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List of Wall Street CEOs prosecuted for the financial crisis (washingtonpost.com)
147 points by gere on Sept 13, 2013 | hide | past | favorite | 137 comments



Two words: fiduciary duty.

Whenever a megacorporation decides to act like a total shitburger, we are told their executive team has no choice, they are compelled by law to act like total shitburgers if it maximizes shareholder value. Keep workers part time to avoid giving benefits? Fiduciary duty. Export jobs to countries with no environmental or labor protections? Fiduciary duty. Charge customers a daily overdraft fee when an undeclared fee for checking their balance from a foreign ATM puts them in the red? Fiduciary duty. Lobby to change laws so they can act like even bigger shitburgers, legally? Fiduciary duty. Don't judge them, we are told, they have no choice. They are not bad people, they are just bound by fiduciary duty to maximize shareholder value. You should feel sorry for them, really.

And then a complex, perhaps admittedly fraudulent scheme (the mortgage crisis) comes along and kills giant megacorporations, wiping out shareholder value entirely. Any WAMU shareholders in the audience? What happened to this fiduciary duty? What happened to these terrible consequences which would arise if shareholders were not appeased? Shareholder value has been minimized ... and nothing happened.

Wall Street wants it both ways. A bailout with bonuses. Reward with no risk. License to act like a shitburger.

Fine, don't prosecute people for bad decisions. But don't pretend like you have no choice but to act like a shitburger, that doing so is anything but screwing the rest of us for personal gain.


Here's some interesting discussion on the 'fiduciary duty' mantra the finance types keep singing:

> Are U.S companies legally obligated to maximize profits for shareholders?

> Not directly, but often conditions surrounding corporations lead to this obligation

http://skeptics.stackexchange.com/questions/8146/are-u-s-com...

As long as we continue to not call them out on their bullshit, they'll keep singing.


The problem with your analysis is that you're thinking of Wall Street and the federal government as distinct entities, which would be nice, but isn't the case.


Two more words: research facts

Yes, there was/is blame to be placed at the feet of corporations. That is probably undeniable. However, it is important to understand root causes here. The truth is hard to stomach for anyone who pro-big-government. The single gating element or decision that opened the doors to what would become the financial meltdown of the century was the US government's decision that everyone should be able to buy a house. Facts and qualifications be damned. Congress wanted everyone to buy a home. So, they loosened all the controls and actually pushed Fannie Mae and Freddie Mac to facilitate lending. It was: Go! Go! Go!

That, and that alone, enabled what followed. Without this gate being opened it would have been imposiible. --as in absolutley fucking no-way impossible-- for masses of bullshit mortgages to be issued and CDO's to follow.

Blame executives all you want for playing within the framework given to them by legislators but, please, be sure to take to task the true monsters who got us here.

BTW, this is not partisan. Both sides of the isle have blood on their hands on this one.

Suggested reading:

http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...

EDIT: My guess as to why nobody has been prosecuted is that a lot of politicians would be exposed through these actions. And, of course, they want to be as far removed from that kind of exposure as possible. The truth is not what they are after. They want votes. None of this would gain them votes and, in fact, might land some of them on the street or in jail.


So... you're saying there wasn't enough government control then.


Nice try. I was waiting for someone to pop this question.

Nope. That's not what I am saying.

I am saying that government is usually an ass trying to control things it does not understand. If we are lucky the collateral damage is absorbable without much pain. Every so often the consequences of their attempts at central control go off the rails and things get really ugly. This was one monumental case.

This wasn't about government regulating less but rather about government actively driving an agenda: reason be damned, everyone ought to be able to obtain a mortgage to buy a house.

That's how you got people making $35K per year buying homes for $500K with no down payment and no income verification. They enabled something unthinkably stupid.

Now, let's look at the same situation without any government regulation at all. In other words, the government does not create any mechanisms through which a lender is coerced to lend money to those not able to repay it.

And, let's make it personal. Let's say you are the lender. You have a million dollars. You'd like to make money by lending it to people who will use it to buy homes. You get to charge interest. Over thirty years you'll earn a profit if all goes well. This means that everyone pays you on time and everyone pays off their loans.

Two people come to you for money.

The first makes $120K a year, has an advanced university degree and has been working in the same industry and job for ten years with a history of advancement. She also has very low personal debt, credit cards are paid off every month and her car is fully paid.

The second is a guy who works at a fast food joint. Didn't go to college. Makes $35K per year. Has never worked anywhere longer than a year. Has credit card debt and a car loan.

Both come to you to buy the same $500K home. The first person has also saved $100K for a down payment and only needs $400K. The second has no money and needs you to finance 100% of the home or $500K.

Would you lend money to the guy making $35K or the woman with a solid history of responsible behavior as well as a solid earning history?

There is no need to pull out a calculator to figure this one out. Nobody with barely two functioning neurons would loan the $35K guy a dime. Not one lender. That's what would happen in a free market devoid of government manipulation.

What would happen if government decides that everyone must be able to buy a home? Let's say they create a set of organizations that will actually guarantee loans up to a certain amount so as to artificially remove risk? And, let's also imagine that they create a mechanism through which lenders are also able to package-up loans, slice up these packages and sell them to each other, even to investors.

What would you do then? Well, that's a different situation. You are in business to make money. Now government has removed nearly all risk from the equation. Now Mr. fast-food worker who couldn't possibly even imagine in any prior scenario being able to afford a half million dollar home is given a loan. In order to make this loan "pass" we make it interest only, reduce the interest to damn-near zero for five years and require no down payment nor income verification.

Off go millions of people who should have never been able to purchase homes and, playing along, jump into these ridiculous homes. The market goes insane. Home prices take off. They quickly more than double in price. They quadruple in price. You have people buying million dollar homes. The whole thing is absolutely insane.

Now, you, the lender, are not stupid. You understand mathematics, statistics and market forces far better than the senators and representatives that popped the cork to let out the genie. You know this is a huge house of cards. But, hey, Congress actually WANTS YOU to do this and they fully support it.

Any bank who does not play along stands to die because there is absolutely no way to close normal loans with normal metrics. The market is so inflated that all but a few people are simply not qualified to buy homes. Whole neighborhoods go from $150K homes to the same homes being priced at $700K. Salaries don't keep pace with home price inflation, therefore, as prices skyrocket, the only way a bank can make loans is to play along or else shut-down their lending business. For most banks that's where the make their money. Everyone plays along.

Now, of course, banks have to mitigate risk. This is where the CDO [0] (Collateralized Debt Obligation) comes into play. They know this whole thing is a huge house of cards that is going to explode and crumble. The CDO mechanism allows them to package-up mortgages, slice them up and trade them as investments. There are also new mechanism that actually allow others to buy insurance against credit packages defaulting (in other words, if loans go bad). A few people realize this before others and buy these CDS's (Credit Default Swaps) [1] ahead of the bubble popping and stand to make a ton of money as a result.

Now lenders can write loans as fast as they can push out CDO's. The system is so convoluted and complex that nobody knows what the hell is going on or when the music will stop. People are going insane, "buying" homes they can't possibly afford and also engaging in the dangerous-but-lucrative game of flipping real estate[2]. The pressure cooker has no relief valve. It's only option is to explode.

And it did.

It's been a few years since I read a few books [4] on the subject so the above timeline and details might not be absolutely on point. What is accurate is that nearly 100% of the genesis of the problem was due to government fucking with free markets. They just don't know what they are doing. Most of them can barely add and subtract, much less understand complex economic and mathematical models. It's a pity we don't have a mechanism to prevent the ignoramus from passing laws that affect massive economies world-wide without first having to prove that they have the scientific background (math, statistics, economics, etc.) to model and understand what they are doing.

We are now seeing a degree of this all over again with Obamacare. The Senate and the House have exempted themselves from living by the same law they are imposing on all of us. The very unions that supported the law are now rioting 'cause someone got out a fucking calculator and figured out what's going on. Large corporations are pressuring, and I understand some have been granted, exceptions. Again, you have a bunch of lawyers and other morons passing laws without understanding what they are doing because, through them they pander to the masses and buy votes.

Blame CEO's if you must, but the playground was created by government meddling. Nobody else can own that part.

[0] http://en.wikipedia.org/wiki/Collateralized_debt_obligation [1] http://en.wikipedia.org/wiki/Credit_default_swap [2] http://en.wikipedia.org/wiki/Flipping [4] http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...


I find it mind boggling that people start raving about the overly expansive criminal justice regime when a hacker does something, but turn around and demand jail time for Wall Street CEOs, none of whom provably did anything wrong.

People act as if the fact that there was a global financial collapse is proof that someone must have been criminally culpable. But who should be prosecuted for the last dot com bubble bursting? Or the next one?

Re: jail time, I think non-violent crimes should not get jail time period, whether you're a banker or a stoner or a malicious hacker.


>none of whom provably did anything wrong

The idea that executives were unaware of the vast amount of fraud that was endemic in the mortgage industry is laughable. We even have documentary evidence from people inside who repeatedly raised these issues but were ignored or fired.


Being aware in general terms of widespread fraud in the mortgage industry and selling mortgage backed securities anyway does not arise to the level of a crime. Say everyone in the tech industry knows that those Instagram guys are sketchy as shit. But there's still nothing illegal about me turning around and then selling you Instagram stock while telling you it's a wonderful investment.


You are focusing on a very specific thing (selling mortgage backed securities) as if that was the only thing that went wrong before, during or after the financial crisis. Are you aware of how widespread foreclosure fraud was? Why were Chase executives (to pick an example) not made accountable for that? If I was caught defrauding people out of their homes I would see jail time.


Foreclosure "fraud" is when a bank cannot produced the signed promissory note in a foreclosure proceeding. Proving actual fraud requires proving, beyond a reasonable doubt, fraudulent intent: that the the bank intended to defraud the homeowner by foreclosing on a property it knew it didn't own. But in these cases it's clear that there was no fraudulent intent. It was careless filing of paperwork. In this electronic age, transferring a mortgage still requires handing over that signed promissory note. It's obvious to anyone that what happened is that when banks bought millions of mortgages from loan originators, the electronic records showed the correct transfers but a bunch of the paperwork got lost along the way. Certainly, that explanation is plausible enough that there's no way you're going to convince a jury, beyond a reasonable doubt, that it isn't what happened.


You don't want to call it fraud? Ok, what about criminal negligence then. These executives knew exactly what was going on, and by any reasonable standard should have known the harm they were causing. This is especially applicable if whistleblowers were ignored or silenced.


Software companies knowingly ship software chock full of bugs that results in millions if not billions of dollars of lost profits, lost time, etc. Does that rise to the level of criminally negligent?


it's the specific, core and obvious portion of not having the right one and only legal ownership piece of paper. not that somewhere a bug exists, somewhere a mistake was made, but the mistake was on the order of Microsoft shipping 1 in 1000 versions of word that you cannot print or save.

I don't doubt that the vast vast majority if these people did actually owe money on their mortgages but if you cannot prove it, the market then gets to sort out those companies who can look after the important things from those who cannot.

the market should winnow out fools and incompetents first, not have them compensated by the courts.


First, the software industry has done worse than ship 1 in 1000 versions of something that can't print or save.

Second, software companies often ship bugs knowing exactly what those bugs are.

Third, bringing a foreclosure lawsuit without the promissory note is not per se fraudulent. It's the homeowners job to raise the defense of asking the mortgage holder to show the document. It's only fraud if you intend to defraud the homeowner by foreclosing on a mortgage you know or suspect you don't own.


I'm not saying that banks fraudulently set out to make people homeless - I am saying they were incompetant in losing the certificates (or buying mortgages without them). and that I would favour allowing incompetence to have a market based effect on those who practise it - instead of using the law to protect the companies.

companies ship products with know bugs in in a calculated risk that firstly the bugs do not violate laws and contracts, and second the bugs have no market based effect. if a software company ships with those bugs then they display same levels of in ompetant e

and yes the ratio is probably wrong


About 4 years ago the government tried to prosecute an employer for having illegal immigrants using that basic logic. The employer said he suspected that about half his employees had forged documents, but he obviously didn't know of any specific case. (The Feds trapped him by telling him they were doing a murder investigation and asking him for information about his employees. Don't talk to cops.)

IIRC the prosecution failed, although they did put the guy through the wringer in the meantime.


>The idea that executives were unaware of the vast amount of fraud that was endemic in the mortgage industry is laughable.

You can't prosecute someone on the idea something is laughable. You need some kind of evidence.


A lot things that seem like terrible ideas are not necessarily fraud, at least, not in the legal, criminal sense of the word, because it's not always illegal to make bad decisions with money.

It's not illegal to loan money to someone who can't pay it back--which is the bulk of the documentary evidence that I've seen. If a bank knows I faked my income statement but lends me money anyway, that is a bad decision, but it's not criminal fraud (except maybe by me!).

It's not illegal to sell securities that might lose money. It's not illegal to buy securities that might lose money.

It would be criminally fraudulent to materially misrepresent the facts and risks--for example for a bank to say "we verified the income on all these mortgages", or "I guarantee this mortgage backed security will not fail."

But except for a few rare cases, that's not what happened. It was ratings agencies--3rd party companies--who decided to rate some mortgage-backed securities AAA without knowing what was in them. But again, that's not against the law because the ratings agencies are just private companies expressing an opinion.

NOTE - I'm not defending what happened because it was obviously stupid. And I'm not saying that no criminal fraud occurred, because some did.

I'm just an advocate for people understanding what is the actual state of the law, vs. what seems like it "should" be fraud.


There are thousands of documented cases of actual fraud, which were not pursued - almost as if the AGs don't want justice. They investigate practically nothing, and when the truth comes out (accidentally or by way of a whistleblower), they move quickly to close it with a slap on the wrist which is usually amounts to a fine far below the damage to 3rd parties.

Almost everything about the mortgage business is a fraud from one perspective: MERS. I don't have time to find the terse summary, but http://market-ticker.org/akcs-www?post=188061 should give you some idea about what the problem is.

The basic problem: without actually recording a transfer at the county registry, a mortgage cannot be given the preferential security treatment. Almost none of the mortgages sold had their title transfer registered -- this would need to be done every time the mortgage changed hands, and incurs a non trivial cost. Instead, the banks made their own law, created a corporation called MERS, which supposedly owns everything, and acts as an agent of the MERS-registered owner. However, this is not legal - not for foreclosing, not for the IRS, not for the counties.

Congress' way to fix it is to make it retroactively ok for the banks to make their own law. I'm not following closely, so I'm not sure if that has indeed happened - but I am sure that the whole MERS thing is illegal, and that AGs (except perhaps in Louisiana) try to fix it by ignoring it.


So basically, you want banking CEOs prosecuted because they constructed an alternate mortgage registry that has lower transaction costs than the existing system?

tl;dr; the financial crisis happened, here is something unrelated which might be technically illegal. Lets get em!


If you actually spend time reading, you'll see that they constructed an alternate mortgage registry that has lower transaction costs that the existing system, but violates (and fundamentally subverts) the law of the land, the tax code, and thus also defrauded investors because when (assuming it does) the IRS and the counties ask everyone to make things right, the investors are going to be the ones holding the bag.

And that's just one relatively minor aspect of the mortgage business. Everywhere you look, there's significant violations of laws (robosigning, co-mingling of assets) with essentially NO law enforcement interest in finding the responsible parties.

> might be technically illegal. Lets get em!

"Technically" illegal? At the very least, they defrauded counties on registration fees (adding up to a few hundred of millions, perhaps billions).


... an alternate mortgage registry that has lower transaction costs than the existing system?

More like "an alternate mortgage registry that has allowed entities to initiate foreclosures even if they don't hold the mortgages".


Engineers can be held liable if something they designed catastrophically malfunctions. Maybe people responsible for the economic well-being of, well, the whole damned world should too?

People tend to think it's wrong that a corporation can play fast-and-loose with their money, and then fuck up royally get government bailouts and generally speaking keep on like nothing happened.

I honestly don't know enough about these institutions and relevant financial laws to know what, if anything, could be done as punishment/retribution/revenge but then again I don't feel like anything was done. Therein lies the problem, a group of people can sink the economy through risky/reckless practices and skip out of it while the common folk lose their jobs/homes/savings and that just feels wrong. At the very least, it feels like a lack of rule of law.


> Maybe people responsible for the economic well-being of, well, the whole damned world

Do you honestly think your bank is responsible for your economic well-being? Or that bankers are responsible for every economically bad thing that happens?

Also: you don't feeeel that anything was done. So what? Feelings are misleading. Angsty teenagers often don't feeeel their parents love them, no matter how much they actually might. I didn't feeeel like getting up to go to work this morning, but I sucked it up and went anyway.

If our country were governed by feeeelings we'd in a deep, deep hole.


No, a bank is not responsible for my financial well being and I never made that assertion. In this case they more certainly are responsible for what happened.

And yes, Our country is governed by feelings and we are in a deep hole. If a member of the legislature feels we need a law for something, they will try to create one. They represent, or are at least supposed to, the collective interests (feelings) or their constituents.

And what is with the extra "e"s every time you spell "feel". I don't know if you intended it, but that most certainly reads to be very patronizing.


Engineers are held liable for failures after an investigation that uncovers say an undersized bolt that led to the failure, plus a showing of negligence on the part of the engineer for undersizing the bolt.

The causes of the financial collapse, on the other hand, are systemic and amorphous. Lots of things had to go wrong at the same time for it to happen. People selling mortgages were not checking to see if people could pay, people where buying houses they couldn't afford, Wall Street sold mortgage-backed securities knowing both of the above. If any of these groups had acted differently, the collapse wouldn't have happened. Why should bankers be the ones to get put in jail? Because we don't like them?


Since everyone is guilty to some extent, and we let go free the financial "team", let's apply the same logic to borrowers. They could not foresee the crisys coming... Now let them keep the houses and erase debt records. Maybe this will make financial team more responsible for their actions in the round 2?


> mortgages were not checking to see if people could pay

> Wall Street sold mortgage-backed securities knowing both of the above

Sounds like negligence then?


Quite possibly, but that's a civil issue, not a criminal one.


With that reasoning there is no need to pay these people excessive payments of millions. Since they are not culpable for bad choices (they were not keeping watch), how can they take credit for the good things?

These people in my view were negligent at their jobs. They chose a career which contained an inherent level of responsibility to society which they didn't live up to. The justice people are seeking is social justice, not perhaps prison time but more repayment of their ill gotten bonuses.


The US economy is built on the principle that people get to enjoy the gains of productive ventures, but suffer none of the losses of failures. Imagine that these executives had been working instead as executive consultants, each with their own company contracted to the firm they managed. In failure, those one-man consultancies would get your huge and "just" debts piled onto them--and then simply file for bankruptcy. This would not take back any of the salary or bonuses that those consultancies had already paid out.


This must be one of the great fallacies of the age: Nobody's been sent to jail, therefore no one's provably guilty, therefore it's crazy for people to be complaining they're not in jail.

The fact is, they're not in jail because nobody was committed enough to prosecuting them, and because the criminals are simply too powerful and influential, and have utterly co-opted elite opinion and the institutions meant to keep them in check.

Look at the Savings & Loans crisis - how many white collar criminals got sentences? How much bigger was this financial crisis? Just do the math (or read up on William K Black, a prosecutor who actually prosecuted, back in the day.)


You're making the illogical inference that just because there was a financial crisis, someone must have been provably guilty.

Comparing the latest crisis to the S&L crisis is comparing apples and oranges. First, most of the ~900 people convicted back then were not high level execs, but loan officers, branch managers and the like. Second, the frauds in those cases were much easier to prove. There was a lot of individual fraud and insider trading. It's easy to make a case to a jury that someone should go to jail for making up fictitious borrowers or trading on an inside tip. But look at the REPO 105 example someone mentioned above. You want to explain to a jury why someone should go to jail for treating a repurchase transaction as a sale instead of a loan, on advice from accountants? Third there was the practical ramifications arising from the fact that this crisis was a much bigger problem than the S&L crisis. The government was preoccupied with saving these institutions to keep the credit markets flowing rather than punishing people for the actions that led to the crisis.


exactly. The government doesn't want to prosecute these guys because if they go to trial, what will come out is that the government WANTED these outcomes, and the bailout was mostly an effort by the government to save face and patch over a mistake that they are significantly responsible for (this is not to excuse bank executives for not having the moral perspicacity to stop it).


You have got to be joking. They knowingly sold packages of crap as AAA, sometimes shorting the bonds they were promoting to idiot clients.


It raises a good point that we cannot (and should not) prosecute people for the consequence of bad but legal business decision.

However that also means that "self-regulation" is a get out of jail free card. Which I sort of understand, you would not want to cripple a growing sector with unnecessary constraint, I understand _once_ ( and you may argue, that it was not the first time for the Banking sector to keep only greed as regulation)

So it is fine that nobody went to jail. But we should also acknowledge that this self-regulation has failed in a spectacular fashion. So spectacular that it has had no impact in the life of most bankers, except a delayed bonus for a year. And nothing has been done to change that in the last 5 years.

To put that in perspective it took a decade for the start-up sector to recover from the .Net bubble. A lot of developer from those time have lost money, and struggled to recover their past salary level. The days of setting your own rules in a company just because you are a developer are also gone.

Here is the City of London, nothing has changed for bankers.

Edit: should -> should not


Manipulating Libor was completely illegal, and whilst banks have been fined, where are the individual prosecutions?


Libor is just structurally insane, and basically designed for abuse. This isn't to say that they should be absolved of responsibilities, but Libor (and equivalents elsewhere) should be redesigned to reduce the opportunities for collusion.


There have been prosecutions in the US and UK.


Read the Gervais Principle. You don't get to the top by leaving a trail of document-able shady decisions.


The Serious Fraud Office has said it's individual prosecutions will be announced in the next few months.


"nothing has changed for bankers"

Well, Fred Goodwin lost his knightwood for the allmighty omnishambles at RBS - serious stuff!

http://en.wikipedia.org/wiki/Fred_Goodwin

[Not long after he was kicked out of RBS I was crossing the road in George Streed Edinburgh and there was a chap sitting in a convertible Ferrari waiting for me to cross and I thought "he looks familiar" - 95% sure it was ex-Sir Fred the Shred]


Technically you are correct, however he's still on £342,500 a year pension and £2.7million lump sum for his troubles.


Stuff like telling your customers to invest in stuff you know is going to crash is not illegal?


>... stuff you know is going to crash is not illegal?

And you know because you're about to crash it.


"America doesn’t criminalize bad business decisions, even when they lead to business failure; if we did, Silicon Valley would be a penal colony."

This is the crux of the problem. It's very difficult to send someone to jail when they haven't committed a crime, no matter how unpopular they are.

I think most people would regard that as a good thing, personally.

It's worth remembering also that the banks were regulated. Did any regulators lose their jobs? http://www.cato.org/publications/commentary/why-cant-we-fire...

EDIT/Afterthought: I suppose we could bring back lynching.


When the government doesn't do a bailout, as it didn't in the case of Enron, public bloodlust over lost capital makes heads on pikes in the public square practically a requirement.

When the government does a bailout, there's no acute sense than anyone is suffering too acutely, and therefore there's no need for prosecutions.

Bailing out Enron would have cost less than other recent bailouts. https://www.propublica.org/special/government-bailouts


The problem with this line of thinking is that "bad business decisions" in most cases only hurt the business. But the banks have gotten so big, and so interconnected -- "too big to fail" (http://en.wikipedia.org/wiki/Too_big_to_fail) -- that their bad business decisions hurt everybody.

A business whose failure could jeopardize the entire global economy demands a different standard of responsibility for management than a photo-sharing website. When you're running something that critical, you're at least in part a de facto public servant, even if you're nominally a private businessperson.

It's an awkward position for a CEO to be in, to be sure. But they could always get out of it by scaling down their businesses to a size where they're not a single point of failure for the economic health of billions of people anymore.

Somehow I doubt they will be rushing to do that voluntarily, though.


This is why we have regulators. It's the regulators and the people's elected representatives who allowed the big banks to grow "too big to fail". You can't expect banks to self-regulate. The competitive, zero-sum nature of the financial markets means that a company that voluntarily hamstrings itself will likely end up being eaten by those who don't.

We need regulators to establish the rules and set the boundaries. The problem is that we have them but they failed to do their job.

It's like sending a man with a rifle to protect a herd of goats from a leap of leopards. If the man decides to go to sleep and the leopards come along and eat some of the goats, who do you blame? Do you blame the leopard for being a leopard or do you blame the man for sleeping on duty?


The sad thing is we really do need better banking regulation, but even this thread is full of people who are just angry and think 1) something must be done 2) this is something 3) therefore we should do it.

I think we should pay government regulators like $400,000 a year. That way instead of having the C students from Harvard's class trying to regulate the A students, you can grab some of the A students to pull into the regulatory role.


I just think that simply holding them accountable would be a good first step.

Say what you like about Dick Fuld but he lost both his job and the majority of his wealth when Lehman Bros went under. Have any banking regulators been even demoted for letting the financial system come to the brink of collapse on their watch?

http://www.businessweek.com/articles/2013-09-12/where-is-dic...


"Hold them accountable" is doing an amazing amount of lifting there. Who is "them"? For what are they being "held accountable"?

I do think the transition of the investment firms from partnerships to publicly traded companies was a bad move, but I have no reason to strongly believe it would have stopped the previous financial crisis. Goldman Sachs made a lot of money betting against the bubble, remember.

Lehman wasn't bailed out, while other companies were. There was little rhyme or reason do which companies did and did not get saved. This wasn't necessarily bad, as it seemed that firms had gotten the expectation of a bailout and were continuing their risk-acceptance behaviors, but the collapse of Lehman is generally considered to be the immediate cause of credit drying up nearly instantly for everybody. The rulebook had changed and people snapped from way too risk-accepting to way too risk-averse.


> Who is "them"?

The regulators.

> For what are they being "held accountable"?

For failing to regulate the industry properly.

Basically, it boils down to this: "Hello, Mister Banking Regulator. Don't sit down. See this financial crisis here? The one where the government had to step in and bail out the banks? Well, it happened on your watch. You were supposed to prevent shit like this from happening. You're fired. Close the door behind you."



Regulatory capture is just one form of regulatory failure.


The government didn't dare let GM and Chrysler fail, either. Should their leadership be prosecuted for mismanaging them into the ground?


If anyone should be prosecuted, it's politicians like Barney Frank and Chris Dodd, http://www.youtube.com/watch?v=iW5qKYfqALE Their policies encouraged banks to relax lending standards and lend to people that could not afford it. Bottom line, they presided over one of the largest collapses of wealth in American history with Fannie Mae and Freddie Mac.


At least Dodd lost his job, although he immediately became a lobbyist for hollywood. but you are spot on - they are both horrible human beings who should not have jobs


He buries the lead -- its in the fifteenth paragraph: "America doesn’t criminalize bad business decisions, even when they lead to business failure"


The article makes the assumption that criminal activity led to the financial crisis. Rather than poor policy combined with risky behavior by some, and as the above poster said, bad business decisions.


Certainly should not be a criminal offense if bad biz decisions are made in good faith. But there ought to be severe, lasting civil consequences for grossly irresponsible risk taking in breach of fiduciary responsibilities. (More than an SEC settlement that just gets written down)


Could you explain what you have in mind? $67 million doesn't sound like a slap on the wrist (it's to a person, not the company, mind), and I'm curious what kind of "lasting" consequences you think are appropriate for civil penalties if not fines.


My response is probably more emotional than logical and I think you raise good points but let me try to respond.

How much did he actually pay out himself in the end? Mozilo's worth ~$600M according to some quick googling. $67M represents ~10% of his net worth (some of which was gained illicitly). From a risk perspective this looks like a great deal! Cheat yourself up to a big fortune and if you get caught so what? You've made it! So I do think the fine should be on the same order of magnitude as the net worth of the individual to really send a message -- and it should not be tax deductible (if it is for individuals, I believe companies can).

I also think there should be a more serve and general ban from the securities industry.


The risks should match the rewards.


Well, the line between bad business decisions and criminal behavior is not that thin in this situation. I'm not an expert on this financial crisis, but here we are talking about hiding the truth to investors and the general public, and make someone else pay for your riksy decisions. Those are not "bad business decisions".


What do you mean by "hiding the truth"? If I think Facebook stock is going to go to shit, should I tell you that before I sell you my shares? If I'm the CEO of Apple or Wal-Mart or Amazon, should I be held criminally liable for contracting to aggressively shift risk from myself to suppliers?

The line between aggressive business decisions and criminal ones can be a thin one. Financial crimes are in fact a relatively new invention. Did you know that at common law, embezzlement wasn't a crime? It took a long time for the law to come to terms with the idea that there should be anything illegal about doing something with money someone voluntarily gave to you.


The US may not but some jurisdictions do but still have not prosecuted anyone.

The UK is an example where company directors can be prosecuted for corporate mismanagement (failing in fiduciary duties http://legal.practitioner.com/regulation/standards_9_3_6.htm) and there are new offences planned specifically for banking.

But in fact Fred Goodwin received a handsome pay-off and has 24x7 police protection as a result of protestors arriving at his house when details of his huge bonus pay-off became public. He even obtained a super-injunction making it illegal for UK newspapers to reveal he worked as a banker ! (http://en.wikipedia.org/wiki/Fred_Goodwin#Superinjunction)

edit: as someone else pointed out he did lose his knighthood but that hardly seems as severe as prison time.



Do you really want there to be a law on the books which means people can be prosecuted for making bad decisions, decisions which the people making them thought were perfectly reasonable and legal at the time ?

The reason that CEOs haven't been prosecuted is that it's not clear there's any basis for which there to be a prosecution. There's no law criminalizing CEOs from making bad decisions, and it'd be incredibly stupid for there to be one.


That is the crux of the matter. Before it all fell apart, Fred Goodwin for example was universally regarded as a shrewd and savvy businessman who transformed RBS from a sleepy regional bank into a global powerhouse. He was a titan of business like Jack Welch or Richard Branston.


Everyone loved the housing bubble. The bankers made the most off of it, but the rest of the mob went along because they had convinced themselves they would get rich, too, and were pushing it along as hard as they could.

I still occasionally encounter people who think the problem with the housing bubble wasn't that it ever existed, but that it ended.


> Everyone loved the housing bubble.

Well, everyone other than people just trying to buy a house for their family. A house in which to live, not to flip-off in ten years time.


As were the management of Enron, or Bernard Madoff, or Robert Maxwell....


There's a lot of backstory that can not be adequately covered in a blog post. If you're interested in reading further, I highly suggest watching "The Untouchables," a PBS Frontline documentary following Wall Street executives and the prosecutors during that time.

It explores the roles and motives of different players, and pretty convincingly shows how the game is heavily tilted towards Wall Street executives.

Video: http://www.pbs.org/wgbh/pages/frontline/untouchables/

Transcript: http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...


I hate this view.

The rationale seems quite reasonable up front: something bad happened, we should find out who's responsible for it and punish them. There's also an unspoken assumption that this punishment would be a deterrent to future catastrophes, either by making these people too afraid of the consequences to commit their crimes, or simply by removing them from their positions of power.

This view of justice makes very good sense on the level of an individual. An individual who can be proven beyond a reasonable doubt to have committed a crime is considered responsible for their actions, and it is appropriate to punish them. If their punishment is incarceration, then locking them up for a time arguably makes society safer. Their fate would serve as an example to others of what happens when you commit a crime.

The problem with this view is that the financial crisis was not the result of individual actions on an individual level. What transgressions met the standard of our justice system, namely the rigorous demonstration of concrete, individual crimes, were treated. This article itself says this: those (relatively few) individuals who were demonstrated to have committed actions that were against the law were investigated, tried, and sentenced.

The financial crisis as a whole, however, was a consequence of the structure of a system. Risk was commoditized. Loans were gathered, sliced up, and sold as instruments. Incredible complexity was introduced: witness the explosion of demand for financial engineers specializing in derivatives pricing. Banks sold mortgages with the intention to sell them up the chain as components of complex securities, encouraging them to be lax with their lending standards.

In a way everyone involved was to blame, from the homeowners who filed shoddy-to-fraudulent paperwork, to the loan officers who looked the other way and accepted it. The mistake this and other articles like it make is it attempts to aggregate this blame upward. After all, the thinking goes, it's a manager's responsibility to ensure the proper behavior of those who report to him, and that chain ends at the CEOs. Therefore, the view goes, the CEOs must be held accountable.

Sometimes a more ephemeral, less informed view is at play. The reasoning is that these companies do what their leaders tell them to do, so naturally consequences of the company's actions are consequences of its leaders' actions. In addition, the CEO is a public figure. When we need a human being to personify a company, he's the first that comes to mind.

This is where things break down. To be held responsible for a crime, you personally have to have done something illegal. Not "you should have known better." You have to have broken the law. These people were investigated and even brought to testify before Congress, and no actions were found that met the rigorous requirements to be called a crime. Perhaps it can be argued that they were morally culpable, but as far as the justice system is concerned, their hands are clean. Their actions could not be proven beyond a reasonable doubt to have directly brought about the financial crisis.

Suppose they had been tried and given jail time, as this and other articles demand? In the absence of all other interventions, would that have made the system any more stable? Certainly not. The economic ingredients for another crisis would still be in place. Would their example have served to convince others to behave better? Certainly not. The message would not have been "don't cause financial crises," (whatever that means) but rather, "try not to be at the helm when things go badly." Their incarceration would have served no purpose beyond crowd pleasing.

It's time to give it a rest. You will never see these people prosecuted because by our standards of justice there is nothing to prosecute. If you want to make the financial system more resilient against collapse, you ought to press for structural reform to prevent these unstable situations from occurring again. If you want mob justice, it not happening. Deal with it.


> The mistake this and other articles like it make is it attempts to aggregate this blame upward.

Rewards accumulate upwards, so surely blame should too.

> Would their example have served to convince others to behave better? Certainly not.

I think it would. If CEOs were going to jail then other CEOs would put more of their company's resources into making sure they are running stably and not taking on too much risk. I'm sure none of these people wanted to run their company into the ground, but the rewards outweigh the risks, so bad decisions were made that might not have been if those in charge had had a more cautious approach.

I agree with you that with the current laws there is not a reasonable thing to prosecute these people for. Personally I would like to see laws that could cover these types of things, not just for banks and finance, but for any large organisation that causes human suffering.


Rewards accumulate upwards, so surely blame should too.

Should the CEO of papa john's personally pay every speeding ticket gotten by delivery drivers while out on delivery? Even though company policy clearly states drive within the laws. Should he have a compliance officer go on every delivery to make sure that all driving rules and regulations are followed? And perhaps a second so that we're sure the first isn't colluding with the driver, perhaps a third to break ties when the first two can't agree. At three we probably need a manager to go along to so we can make sure the others aren't slacking off. That's right we need a five man team to make sure a pizza gets delivered correctly and safely.

The CEO of an organization has a large effect on everything, but isn't solely responsible for everything that happens. Blame should only rise as far as the decision to act irresponsibly did. As far as the liar's loans go blame should be on loan officers who didn't do due diligence and as far up the management chain as can be shown to have had knowledge of that fact.


I don't buy the "rewards accumulate upwards, so surely blame should too" argument.

This argument hinges on the idea that the executive is earning rewards that are vastly disproportionate to the risks he faces for making mistakes.

Since the executive is compensated orders of magnitude more than any individual rank and file employee, it's easy to think that his reward is too large. However, on deeper examination you find that this isn't as clear as one might think it is.

Doesn't every employee enjoy the benefits of the company's success? Individually their pay is small compared to the executive's, but taken together their collective reward dwarfs what the executive takes home. When taken in the context of the entire company, the pay of the executive seems more reasonable.

As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business. Morality can and certainly does enter into it, but only in such a capacity where it doesn't interfere too severely with this mission.

When viewed from this angle, it's clear that putting in place laws that would allow you to prosecute CEOs that execute this mission in good faith is foolish. It would be incompatible with our legal principles because it would assume that all leaders of faltering companies are criminals unless proven otherwise, simply by virtue of being at the helm during bad times. Worse, it would transform the role of the CEO from that of the responsibly careful and reasonably bold leader to a timid sheep who lives in fear of mob justice for impossible-to-foresee consequences of his innumerable, seemingly innocent, decisions.


I totally agree with the thought that rewards go up and so should blame. The reason they get those rewards in the first place is due to some theory that their decisions and actions carry so much weight and responsibility. Why is that this weight and responsibility is factored only in rewards and not blame?

But your argument about executive compensation is rather odd to me. Not every employee enjoy the benefits of the company's success unless you just consider having a job the only benefit to worry over. Since the employees take home pay is collectively larger then the executive pay seems reasonable? I strongly disagree. That's implying that the executive can pay himself a million a year and there's no problem with paying 100,000 employees $100 a year because collectively they get paid more. I think the executive would likely feel that's a great deal for him but I would think the employees would disagree. Granted, extreme example. The simple fact is that in most companies I would expect the collective pay of employees to be larger than the pay of its executives, that shouldn't be a factor at all.

I'm not aware of examples shareholders being involved in the day-to-day decisions that the executive makes. Sure, there's pressure to do this or that, but shareholders tend to just say "make us money". They don't necessarily so how it should be done. That doesn't excuse the executive's decision if it goes bad.

As for "foolish" laws that could imprison CEOs for bad decisions. We actually already have such laws on the books, they just aren't enforced on that level. If you as a person make a bad decision that results in harm to someone else, those laws may hold you accountable. In terms of CEOs making the same exact decision that results in the exact same harm to someone else tends to result in the company being held responsible. Which usually results in a fine of some sort, if anything at all. In most cases where the company causes harm, it was a person's decision that led to that harm. If it can determined that it was the person's decision that led to that harm, you're damn right they should face the consequences of that decision.

Big example. Deepwater Horizon oil spill, several individuals faced criminal charges for decisions made before and after the accident and rightfully so. Why is it a CEO shouldn't face consequences for decisions that they make if it can be shown they were in fact the ones that made them?


This is a principal-agent problem. http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem

As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business.

That is the principal (shareholders/board)'s intended role for the CEO.

But as an agent of the principal, the CEO's incentive is different, it is actually to use his power and influence to manipulate the company into offering him maximum compensation and minimum risk in the short term, and to rig the company's business into taking risks that are degenerate in the long term but boost profits in the short term. And members of the board, who are also CEOs of other companies, are complicit in this because they are helping each other do the same thing--colluding to basically rob each others' companies together.


> This argument hinges on the idea that the executive is earning rewards that are vastly disproportionate to the risks he faces for making mistakes.

C-level execs of large banks (the kind of execs in question) DO early disproportionate amounts of money and face no real risks even when they fail miserably. C-level execs typically get golden parachutes and usually face no criminal charges even if their actions or direction lead to criminal behavior.

> Doesn't every employee enjoy the benefits of the company's success?

No, absolutely not. Is it better that someone be employed rather than have no job and go hungry? Yes. But you are wrong if you think the janitors that clean the offices and other low level employees share in the success of the company, these people are paid low, flat wages and are highly expendable even in successful times for a business.

> Individually their pay is small compared to the executive's, but taken together their collective reward dwarfs what the executive takes home.

The average worker does not share their income in some kind of collective way and does not have a way to collectively bargain for extra wages or benefits. C-level executives, on the other hand, have tremendous salaries compared to the average worker working under them and are rarely in danger of any penalty for bad or illegal decisions.

> As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business. Morality can and certainly does enter into it, but only in such a capacity where it doesn't interfere too severely with this mission.

If high level executives get a license to act against moral interests of people at large without the risk of punishment, we should expect sociopathic-like behavior from those person and they will do damage in some capacity or another.

> When viewed from this angle, it's clear that putting in place laws that would allow you to prosecute CEOs that execute this mission in good faith is foolish.

Nonsense. No person or business entity is entitled to profit without rules or regulation. We aren't Ferengi.

> It would be incompatible with our legal principles because it would assume that all leaders of faltering companies are criminals unless proven otherwise, simply by virtue of being at the helm during bad times.

Running a business poorly is not a crime. Running a business with the intent to lie, defraud, and otherwise cheat the law is. Expanding or strengthening laws to ban behavior that is destructive to society is not wrong but is moral and necessary.

> Worse, it would transform the role of the CEO from that of the responsibly careful and reasonably bold leader to a timid sheep who lives in fear of mob justice for impossible-to-foresee consequences of his innumerable, seemingly innocent, decisions.

If this were to happen, society would be a better place. Instead now we have not sheep but wolves that seek their own profit regardless of how many lives are destroyed.


Does this mean we should look to see which politicians should go to jail for encouraging NINJA loans?


I could swear the article I just read ended with the conclusion that jailing wouldn't work and that structural reform would be better. In fact, I'm positive it specifically mentioned that we shouldn't punish businesses for failing, and that changing this policy for businesses with potential for collateral damage is a bad idea.

I understand entirely why you object to the article's tone, but perhaps "Nobody's in jail for this, and it pisses us off, but it's not tenable to put people in jail for this so let's look at other options" is the perfect message for people who don't already understand what you're saying.


> The problem with this view is that the financial crisis was not the result of individual actions on an individual level.

Come on. Is the 2008-09 time period already so distant that we've forgotten that, yes, firms & their CEOs did individually misrepresent/lie/fudge their investments and operations.

Sure there was a "structural" issue like you say, but it was fanned by an orgy of company-specific actions. Some of them, to jog our collective memory:

- The use of 'Repo 105' transactions to conceal $50 billion in loans on Lehman's balance sheet [Source: http://www.accountancyage.com/aa/news/1934026/-sued-lehmans-...]

- A series of obsfuscations to hide the true value of stock options awarded to executives. In one instance Fuld claimed he earned $146 million via stock grants when he actually earned $409.5 million. Also, Fuld made $469 million from stock sales between 2000 and 2008, compared to his claims to have hardly made any money that way. [Source: http://www.businessweek.com/magazine/content/10_19/b41770562...]

- Bank of America hiding $5.8 billion in bonuses it authorized for Merrill Lynch executives before taking over the firm [Source: http://abcnews.go.com/Business/story?id=8240633&page=1]

- Citigroup understating its subprime exposure by $40 billion [Source: http://blogs.wsj.com/deals/2010/07/29/the-secs-citi-complain...]

I could go on.

I'm not arguing for jail time for each of the CEOs of these companies. But in most cases these companies and their executives have gotten off through settlements and fines, paid for by their shareholders.

Which brings me to your strong conclusion:

> You will never see these people prosecuted because by our standards of justice there is nothing to prosecute

I beg to differ. There is TONS of stuff to prosecute. But perhaps, there is no desire or will. Cue, the SEC's Revolving Door: http://www.bloomberg.com/news/2013-08-04/sec-door-spinning-m...


So let's break these down here.

As a background principle, remember that every company takes measures to make its books look good. Accounting isn't a simple mechanical process, and there is quite a bit of leeway in how to classify various things and treat various assets.

Re: Repo 105 transactions. From Cuomo's lawsuit against E&Y: "E&Y not only approved but consistently supported Lehman's Repo 105 policy, and advised Lehman that it could take advantage of a technical accounting rule, known as FAS 140, to treat these Repo 105 transactions, which in reality were short-term financings, as 'sales,' enabling Lehman to remove the securities from inventory on its financial statements until they were repurchased." Here's a description of the Repo 105 transaction: http://www.npr.org/blogs/money/2010/03/repo_105_lehmans_acco.... Essentially, a bond is sold for cash with a short-term agreement to repurchase it. Lehman's accountant signed off on its treating these transactions as sales instead of loans, pursuant to FAS 140 (an accounting standard). This is criminally fraudulent activity?

Re: obfuscations to hide value of stock options. How is this fraudulent? Fraud doesn't just mean lying or misleading. It means basing a transaction on a lie or a misstatement.

Re: hiding bonuses. Again, how is this fraudulent?

Re: the revolving door article, see: http://www.slate.com/blogs/moneybox/2013/07/23/robert_khuzam... ("If you manage to unplug from the revolving door narrative for a second, you can see why this makes sense—if you spend your time as a government lawyer being extremely lackadaisical in your prosecutorial efforts that's going to make you look like a bad lawyer who people don't want to hire. If you want to cash in some day, you want to have the reputation of being someone who's really smart and tough and effective and who understands how to make cases.")

Note that article is by Matthew Yglesias, who is hardly some industry shill.


# On Repo 105: Lehman's accountant - EY - signing off does not imply anything was kosher. Accounting firms rarely ever blow the whistle against their large clients, especially one that earned it $150 million in fees between 2001 and 2008.AFAIK, the case against EY for fraud still isn't dead. [Source: http://www.forbes.com/sites/francinemckenna/2012/12/13/lehma...]

And btw, Dick Fuld denied having any knowledge of Repo 105 transactions at Lehman, a tool that was used to hide nearly $50 billion on its books. [Source: http://www.zerohedge.com/article/repo-105-scam-how-lehman-fo...]

# And while you are correct that wilfully understating the value of executive stock options by $250 million may not be fraud, it is a lie told to shareholders and regulators. And we can't blame it on "global" or "structural" issues.

# Hiding bonuses is fraudulent when it is done in the context of an acquisition (Bank of America authorized those bonuses to be paid to Merrill Lynch execs, when the financial world was collapsing all around).

# Khuzami wasn't the first or only person who walked through SEC's revolving door, nor will he be the last. Here's a great, comprehensive and data-driven analysis of SEC's Revolving Door by the Project on Government Oversight: http://www.pogo.org/our-work/reports/sec-revolving-door.html

Again, I'm not alleging each of these (or the numerous others just a simple web search will throw up) is fraud, but refuting the parent's suggestion that the financial crisis was "a consequence of the structure of a system"; that there was no individual culpability/actions; and that "by our standards of justice there is nothing to prosecute".


That article is completely missing the "revolving" part of the analogy. Khuzami was previously at a leading position for Deutsche Bank, only then in 2009 did he join the SEC. He then left again in 2013 for Kirkland & Ellis.

You can't just group him together with the lower layers that start in government and want to cash out in private later. These usually don't come back.


It's fortunate that no private individuals did similar things - specifically misreporting their capability for taking on debt, particularly mortgages...

It was global crisis brought on by global creed. And when I say global, I mean capitalist 1st world. Stop scapegoating.


> Not "you should have known better."

If by this you mean that ignorance is a defense, Sarbanes-Oxley was enacted specifically, in the wake of Enron, to remove this defense. CEOs sign a statement each year attesting that they do know, and they can be prosecuted for lying about it.

From a speech Cynthia Glassman gave:

Recognizing that awareness must precede action, Sarbanes-Oxley and the Commission’s rules require the CEO and Board to make certain that procedures are in place to ensure that they hear bad news. Under the Commission’s recently adopted rules, these procedures must ensure that all material information - both financial and non-financial – gets to those responsible for reporting it to the investing public.


The legal principle you're referring to is indeed an old one: Ingorantia juris non excusat [1]

[1] http://en.wikipedia.org/wiki/Ignorantia_juris_non_excusat


Totally agree that demanding that someone be put in jail is the wrong approach, however clawing back all the ill-gotten gains and then some as a fine are reasonable. Every single one of these people responsible should have had every penny of the money earned clawed back. The correct deterrence is to make sure that being irresponsible is simply bad business because it is undeniably unprofitable.

I guarantee you that if you were to look at the lifestyle of many of those responsible today that we would see that they have plenty of money stashed away, many apartments and homes, club memberships, etc.

I think we would all feel more comfortable that a crisis like this would not happen again if we knew that the practices that led to it were shown to be unprofitable.


I think deterrence is pretty effective though. Currently, the people in charge have no risk. Worse case scenario is they get a huge pile of money and are told to leave. If they actually had a stake in the game, they would do everything in their capability to make sure things are being run properly.

Right now, they are actually being incentived to disregard ethics in order to maximize profits.


Balderdash.

There were many examples of outright fraud in the years leading up to 2008, some of which are presently being discovered in civil suits. The perpetuators of these frauds have never been brought to justice. (or even really investigated by the justice dept) The victims of these frauds are still seeking relief.

Many people are frustrated as our supposed functionaries of justice in this country are too cozy by half with those entities they are supposed to be regulating. This is corruption writ large.

Here is just one example of outright fraud:

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet...

This is a quote from the document in question:

1003. Specifically, plaintiffs performed an investigation concerning the mortgage loans purportedly transferred to the trust for the JPMorgan Defendants’ JPMAC 2006-WMC4 offering. The closing date for this offering was on or about December 20, 2006. Plaintiffs reviewed the transfer history for 274 loans that were supposed to be timely transferred to this trust. Sixty-six (66) of the loans were not and have never been transferred to the trust. In addition, several other loans that were supposed to be transferred to the trust were transferred to entities other than the trust, but not to the trust. The remainder of the loans (approximately 140) were eventually transferred to the trust, but all such transfers occurred between 2008 and the present, well beyond the three-month time period required by the trust documents and far after the three-month period for the trust to maintain its tax-free REMIC status. In other words, none of the reviewed mortgage loans were timely transferred to the trust, a 100% failure rate.

not a single one of the surveyed loans in this REMIC was actually deposited into the trust in a timely fashion and over half were never deposited at all

The trust is void under the law. Everyone who paid the servicer of this trust was screwed as the trust didn't legally own the debt it claimed to. Every investor who sold 'certificates' backed by this trust was robbed. These trusts, which don't really legally own the debts they claim too are foreclosing on debt they don't own. This isn't just failing to cross some t's and dot some i's.

Do you agree (if you assume the above to be true) that people should go to jail for this? Do you think none of the senior execs at JP Morgan Chase knew about this? Do you think it is acceptable that the neither the SEC, the OCC or the OTS have been looking into these problems?

You seem to think being a member of a group committing a crime absolves the individual actors of culpability? By this measure, many members of organized criminal enterprises aren't doing anything wrong.

Maybe we should actually investigate these crimes and at least try and assign responsibility and have trials? Isn't that what the court system is for?

Shouldn't we be embarrassed by this complete breakdown of the rule of law?

In Iceland at least, they've done something about it!

http://www.bloomberg.com/news/2012-02-20/icelandic-anger-bri...

Speaking of organized crime

http://www.bloomberg.com/news/2012-12-12/hsbc-mexican-branch... and more money laundering http://www.bloomberg.com/news/2012-08-18/deutsche-bank-among...

The justice department 'probes' these matters and then issues civil penalties. These are criminal acts and deserve criminal investigations.

I agree that singling out and only blaming CEOs is ridiculous. Far more than just the CEOs of these banks should be in cuffs. Many of these banks should lose their US banking charters and be dissolved as US banking entities.

If you do not punish this behavior, harshly, it will continue. Civil suits are not enough. For this to stop, many people need to go to jail.

The regulators aren't looking; they don't want to throw their friends and future employers in jail.

How can we 'give it a rest' when we haven't even tried to fix the problem?


There has been some _actual_ fraud involved, most notably the "robo-signing" (steal a million homes at the stroke of a pen): http://www.reuters.com/article/2013/06/25/robosigning-senten...


Firstly, but this led to a conviction. Justice at work.

Secondly, would the crisis could have been prevented if this practice were not in place? Absolutely not. This behavior was a symptom rather than a disease.


It would not have prevented the crisis, but it would have prevented a substantial amount of cost-shifting onto mortgagors.


Government's job is to regulate and legislate. Within that frame work, all if fair. The regulation and legislation failed. Government failed. That's where fingers should be pointed.

Same deal with tax avoidance.


Indeed, where has the Department of Justice been all these years, when the banks were becoming "too big to fail," and now (per Eric Holder's insinuation) "too big to jail?" Where were the antitrust suits? Where are they now?

To a major extent, the bigness of these financial institutions is the issue -- the fact that they're so ingrained into our economy as to be deemed untouchable, save for infinitesimal borrowing rates and occasional cash transfusions.

In many cases it's hard to draw clear distinctions between "government" and "finance industry," as some pretty connected foxes were guarding the henhouse before, during, and after the crisis.

Government failed us here, big time, and continues to fail us. But let's not let the culprits off the hook, nonetheless. The reason our government gives this industry a pat on the back, a few trill, and an 'atta-boy every time it fucks up is because this industry has made a concerted effort to buy off the government. And it has.


Antitrust enforcement was gutted under Reagan and never recovered.


The problem is that the banks never became "too big to fail" and they should have been left to fail, and then we wouldn't have this problem.

But some politicians were all "oh no!!! we can't let these banks fail!!! the stock market would collapse and unemployment could spike over 10%." And then the stock market collapsed anyway and unemployment spiked over 10%.

And now the banks are even bigger. :P


As comfortable as this logic feels, the fallout would have been even worse had the banks been left to fail. That's basically what we did in the 1930s. Didn't turn out so well.

Some sort of bailout, unfortunately, needed to happen to keep the world from going completely Mad Max. But the bailout should have come with conditions: new regulations, enforcement with actual teeth, and trust-busting breakups of institutions on the receiving end. None of that happened.

For the record: prosecutions of top execs, while warranted in many cases, are little more than sideshows. They're basically conducted for appearances. They do nothing to stop the next CEOs from going right back to business as usual. What really matter are antitrust policies, regulations, and enforcement.


In the 1930s we didn't have the FDIC.


Among other things, sure. That we have the FDIC now wouldn't have stopped a significant depression from happening had we simply allowed the financial sector to collapse.


People and their democratically elected leaders should take more responsibility for the bad incentives they created for other people. When the rules of a system are easily gamed, it's only a matter of time before someone starts to exploit it.


People are unwittingly bearing the cost of this in terms of ridiculously low interest rates on savings and high unemployment.


Its sort of similar to the outcome here too - http://en.wikipedia.org/wiki/Libor_scandal - a bunch of investigations, banks being fined, new regulations put in place, but noone has gone to prison.


The LIBOR scandal is rediculous. It's a private entity that can say whatever the hell it wants. The real scandal is that governments decided to put so much trust in a single private entity to "get things right". Or maybe there's a scandal that governments care at all. Why should a government care what the interest rates are?


It certainly didn't help that Eliot Spitzer's political career imploded months before the financial crisis hit. It's impossible to know what he might have done -- either as governor or in some investigatory/prosecutorial role after his term. But it's also hard to imagine him remaining on the sidelines on this issue if his own dumb hubris hadn't taken him out of the game.

Edit: if any of you have seen Enron: The Smartest Guys in the Room, the same filmmaker also made a documentary to explore Spitzer's downfall with regard to the financial crisis:

http://www.theguardian.com/world/2011/feb/27/eliot-spitzer-w...



"About 4,000 people a year are executed annually in the country"

I'm not even a native English speaker and that opening phrase screams sloppy journalism to me.

I guess for some reason I expect a higher quality from established news outlets


Although "Business" is in the title Business Insider is closer to a Buzzfeed than it is an Atlantic or a New York Times.

It is interesting to see the sentences people got for their crimes. I agree all of those mentioned in the article are wrong, but a death sentence seems incredibly harsh.


Is China's justice system really what we want to aspire to?


If no-one significant did anything illegal and yet the result was the financial crisis, then clearly the legal/regulatory framework was/is flawed.

The most troubling issue is that there hasn't been any significant adjustments since then. Perhaps not that surprising given the amount of influence the financial industry have in policy making, but still. It's also distressing to see an individual like Larry Summers being nominated as the next Fed Chairman. It seems very little has been learned.

For anyone interested in understanding the events that led to the crisis, I can't recommend highly enough: All the Devils Are Here[1]. Of the many books written on the subject, it provides a very objective and thorough account.

[1] http://www.amazon.com/All-Devils-Are-Here-Financial/dp/15918...


It really seems messed up that Martha Stewart went to jail and no financial crisis CEOs did. Prosecutors seem to be focusing in the wrong direction.

(I know it's not quite that simple. Strangely enough, Martha Stewart used to be a stock broker, so she should know insider trading laws. But still...)


For what I consider to be an informed opinion on the matter, I'll cite the head of the 80's Savings and Loan scandal investigation and prosecutions. He was interviewed on public radio the other year.

This is someone with expert knowledge who has actually been through and on the inside of a similar, if smaller, situation.

He pointed out that, in that case, they pursued investigations and prosecutions and were able to win settlements and judgments in circa 1000 instances including criminal prosecutions.

As I recall, he described what has happened this time around and a real shortfall and travesty. One that was not necessary, had justice been more aggressively (or, at all) pursued.

I'm not an expert. But this guy, not just through credentials but also experience and demonstrated results, is. And that's what he had to say on the matter.

Sorry, but it's been long enough that I don't recall his name off the top of my head. If I have time, I'll look for it and perhaps for that interview, as well. Or maybe someone else has a name and/or reference handy.


That was probably William Black. His usual point is that the lack of prosecutions is a result of the investigatory system having being gutted. He says that in the S&L scandal, his agency made 10,000 criminal referrals to the DoJ, while in the recent (much larger) crisis they made 0.

According to Black, the common argument that nothing can be prosecuted because it was all (perhaps regrettably) legal is totally wrong; rather, standard investigative procedures were simply not applied because there weren't the investigators to do it, and what you don't investigate you don't find.


That name sounds familiar.

I recall also his describing how they would "work up the chain". Where they had evidence of culpability at a lower level, they would use it to apply pressure to "flip" such employees against their management.

I think the description you cite is well taken.

I know someone who is fairly senior in the SEC. They have more or less confirmed what I've also read. The SEC is supposed to be self-funding. The revenue they take in (fees, etc.) has been far in excess of their budget. Instead of staffing up (woefully needed; occasionally promised -- most recently a couple of years ago; never delivered), Congress -- who sets their budget after incorporating that revenue into the general budget -- has treated them as a cash cow.

People need to look beyond "regulation is good/bad" labels, to learn and understand what is actually going on -- the specific circumstances.


The financial crisis was one big fuck-up, but that fuck-up was accidental and not on purpose. Generally, there is no criminal liability for an accident, because it was an accident. There is criminal neglect, but that doesn't come into play here: given a reasonable level of expertise, it was impossible to predict, and, after the fact, can be seen as a natural consequence of the structure of the world financial system. Who do you jail for accidentally, unpredictably creating a flaw in a worldwide system?


In the western world, gain is privatized, and loss is socialized. Nothing changes unless tax rates or some other form of revenue emerges to back up that socialization. Oh wait, my money market account is earning ~0.15%. Silly me, problem solved.


Not sure he was a CEO, but Bernard Madoff was prosecuted.

http://en.wikipedia.org/wiki/Bernard_Madoff


Ah, but his crimes were against Wall Street, not the proletariat^H^H^H^H^H^H^H^H^H^H^H general public.


Though it's a counterpoint to the argument that U.S. doesn't prosecute business decisions.


Madoff ran a Ponzi scheme and was convicted for fraud.


There are economists, like Steve Keen, who argued that subprime mortgage crisis and financial crisis in general was a Ponzi scheme. And I would say it's pretty obvious to most people that it essentially was.

Madoff could say, in his defense, "I don't know this was a Ponzi scheme, I was just incompetent". At that's similar to what these bankers are saying. We don't accept it as a defense, though; we just prosecute it.

The point is, there is no strict line between incompetence and fraud. Every fraud can claim incompetence.

The unfortunate truth is that the U.S. indeed prosecutes _obviously_ bad business decisions. Just not in the cases where the fish is big enough. (The same is actually true in my country, Czech Republic.)


Eventually...


Simple explanation: they broke no laws


Ask yourself how did it happen that some people got some much power to affect economy around you. Now find a way to insure/protect yourself against that.

You will probably find out that, for instance, central bank manipulations with currency are protected by police enforcement in forms of various laws and regulations anybody dealing with money needs to comply ("allowed to participate on the market"). Liberty Dollar founder was deprived of all his customers' silver and is being prosecuted. Bitcoin companies are all on the verge of being harassed etc.

Or, if you want to create an alternative bank or fund, you'll find it's not so easy to do: people with armed forces will politely ask you to comply with tons of regulations. It's basically a one self-protecting cartel and the basis of it is access to "legal" violent power.


There have been no members of the US Government or the Federal Reserve prosecuted for providing the laws, financing and hyper liquidity that made it all possible. Don't hold your breath on that one either.


"Who permitted them to do it? No particular man among the dozens in authority. No one cared to permit it or to stop it. No one was responsible. No one can be held to account. Such is the nature of all collective action."

- Ayn Rand, The Fountainhead


I feel like the problem is, there are no easy answers. The mortgage-backed securities did exactly what they were supposed to do: diversify risk so that the only thing that could bring down the ship was a system-wide failure. And until that happened, things were great.

People were buying houses. This was great for politicians, great for the middle class, great for businesses. Politicians wanted this to continue, so they pushed for easier access to borrowing. Banks/Wall Street wanted this to continue, so they were lax about loaning standards. People wanted this to continue because home values were soaring, and they were able to "afford" nicer and nicer places.

Digging into it further, mid-level people in the banks, the ones responsible for handing out these 0-down mortgages, were pushing mortgages out the door as fast as they could. The model kept showing home prices soaring, and this mid-level mortgage official wanted his bonus. The home-buyer wanted that $750k house on his $70k/yr salary, because if he could only hold onto it for 5 years, it'd be worth $1.5m. Politicians wanted this to continue because they were raking in taxes on it.

And for years, this grew outrageously. Until suddenly the one thing that could bring the whole industry to its knees happened: a country-wide slowdown on buying houses. Suddenly home prices stagnated, mortgage rates rose and bam, everyone is fucked. Banks are stuck with loans that were given to people on the ragged edge of what they could "afford". People were stuck with mortgages that they could barely afford the interest on. Politicians were stuck with constituents who suddenly were shocked that they weren't able to afford the lifestyle they wanted.

Who's at fault? A little bit of everyone. Banks loaned money to people who couldn't afford a bump in the road. Should they have told people "nope, you can't afford that house"? Maybe. But at the same time, should a person have taken on the responsibility of a house they couldn't afford? Politicians, who are in charge of setting the rules of the game--should they have told the banks not to make loans? After all, their constituents were demanding it. Why shouldn't they have access to a booming housing market? Should the government have stepped in to tell people what financial risks to take?

It's a really, really tricky situation. And honestly, everyone is a bit to blame. Picking out a few CEOs to toss in jail seems arbitrary. What about the loan officer who wanted his bonus for a new pool? He's probably a middle-class person just like the majority of people in this. He wins because he pushed a mortgage, the client "wins" in the short term because he gets a crazy nice home. Do we prosecute all of the mid-level people at the banks too?


>The mortgage-backed securities did exactly what they were supposed to do: diversify risk so that the only thing that could bring down the ship was a system-wide failure.

They weren't meant to diversify risk, they were meant to obscure risk.

>The home-buyer wanted that $750k house on his $70k/yr salary

The homebuyer always wanted this. The difference is that during this time, they were given this, and allowed to leverage the value of a piece of property that would always rise and never fall in value in order to pay for it.

>Until suddenly the one thing that could bring the whole industry to its knees happened: a country-wide slowdown on buying houses.

Or rather a country-wide slowdown of the rate of increase in buying houses, which was an inevitability.

>Who's at fault?

1) The people who kept swaps from being regulated as insurance. 2) The ratings agencies. 3) The people who took away the wall between investment banking and deposit banking. 4) Black-Scholes, 5) Everybody who saw that the housing bubble was stupid, and made money from it anyway by selling it as sustainable. 6) General American innumeracy.

There are easy answers.


Not really, especially from a legal standpoint (not a lawyer!).

> The homebuyer always wanted this. The difference is that during this time, they were given this, and allowed to leverage the value of a piece of property that would always rise and never fall in value in order to pay for it.

Why was this? I'd argue that it's because the whole system wanted that to be true: politicians wanted people to be buying bigger and nicer houses. People wanted access to a nicer house than they can technically afford. Companies wanted to push mortgages out, then slice them up to try to minimize risk. The entire system from top to bottom wanted this.

> Everybody who saw that the housing bubble was stupid, and made money from it anyway by selling it as sustainable. Just like the dot-com bubble, it's really who got left holding the bag. Many, many people made money off of it. Many middle class families also! People who sold a house when home prices were soaring. People who locked in low rates. Everyone knew that the home market wasn't going to grow forever, it was just a gamble as to how quickly the growth would slow, and how wide-spread defaults would be.


maybe - you see I own a home that according to the millionaire next door I cannot afford - the idea is to own a home that is 2.5 times annual salary. at the time I was in the top 5% of earners in the UK - and 2.5 would have given me a one bed flat in London for my family.

A average salary of 25K would have a 62k purchase price. according to zoopla there are precisely no houses in all of London at that price and a grand total of 66 flats for sale.

so for 50% of the 10 million people in London, prudence dictates that there are 66 available properties


Fed monopoly/hegemony over printing our dollars is undesirable.




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