So why have no Wall Street executives gone to jail for their role in contributing to the Great Recession? It is a question that just won’t quit. And for good reason. The billion dollar fines keep rolling in from one bank after another. But the titans that run these institutions have not been called to answer for any of their company’s financial misdeeds. One outspoken federal judge in Manhattan, the Honorable Jed Rakoff, speaks his mind on what he thinks is really behind this curious regulatory lapse.
Judge Rakoff points to three likely explanations. First, he contends, the government has had other priorities. He notes that after 9/11, much of the resources that had been devoted to investigating financial fraud were necessarily redirected to antiterrorism efforts. Recent budget limitations have only exacerbated this resource drain. With respect to what energy has been directed into the fraud arena, Judge Rakoff surmises that the bulk of it has been spent on Ponzi schemes and insider trading cases. They are much smaller, simpler and more easily resolved than cases connected with the financial crisis like fraud in the sale of mortgage-backed securities.
Next, Judge Rakoff posits the government may be restrained in its enforcement zeal in this area because the government itself has possibly played a role in setting the stage for the mortgage-based financial meltdown. It permitted the banks to engage in the practice of securitizing pools of mortgages. It encouraged bank deregulation and the concomitant weakening of agency oversight. It kept interest rates low to encourage mortgages. And it strongly encouraged banks to make loans to low income individuals who historically were considered too risky to warrant a mortgage.
Finally and most problematically, Judge Rakoff identifies a seismic shift in enforcement over the past thirty years where the prosecutorial focus has moved to the companies and away from the individuals who run them. It has been rationalized as part of an attempt to transform “corporate cultures” to prevent future crime. To Judge Rakoff’s thinking, however, it is the wrong way to proceed and both technically and morally suspect. Technically so because companies do not commit crimes; only their agents do. And morally so because it punishes innocent employees and shareholders and leaves untouched the individuals who actually committed the crimes.
But where Judge Rakoff delivers his most blistering attack is on how, in his view, the government has been less than honest in explaining its lopsided enforcement approach. He notes the government has never taken the position that the bank officials involved in the events leading up to the financial crisis were innocent (and there appears to be plenty of evidence to show they were not). Rather, the government “has offered one or another excuse for not criminally prosecuting them — excuses that, on inspection, appear unconvincing.”
So where does this all leave us? According to Judge Rakoff, it may just be “one of the more egregious failures of the criminal justice system in many years.” And if not corrected, it certainly does not bode well for any reining in of this corporate misbehavior going forward. Without holding the executives at the helm individually and criminally responsible, the corporate reprimands — even the multi-billion dollar ones — will continue to be treated as simply a cost of doing business; a monetary slap on the wrist.
Nothing new here. It has all been said many times over. But maybe Judge Rakoff’s lament will take on a little more significance. Who better to assess dispassionately how well our prosecutorial system is running? Even if his outcry falls on deaf ears, it is nice to know we are not alone in questioning why for the greatest financial fraud in our time, there has yet to be a Michael Milken or Charles Keating or Jeffrey Skilling or Bernie Ebbers brought to justice. Nor has there been a satisfying explanation from the government as to why.
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