A recent New York Times article starts with “a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?”
Admittedly this is not a simple question. Criminal intent can be difficult to prove, especially in a highly complex financial environment. There may be sensible reasons for the lack of major prosecutions. But as the above article states, “[f]ormer prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.” Consider these examples:
1. “As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud.”
2. “That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.”
3. “Leading up to the financial crisis,…regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.”
4. “[E]nforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.” But “regulators have referred substantially fewer cases to criminal investigators than previously.”
The result has been “fraud with impunity,” according to William K. Black, who was the federal government’s director of litigation during the savings and loan crisis in the 1980s. Now a law professor who has testified many times before Congress, in a recent Bloomberg article he argues:
The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity and the failure of regulators to do their jobs. . . . . The two great lessons to draw from this epidemic of fraud is that if you don’t look for it, you don’t find it and that wherever you do look, you do find fraud. The FBI was concentrating on retail banking, or individual borrowers and smaller lenders. But the big problems were being created in the wholesale end of the business, where loans were pooled, packaged, sold and securitized. Because the FBI only looked at relatively small cases, it found only relatively small frauds.