Across the world people have been asking why none of America's top bankers went to jail for the crimes that caused the 2008 financial crisis. A leading New York judge now provides disturbing answers and underscores that none of the key bankers who caused the crisis will ever be criminally prosecuted.
The hard fact is that the gangsters got away. This result should anger all Americans whose taxes had to be used to contain the financial crisis, and especially those Americans who were victims of sub-prime mortgage fraud and who, in tens of thousands of cases, lost their homes. More generally, the result leavers the impression that multi-millionaire American bankers are beneficiaries of judicial impunity that enables them to operate above the law.
Writing in the January 9, 2014 edition of The New York Review of Books, Jed. S. Rakoff, a U.S. District Judge for the Southern District of New York with vast experience of financial crimes, laments the lack of prosecutions. This is an angry judge, after all he points out that the Financial Crisis Inquiry Commission, established by Congress, used variants of the word "fraud" 157 times in explaining the causes of the crisis.
The judge writes: "Not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears likely that none will be. It may not be too soon, therefore, to ask why?"
Top bankers in a range of institutions pocketed millions of dollars in annual income in the years running up to the crisis -- profits in part from leveraging huge bets with the deposits of tens of millions of customers. Those bets centered on packages of sub-prime mortgage loans that many of the bankers knew could never be repaid. When the bets paid off, the banks made billions of dollars. When the bets failed, as they did in 2008, then the U.S. taxpayer picked up the tab at a cost of hundreds of billions of dollars.
Not a single criminal prosecution
However, the U.S. Department of Justice (DOJ) has not brought a single criminal prosecution against a top level banker responsible for some of the frauds. Rakoff has several plausible theories to account for this. One is that the DOJ had other priorities. Many of its top investigators became deeply involved in anti-terrorism work after 9/11 and the DOJ also suffered budget cuts so its force of highly experienced financial crime investigators was very thin.
Then, the judge points out that other financial crimes were abundant on Wall Street, such as insider trading of shares and that these were relatively easier to investigate and successfully prosecute than the frauds related to the financial crisis. So some of the DOJ's investigative power was diverted to such cases and indeed it has recently registered some big victories here.
Most importantly, according to Rakoff, the DOJ found it more efficient to focus its attention on the financial institutions themselves, rather than on the people who ran them. Individuals perpetrate crimes not corporations, but the latter have far deeper pockets when it comes to paying big fines than the former.
The DOJ has repeatedly gathered evidence against banks and then threatened prosecution. In almost every case the result is an agreement by a bank to pledge that it will behave better in the future and to pay a fine. Each settlement is hailed by the DOJ as a victory against financial crime.
Fines seen as the cost of doing business
Numerous banks have paid very high fines -- the largest being $13 billion by J.P. Morgan Chase in 2013 for charges related to mortgage fraud. What angers Rakoff and no doubt many others is that the fines are unlikely to impact those very executives who oversaw the frauds. The fines have widely been viewed as just a cost of doing business.
The DOJ actions against the banks have been civil not criminal. The DOJ has worried that a criminal verdict against a major bank may force it to lose its operating license and this could gravely damage the stability of the global financial system. Banks are, in fact, too big to jail.
What is surprising is that that the DOJ never prosecuted individual bank managers when bringing cases against the banks themselves. It could be that the DOJ concluded that it lacked the manpower to pursue the detailed investigations. Or it could be that the DOJ calculated that securing a big fine settlement with a bank would be far harder if at the same time it went after the bank's top managers.
In addition to Rakoff's views, it is interesting to note that there has been very little pressure from official bank regulators to press the DOJ to bring criminal prosecutions. Here too the issue is one of priorities. It appears that the regulators have been far more preoccupied with writing new rules and rebuilding the financial system, than running after the individual bankers who committed crimes.