Andrew S. Ross
“Forgive me,” said Berkeley filmmaker Charles Ferguson upon receiving an Academy Award on Sunday night for his documentary “Inside Job.”
“I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail – and that’s wrong.”
A number of people would agree, including a majority of Americans, according to opinion polls, who blame U.S. banks and other private institutions for the 2007-08 financial meltdown documented in Ferguson’s film.
“He raised exactly the right question,” said William Black, a senior regulator at the former Federal Savings and Loan Insurance Corp., which helped clean up the far less costly S&L crisis of the late 1980s and early 1990s. More than 1,800 S&L officials were convicted of felonies in its aftermath, with more than 1,000 jailed, according to the Justice Department.
But the difference between then and now – and with the 1929 crash, which saw a number of bankers go to jail – is open to much debate.
“We had well over 10,000 criminal referrals from regulators in the S&L crisis,” said Black, now an associate professor of economics and law at the University of Missouri-Kansas City School of Law. “This time, zero.”
Not like S&L case
Compared with the veritable army of strike forces, FBI agents and prosecutors let loose by banking regulators in the S&L crisis, “The regulatory agencies have since gone out of the business of making criminal referrals,” he said.
Robert Gnaizda, former president of Berkeley’s Greenlining Institute, says some of the responsibility lies with the current White House.
“There’s an unwillingness by the Obama administration to effectively criticize ‘too big to fail’ institutions,” said Gnaizda, who is featured in the documentary vainly warning successive Federal Reserve Board chairmen about the kind of doomed-to-fail loans Countrywide Financial and others were making.
“It’s not the difficulty of the cases so much as the view of the administration, reflected by (Attorney General Eric) Holder, that you shouldn’t do anything unless you’re certain of the result.”
But outright criminality in the S&L crisis was far more apparent and easier to prove than in the recent financial crisis, at least at the executive level, say others.
“When you have executives making broad policy decisions but without any specific intent and without actually engaging in an act that is criminal, they are pretty hard to prosecute,” said Rachel Dollar, a lending institution attorney and editor of Mortgage Fraud Blog in Santa Rosa ( www.mortgagefraudblog.com).
“I think there’s a real reluctance to put people in jail for participating in their own small portion of an overall fraud where an intent to defraud is very difficult to prove,” said Jay Gould, a former SEC attorney, now with Pillsbury Winthrop Shaw and Pittman in San Francisco. “Just because I was packaging no-doc mortgage loans into RMBS (residential mortgage-backed securities) – with pretty full and onerous disclosures that no one read – does not necessarily mean I should go to jail.
“After all, much of the activity that occurred was legal.”
Two cases in particular are cited as examples of how steep a mountain the criminal prosecution path is to climb. Seen as a marker for future prosecutions, two Bear Stearns hedge fund managers were acquitted in 2009 on fraud charges relating to a $1.6 billion investor loss in one of Bear Stearns’ funds, in a trial about what prosecutors said were “black and white lies.”
“The jury said they felt the government did not meet its burden of proof, and neither were they going to hold these people responsible for the market’s collapse,” said Jacob Frenkel, a former senior counsel with the SEC’s enforcement division, who is now in private practice in Maryland.
In a more recent instance, federal prosecutors last week reportedly dropped their criminal case, after a two-year grand jury investigation, against Angelo Mozilo, the former CEO of Countrywide Financial, once the country’s largest mortgage lender.
“If you can’t get that guy, then there probably isn’t much hope of bringing others to justice,” said Gould.
So, a $67.5 million civil penalty levied on Mozilo – most of which will be paid by Countrywide’s new owners, Bank of America – will have to do. As such, penalties may have to do in other situations.
The Federal Deposit Insurance Corp. is reportedly seeking more than $1 billion to settle a case with former executives of Washington Mutual, the biggest U.S. bank ever to fail, and now owned by JPMorgan Chase. Should the executives agree to settle – if they don’t, a lawsuit will reportedly follow – most of the money will apparently come out of the bank’s liability insurance fund.
At the same time, there have been lower-level criminal prosecutions of mortgage fraud. Other crimes that spun off from the crash have resulted, for example, in the 50-year jail sentence for Bernard Madoff. More recently, sentences have been handed down to executives caught up in the hedge-fund insider trading scandals.
One case to watch involves Taylor, Bean & Whitaker Mortgage Corp. in Florida, which at one time handled $35 billion in home loans. Last week, the company’s former treasurer, Desiree Brown, pleaded guilty to her role in a $1.9 billion fraud scheme that resulted in the collapse of banks and losses to the U.S. government’s Troubled Assets Relief Program.
Brown, who faces up to 30 years in prison, has reportedly agreed to testify against the company’s former chairman, Lee Farkas. An executive at one of the banks involved is expected to plead guilty to criminal charges on Wednesday.
“Would we like to see more people headed for the slammer? Sure,” said James Balassone, director of the business ethics programs of the Markkula Center for Applied Ethics at the University of Santa Clara. “But it’s a matter of degree, and it can take a while for the process to work.”