By James Kwak
Update: See notes in bold below.
The only “Wall Street” “executive” to go to jail for the financial crisis was Kareem Serageldin, the head of a trading desk at Credit Suisse, according to Jesse Eisinger in a recent article. Serageldin pleaded guilty to—get this—holding mortgage-backed securities at artificially high marks in order to minimize reported losses on his trading portfolio.
Now if that’s a crime, there are a lot of other people who are guilty of it. In fact, a major premise of the federal government’s crisis response strategy was exactly that: allowing banks to keep assets at inflated marks in order to pretend they were solvent when they weren’t. FASB changed its rules in April 2009 in order to make it easier for banks to inflate their marks. And the Obama administration’s “homeowner relief program” was designed to allow banks to delay realizing losses on their mortgage loans by dragging out—but generally not preventing—foreclosures. (Remember “foam the runway”?)
Combine Serageldin’s story with the story of the vigorous prosecution of Abacus Federal Savings Bank—a little Chinatown bank that, if anything, was probably allowing its borrowers to underreport their income on loan applications—which Matt Taibbi tells in the first chapter of his latest book, and the picture you get isn’t pretty. It’s a picture of the immense resources of the American criminal justice system being deployed against bit players, with no consequences for the people responsible for the financial crisis. The judge in Serageldin’s case even called his conduct “a small piece of an overall evil climate within the bank and with many other banks.”
Eisinger’s article attempts to explain why the Justice Department hasn’t even tried to convict anyone at a bank with any significant responsibility. And it’s not like they haven’t been given the opportunity. What about Standard Chartered, where manually overtyping data fields to circumvent money laundering controls was a written procedure? According to Eisinger, it’s a combination of blowback from the Arthur Andersen conviction, lack of resources, lack of practice in prosecutions, and court cases disallowing some of the DOJ’s more aggressive tactics.
There are also the usual suspects. There is the Federal Reserve protecting the banks, warning the DOJ not to go after PNC Bank because of financial stability concerns. There is the revolving door: “According to numerous former criminal-division employees, [Lanny] Breuer almost immediately signaled his interest in bigger things.”
There is the thrill of the easy victory. Exhibit A: Preet Bharara’s 80–0 record in insider trading cases. As a former Southern District prosecutor said: “They made our careers, but they don’t change the world.” [I originally wrote that Bharara himself said this, but I misinterpreted the subject of the sentence in Eisinger's article.] By contrast, Eisinger quotes James Comey, a deputy attorney general in the second Bush administration: “We have a name for prosecutors who have never lost — the ‘Chicken(expletive) Club.'”
What’s missing is any reason to think things will change. Basically, everyone is well served by the current arrangement. Prosecutors rack up impressive winning records, the revolving door spins, and the banks continue doing what they do. Even as we amass more evidence of their basic incompetence and out-of-controlness, in the form of Lehman CFO Ian Lowitt saying the bank had $42 billion of liquidity—five days before it went bankrupt. “When Lowitt came to talk to Jenner & Block,” Eisinger continues, “he explained that he had not fully understood the issues when he assured investors of its liquid assets.” Not very reassuring.