Where Are the Criminals?

Posted by kevin on December 8, 2012 under Foreclosure Blog | Comments are off for this article

Last week, the Wall St. Journal ran the above captioned editorial in which it chides the government for losing mortgage crisis cases which are directed against individual bankers. While admitting that the government has had some small success in suing banks (which settle without any admission of guilt or liability), WSJ states that when the Obama Administration tries to prosecute a specific individual for a specific crime, it turns out there was no crime.

To support its position, the WSJ then cited two civil cases brought by the SEC involving collateral debt obligations or CDO’s where the defendants got off. First, these were not criminal cases. Second, CDO’s are complex and pretty much involve high stakes gambling between big time players. It is a difficult case to prove that one billlionaire got taken advantage of by another billionaire, and who really cares. Not much jury appeal and little wonder why these cases are not winnable. These types of cases are bad examples to support a premise that no crimes were committed.

The editorial goes on to say that pundits are saying that the government should go after the CEO’s. WSJ’s retort is if you cannot prove criminality against the lower level guys that were supposedly doing the bad things, how could you nail the CEO’s who are removed by layers of buffers. Sort of sounds like Michael Corleone before the Senate committee in Godfather II.

The next point made by WSJ is that people are blaming incompetence at the SEC or at the Department of Justice. But WSJ finds no fault with the quality of the regulators.

Finally, the WSJ concludes by saying that the fact that Washington can’t find a real criminal should focus public attention back on the real crime. That was Beltway policy. In effect, the WSJ is blaming the entire housing crisis on the government.

Now, that is a pretty disingenuous editorial. Sort of reminds me why I gave up my New York Times subscription. Allow me to briefly retort.

First, there is a difference between criminal prosecutions and civil lawsuits. The main difference is the level of proof needed to win. In a criminal matter, the prosecutor must prove that the defendant is guilty beyond a reasonable doubt. That is a tough standard. Given the complexity of the underlying financial transactions, and the money that defendants have to spend on top notch lawyers, criminal cases are not easy to win. That is why you see that most of the cases brought are not by the Department of Justice, which handles criminal matters, but the SEC and the civil sections of AG’s offices which handle civil matters.

Second, does the WSJ really believe that the CEO’s of the major banks and investment houses did not know that their underlings were peddling bad paper to the public? I doubt it. They knew that the securitized trusts were putting hundreds of millions of dollars in the firm’s coffers during the heyday. You mean to say that the guys in the penthouse never discussed how the young hot shots were bringing in gazillions of dollars to the firm. I do not think so. (The real question is why didn’t the Justice Dept use Sarbannes Oxley to go after the CEO. That law makes CEO’s liable.)

Third, the SEC is not what it used to be, unfortunately. I was an intern at SEC Enforcement in the mid 1970’s. Stanley Sporkin was then Director of Enforcement. He was one tough guy who had no qualms about going after investment banks or commercial banks. SEC enforcement was feared and kept bankers in line. Now, SEC enforcement is headed up by the ex-general counsel of Deutsche Bank, a big time player in securitized trusts, CDO’s, and other derivatives. Now, I am not saying that the current director is rolling over for Wall St ( I’ll let other say that); however, he is no Stanley Sporkin. And the WSJ knows that.

Finally, the WSJ concludes by saying that the fact that Washington can’t find a real criminal should focus public attention back on the real crime. That was Beltway policy. In effect, the WSJ is blaming the entire housing crisis on the government.

There is an element of truth to this accusation. The government, by re-pushing the Community Redevelopment Act, by repealing Glass Steagall, by allowing Fannie Mae and Freddie Mac to threw out underwriting standards, by bailing out the banking system with TARP, by failing to allow Chapter 13 cramdown, and by allowing servicers to make a mockery out of HAMP, allowed the banksters to run wild. Just like Prohibition allowed Al Capone to establish a criminal empire. Yeah, there is political blame.

And that may be the real problem. When I was an intern at SEC, my boss told me that best way to investigate a complex situation was to follow the money. If you follow the money in the mortgage crisis, it seems like the bulk of it went to the banks. The federal government did not do that by accident. So, why would the federal government want to throw in jail the very people it invested in.