03/07/2011 01:36 pm ET | Updated May 25, 2011

Making the Case Against Mortgage Banksters, Part Two: Financing Prosecution

The Federal government has now let former Countrywide CEO Angelo Mozilo go scot-free, paying less than 10% of his assets in fines, with no admission of guilt. Unless public fury mounts, that may be the story for the rest of the banksters – at the Federal level. State Attorneys' General offices need to be more aggressive in criminal prosecution, and in that regard the important piece of news may not be the $67 million Mozilo and Countrywide paid in Federal fines, but the $6.5 million paid to the California state government.

This $6.5 million is currently earmarked for a relief fund to aid distressed homeowners. The plan is compassionate, but not necessarily wise, as it merely props up a real estate market that probably still has a ways to fall before home values return to reasonable price levels (and may not do much to prop it up anyway).

Looking at the future of how business is conducted in America, the money might be better spent on spreading fear among banksters by criminally prosecuting a prominent mortgage bankster – and then making a formula of it.

The formula would work like hopscotch: prosecute bankster A and settle for a few million and no jail time, then use the money to fund the prosecution of bankster B, going hard for a long jail term. Then repeat.

How should the states chose who gets to walk free and who gets the perp walk to prison? Randomly might be a good way. First separate all the potential cases into two lists, those who can be successfully prosecuted criminally (List B), and those who can only be prosecuted civilly (List A). Then throw a dart at List A, and take them to court. With that bankster's settlement in hand, throw a dart at List B and go for jail time on the second bankster. Repeat and repeat.

Why choose randomly? After all, criminologists have pointed out for decades that it is not the severity of punishment that deters criminals, but the certainty of punishment. But that's blue collar career criminals, who can if need be amortize a few years of unexpected jail time as a cost of doing business, and return to the 'hood with no shame, and perhaps even increased stature.

It doesn't work that way for high-flying white collar criminals. A conviction ruins their careers, and in their personal lives they lose 90% of their friends. And unlike a Mafia don or major drug dealer, they can't run their operation from behind bars. When they hit the streets again they are pariahs, and if they try to start another business it has to be in a different industry, because in finance even the small fry (the criminal foot soldiers) are scared to do business with them.

Of course prosecutors couldn't tell the media that they were throwing darts to choose targets – that would undermine their case before the jury. However the apparently random nature of the criminal prosecutions would be distinctly terrifying to the banksters who caused the Great Recession – several years of nail-biting as they wait for the statute of limitations on fraud prosecution to expire, each day wondering if it is their name that will be on the front page of tomorrow's newspaper, to be followed the day after by a photo of them in handcuffs.

Criminal prosecutions would provide the additional benefit of negative publicity for the businesses whose executives are jailed. While Goldman Sachs and AIG work behind the scenes and are shielded from direct consumer decisions, negative publicity could prompt many consumers to move their bank accounts to smaller banks or credit unions, thereby using market forces to reduce the "too big to fail" problem that still looms over America.

As an alternative or supplemental source for financing criminal prosecutions, state Attorneys General may want to look back at the Tobacco Master Settlement Agreement (MSA) of 1998. Since the MSA let all tobacco companies off the hook for private lawsuits – in return for payments to the states – it is not a suitable master plan for going after banksters. However some variant might be used, by letting some companies off the criminal charges hook in return for big settlements, and using those funds to go after the executives of the remaining bankster companies with criminal fraud charges.

What won't reform Big Finance is exactly what the Feds are doing now – trying to get some good press by rounding up a few hundred crooked mortgage brokers at a time. This merely assures the big banksters that they're immune from prosecution. The bottom line in criminally prosecuting banksters is that it costs more to jail a big criminal than the small fry, but if a repeat of the financial crisis can be prevented, the return on investment is worth it.

You can read Part 1 here.