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Ireland jails three top bankers over 2008 banking meltdown (reuters.com)
229 points by randomname2 on July 30, 2016 | hide | past | web | favorite | 146 comments

I don't understand how bankers in the US haven't been criminally investigated for their roles in making loans that had no good faith data behind them.

Probably some mixture of the fact that:

1. The bankers you probably are hoping to net had no role in "making loans".

2. "making loans that had no good faith data behind them", once translated into concrete legal terms, turns out not to be a crime.

The punishment for lending someone money they can't pay back is, historically and legally, that you don't get paid back. If I work at a bar, and I let one of my customers run up a $800 bar tab and it turns out they're not good for it, I might be an idiot, but I'm not a criminal and I'm not going to jail.

> 2. "making loans that had no good faith data behind them", once translated into concrete legal terms, turns out not to be a crime.

Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA? If so, how is that not straight up fraud?

> Aren't we really talking about junk rated mortgage back securities being packaged and sold as AAA?

Yes. But I suspect you don't understand precisely what that means:

First: A large number of mortgages were made, grouped into pools, and sliced into "tranches", where losses were assigned to the most junior tranches first, and the most senior tranches last. Thus, a junior tranche might stop paying out if 5% of the loans in the pool were defaulted on, while a very senior tranche might only stop paying out if 80% of the loans in the pool went bad. (Or whatever; numbers for example only.)

Second: These tranches were submitted to ratings agencies, who constructed models where they said "well, the chance of 5% of the loans defaulting is X%, the chance of 20% is Y%, the chance of 60% default is Z%...", then based on this model they assigned ratings to the tranches, reflecting the models estimation of their likelyhood of paying out, which is the entire job of a ratings agency.

Third: Tranches rated AAA were sold as AAA securities, because they were. The model said that Random Senior Tranche was 99.5% likely not to default, which is enough for a AAA rating from whomever was giving the ratings, so that's what it got. We've later come to question some of the models used, and in particular, it's been suggested that the ratings agencies incorrectly assumed default risk was less correlated than it was, and systematically undervalued the chance of a "black swan" event. But that's hindsight.

> If so, how is that not straight up fraud?

How is it even sort of fraud? Or if it is fraud, who do you think committed it, and what should they have done differently to avoid it?

What about robo-signers? ( https://en.wikipedia.org/wiki/2010_United_States_foreclosure... )

EDIT: Also the scenario described could still be fraud. The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud. If someone did this for their personal benefit while the company they were running took a loss then they would also be defrauding share holders.

So it's a lot more complicated than simply saying the instruments were AAA rated by the rating agency and they were simply sold like any other AAA rated instrument. It could have all been innocent but it certainly smells and warrants investigating.

The robo-signing stuff is straight up illegal. But that falls under my original point 1: The people doing that were tiny, tiny fish, who had nothing to do with the CDOs.

> The rating agencies could have been defrauded and if people sold those while not really believing they were of the rated quality IMO it's still fraud.

Legally that's a harder question than you might imagine. However...

...there's absolutely zero evidence of this on a systemic basis. Banks overwhelmingly made it clear that they believed the assets were good. The bailouts went primarily to institutions that had originated utter crap and then held on to it because they thought it was a great investment. Studies have been done to look at the personal investments of bank executives; it turns out they were closely correlated with their job; the more you knew about CDOs and MBSs, and the more closely linked to the system you were, the more you thought CDOs were safe as houses, and the more willing you were to have your retirement invested in it.

Conversely, the small handful of Cassandras were utterly ignored by the world in large part because they were complete outsiders who had no inside knowledge. The arguments boiled down to: "What do they know? The people who know the most about CDOs are all in; these people must just not understand the models."

(There are exceptions in specific cases. One that springs to mind is Fabrice Tourre[1]. But he was very much the exception to the rule, and it's probably not a coincidence he worked at Goldman...)

> It could have all been innocent but it certainly smells and warrants investigating.

And it was. Unfortunately (or fortunately, depending on your view) no smoking guns emerged.

[1]: http://www.reuters.com/article/us-goldmansachs-sec-tourre-id...

Wouldn't any economist be able to say that the assumption that house prices will not move in a correlated way across the united states is patently false? It happened before during the great depression, and to some degree in the 80's and 90's. It was also clear house prices were in bubble territory by any sort of economic measure. While no one can accurately time the burst of bubbles there's enough historical data to be able to have an idea of whether things are over valued by various metrics.

What I'm saying it that I don't think that claims that bankers, who are sophisticated players and experts in their field, didn't know what they were selling. They should have known those instruments were not of the quality they represented them to their customers. I don't think shifting the blame to the rating agency holds water. At the same time they were giving mortgages to people who wouldn't "normally" qualify and where the risk was obviously very high they were selling pieces of those mortgages as AAA rated securities. Doesn't pass the red face test in my books.

> They should have known those instruments were not of the quality they represented them to their customers.

You're not wrong! And yet it seems very clear they did not know this. Which is pretty stupid, really...but being stupid isn't a crime.

(Plus...I mean, you were alive back then right? Did you make a ton of money betting against the housing market? If not, why not? Or if you were too young/poor, then do you know anyone who did?)

> And yet it seems very clear they did not know this.

And therein rests your case. But you appear to be simply taking them at their word on this, to me. Unsophisticated observers will say, "Why would they do something so colossally stupid that it'd bankrupt their firm". But the person is not the firm. The person quite often can permanently enrich himself on the path to firm-wide dissolution.

> Did you make a ton of money betting against the housing market? If not, why not? Or if you were too young/poor, then do you know anyone who did?

Considering there was no product to bet against the housing market, your options are:

(1) Be a hedge fund manager of a large enough hedge fund to enter a custom derivative contract with a bank, to create the product (which is what those funds that made a ton of money betting against the housing market did)

(2) Have a few million for the minimum to investment in one the said hedge funds

So I'd say the answer for most people is "were too poor".

being stupid isn't a crime

Doing stupid things is often a crime. It may not be in this particular case, but it's not true that lack of criminal intent is always exculpatory.

> the more you thought CDOs were safe as houses

Didnt Warren Buffett say in 2002 that derivatives were weapons of mass destruction.

Of course they are (or can be)! Any kind of highly leverage finance can be - they are extremely powerful tools, and in the wrong hands things can and do go wrong.

That doesn't make them illegal. The morality of them is more to do with selling them to people who don't understand what they are buying.

"they are extremely powerful tools, and in the wrong hands things can and do go wrong."

Like guns, or even some drugs.

"That doesn't make them illegal."

But it should make them heavily regulated and scrutinized, which they aren't, and won't be unless for some serious civic activism.

Actually they were all junk. Even the "good ones" and they knew it. When the pool became so shitty that the rating agencies were about to start rating them as junk they changed their rating "algorithm" at the behest of the banks. It was straight up fraud all around but the govt just didn't want to prosecute the anyone that mattered.

Yeah, but what if all the worst tranches were repackaged into CDOs that were knowingly composed of shit loans, and then rated AAA, like what happened?

Jailing is pointless and dumb. What we need to do is put in a process that will prevent this from happening ever again. On that point, I see no actions being taken. So jail or don't, there's just going to be more crisis down the line.

One such process is what would have happened by default: let the banks who bought bad assets crash and burn. Now that we bailed them out, we have actually encouraged similar behavior in the future. The banks get all of the upside rewards, but none of the downside risk.

I'm not arguing that the bail out was necessarily the wrong thing to do. There's other considerations (like the effect on the rest of the economy) but this is one of the big drawbacks.

I have heard a story that goes like this:

-Rating agencies set criteria for marking things BB, BBB, etc.

-Banks noticed that those criteria did not perfectly correlate with credit risk and created products that optimized for ratings rather than low risk.

-People bought these products based on the rating, and then got blown up.

You should take this with several grams of salt; I don't know if it's actually true.

The ratings agencies also have a direct conflict of interest in how they rate securities because the bank will go to their competitor if they don't get the rating they want.

"their competitor" looks like a typo but is correct. US financial regulation grants a duopoly to the two big ratings agencies: despite their utter failure in 2008 and despite the low barriers to entry, no new competitors have emerged to challenge them because of that.

You can go to Whole Foods and every product will have some meaningless "All Natural" or "Asbestos Free" certification. That's not fraudulent.

Labeling which creates a reasonable impression of some meaning, which doesn't actually mean what that impression suggests, strikes me as quite problematic.

There are different classes of lies -- comission yes, but also of omission and distraction.

It's common to see poultry labeled in the US as "No Antibiotics. No Hormones". The implication is that the brand (or producer or processor) is making some specific claim. The truth is that USDA regulations forbid the use of antibiotics or hormones in poultry. My view is that the labeling, if it omits clarification that this is by government regulation, is misleading.

Another element of commercial practices in the United States is that there is no preemptory screening for validity of business claims. All sorts and manner of fraudulent activity occurs. Only in very select cases are the perps called to account for it.

Claims regarding freedom from some possible contaminant or allergen may not be particularly meaningful, but they aren't, if true, fraudulent. There's a fair case to be made for standardising both the claims and their presentation -- e.g., a standard "allergens and exposure" labeling, much as existing nutritional labels communicate macro and micronutrients and ingredents. That wasn't always the case.

Some of the history: http://www.fda.gov/AboutFDA/WhatWeDo/History/Overviews/ucm05...

... though I seem to recall that more complete ingredients-and-nutritional labels appeared in the 1970s.

It's more like a package that says "Peanut free!" and then is actually comprised entirely of peanuts

Because the rating is not a guarantee. You are allowed to be wrong. Due dilligence is your responsibility.

Because the entity that is selling it is not the same as the one rating it.

Bankers don't mark bonds as AAA. The ratings agencies do.

You forgot that in America, the punishment for lending someone money they can't pay back is getting free money from taxpayers.

Didn't countrywide have such rampant forgery they called their loan department "Arts and Crafts"? Also, wasn't there a foreclosure crisis brought on by robo-signing and mass forgery?

Here's Judge Jed Rakoff, a senior judge in lower New York and one of the leading securities experts in the American court system today: ""One possibility, already mentioned, is that no fraud was committed. This possibility should not be discounted. Every case is different, and I, for one, have no opinion about whether criminal fraud was committed in any given instance.

But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior.""

For what it's worth, he chalks up the failures to prosecute as 'discretion' on the part of the justice department. Personally, I'm convinced that a man like too-big-to-fail Eric Holder is too morally corrupt to find fault in such blatant fraud. If he can sign off on the banks financing terrorism and drug cartels, he's probably okay with the suicides resulting from the mortgage crisis.


Jamie Dimon admitted that he violated Section 906 of the Sarbanes-Oxley Act, which carries a prison sentence of up to 20 years.

I assume you're talking about: http://www.salon.com/2013/12/18/jamie_dimons_perp_walk_why_i....

It's one of the most ridiculous theories I've ever heard. Sarb-Ox 906 in conjunction with Section 13 of the Securities Exchange Act requires bank CEOs to certify that the bank:

"maintain[s] a system of internal accounting controls sufficient to provide reasonable assurances that— (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences"

"Reasonable assurances" does not mean "free of problems." Imagine a law that required Program Managers at tech companies to certify that they had controls that gave "reasonable assurances" that the software performed as designed. That would just mean they had a Q&A procedure--not that the procedure was perfect or that the software was perfect. It would not violate the law for Satya Nadella to sign such a certification, even though everyone knows Windows (like all software) is full of bugs that need to be fixed.

Because the SEC and the FED are staffed by the same rotating crew of bankers and politicians that engaged in, endorsed, and continue to profit massively from exactly the same behavior. Mary Jo White, Chairwoman of the SEC is a prime example. This "revolving door" is unfortunately nothing new and not limited to the SEC.


How would you go about creating a competent banking regulatory system that includes no trained bankers? Once they have gained experience how would you prevent the staff from leaving to more lucrative options?

Reasonable questions. What incentives would lead a trained banker to rigorously and honestly enforce regulations? What incentives would lead to retaining trained, rigorous, honest people?

Mary Jo White isn't a banker, she's a securities lawyer. She was a big deal partner at a major law firm before she went to the SEC. She's almost certainly going to go back to the same job after. All her incentives are aligned with aggressive enforcement of securities laws. Her firm makes money when the SEC comes down on people, not when it rolls over and lets things slide. You can see this starkly in the antitrust world. There was a lot more money in antitrust practice back before the current trend of going easy on antitrust enforcement.

The parent poses good questions and they're rhetorical - instead of disincentivising this, it would be better to accept it and then create an organization with checks and balances to counteract it.

What incentives would lead a trained banker to rigorously and honestly enforce regulations?

A salary.

What incentives would lead to retaining trained, rigorous, honest people?

A bigger salary.

The difficulties the public sector has in implementing that is one of the reasons regulations so often go wrong.

Everything I need to know about banking regulation I read in Rolling Stone. Make me the regulator!

I'm down for that. You couldn't do much worse.

Many other countries have functional regulatory systems that don't appear to suffer from the same kind of regulatory capture problems that exist in the US.

I realize this doesn't have a specific recommendation, but it does show that it is possible.

You need to radically simplify regulation for that to work.

One way is to just regulate banks like any other business without any special laws for them.

That's interesting. Would we still dare to offer deposit insurance without the regulations in place?

Deposit insurance is part of the problem because it makes customers not pay attention to the security of their bank until it's too late.

If you want dead simple regulations, require that banks publish their balance sheet. (Perhaps with a bit of a lag, if you want to give them the opportunity to have some trade secrets. But easier to just ask for all current balance sheet items to be public.)

Without deposit insurance customers will take a flight to quality. Or see https://www.bloomberg.com/view/articles/2014-08-27/lending-c... for how banks might want to make assets match liabilities.

Reinsurance companies might offer private deposit insurance for a fee to banks with good enough balance sheets.

Right now we have regulators require a minimum quality of balance sheets, but also giving an explicit and implicit guarantees that deposits with banks that meet that minimum quality will not go down. What I want to do is remove that minimum, replace it with more transparency instead, and remote the guarantee.

Argument stolen from this book http://www.independent.org/publications/tir/article.asp?a=51...

The author is obsessed with figuring out simple regulations that only require a few competent and honest civil servants to implement. That's because competent and honest civil servants are one of the most precious resource.

For privatizing companies he suggests: just auction off the company to the highest cash bidder. (If the winner wants to take the former state company public, that's there choice.)

For bankruptcy: if creditors and debtor company can't agree on restructuring, just liquidate the company in an auction. (Court ordered debt restructuring takes up precious civil servants, and invites corruption.)

The author actually describes the how and why and historical background. He's actually worked in the field.

By setting up an antagonistic system, I think. A system of checks and balances in which the interests of the employees of the SEC are OPPOSED to the interests of the banks.

For example, if the SEC successfully fines JP Morgan a sum of $2 billion, let the key employees of that prosecution them keep $500 million and distribute it among themselves. That way the employees of the SEC have an incentive to be antagonistic to banks.

> For example, if the SEC successfully fines JP Morgan a sum of $2 billion, let the key employees of that prosecution them keep $500 million and distribute it among themselves. That way the employees of the SEC have an incentive to be antagonistic to banks.

Then the SEC will start making a bunch of awful rules that will transfer the wealth of widely held companies to a few regulators.

Then the awful rules can be challenged in a court of law, which will act as the limiting power on the SEC. There does exist a mechanism for challenging malicious prosecution in our legal system, and if the corporations feel they are victimized, they can use it.

The point, however, is without antagonistic checks and balances in place, you will always run into the "revolving door" problem.

Challenged how? In legal systems like that of the USA, the regulators can make new laws. You can't indisputably break a law and then challenge the law itself unless it's unconstitutional, but the constitution has very little to say on the topic of financial regulation.

They should disperse that cash to the taxpayers.

Well that's what they do now. The only fines that go to people are whistleblower cases and they get a percentage (and aren't government employees in charge of making the rules!).

Rayiner's response below more or less refutes this comment directly, doesn't it?

Not so easy and it is a dangerous, slippery slope.

There is a large and (warranted) initiative to bank minorities and other disadvantaged communities. Until the government created huge incentives to do this it didn't happen. In many markets it still doesn't. If you tell someone they are criminally responsible for the loans they underwrite, on the margin, they are far less likely to bank the people who "really" need it. The rich get richer, the poor stay poor.

As the saying goes, you can't have the cake and eat it too.

One solution to this is to do away with the whole idea of having the fed give money to banks and then assume the banks will give money to the people. If the government really wanted to give home loans to specific people, it could do that directly.

The same thing applies to giving tax incentives to employers for health insurance plans or guaranteeing student loans made by private companies.

>One solution to this is to do away with the whole idea of having the fed give money to banks and then assume the banks will give money to the people.

Except that's not a solution if the whole point is to give the banks money, which is the motivation of Washington DC, the FED, and the SEC. Don't take my word for it, listen to Senator Dick Durbin.


Institution can be changed and/or replaced. The aren't givens.

Most of the bad loans made and securitized during the crisis were made to others than those you describe [0]. Loans from that time period to minorities and other disadvantaged performed about as well/poorly as they always had.

[0] http://ritholtz.com/2016/06/no-cra-not-cause-financial-crisi...

Your stated position is deeply troublesome in terms of both de-ontological and consequentialist moral reasoning.

In the first case, it raises the question of how one can possibly have the right to attempt social engineering on such a scale, forcing people to act against what morality and prudence would dictate, and compelling them to take on potentially ruinous risk. People are not dirt to be shoveled about on a whim.

From the consequentialist position, we have seen that people who belong to those demographics that the law was supposed to help are actually the hardest hit. They have been made much worse off.

I tried making sense of your 2nd paragraph. You lost me (and others?).

Sorry. I ought to have been more specific. I was referring to making a law that made it compulsory to lend to an individual even if it was clear from assessing that particular individual that their likelihood of defaulting was unacceptably high.

That's precisely what caused the financial crisis of 2008. The Community Reinvestment Act (passed 1977, expanded in 1992 and 2002) led to severely reduced lending standards that brought about the failure of the financial system. Legislation along the lines of what you propose leads to systemic failure. The mechanisms for providing credit to risky individuals are unsavory (collateralized - pawn shops, uncollateralized - payday loans), but they adequately compensate for the risk associated with making the loans.

A cursory search yielded http://www.businessinsider.com/the-cra-debate-a-users-guide-...

I was not proposing such legislation, but condemning it on the grounds that such laws amounted to social engineering, an overreach that preempted and violated individual decision making. I am well aware of the inevitable consequences of such a law.

I was criticizing the position stated in the top comment of this thread which stated:

>There is a large and (warranted) initiative to bank minorities and other disadvantaged communities. Until the government created huge incentives to do this it didn't happen.

I read your comment in isolation and misinterpeted it, but thanks for providing the context. The government absolutely overstepped its mandate with such laws.

I think it's important to distinguish between all banking services and credit facilities. I feel as though improving access to banking services in otherwise under-banked groups is an important initiative. ~30% of Americans do not have access to a savings account. Ensuring that all communities have access to these basic services would likely be beneficial to individuals and the economy. However, access to credit should be decoupled from such considerations.

>At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of "affordable" mortgages.

That is a complete explanation in itself and it was not caused by the CRA legislation (it merely shared the same motivation). When you let mortgage brokers offload all the risk from writing stupid loans, you have altered all their incentives.

It should never be a law to compulsory lend money to anyone. Aside from being morally reprehensible, such a law would almost certainly be met with either A) widespread noncompliance or B) widespread closure of lending institutions.

I agree that it is wholly immoral to make such a law, yet it was done and led to the subprime mortgage crisis. Others on this thread have supported this law on the grounds of social justice, despite the consequences being inevitable, obvious, and harmful.

The problem lies in the fact that the fed gives essentially free money to banks in order to have them loan it out in the first place. If the government didn't supply this money, there would be less of a moral case for them to dictate how it should be used.

Outside of the 2008 the bailouts, the Fed doesn't give money to banks. That is not how the Fed works. I am not even sure what you are referring to. Fed overnight rate? The discount window? The Fed has a few tools at its disposal but none of them includes giving money to banks.

Artificially setting the fed funds rate at 0.25- 0.50% is essentially giving money for almost free. That rate was even lower before last fall.

The Fed funds rates is not money from the Fed. The Fed funds rate is the amount that banks charge to borrow from each other, bank to bank. And this money banks lend each other is NOT and can NOT be used for loans, it is used to cover their Federal Reserve obligations. Also the Fed does not actually set this rate, it can only try to influence it via Open Market Operations, so no it not the same thing at all, most certainly not "essentially."

Whether obtained as Discount or Fed Funds, the money allows the bank to loan out more money, because it increases the bank's reserve, no?

Does not the Fed effectively control banks' demand for money through reserve ratios?

I think they're talking about Fannie Mae / Freddie Mac.

But then, banks would need to solicit deposits from savers (the horror!), which would cause interest rates to go up, and the whole current economy based on debt could possibly collapse...

> The problem lies in the fact that the fed gives essentially free money to banks in order to have them loan it out in the first place.

The Fed R3serve or the Fed Gov?

What do you mean by:

"There is a large and (warranted) initiative to bank minorities and other disadvantaged communities"

What does it mean to "bank" a group of people? I am not familiar with this usage.

"To provide retail banking services to", to not redline[0].

0 - https://en.wikipedia.org/wiki/Redlining

> their roles in making loans that had no good faith data behind them

Everyone was doing it and the government was practically demanding it because a) they'd told everyone that real estate is the only asset class that never goes down, so keep buying and b) everyone should have a home, whether they can afford it or not, so make it happen banks, we'll even help.

So what law was broken exactly that these bankers should go to jail for? I have no doubt they've been investigated.

You want to know who should go to jail? Anyone selling student loans right now. That's going to blow up just as hard as the housing market did, and--in hindsight--their business practices will look just as shady. The equivalent of "How was a janitor going to afford a $300,000 house?" will be "How was an English lit major going to afford a $300,000 student loan?" The answer is "They can't" and I think you're a piece of shit if your job is to say otherwise. But when I say they should go to jail, I say so facetiously; they're not breaking any laws.

Should the person taking out the loan have 0 responsibility as well? Surely either the janitor or the english lit major should have some personal responsibility when it comes to taking on debt that they could not possibly pay back. I think both parties in the transaction have some responsibility in making sure that the loan is beneficial.

> I think both parties in the transaction have some responsibility in making sure that the loan is beneficial.

I agree.

And interestingly enough, the government agrees as well. Student loan debt backed by the government is difficult to discharge through bankruptcy - http://www.usnews.com/education/blogs/student-loan-ranger/20...

Indeed, and I strongly disagree with that. It's a feeble attempt to prop up an unsustainable market, at the cost of people's futures. When the student lenders eventually go broke (and they will) I doubt they'll stick to their philosophy of "gotta pay what you owe".

Why will they go broke? A large proportion of student debt is guaranteed by the federal government.

actually that law predates the explosion of the student debt market. it was intended to close a loophole - lore goes that law school graduates would default on their student loans just after they passed the bar and got their first law firm job

> So what law was broken exactly that these bankers should go to jail for? I have no doubt they've been investigated.

Well, you could start with the widespread falsification of income documents, etc, to make people qualify on paper for federally backed mortgages?

Sure, that's a good one. But wasn't that done by the mortgage applicants themselves? Or in many cases wink-wink encouraged by the brokers themselves? I haven't heard where that was a formalized policy within an organization, so it seems to me you'd be going after pretty low-level individuals?

Sure, the individuals committing crimes with easily provable signatures were small fry. But the instructions, incentives and 'wink wink you know' practices were coming down from the management. Nobody believes that all the mortgage brokers in America spontaneously began lying on their loans, or that management at e.g Countrywide was blissfully unaware of it happening. They were doing this in the company's name and a company that allows (/encourages) this to happen should be liable. IMO it's a very similar case to Zenefits except that Zenefits was just one company and not an entire industry.

I think it's more like car dealerships, and the banks are the people that make the cars (mortgages) which the dealerships (mortgage brokerages like countrywide + many many smaller operations) sell.

Being a mortgage broker is one step up from being a car salesman. Similar incentives, slightly more complicated, higher ticket, so they make more money. It is an extremely sales driven industry. "Sales driven" has meant different things throughout the decades, but it mainly means "get it sold" and/or "figure out how to get more money for a relatively undifferentiated product".

So here's my point: Someone sells me a piece of shit used car for $15,000 that they bought for $2,500 and turns out to have all kinds of problems with it. That car happens to be a Toyota. Am I going after Toyota?

Let's say this dealership is also the highest grossing toyota dealership in the tri-state area. Does that make a difference? Maybe I go after the dealership, but again, good luck; they didn't tell you there's nothing wrong with the car and the guy that did (good luck proving that) has moved on to another dealership, or maybe they're selling real estate now.

I'm not saying no crime was committed in the philisophical sense. I'm more saying that our practical implementation of crime and punishment is stretched by situations like this, and for good reason (which are the reasons I outline above). The answer to who is culpable, really, is everybody. So what?

No, these loans involved actual fraud. It's more like Toyota removed every form of safety testing from their manufacturing process and changed it to a 'wave at the foreman if this car has any defects' policy. The specific lies would be from factory workers who were told that they needed to produce x cars per day and that saying a car has a defect will get them fired, but the bigger lie is Toyota selling millions of cars knowing that they were labelling all of them as roadworthy but hadn't even attempted to verify that (and that it was literally impossible for the workers to have verified it when they had one guy testing the brakes on 500 cars per day). But that would probably actually be prosecuted because it's easy for people to understand 'Toyota lied about having verified their cars were safe!' and hard for people to understand 'Countrywide lied about having adequate underwriting practices to ensure that their loans were valid!'.

> You want to know who should go to jail? Anyone selling student loans right now.

The US government has essentially taken over the student-loan sector after the current administration decided that student loans had interest rates which were too high. (Perhaps they were high because they actually reflected some of the risk?)

Because "bankers" didn't "make loans" to Joe and Sally Blow. Relatively low-level folks at mortgage companies did that. Then those companies sold off the mortgages and ultimately the "bankers" took bundles of them and securitized them. Somewhere between Point A and Point B it becomes hard to articulate what someone did that warrants sending them to jail.

And the US did try to prosecute bankers. It brought two headline prosecutions against Bear Stearns executives as the company collapsed. It suffered stunning losses at trial.

These folks engaged in acts that would be viewed as criminal in any other industry. It's not so much the loans themselves, but what happened after they were sold. The credit ratings assigned to CDOs and MBSs containing mostly junk were so off the mark that it's impossible to claim that they were realistic. There was clear collusion between the credit agencies, the banks, and the SEC. It's a shame no one has gotten more than a slap on the wrist.

Doesn't sound like these people were found guilty of simply being bad bankers - they were actively conducting dubious transactions to prop up the banks balance sheet via a "circular transaction scheme".

Investigated? Yes. Jailed? Not often.


"The Wall Street Journal examined 156 criminal and civil cases brought by the Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission against 10 of the largest Wall Street banks since 2009. In 81% of those cases, individual employees were neither identified nor charged... analysis shows not only the rarity of proceedings brought against individual bank employees, but also the difficulty authorities have had winning cases they do bring.... One of the few successful government cases was overturned Monday [May 23, 2016]."

Wait a minute... People actually think bankers should go to jail for bad loans? What about the people who lied on their mortgage applications? Should they go to jail too?

because giving a bad loan, just like taking a bad loan, is not illegal.

Selling a package of bad loans by telling people they're good loans probably ought to be illegal though. The fact no one has been charged for doing so implies it isn't.

Fraud is illegal.

Now prove it was fraud.

Because the government doesn't consider this as crime.

More specifically, the law doesn't consider it a crime, and being hated by population/government/etc is not a reason to put people in jail. This is a good thing: due process.

It's important to note that the "this" in question - reckless lending - is not what the guys in Ireland are going away for.

That is true, but there are similarities. The American lenders went beyond simple 'reckless lending' by disguising the subprime loans as healthy assets. This is similar to what the Irish bankers did when they created fictitious assets to give the false impression that the banks were not financially in trouble.

The rule of law is important -- which criminal law specifically applies to ratings agencies giving incorrect ratings to CMOs?

There has to be criminal fraud somewhere in the process of taking very bad mortgages, transforming them into AAA securities and selling them to pension funds.

I do not believe this statement to be correct: it seems entirely possible for this to be done via reckless incompetence, rather than criminal fraud. All it takes is for somebody to calculate the risk incorrectly and everybody else to fail to check their calculations.

It may involve criminal fraud, but it is also possible that it does not.

The pension funds had the prospectus, and on top of that a list of all the bundled mortgages. If they had wanted to look deeper beyond the AAA rating, they could have, but they were lazy and greedy too.

There are very profitable things that are illegal to do when selling vegetables in a street market, like fudging the scale. But you say there is no such protection against bad actors when selling billions in securities. Ok, in this Libertarian system where everything except physical violence is legal, why do people still deal with institutions that obviously deal in bad faith?

Were there any lies in the prospectus? Are Chinese companies selling asbestos with "asbestos-free" certificates doing anything wrong?

You're a pension fund manager. Your job isn't very exciting because you're rather limited in the assets you're allowed to invest in. Each month you get to wake up and decide whether you want to buy more US securities or more GE bonds. Not a lot of room to distinguish yourself in this environment.

One day Mr. Lehman knocks on your door and announces he has a new "AAA" security for sale that pays twice the market rate. Hot diggity! You're god damned right I'm interested, I'll take everything you've got.

Now, as any fund manager who's been on the job even a week knows, you also know that if the rate goes up, so does the risk. There's no possible way that these "AAA" securities are as safe as the AAA securities you're used to dealing with. Not your problem, though. You're knocking it out of the park and your fund still has the exact AAA/AA/A asset ratio that your promised your pensioners.

Same story at AIG. As long as they were collecting premiums, nobody thought to ask why people were buying up all this insurance on "default-proof" securities. Oh, wait, somebody did, but they were told to shut up because free money.

Of course, after the music stops, out come the crocodile tears. "Oh, woe is me, I never could have guessed there was anything unusual happening here."

But yes, let's blame the MBS packagers for making exactly the product the buyers wanted. If anybody was defrauded, it was the pensioners whose manager shut his eyes as tightly as possible and the AIG stockholders who were not informed of the risk AIG was carrying.

Do the pension fund managers not have a fiduciary responsibility to actually investigate the mortgages in the CDO?

Could they not be prosecuted along those lines?

No, that's the role of the ratings agency who rates the assets.

Even if no one committed fraud (which I don't buy), you agree people were stupid a greedy. Did those people at least lose money? Because ordinary people were badly hurt, and the people responsible appear largely unharmed. Is that the nature of "elites"?

That is the nature of the principal agent problem.

This is a good thing in principle. In practice, when people give bribes/campaign donations to cause these very laws to be created in such a way that keeps the actions of the people offering the bribes legal, there is something bad going on.

It was a crime because they did a inter bank loan to bust bank through a non bank subsidiary and portrayed it as a deposit. This fraudulently portrayed the bust bank as being more secure than it was.

Because the government is made from people, specifically people with an interest in decriminalizing this kind of action.

The S&L crisis of the 1980s[1] put hundreds of bankers in jail. The 2008 banking crisis did not. The Administration was squishy-soft on banker crime. It didn't help that the Secretary of the Treasury was from Goldman Sachs.

[1] https://en.wikipedia.org/wiki/Savings_and_loan_crisis

Because the US government forced banks to make those subprime loans through the Community Reinvestment Act. Although the government (through the FCIC, a government-created commission) obviously denied that this was a root cause of the housing crisis, they probably know that if they try to pin it on some scapegoat bankers it will not hold up legally or in the court of public opinion.

Even in my position of just an average citizen, I've tried to do something:


With the people I've shared this with, I've been met with downright hostility and vitriol. I felt like I should do something, so I started that petition. To date, I literally have two signatures...

Apathy is incredibly strong in this country right now.

wmccullough - you hang out on HN, you seem like you might be a smart person, let's all do a smart-person thing together to analyze this failure, instead of just blaming 'apathy' as the first thing that comes to mind and giving up (which would be a little ironic after all). We can brainstorm and write down a list of reasons, besides apathy, which could potentially explain to the lukewarm response to a petition like yours.

A few to get started:

- People might be concerned that a petition to charge unpopular people with a crime smacks of mob justice and kangaroo courts, the sort of thing you'd expect from an administration which rounds up and purges its political enemies (like, say, Turkey over the past few weeks).

- People may not feel sufficiently informed about the facts of the case to accuse the named individuals of wire fraud, and as such do not wish to make such serious allegations.

- Your particular petition (as an artifact of the website associated with your creation) may seem unlikely to succeed with only limited word-of-mouth marketing.

Arguably it was the ratings agencies that should have been prosecuted.

They certified many, many unsafe investment as "AAA rated", when they should have asked questions.

The few people who did pick the crash did exactly what the rating agencies were supposed to do - they dug through the paperwork, found out what was backing each investment and saw how bad they were.

One might argue that they couldn't because they were paid by the banks. I say that is a separate issue to what could be argued was either careless or fraudulent behaviour.

similarly individuals that took out bad loas without properly reading and understanding the terms should be prosecuted too.

Under what grounds would you recommend that someone who didn't understand the terms be prosecuted? What law makes it illegal to not understand the terms of the contract that you are signing?

>What law makes it illegal to not understand the terms of the contract that you are signing?

Interesting the US law already does this. The law is literally the terms of living in the USA and we prosecute people for not understanding them all the time.

You can also easily prosecute people that did not understand the terms of a contract. Happens all the time, though I'm too lazy to look for an example right now =)

Never mind the loans; that wasn't actually illegal. It's the robo-signing that should be prosecuted into the ground.

Care to elaborate? I love online / e-signing, so would like to know what you're talking about and how it is differentiated...?

Not e-signing, but the mass signing of defective mortgage title documentation. Due to re-sale and tranching of mortgages it was not always clear who had the authority to evict homeowners. So the documentation was simply made up, "robo-signed" by applying a notary's signature who had never seen the document and had no idea of its veracity. And tens of thousands of people were evicted based on essentially forged documents.

Nobody seems to care about this; after all, they usually (but not always!) were genuinely behind on payments. And there seems to be strong moral pressure to punish borrowers rather than lenders in the debt crisis. Without stopping to establish the facts of individual cases.

Because they control the system, including your elected officials.

Don't ever dream of that happening here. Ever!

The former DoJ chief literally said he wouldn't prosecute them "because that could hurt the economy" .... ?!?

He only said that perhaps it wouldn't have hurt the economy, after he quit that job and got hired at a big financial institution, and when it didn't matter anymore.

I recently read Rene Girard's "Things Hidden Since the Foundation of the World".

He postulates the following theory of collective violence in the world. First, people form mimetic desire - they want things before other people also want and have them. Second, this mimetic desire results in a crisis - the collective actions of virtually everyone result in bad circumstances. Finally, in order to resolve this crisis, a scapegoat must be identified and subjected to collective violence. At this point, society can return to normal.

He wrote this book in 1978. I find it quite amazing how well it describes the financial crisis, and the post-crisis search for a scapegoat/villain.

Au contraire, I find it interesting how there's a total lack of enthusiasm among the general populace to put bankers in jail. Many potential explanations: maybe a certain degree of unethical behavior has become the norm for bankers, and so we feel we can't punish people when really they're the norm? Maybe we feel like the system has to change and that punishing individual actors doesn't make sense? Maybe we don't understand the economic crisis and thus find it hard to identify culprits?

Sounds similar to "the theory of the leisure class".

Based on the wikipedia summary, Girard's mimesis seems similar to Veblen's conspicuous consumption. But Girard generally doesn't go too much into the economic details of any specific era - he is more focused on traditional religion. I may need to read Veblen.

I'd also be curious to see a modern update of it - Veblen's theory of a leisure class driving conspicuous consumption and a worker class partaking of it doesn't reflect modern reality at all (these days the poor form the leisure class). Yet the consumption/Girardian mimetic behavior persists.

The scapegoat was for collecting the sins of the group onto one thing ( animal ) and casting it out of the village. Leviticus 16:9... this is where the term comes from and way predates 1978. There is another goat which is sacrificed immediately as well. http://biblehub.com/leviticus/16-10.htm

Iceland sent 29 bankers to prison for the 2008 crisis.

On what charge? "Being banker during a financial crisis" is not a crime.

On charges of holding them accountable for the rampant fraud that occurred in the run up to the crisis.

Was the fraud uncovered by the crisis, or was it known about and tolerated until it turned into a crisis?

It was uncovered by the crisis. It was laid bare when the assets banks were booking as tier-1 capital turned out to be illiquid or worthless, and often both; and when off balance sheet losses revealed they were swimming naked for the same reasons.

The financial scams continue even now. In 2011 I sold my deceased mom's house. The buyer was financing it through Chase. Appraiser comes out to do the appraisal for the loan approval. Since the deadline for closing was coming up fast, I asked when he'd have the appraisal finished. He said he'd be done in a couple of days, but when he submits the appraisal to "the middle man between him and the bank" via email, the MM always has changes. This goes on for a couple of weeks. Why is a middle man who has never seen the house forcing an appraiser to make changes to his appraisal? It's nuts. The mortgage industry was rife with fraud in the 2000's because appraisers were inflating home prices at banks' request to justify stupidly overvalued loans. Some government agency made a rule that appraisers couldn't talk to banks to avoid this problem, but now there is some other "middle man" involved who is cooking appraisals.

Here's my suggestion on how to prevent fraud in the financial industry:

1. Keep investment banks and deposit-taking banks separate, as was done successfully for years.

2. When an investment bank fails, let them fail.

3. If there is fraud, try executives and put them in prison.

Instead, we have a revolving door between govt regulatory agencies and big banks.

Great start - now how about sending Dick Fuld, Jimmy Caynes, and a few other top bankers in the US to jail.

What law did they break?

Just to be clear Ireland's bankers for the most part have so far escaped anything harsher than public censure.

These guys committed the unforgivable sin of actually thinking they were doing the morally correct thing, encouraged tacitly by a hapless regulator and a terrified government.

They did something so obvious and so transparent exactly because they felt they had the assent of the establishment.

They just literally lent another bank 7.2 billion so it could say all was well and thus "save" the country from financial meltdown.

Now now scandox, not sure if you're trolling with this one? I don't for one second think "the green jersey" was a factor in their thinking at all.

It's a start.

To the audience in the US:

NOT coming to a theater near you.


It's funny because Ireland had a real estate problem.

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