Attorney General Eric Holder's presentation at the NYU Law School last Wednesday was a self-serving and fact-free account of the Justice Department's (DOJ's) commitment to law enforcement on Wall Street during and after September 2008. That month and year, you will recall, the U.S. economy disintegrated, along with the jobs and pensions of millions of Americans, thanks to pervasive fraud at our largest financial institutions. To address the malfeasance, Holder told his audience last week, DOJ needs help from whistleblowers because their evidence is crucial to the work of investigators.
The speech was an obvious attempt to shore up the record of Holder's Justice Department on enforcing the law when Wall Street banks saturated the market with worthless securities years ago. While apparently referring to the 2008 crisis, Holder asserted that DOJ has just racked up two convictions of major banks for criminal misconduct. He then cited the DOJ prosecutions of Credit Suisse and BNP Paribas, neither of which had anything to do with the financial collapse of 2008. BNP pleaded guilty to violating U.S. sanctions against Iran, Sudan and Cuba. Credit Suisse was convicted earlier this year for helping wealthy Americans evade U.S. taxes over many decades. Moreover, expert observers were not entirely impressed by the deterrent effect of the convictions.
BNP said in a statement that it will retain its licenses and expects "no impact" on its operational or business capabilities. In 2015, the lender will clear U.S. dollars through a third party. The Bank of France said BNP can withstand the fine and dollar-clearing ban.
And Credit Suisse will be all right, too:
For Credit Suisse, other than the fines and the reputational stain of being a felon, the implications are likely to be limited. The bank may lose some clients but is otherwise expected to survive largely unscathed.
While Holder tried to present the recent pleas as part of the DOJ's record on the crimes behind the Great Recession, he's not all that convincing. The New York Times pointed out:
In the wake of the 2008 financial crisis, the Justice Department did not file any criminal cases against a Wall Street bank or top executives. And in 2012, the British bank HSBC escaped charges of money laundering, stoking a public outcry.
Well, Holder told us last week, the task of prosecuting powerful bank officials is difficult. Nonetheless, he claimed, the DOJ is committed to it and needs the help of whistleblowers to make the charges stick.
At the same time, however, Holder told NYU that his Justice Department is...
... [S]tanding vigilant against financial fraud wherever it is uncovered - and never hesitating to prosecute criminal conduct to the fullest extent of the law. Over the past six years, my colleagues and I have been aggressive in bringing cases whenever they are warranted - and where we have enough evidence to bring charges.
This statement sounds like DOJ intends to be more forceful in pursuing financial fraud. But if you look closer, there's a loophole. The Justice Department brings criminal charges where there is enough evidence. If there isn't sufficient evidence, however, there are no charges. So how do you let your bankers off the hook when they've personally driven their business into the ground, and taken their investors, their employees and the taxpayers with them? Easy. Don't collect the evidence.
Here at the Government Accountability Project (GAP), where we protect Wall Street's whistleblowers from retaliation, we've repeatedly seen how this works. One clear example is the case of Eileen Foster, the former head of investigations at Countrywide Financial, the reckless lender at the heart of the mortgage-back-securities debacle that triggered the 2008 crisis. Foster blew the whistle on fraud at Countrywide and was fired by Bank of America when it bought the company just before she was to talk to regulators.
In her files, she had names and dates and documents. Her case was so spectacular that Steve Kroft of 60 Minutes interviewed her on camera for a segment originally broadcast on December 4, 2011:
Kroft: Do you believe that there are people at Countrywide who belong behind bars?
Kroft: Do you want to give me their names?
Kroft: Would you give their names to a grand jury if you were asked?
Narrator: But Eileen Foster has never been asked -- and never spoken to the Justice Department -- even though she was Countrywide's executive vice president in charge of fraud investigations. At the height of the housing bubble, Countrywide Financial was the largest mortgage lender in the country and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud.
Also interviewed for that segment on 60 Minutes was Richard Bowen, a former Citigroup executive who oversaw mortgage underwriting. In 2005, Bowen began alerting his business unit about defective mortgages sold to investors. Finally, on November 3, 2007, Bowen wrote an extensive e-mail to four senior executives at Citigroup, including Robert Rubin, the board chairman and a former U.S. Treasury Secretary. Bowen characterized the e-mail as a "Hail Mary pass" in his efforts to draw attention to the financial catastrophe fast descending on Citi. The subject line of the e-mail read "URGENT - READ IMMEDIATELY - FINANCIAL ISSUES." In the message, Bowen expressed his increasing concern about the bank's understatement of the risk attached to the mortgage backed securities Citi sold:
The reason for this urgent e-mail concerns breakdowns of internal controls. The REL Chief Underwriter (my 2006 manager) and I have widely communicated these breakdowns, with possible ramifications in weekly reports, e-mails and discussions (which included the CLG Chief Risk Officer). There have also been two investigations by CLG Business Risk and Control (the first initiated by me) with the findings confirming these breakdowns.
In his e-mail, Bowen included a bullet point that is chilling in light of what happened less than one year later:
- I do not believe that our company has recognized the material financial losses inevitably associated with the above Citi liability.
In more detail, the e-mail informed senior managers that 60 to 80 percent of the mortgage backed securities Citigroup was selling to Fannie Mae, Freddie Mac and others did not meet the creditworthiness standards Citi certified for them. He specifically requested that an investigation be conducted by officials outside of his business unit, because if the investments went bad - as they were sure to do - Citi could be forced to buy them back. The buy-backs would blow an enormous hole in the bank's balance sheet.
No one at Citi acted; Rubin did nothing. And Bowen, a whistleblower, began to experience retaliation. Still, he took his evidence to the SEC in July 2008, demonstrating to putative regulators the extent of the fraud months ahead of the bailout for Citi. Bowen also testified before the Financial Crisis Inquiry Commission and went to DOJ. No one investigated Rubin's role or that of others who knew the vulnerabilities Citi acquired by selling worthless securities. As Bowen had predicted, Citigroup convulsed in systemic failure in 2008. Subsequently, the U.S. Treasury bailed out the whole enterprise to the tune of $45 billion:
The loss agreement followed capital infusions from the government of $20 billion in December 2008 and $25 billion in October 2008. Citigroup received more assistance than any other U.S. bank in the crisis.
In addition, the government guaranteed Citi's capital in January 2009 by agreeing to share responsibility for losses on over $300 billion of the bank's toxic assets.
In short, Richard Bowen blew the whistle on risk that resulted from apparent fraud and warned the most senior official at Citi that the bank might face insolvency. He then warned the SEC, turning over thousands of pages of evidence of fraud months before the bailout. Then, what he most feared materialized. Yet DOJ never prosecuted anyone at Citi for fraud despite the evidence Bowen supplied to both the SEC and DOJ. After the bailout, criminal prosecution was unlikely; the U.S. government had a conflict of interest. How could DOJ prosecute a financial institution that was then partially owned (36 percent) by the U.S. government?
Nonetheless, according to Holder, for lack of evidence DOJ preferred civil lawsuits to criminal prosecutions in the big bank cases that caused the collapse. But although the fines that result from successful lawsuits are substantial, they're not a deterrent to fraud: they're paid by the bank's shareholders, not by corrupt senior managers.
And how does the whistleblower's fate stack up against the corporate culprit's? Well, Eileen Foster lost her job, as did Richard Bowen. In contrast, between 2001 and 2006, Angelo Mozilo, CEO at Countrywide during the housing bubble raked in well over $450 million. To settle civil charges of insider trading, he paid the SEC a fine of $67.5 million, of which Countrywide and Bank of America paid $45 million. In February 2011, federal prosecutors dropped their inquiry into the facts underlying the civil settlement, and the case against Mozilo was closed.
And Robert Rubin? He collected $124 million for his 10-year stint at Citi.
Holder skated by this ugly comparison in his speech at NYU, demonstrating deliberate indifference to the real reasons whistleblowers speak up and what usually happens to them when they do. Our Attorney General recommended raising the cap on bounties paid to Wall Street whistleblowers who disclose fraud, so that more of them come forward to assist DOJ.
At GAP, where we've helped more than 5,000 whistleblowers over the last 37 years, we've rarely seen a case in which the whistleblower came forward for money. Richard Bowen made his disclosures because he was doing his job and he believed that it was the right thing to do. Eileen Foster did the same. Neither expected to be paid anything other than a salary -- but then they didn't expect to be fired either.
DOJ doesn't have to hand over huge bonuses in order to encourage whistleblowers on Wall Street to come forward, now that, as Holder admits, the Department is no longer actively policing the financial world. It ought to protect them from retaliation, though. And it might act on their disclosures by prosecuting fraud cases, instead of collecting fines paid by shareholders, convicting foreign banks for helping tax evaders and congratulating itself on a job well done.
Bea Edwards is Executive & International Director of the Government Accountability Project, the nation's leading whistleblower protection organization. She is also the author of The Rise of the American Corporate Security State.