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.
- 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.
- 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:
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.
But what about subprime mortgages? Weren’t there tons of evil things going on there that went well beyond stupidity? Yes - but it’s often hard to make the case that executives are to blame. Consider Countrywide, one of the most notorious subprime lenders, whose CEO, Angelo Mozilo, is far from a sympathetic figure. As the New York Times writes:
The problem is that Mr. Mozilo, though he helped create the culture that made such predatory lending acceptable, never made the fraudulent loans himself. Legally, if not morally, he’s off the hook.
2. In cases of actual illegality, has the federal government put enough resources into prosecuting malfeasance?
As a comparison, the NYT looked back at the savings and loan crisis of the 1980s, which ended with more than 1000 felony convictions (remember, a single person can get multiple convictions).
[T]he federal government threw enormous resources at those investigations. There were a dozen or more Justice Department task forces. Over 1,000 FBI agents were involved. The government attitude was that it would do whatever it took to bring crooked bank executives to justice.
The executives howled that they were being unfairly persecuted, but the cases against them were often rooted in a simple concept: theft. And as prosecutors racked up victories in court, they became confident in their trial approach, and didn’t back away from taking on even the most well-connected thrift executives
Why can’t they do that today? That’s a serious question. Encumbering factors include a lack of FBI resources, given terrorism concerns, and a lack of legal expertise on the part of public prosecutors outside New York on complicated financial questions. The latter point is particularly relevant given the well-paid legal defenses marshaled by financial executives.
3. To what extent are government figures liable?
On TIME’s list of 25 people to blame for the financial crisis, several government figures are named along with top financial executives - including former Federal Reserve Chairman Alan Greenspan, presidents Bill Clinton and George W. Bush, and former Senate Banking Committee Chair Phil Gramm (R) of Texas.
Peeling back financial regulations, keeping interest rates “too low” (a subjective measure, to be sure), and falling asleep at the regulatory switch (a la the Securities and Exchange Commission) all had a role to play in the financial crisis.
How much liability should we apportion to government figures?