining its decision.
LAST CHANCE FOR PROSECUTORS
Obama's multi-agency mortgage task force was supposed to succeed where previous investigations had failed.
"This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans," Obama said in his State of the Union address in January.
The goal of the new unit was to drill down into the sophisticated financial instruments the banks created to package and sell mortgages in a search for fraud. But the group was met with skepticism from many legal experts, who wondered how this effort would be any different from previous investigations.
The group got off to a rocky start. Three months after its formation, it had failed even to secure office space. In May, Schneiderman told the Wall Street Journal that he wanted more resources and wished that investigators at his partner agencies would pick up the pace.
According to the Justice Department, the investigation is now in full swing.
More than 200 investigators are on the job, "devoting significant resources to investigate and prosecute misconduct by financial institutions in the origination and securitization of mortgages," the agency said in a statement.
The DOJ has issued 30 civil subpoenas in the past four months, it said, and the SEC has issued more than 300 -- though that number includes pre-existing investigations.
The New York attorney general's office, HuffPost previously reported, is now investigating several major institutions.
But if none of these cases yield a criminal indictment, who, if anyone, is to blame?
Schneiderman, though he never promised criminal cases, is likely to attract some criticism for the lack of prosecutions due to his aggressive advocacy for the task force. Last year, Schneiderman led an insurgency against a robo-signing settlement shaping up between state attorneys general and five large banks. His goal, he said, was to preserve his ability to continue an investigation he had opened in the spring into possible fraud that led to the housing bubble and crash.
The states leading the negotiations dispute that Schneiderman's ability to continue his investigation was ever in doubt. Nevertheless, his initial opposition to what became a $25 billion deal led directly to the creation of the task force
Schneiderman co-leads the task force, along with Robert Khuzami, the enforcement director of the SEC; Lanny Breuer, the head of the criminal division at the Justice Department; Stuart Delery, the head of Justice's civil division; and John Walsh, the U.S. Attorney for the District of Colorado.
Though each of these entities are sharing documents and resources, it is up to the individual agencies to file charges.
The biggest challenge for Schneiderman, who took office in January 2011, was the ticking clock. Most mortgage bonds were packaged and sold in 2006 or earlier, and the statute of of limitations on most types of fraud cases is five years from the commission of the alleged wrongdoing.
It is possible to extract "tolling" agreements from a business or individual under investigation that effectively extends the allotted time in which to bring a case, in exchange for more lenient treatment. But Schneiderman would have had to enact tolling agreements in very short order after taking office. It isn't clear whether a bank or an individual would accept such an agreement in a criminal case if they knew the statute of limitations was about to run out.
It is also true that while the New York attorney general's office has the authority to bring criminal fraud cases, it historically almost never does. Like the SEC, the office instead typically files lawsuits with the expectation of wringing a settlement -- and political bragging points -- out of a Wall Street firm. It's part of the recipe that both Andrew Cuomo and Eliot Spitzer used to pave their way to a governorship.
Instead, the attorney general's office typically defers to the Department of Justice, which has a large team of experts parked in the U.S. attorney's office just a few blocks away in lower Manhattan. But instead of taking on Wall Street's top executives, that office has focused on alternate cases -- such as the recent prosecution of hedge fund king Raj Rajaratnam, who was convicted of insider trading.
Stricklin, now in private practice at the Bryan Cave law firm in Denver, said that he doesn't know whether there was criminal conduct in the run-up to the financial crisis.
"The truth is more complicated than can be explained in sound bites," he said.
But he has seen, he said, a decline in the talent level of those working white-collar cases at agencies like the Federal Bureau of Investigation and the Justice Department, which over the past decade have diverted some of the most talented people over to counterterrorism.
"The government needs to decide if it is really going to tackle white-collar crime or not, and if so it needs to allocate resources," he said.
Otherwise, the result will be fewer cases, and more losses, Stricklin said.
"It always matters to bring solid criminal cases where you are holding people accountable," he said. "But the worst signal is not to do nothing, but to do something partway."