Monday, December 30, 2013
Economists say 2014 could be the year the American economy finally crawls out of the slump that followed the 2008 market crash and financial crisis that brought currency to the concept of “too big to fail.” Lesser known, but perhaps just as galling, is the idea of “too big to jail.”
The U.S. Justice Department in November reached a $13 billion settlement with JPMorgan Chase to penalize the company for its sale of troubled mortgages linked to the crash. Of that sum, $4 billion will go to consumers.
At the heart of the collapse was the practice of bundling real estate investments into securities. Lots of those turned out to be overvalued and insecure. The real estate market in the U.S. took a nose dive, yanking vital assets away from millions of American homeowners.
Though the stock markets have finally rebounded, thanks in part to a fierce campaign of bond buying by the Fed, ordinary Americans who lost equity in their homes haven’t been as lucky. Neither have those who had to cash out of stocks at the worst time and then watched values return to stocks they no longer owned.
The JPMorgan Chase deal was the largest settlement in U.S. history and the Justice Department is reserving the right to investigate and prosecute individuals, a spokesman said, “if the evidence supports it.”
While that possibility remains, the chief executives of the companies that brought the American economy to its knees by creating and trading in risky investments have not been held accountable.
In a recent issue of the New York Review of Books, a U.S. District Court judge who has handled high-stakes financial fraud cases said he wants to know why. He isn’t the only one asking that question.
The essay by Judge Jed S. Rakoff lends weight to the argument that, unlike earlier eras when people went to jail for bilking investors, the people behind one of the biggest debacles in American finance history are getting a pass.
Rakoff says the Justice Department has failed to serve its role of targeting people who erred, not just corporations. He argues that big settlements with financial companies punish shareholders and employees rather than those behind the wrongdoing.
Time is ticking down on prosecution, for the statute of limitations on crimes that could lead to charges is running out. As of now, not a single chief executive of a Wall Street firm has been held accountable.
The government’s Financial Crisis Inquiry Commission couldn’t bring charges, but it could bring light to this issue: It found, after 19 days of hearings and testimony from 700 witnesses, that fraud, incompetence and lying ran rampant on Wall Street in the years leading up to the collapse.
In his essay, Rakoff says he does not know whether any top executives in fact were guilty of crimes. That disclaimer freed him to offer his perspective in a general sense and to preserve his ability to preside over financial cases in Manhattan.
His record shows he walks the walk. Rakoff has blocked proposed settlements in his courtroom that he felt were excessively lenient, or cloaked with language that shielded the companies involved from what the judge sees as the moral responsibility to accept blame for conduct that harmed others.
Attorney General Eric H. Holder Jr. comes in for particular criticism for having told Congress the government must be careful not to take on prosecutions that “have a negative impact on the national economy, perhaps even the world economy” — the “too big to jail” stance.
Rakoff acknowledges that it can be difficult to prove criminal intent in the work of top executives, but notes in his essay that the legal concept of “willful blindness” can be used to make cases. The government was able to send Michael R. Miliken to prison in 1991 for his junk-bond scams and successfully prosecuted Jeffrey K. Skilling, the chief executive of Enron, and Charles H. Keating, who in 1999 pleaded guility to four counts of fraud related to the savings and loan crisis.
Going to jail sends a message — and has the power to change behavior throughout an industry — in a way that having a company write a big check (much of it tax-deductible) never will.
Rakoff admits the government may be wary of bringing charges that put its own conduct on trial. In the years before the crisis, the loosening of regulations in the financial industry led some Wall Street companies down new paths to extraordinary profit and, ultimately, to ruin.
It increasingly looks like those responsible will never be held accountable.