Fact or fiction? No one on Wall Street went to jail for financial crisis

A recurring theme among Occupy Wall St. protesters and some Democratic politicians (see this massively popular Tumblr image mashup) is that no financial industry types have gone to prison for the malfeasance that led to the financial crisis.

As a technical matter, this isn’t true. The number is (at least) two, according to HousingPredictor.com.

1. Michael J. McGrath Jr., former president of U.S. Mortgage Corp., got 14 years in prison for orchestrating a conspiracy that defrauded credit unions and Fannie Mae of $136 million.
2. Lee B. Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp., got 30 years in prison and was ordered to forfeit $38.5 million, for his role in a $3 billion scheme to rip off banks through the sale of fake mortgage assets.

Still, these two arrests would likely seem to most irate protesters like pretty small potatoes. So why is it that so few top executives seem to have gotten their proper comeuppance for the financial crisis? Decoder would put forward three broader questions for consideration:

(If you want a more in-depth take on all this, read this article from Motley Fool and this piece from the New York Times, from which our analysis is drawn.)

1. What is the difference between “illegal” and “irresponsible”?

Asked at a Thursday news conference about the lack of Wall St. prosecutions, President Obama said this:

[O]ne of the biggest problems about the collapse of Lehman and the subsequent financial crisis and the whole subprime lending fiasco is that a lot of that stuff wasn’t necessarily illegal, it was just immoral or inappropriate or reckless. That’s exactly why we needed to pass Dodd-Frank, to prohibit some of these practices….

I think part of people’s frustrations, part of my frustration, was a lot of practices that should not have been allowed weren’t necessarily against the law, but they had a huge destructive impact.

While the distinction between hubris/stupidity and illegality may not satisfy many, it’s a key component to the financial crisis. The Motley Fool put it thus:

Blowing up your company isn’t necessarily a crime. Leveraging 30-to-1 isn’t unlawful. Neither is buying securities backed by homeowners unable to repay. Nor is ignoring caution signs. Or disregarding history.

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