Fraud amongst bankers was endemic leading up to the financial crisis, but to date the SEC, the Justice Department and the FBI haven't arrested a single executive at the big banks. Someone smuggling $2,000 of marijuana across the border with Mexico can expect to have a major investigation initiated at the behest of the FBI, the Justice Department, local police and US Immigration while bankers have virtually gone scot free, having caused a global crisis with global unemployment now at 180 million, an estimated 10 million people possibly losing their homes to foreclosure just in the US alone and I estimate $30 trillion of wealth will have evaporated from worldwide wealth of $200 trillion.
To those who argue that there is no smoking gun, I would say that how could there be, there hasn't been any investigation. Put yellow crime scene tape around Goldman Sachs' new building, tap some bankers' phones, seize hard drives and desktop computers, and drag mid-level traders and banking executives off to prison and watch to see how quickly these folks learn how to sing. Can you imagine what leads and evidence would be uncovered by getting one bankster to wear a wire while golfing with his fellow decamillionaires in Southhampton?
Enforcement agencies like the SEC and the FBI complain about being understaffed and this is true, and not coincidental as banking industry lobbyists have been successful in convincing congressmen to cut back on the budgets of these important policing agencies. We have become anesthetized to totally criminal behavior occurring right before our eyes but I think this would be like Al Capone telling the mayor of Chicago to fire half the Chicago police force, and him doing it. The FBI has also focused so much of its staff on counterterrorism that it is unable to properly staff criminal investigations of bankers although this may just be the unassailable excuse everyone uses these days for not doing their job. "Oh, your pension plan was raided and the Treasuries replaced with worthless CDO's? Sorry, I was busy hunting down Osama bin Laden. What do you mean he's dead?"
But, the pressure also comes from the top down. Lawyers in these institutions understood clearly whether the Bush or the Obama administration really wanted them spending time investigating the banks that are their biggest campaign contributors. What possible reason could an investigator have to aggressively pursue a banker whose firm is the biggest contributor to a congress that determines the operating budget of the investigator's own agency? What message is sent from these administrations when Hank Paulson, the CEO of Goldman Sachs, is appointed Treasury Secretary, Tim Geithner, the banks' errand boy at the bank-controlled New York Fed, is appointed to replace him or more recently, when William Daly, the top lobbyist at JP Morgan is named to be Obama's chief of staff at the White House?
Everybody knows that financial fraud investigations are hard work. Reading accounts of how badly the SEC responded to warnings about Bernie Madoff's malfeasance makes one realize that many at the SEC would rather take the easy way out and ignore claims of fraud than have to do their job and conduct a proper investigation. It is as if they see their time in Washington as a temporary resume-building vacation during which time they don't want to either work too hard or ruffle any feathers.
And this gets at the real reason why there have been no indictments and no arrests. Most SEC and Justice Department lawyers will leave their government posts and reenter private practice. Their dream jobs await at the country's largest law firms. And the biggest law firms with the highest paid partners serve Wall Street and these very same banks. Even at smaller law firms, the financial industry practice group is typically one of the largest and most profitable areas of expertise. As long as we allow regulators and agency lawyers to move back and forth between public service and private practice this corruption will continue.
Why would this be a problem today and not have been a major problem in the past? First, banks have not always acted fraudulently. Until thirty years ago, banking was a fairly laid-back, staid profession in which bankers were happy to take deposits and hand out toasters. But, over the last thirty years banks have aggressively moved into riskier businesses like investment banking, securities trading and merchant banking which are intensely more competitive with much greater leverage and thus have much greater pressures to cut corners and act immorally, unethically and criminally to maximize profits and bonuses.
But the biggest difference today is that now salaries of $100,000 to $200,000 in the public sector pale in comparison to the $2 to $5 million a partner can make at a major law firm. Salaries in Washington have always been lower than those in private practice, but never have they been so dramatically different. I'm not suggesting we pay government lawyers $5 million a year, but I would feel much better protected with a lifelong bureaucrat who was restricted from jumping back and forth between public and private service. We used to think lifelong service in government was a negative, but considering the alternative, it is looking to be a much more honorable profession.
When you think about it, this financial crisis was as much about the law as it was about economics. Economic models like efficient market theory still work in the laboratory; they just failed to anticipate how corrupt and criminal participants in the real world would act. You can't expect a market to properly price securities and evaluate risk if traders are fraudulently hiding the fact that the mortgage security they are selling is backed by mortgages that are already exploding into foreclosure. The Rule of Law has been found to be quite possibly the most important institution in explaining why some countries of the world are prosperous and others perpetually poor. We need to turn this finding inward and begin to investigate our own legal institutions starting with congress and the regulators but also including these very important policing agencies.
So why haven't we heard more from professors at our most prestigious law schools about these failures in the law? Bill Black has led the charge in railing against the corruption amongst politicians, bankers, lawyers and regulators. But others in academia have been strangely quiet. Does the old boy network of banking and their law firms extend even into the ivory tower? It turns out that banks and law firms and their executives are some of the largest contributors to our nation's universities and law schools.
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