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“Cheating teachers go to jail. Cheating Wall Streeters don’t. What’s up?” (washingtonpost.com)
307 points by grej on April 23, 2015 | hide | past | favorite | 152 comments



You know who never goes to jail? Regulators.

Madoff, for instance, moved from Wall Street into a cell where he belongs, refuting the above headline. His regulators, however, weren't even charged with anything AFAIK. That despite their inaction for many years being either criminal negligence or the result of being bribed.

(From http://www.bloombergview.com/articles/2014-01-07/jpmorgan-pa... - "The government regulators, led by the Securities and Exchange Commission, also didn't catch Bernie Madoff, even though they were his regulators and that was literally their job. And while yes JPMorgan ignored some red flags, so did the SEC. Like, the many many credible letters they got to the effect of "Bernie Madoff is a big ol' Ponzi scheme." Should the SEC be paying an even bigger penalty than $1.7 billion?")


> You know who never goes to jail? Regulators.

Nor should they unless they were colluding with him or accepting bribes.

The punishment for just being bad at your job should be getting fired, not jail. Of course, I doubt many lost their job either.


I don't know the answer to the following questions, but I'll take wild guesses:

1. Were Madoff's regulators fired? (My guess: they weren't, it wasn't even weighed as a realistic option by whoever should fire them.)

2. Was there an investigation into whether they were bribed, as there should be when someone is so spectacularly incompetent at their job that it's hard to reconcile with having the mental skills necessary to get the job in the first place? (My bet: there was no investigation whatsoever.)


On number (2), you forgot the other major (and very probable) option: the regulators were told, by the legislature, to shut up and stop doing their jobs like competent professionals, because Congress's friends don't need no regulation (♫ they don't need no bank control ♫). They were probably also defunded by Congress, leaving them with too small a staff to do their job well.

"Starve the beast", remember?


I can't believe all the comments saying pretty much what you said.

How much bloody staff do you need to take a peek at the securities kept at a fund's bank account? We aren't talking "complex" stuff like rating agencies putting AAA ratings on junk (and BTW S&P was slapped on its wrist with a >$1B fine over that after an investigation). We're talking about a guy with almost no staff who paid "returns on investments" from his pool of investments.

The sum of the securities he'd keep would thus fall far behind the number following from his reports. Not noticing can only result from not checking. Not checking that much after multiple warnings results from defunding?! Perhaps, if there was just the janitor left and all the regulators were fired. Was that the case?

(You know what could be a probable cause other than incompetence or taking bribes? A desire to be employed by a Wall Street firm after resigning as a regulator, and a belief that it wouldn't work out if Madoff were checked and found clean, or even if checked and found guilty. But is it more than a convoluted bribe?)


It's easy to know, after the fact, that Madoff was a Ponzi scheme, and say he should have been investigated. But that neglects two important numbers: how many prospective Ponzi schemes were there to investigate, and of those, how many actual Ponzi schemes, out of which Madoff's was only one?


Regulators can only make decisions based on the information they have, which ultimately comes from the people they're trying to regulate. Eventually the wheels come off, but you can give plausible numbers to the government for a long time before that happens.

Your assumption they were either bribed or incompetent is unwarranted.


To spot a Ponzi scheme you only need to look at the balance sheet, not? Do regulators not have a right to do so, especially having gotten multiple warnings (from people who, unlike public employees, have an actual stake at the game because they competed with Madoff and figured his official returns on investment were impossible?)

If the SEC cannot look at the actual balance sheet as maintained by banks etc. until "the wheels come off" and until then they can only rely on what the org says its balance sheet is, things are really bad but somehow I doubt that's the case.


>To spot a Ponzi scheme you only need to look at the balance sheet, not?

No, actually. This is wrong. You can't spot a clever Ponzi scheme if the person who provides the balance sheet is willing to put down false information.

As an auditor all you can do is correlate the bits of information you have. If the criminal is intelligent you won't spot anything until it's too late.

The "warnings" they got were that Madoff's fund was making money too consistently. That's useless.


Well, you can go to the bank where he actually keeps the securities if you don't trust the declarations. His bankers for instance were tipped off by his balance sheet and shorted him. Why couldn't the SEC look at the real balance sheet as maintained by the bank(s)?

As to the warnings being useless - you mean that the likelihood of such warnings does not correlate with the real state of things enough to justify action? As in, every legitimate money manager is suspected by many competitors of being a fraud and the SEC is overwhelmed with meaningless warnings to that effect? I doubt it somehow.


firing a public employee is like pulling teeth from healthy gums


A bad engineer who designed a bridge that later collapsed and injured/killed people will go to jail, in addition to being fired.


The most relevant [ETA: US] case I can think of is the Hyatt Regency Walkway Collapse (http://en.wikipedia.org/wiki/Hyatt_Regency_walkway_collapse) in which over 100 people died and the engineers involved lost their licenses. No one went to jail, and this case was actually noteworthy for professional consequences being imposed for negligence.


That's not a 1:1 analogy. Civil engineering is a mature field, and the best practices in design / methods for analyzing structures are very well defined at this point. Effectively regulating the finance industry requires more than following the rules to the letter - also involves who you know, creativity in catching new kinds of misbehavior, and a bit of luck.


There is an argument to be made that we shouldn't allow the finance sector this much creativity. Banking has worked for hundreds of years, and most problems seem to be caused by new phenomena. It may be better to over regulate and then remove certain regulations only when the activities can be proven safe, rather than let everyone go crazy with our money and bankrupt millions of Americans every decade or so.


Right. New financial products/services should be, essentially, "guilty until proven innocent". Regulations should be very tight in the beginning, and then slowly relaxed - say, over 50 years.

By way of analogy, if I create a new kind of medical device, the FDA does not say, "We don't have any regulations that cover that, so it's completely unregulated until we see the need to write some." No way.

But a new financial product, while it can't kill anyone, it can still cause massive damage. (We just got a case study in this in 2008.) The default for any new financial idea should be regulated, not unregulated.

And "but it's not a bank!" doesn't cut it. Mortgage securitization wasn't a bank activity, but it still nearly destroyed the world economy. Repo isn't a bank activity, either, but it played a significant role in the crash. Both are "bank-like" enough that they needed serious regulation. Since the risks were not yet understood, any regulation in place was not nearly stringent enough.


How did repos play a role in the crash?


This sounds like Paul Krugman's thesis that the run on the (unregulated) shadow banking system was at the "core of what happened" to cause the crisis and if only it was regulated, the crisis wouldn't have happened.

A great writeup about this by someone a bit more credible than Krugman can be found at http://blogs.wsj.com/economics/2010/02/23/so-what-exactly-ca...

Written by Yale and Wharton Professor Gary Gorton, who has held positions at the Bank Of England, the Federal Reserve and the FDIC.


I am 100% sympathetic to that argument. Every time I hear someone bashing Sarbox because it "stifles innovation" I want to reach into my radio and slap the person who said it. I don't want "innovation" from my retirement fund. I want good stewardship of my money.

"Innovation" is almost always another way of saying "We found another way to gamble with the customer's money."


The entire premise that the banks brought down the economy is complete BS. They just make an easy scapegoat.

The regulators, rating agencies, mortgage lenders, government, GSEs all contributed to people overleveraging, but thats not even the real issue.

The real problem is that the economy has changed, and all but the high skilled jobs are going overseas or being done by machines.

Bankers are not going to jail because they didn't break any laws. People need to stop being parrots and making claims about things they dont understand.


Where did I say banks brought down the economy? Where did I say bankers should go to jail? Did you just see some words you can identify and decide to hang rant #47 on a reply to my comment?


One could say exactly the same thing of the software industry.

You look at the software industry, what do we see? Mild amateurs not encrypting personal data, or not protecting their sensitive data against hacking 101 attacks (we still see sql injections attacks in this day and age!). You see a very large shady industry prospering on invading the privacy of unsuspecting users (and not just the adclick of this world: google, facebook!). In a corporate environment, developers have a similar bad reputation than house builders in term of creating projects that very often take a lot longer that expected, fail, or simply are not fit for purpose.

Does it have no consequences? It has massive consequences and the worst data leaks are probably yet to come. Should we impose heavy regulations on the software industry and curb toxic innovation? It is certainly not an absurd debate. Obviously most people in the software industry will react to this with hostility. They will argue it would negatively affect innovation and progress, that there are good and bad apples, and that one cannot judge an entire industry without a minimum understanding of how it works and how it benefits the economy.

Well guess what: it is the same with the financial industry!


Can anyone verify that there are cases of criminal negligence where engineers have been imprisoned as a penalty?


Don't know if this was ever enforced, but in the Code of Hammurabi (~1754 BC), Sections 229 and 230 prescribed capital punishment in the event a builder constructed a house, which then fell and killed someone.

http://mcadams.posc.mu.edu/txt/ah/assyria/hammurabi.html#Ham...




No need. We can use the example of medical negligence, if your rather.


People dying is not equivalent to people loosing money.


Mass loss of money, while not as direct a cause and effect, can be far more lethal. People not going for checkups they can no longer afford. People scaling back budgets resulting in less healthy choices. People forgoing using costly medication. People moving to cheaper (and less safe) neighborhoods due to money lost. The general increase in stress with the money lost.

Far harder to measure but magnitudes greater damage.


Madoff was sentenced to more prison time than many murderers. Murder and fraud may not be equivalent, but that does not mean that one must necessarily be less serious than the other.


Financial crimes in the US carry some pretty draconian penalties in terms of sentence length. They have to, because if people think financial institutions are going to run off with their savings the whole industry collapses.

In Madoff's case there was an additional issue - the people he defrauded were mostly wealthy and powerful.


There are plenty of examples of regulators acting abusively or in bad faith. They can get away with this because there are no repercussions.


> The punishment for just being bad at your job should be getting fired, not jail.

You should keep that in mind next time you get surgery. :-)


You really want the surgeon who is only doing his best due to fear to be operating on you?

None of those listed professions at any time motivate their training due to fear of imprisionment. It is a complete non factor and it's only effect is to shovel more pain and tragedy on already tragic situations to the illusion of relief for a small porportion of the parties aggrevied.


You really want the surgeon who is only doing his best due to fear to be operating on you?

I don't care why he's doing his best. It would be nice if he was doing his best because he's a dedicated professional, but doing his best out of fear is far better than being operated on by some slacker not giving their best.

So the answer to your question is yes, please, I want the surgeon who is doing his best; not the one who is slacking.


Or building a bridge.

Or coding software for medical machines.

Or being a pilot or a bus driver.

Or construction.


> Or coding software for medical machines.

I don't believe anybody was arrested for the Therac-25[1] accidents.

[1] https://en.wikipedia.org/wiki/Therac-25


I know of people who have been arrested. They were upper management, though, not engineers. They tried to ignore the FDA, and they got walked out in handcuffs. (This was not in relation to Therac-25.)


What about when police officers wantonly kill people or CIA operatives torture the innocent?

Of course they should go to jail, justice is blind, the law applies to all, look up the magna carta. When some are more equal than others injustice and corruption occurs, we see it vividly throughout the US corporate-fascist complex.


Invalid comparison. Failure to prevent something is not the same as personally perpetrating it.


It's not necessarily invalid, at least not for the reason you give.

Lifeguards can go to jail (in Europe, at least) for manslaughter, as can ski marshals, if they're deemed sufficiently negligent when someone dies. It's pretty rare, but certainly something on the equivalent scale to causing a global economic crisis would warrant it.


There's no real incentive for regulators to regulate if you think about it. If you DO regulate you're less likely to have exit jobs to Wall Street. If you DON'T regulate and things go well, everything will be good and you'll go through the revolving door to work for big banks and big bucks. If you DON'T regulate and everything goes very badly (you know like a financial meltdown) it's "not your fault."


That doesn't make any sense. The more you regulate, the more banks need in-house regulatory folks and the more opportunities you have to go through the revolving door.

Deregulation is not a good thing for people who want to go in-house doing regulatory work.


That's wrong. That kind of regulation comes from the legislature. It's an outside force. The effects of a regulator's actions on their ability to join banks afterwards are measured independently of legislature regulation. What I'm talking about is the people whose job it is to enforce that regulation (the people we call "regulators"). Their incentive is to not enforce it as strongly as they could or should. They "adapt" their policy enforcement to fit what people believe in industry right now, which is why they let all these banks peddle bad loans and commit massive fraud. The reason they "adapt" is contained in my original post.


Congress only lays out the general contours of the regulatory scheme. It's the regulators that impose the specific requirements and define what they mean.


That is the case with Dodd-Frank. That is not usually the case with regulation. Normally it goes "here are the rules, execute." Dodd-Frank is a nightmare exactly because they just have an outline full of blanks. It turns out regulators are not that good at 1. Enforcing regulation or 2. Writing regulation. The reason for this is because they have no incentive to.


A friendly, helpful regulator will get job offers to work for the firms he is regulating.

A tough regulator will not.


And yet Wall Street is highly regulated (it might not be very effective, but there is a huge amount of regulation nonetheless), so it seems like there must be forces at work beyond what you're considering here.


Any industry that gets regulated, has a strong motivation to take control of the regulation of their own industry. This process is called regulatory capture.

Once regulatory capture has happened, incumbents in the industry are incentivized to use regulations to create barriers to entry.

The result is a lot of regulation, lots of work around regulatory compliance, and very little that accomplishes the purported purpose of said regulation.

Every so often regulatory failures become so bad that government steps in, creates more rules, and we get more bureaucracy. But the status quo inexorably reasserts itself.


It is kind of like the prisoners dilemma. If a regulator defects(doesn't do his job) he gets a high paying bank job. If he doesn't defect (does his job right) then he is stuck as a government employee with shrinking budgets.


See my response talking about legislature regulation versus regulators whose job it is to enforce that regulation (It is the comment above).


>You know who never goes to jail? Regulators.

Are they paid enough for that increase in risk? I don't know what they make, but other government positions are already underpaid compared to their private sector equivalents. Making them come with a risk of jail time for failing ones job too badly will only result in even less qualified people filling those positions.


I've often thought that we should pay financial regulators competitively with what they could make in the private sector AND in conjunction institute some kind of sweeping moratorium (e.g. you may not take any corresponding job in the private sector for at least 10 years after your government service ends.)

I'm sure this would be politically untenable. Headlines would cry about absurd salaries being given to government employees.

However I'm equally confident it would save us money in the long run. The current system seems almost designed to create toothless regulators and a revolving door.


I dare say the majority of government waste and other problems are simply a case of 'you get what you pay for'.


Why would someone go to prison for being bad at their job? I don't think you know what a crime is.


You've heard of criminal negligence, right? Where someone is so outrageously bad that it can only be intentional, with something important at stake that gets hurt.


With the amount of money in play, the implication is that they were being bribed to look the other way. If nothing else they should get audited down to their grade school allowance to be sure they were merely grossly negligent.


> "If nothing else they should get audited down to their grade school allowance to be sure they were merely grossly negligent."

That would not even be sufficient, because for all we know they were bribed with hookers and cocaine. It would not be the first time.


Everyone should read http://lawcomic.net/guide/?p=18


> criminal negligence

A regulatory agency that serves a liberal (or at least pro-regulation) administration failing to catch a crook is indeed bad at its job, and yes people should probably get fired.

A regulatory agency that serves an anti-regulation administration (and in particular Bush's SEC) failing to catch a crook, is doing exactly what the American people voted for it to do, which is nothing at all.

You can't win an election on the platform that someone's job shouldn't exist, he shouldn't have the tools to do it, and we shouldn't be paying his salary, then suddenly turn around and want to throw him in jail for not doing that effectively enough.


Weren't Madoff's regulators paid a salary?

What tools did they lack to check the warnings they got from numerous sources? Do they not have the right to check which securities the fund actually holds in its bank accounts?


I wonder if that's the idea voters have of Reaganomics.


What's the basis for sending regulators to jail? Will you send cops to prison when crimes happen, because they failed to prevent them? This is somewhat of a pre-cog/ Minority Report dilemma. I think law makes a reasonable distinction between crimes of commission and crimes of omission. Proving motive and intent are important parts of the judicial process. Madoff intended to defraud.

You can prevent a person with malicious intent from causing further damage by imprisoning them. You 'deter' people who commit crimes of omission by keeping them away from whatever they proved incompetent at (debar lawyers, de-license doctors and regulators, fire engineers, etc.)


> You know who never goes to jail? Regulators.

Clever way to divert a discussion.


> You know who never goes to jail? Regulators.

Not true. They go to jail when they're caught getting corrupted by those they should regulate, which unfortunately happens often enough.


That's a moot point, it's a revolving door between wall street and the regulators. It's the same people.


Mortgage loan offices aren't quite "Wall Streeters." These are people in your local communities and they are defrauding the people loaning the money, who are wall street people. So not like Gordon Gecko or Leo in Wolf of Wallstreet. But the guy in the illfitted suit who pesters you about mortgages when you in line to deposit a check.

I make this point because these people aren't super rich wall street people above the law. And plenty more than one were caught and jailed for it, I've found 4 examples on the first page of my bing search. Stewart is saying only one bank exec went to jail, but bank execs weren't the ones doing this mortgage fraud.

Some "Wall Street" banks do sell mortgages directly and would employ these mortgage offices, but a lot banks don't like Goldman Sachs, the former Lehman Bros.

The question is whether big commercial banks were complicit in the fraud of their lower level employees. You'd need to find an email or someone willing to testify that the banks knew that the loan offices in podunk were encouraging fraud. That is an extremely tough case to prove without solid evidence.

Also, this kind of document fraud was only a minor part of the financial collapse. The big mistake, which Stewart briefly touched on, was that the rating agencies massive fucked up. The financial risk model they used didn't work.


The big financial institutions were demonstrably complicit in the fraud of the underwriters and loan officers. There are emails, and plenty of people willing to testify. The problem is that the SEC and DOJ never pursued those investigations.

A while back, Frontline did their own investigation on this very topic, and interviewed multiple underwriters and loan officers who said that the higher ups on Wall Street were literally directing everyone to not abide by their own standards.

You can watch the entire documentary here: http://www.pbs.org/wgbh/pages/frontline/untouchables/

Lanny Breuer from the DOJ was interviewed in this documentary, and his attempt to explain why the DOJ did not pursue any charges on executives was so laughable, and the evidence presented from Frontline's cursory investigation was so damning, that Mr. Breuer resigned days after the program was aired. After not prosecuting any banking executives, he then of course went on through the revolving door to make $4M/year by taking a position at a corporate law/lobbying firm that defends financial institutions.

This is NOT a "tough case" - the solid evidence is there. This is a case of a captured regulatory system.

Also, to say that ratings agencies simply "fucked up" is disingenuous. They were totally and knowingly complicit as well. The way the system was set up, the more they gave good ratings to crap, the more money they made. That's not just a "fuck up".

To the main point of the rant, aside from the regulatory capture, the difference between teachers and Wall Street is that Wall Street is very good at setting up a system where there's plausible deniability for executives, massive lobbying efforts to garner political influence, and if needed, gigantic legal teams to fight for every inch.


Yeah, I was suspicious of the claim that only one mortgage banker went to jail, and for 12 months only. In fact, Lee Farkas is serving a 30 year sentence for mortgage fraud, effectively a life sentence at his age.


Also, this kind of document fraud was only a minor part of the financial collapse. The big mistake, which Stewart briefly touched on, was that the rating agencies massive fucked up.

Well, no, those are two sides of the same coin.

On the one hand you have people giving out dubious loans and reselling them while claiming that if you mix the shit up the right way it turns into gold.

On the other hand you have ratings agencies who bought into the nonsense.

The two were 100% complicit and, I think, equally to blame.


But the dubious loans were known to be dubious, it wasn't fraud. It would have been a problem even if there was no fraud.

The fraud exacerbated the issue further, but I wouldn't say it is two sides of the same coin.


I'm not claiming they were equally complicit in fraud. I'm saying the ratings agencies and the lenders are equally responsible for the collapse. The lenders knew they were giving out dubious loans. The ratings agencies bought into the mathematical models.

Frankly, I think it was simply stupidity and hubris. On both sides. It's amazing how stupid people are in the face of irrational exuberance. Which is why I say: they're equally complicit.

As are those folks who took the loans (though to a lesser degree, as they may have been poorly or actively misinformed by loan officers), and those folks who bought and sold the derivatives knowing full well what was in them (or at least were aware of the models the risk assessments were based on).

Which is where ultimately regulators and regulations are supposed to play a role: to counteract the market's tendency toward irrationality. IMO, if you want to lay the crash at the feet of anyone, it's captured regulators, toothless regulatory bodies, and elected officials who bought into Wall Street bullshit that they could mind their own playground.

And really, you could lay all that straight at the feet of that granddaddy of all corruption issues: money in politics.


Almost all those mortgages were insured by Fannie Mae and Freddie Mac, both of which have very strict documentation and qualification requirements to issue policies. If the big banks knowingly lied to them or to any other insurer about the mortgagees in order to obtain an insurance policy, and the insurer relied on these misrepresentations, they are guilty of fraud.


Jon Stewart's thesis is that teachers are punished for crimes and "Wall Street" is not.

In this segment he singularly cites the actions of loan officers soliciting incorrect information comparing their actions to teachers falsifying test results.

First of all, loan officers are hardly "Wall Street" fat cats. They are low level employees who are paid an average of $50,000 [1] and do not work for "Wall Street" firms like investment banks.

Secondly, loan officers operate throughout the United States rather than actually on Wall Street or in Manhattan and, as a group, are subject to the jurisdiction of the federal government, 50 states, and 3,144 counties each with independent prosecutors (elected state's attorneys, district attorneys, etc.).

If none of the thousands of entities who could have brought cases have done so, either there is conspiracy vaster than any other or there are not credible cases to bring.

[1] http://www.glassdoor.com/Salaries/loan-officer-salary-SRCH_K...


Teachers, Garbage men... The DA and judges in Atlanta love to throw low level employees in jail for doing their jobs. Maybe they are too dumb to realise that these employees more or less do what they are told.

No one below the district level should have been on trial for this.

I agree with you to hold the actual loan officer liable is dumb. They were following directions.

[1] http://fox17online.com/2015/03/09/garbage-man-to-spend-30-da...


So knowingly cheating in order to get a bigger bonus for themselves isn't criminal because they were told to do it? Pretty screwed up world you live in from an ethics perspective, but then I've heard all sorts of "they might be crooks but they shouldn't be held accountable for it or anything" sophistry around this case.


Being told by an authority results in people going against their morals for the majority of people. Look up the Milgram experiment.


>Being told by an authority results in people going against their morals for the majority of people.

I think it's somewhat simpler: for a lot of people, obeying authority is their morality.


1. Cheating on some childrens exam should not even be a criminal offence. If people went to jail for fluffing up their progress we would all be in jail.

2. Disobeying your boss is usually not a good career move. This is not an ethics issue this is a "do you want to pay rent this month" issue.

3. Why not quit? A software engineer in the valley could go downstairs and work for another software company, a teacher would have to relocate to find another employer because the local district controls 95% of the local teaching jobs.


1) It wasn't a "some" children, it was hundreds. It wasn't "fluffing", it was done to extract bigger bonuses they were not entitled to. Theft is a criminal offense. 2) They had a teachers union to protect them; they could not be summarily fired without due process. And if you don't see "I'll do anything to pay the rent", even if that was the case here, as "not an ethics issue", I suggest you learn something about ethics. 3) There are, what, a dozen distinct school districts in the metro Atlanta area. So, yet another specious argument.

I get that some people want to paint this as a "poor put upon teachers at the mercy of evil administrator". It's an even more compelling narrative for the defense now that the head evil administrator is dead and can't be called into court. But what the trail showed was this was a bunch of teachers who got together as a group and said "We'll get a bigger bonus if we fake these test scores. If that hurts kids so be it and management has our backs".


Loan Officers get a percentage of the loan amount, and it's not rare for them to make $300k/year in a good year.


Where do you live that it's "not rare" for the loan officer of a suburban bank originating mortgages to be making north of a quarter million dollars?


I live in SF, but it's any midsize market (or larger) really. Loan officers are effectively sales people, they eat what they kill. The better ones have teams working for them in a sales-support capacity.

Its the same with real estate agents, a good one can be very wealthy. Some LOs hit annual comp > $1M, though that is rare. I found it pretty shocking when I first found this out.

Send me an email if you want to make the market more efficient, I'm working to build a modern mortgage bank :)


That's what I was wondering. I know a couple that were both loan officers before the market crashed. If they were making (individually) six figures I'll eat my hat.


It's a tough case to make but you can say loan officers were pressured by their managers to falsify info. Managers were pressured by their higher ups. Eventually it comes back to Wall Street firms who were lusting over subprime mortgages so they could make more commissions.


Step 1: Loan officers pressured by their managers.

Step 2: Managers pressured by their higher ups.

Step 3: ???

Step 4: Profit (for Wall Street firms lusting over subprime mortgages).

In a nutshell why this has been so difficult to prosecute.


The reason is that it was a systematic structural problem. Instead of picturing that chain of command (the one you just listed) inside one organization. Imagine EACH step of that chain is actually a different organization that handles one part of that chain of command. Its like if people want euthanasia in Spain, they distribute the task of getting the arsenic among 20 people so none of them can be prosecuted for a crime. One person takes the vial from 20th street to 15th street. One person enters the building. One person walks up the stairs. etc. Their individual part is so small and they have no knowledge of other parts; it's hard to prosecute them for murder. Finance is kind of like that too. They split everything up; it's hard to prosecute.


Thiel should start focusing his network analysis tools on the internal workings of finance corporations instead of merely using it to create models to predict default risk.


Who profits? The banks that just issued risky loans, packaged them into CDOs and held onto the risky tranches?

(Typical names in that space were WaMu, BofA, Countrywide and Citi.)


Prior to the market imploding these guys were making huge sums off commissions selling to mortgages to the "clients."


A third possibility is simply that there is no political benefit to prosecuting mortgage brokers and the home buyers who colluded with them to get banks to issue risky loans. Think about it - you are a prosecutor in a county with tens of mortgage brokers, thousands of home buyers and 0 banks. What political benefit do you gain from it?


While I hate the plea bargaining system, this would be a great opportunity to use it to get at those up at the top. Use the $50k a year people to get the managers. Use the managers to get their managers, so on and so forth. Anyone at the very bottom that takes the plea gets off scott-free. As you move up the food chain, you hand greater sentences.


Why is something that you profess to hate suddenly acceptable in this situation?


Honestly, I would be okay with plea bargaining if the only bargain that could be offer the DA could make is getting off completely, not a lesser sentence. Perhaps a reasonable fine would be okay if it were enough to teach someone the risk isn't worth the reward, but not so high that it screws them for life or bankrupts them. Either way plea bargains shouldn't involve lots of jail time vs less jail time.


Why do you keep putting Wall Street in quotation marks?


Because not a lot of financial work is actually being done on Wall St. anymore, IIRC it mostly moved north.

The stock exchange even looks emptyish nowadays because it's all done online.



This is perhaps the biggest failure in the aftermath of the 2008 financial collapse. There should have been many more criminal prosecutions on Wall Street. It didn't help that the Secretary of the Treasury at the time came from Goldman Sachs.

Criminal convictions of CEOs are useful. They're very effective in changing CEO behavior. Sending a few low-level drug dealers to jail for a year does little to change drug dealer behavior in the neighborhood. Sending a few Fortune 500 CEOs to jail for a year tends to result in substantial CEO behavior modification. There was a famous example of this in 1961, when executives of GE, Westinghouse, and Allis-Chalmers were found guilty of price-fixing and sent to jail. That changed corporate anti-trust behavior for a generation.


> Criminal convictions of CEOs are useful.

Yes, if they actually committed a crime and there is evidence to prove it beyond a reasonable doubt.

A drug dealer who gives all his money to feed the poor is morally good but legally a criminal. A CEO who lays off a chunk of his company to upgrade his yacht is a slimeball but not a criminal.

Being morally repugnant is not the same as being a criminal. The urge to ignore the letter of the law and obey the will of the mob turns us into a nation of men instead of a nation of laws.


There's not much point being a nation of unjust laws, so they should probably be rewritten to criminalize the really severe harms and impose less penalty on less-severe harms.


People should not be punished soley to 'make an example' or for large-scale 'behavior modification'. Punishment should only be doled out for actual wrongdoings and only proportional to that individual's actions.


You're assuming that the CEOs cited in the example were not actually guilty.


Is there any direct, actionable evidence that individual CEO's willingly were involved with illegal activity related to the 2008 finance crisis? Most of what happened at the time was not technically illegal thus a large complex system with many participants makes prosecuting people very hard.


Not obviously. I made another comment upthread to the same effect - between the changes in the regulatory environment and the complexity of financial institutions, it's incredibly hard to prove criminal intent. I don't know what can be done about this - require all board meetings to be recorded? Introduce concepts of strict liability for financial mismanagement involving losses above a certain threshold?


I'm not assuming anything, merely making a statement about punishment.


A CEO is responsible for the actions their company takes.


Simple: there are two Americas.

The first is the one that is populated by the wealthy and the elite; some people you've heard of, and a lot you've not. They're former Presidents and senators, important political donors, lobbyists, and a cloud of related individuals that orbit trust funds and old money. This America features well-groomed lawns, catered luncheons, executive offices, first-class health care, golden parachutes and custom transportation.

The second is where the rest of us live. It features waiting both in lines and on telephones, meals grabbed on the fly, taxation, potential observation and harassment by Federal or local security agencies, wildly varying health care, and advertisements on everything.


Example: Petraeus just got a slap on the wrist


It's important to note that there are significant overlaps here, especially in daily life habits. What this boils down to is income inequality and the different lifestyles that result.


This could be taken to mean that society (correctly, in my opinion) considers the work of schoolteachers to be more crucial for the future of our society than the work of "Wall Streeters." With a more important role in society comes higher responsibility and just possibly greater accountability.

The Answer Sheet opinion blog, from which this post commenting on a Jon Stewart Daily Show is kindly submitted for our discussion, basically has a theme of decrying any public policy that makes schoolteachers accountable for actually teaching something to the learners in their care. That's a defensible policy position, I suppose, if you think that employment in the public school system is a jobs program for graduates of teacher-training programs. But I think it is also a defensible policy position to agree that spending money on schools is good, good for society in general, but especially so if the schools actually help learners learn. If learners are not learning well in school, and similarly disadvantaged learners in other schools are learning better, let's learn from the schools that are doing better how they are succeeding, and emulate their practices. That doesn't sound very radical to me.

Right now in the United States, the school-to-school variance in learning results of pupils is not very large, not even particularly large between poor and rich neighborhoods (by international comparisons).[1] But the teacher-to-teacher variance in teaching effectiveness within any one school is quite large, and one of the best things schools could do to become more effective rapidly is simply to hire the best available teachers, and let the lowest few percent of teachers (by teacher effectiveness) seek other occupations more suited to their abilities.[2] Other measures to improve teacher quality will also be helpful for schools and the learners in their care.[3] Teachers who cheat on tests used in part to gauge the effectiveness of teachers cheat all of society out of having better teachers.

[1] http://educationnext.org/when-the-best-is-mediocre/

[2] http://hanushek.stanford.edu/sites/default/files/publication...

http://hanushek.stanford.edu/publications/valuing-teachers-h...

[3] http://hanushek.stanford.edu/sites/default/files/publication...


"This could be taken to mean that society (correctly, in my opinion) considers the work of schoolteachers to be more crucial for the future of our society than the work of "Wall Streeters." "

If that were true, wouldn't we pay them more and treat them better?


Teachers have job security that is very rare in the private sector. They also have fully funded benefits of a kind that is rare in most occupations at matching salaries. They also get a lot of psychic rewards from their jobs, and graduates of teacher-training programs are in large supply, changing the supply:demand ratio for that occupation. I would indeed be glad to pay teachers more in salary, but I'd also like to be sure that wherever your children or my children go to school, the friendly local school is hiring only effective teachers, not ineffective teachers. If teachers get behind public policies that ensure that, then I think they will see increases in pay. (See the links in my earlier post in this thread.)


How many teachers do you actually know? I ask because both my parents were teachers and most of their friends are teachers and it's a lot of hard work for not much reward if any, whether financial or otherwise.

Students arguing about their grades. Students refusing to write papers or read articles about subjects they cannot handle intellectually (because it "conflicts with their religion or politics"). Many students who simply don't care about the subject material or education in general. Poor pay and long hours spent gradings papers and tests. Administrative duties outside of their teaching duties. Low pay and patronizing moronic administrative staff. Pensions reduced so that state legislatures can give ill-advised tax breaks to the wealthy and corporations (but I repeat myself).

Teaching is something done out of passion and while I can understand the passion I've seen derived from touching one life, it sure isn't the cake-walk you're alleging.


Because it's easy to understand why cheating on tests is wrong, and easy to explain to a jury what people did that was wrong. Try to explain LIBOR manipulation to a jury and explain why it's wrong.


I am pretty sure I could do that.

The more accurate answer is that rich and connected people are rarely held to account for their heinous crimes against the rest of us.


I wanted to say "but that's why they get a jury of their peers, people that know what means!" but then I remembered not only would that not happen, but even if it did, those same peers would likely have a tribe mentality and seek to protect their own.


Plus if you give enough money to the right people you never even get indicted so there you dont have to get involved with juries and mess stuff like that.


A regulator or prosecutor needs to first be willing to charge a bank or Wall Street executive before anything can get to a jury.


In order to explain that to a jury, you have to actually charge someone with a crime.


Teachers have much less money to spend on lawyers. If you steal/scam/cheat billions of dollars you can then afford a great team of lawyers


Well that would usually be the teachers unions but they are not going to go on a suicide mission to defend these teachers.


I would agree with you if there were a history of difficulties prosecuting white collar crime.


Tax dodges, like straddles, are hard to explain, yet they get prosecuted.


In a tax case, the legality of the conduct can be proven almost entirely on the papers. Everything relevant to the prosecution is in a formal financial document somewhere.

In a financial fraud case, the evidentiary problem is much harder. The difference between a legal transaction and an illegal one is often what was in the person's head, not just things you can deduce from a paper record. Sometimes you have emails or the like to fill in the blanks, but often you don't.


Not to mention that the volume of discovery materials is so huge that it costs a fortune in both hourly wages and time to comb through it, and lack of resources has often been a problem at the DoJ; plus, with such a huge volume of evidence to sift through, the procedural arguments over what is admissible and so on and can be strung out for years on end.

I think a lot of commenters here don't appreciate that prosecuting a large bank involves sifting through literally tens of millions of documents looking for patterns of intentionality, which as you say is very hard to prove, and where the subjects of the investigations in question know it's hard to prove. Nobody gets anywhere in the financial industry without a very good knowledge of securities law, whereas it's highly unlikely the teachers in Atlanta didn't cover up their malfeasance very effectively and their defense could almost be summed up as 'what's the big deal?'.

That said, I think the lack of prosecutions was partly political. If the administration had gone nuclear on Wall Street as soon as it came into office (which was when anti-financial sentiment was at its peak) then it would have laid waste to the US financial industry and could have caused a far worse financial and economic collapse than the one we experience. It's no good pointing to things like the S&L crisis as many people do; that was a different, and much stricter regulatory environment. The reason (IMHO) that the financial crisis was so severe was that we deregulated the financial industry heavily in the late 1990s, and so a great many of the systemically risky activities that eventually proved unsustainable were not illegal. It was assumed when Glass-Steagall was dismantled that the market would flush out excessively risky players because too much risk is bad for business. But in a classic case of the market remaining irrational longer then any one participant can remain solvent, the big banks became so leveraged, and their retail and investment arms so entangled, that allowing market forces to operate in late 2008 would have meant the collapse of the payments system. A similar problem obtained after the Great depression; hardly anyone went to jail because although everyone agreed it was a massive disaster, it was a product of hubris rather than malice. See http://www.pbs.org/wgbh/pages/frontline/business-economy-fin... for a simple overview of the situation.

There was a lot of bloodletting in the government - not in terms of people going to jail, but in terms of agencies being dismantled or massively reorganized. Agencies like the Office of Thrift Supervision, whose income derived entirely from regulatory fees and so had every incentive to keep as many banks in existence as possible, were shut down completely. Instead we have the Consumer Financial Protection Bureau, and a mass of new investment compliance requirements under the Dodd-Frank legislation...a bit like the way national security was massively reorganized after the 9/11 incident so that we got the Department of Homeland Security and a ton of new anti-terrorism legislation. Unfortunately I don't think these reorganizations have made us significantly safer; they were well-intentioned but IMHO simply shifted the risk around and substituted elaborate and very expensive compliance regimes for true structural reform. With hindsight, it would have been a lot better if Obama's administration had a) siezed the political momentum that swept him into office to reinstitute the relatively simple Glass-Steagall regulatory regime, b) required the megabanks like Citi, BofA etc. to demerge their retail and investment arms in short order, and c) encouraged large numbers of bankers to take early retirement and leave ethe industry forever or expect 4 years of legal harrassment - and no, I don't think the last suggestion is good law, but it might nevertheless have been an appropriate exercise of political power.

The thing is, if you look at how the industry has been treated from a right-wing standpoint, the administration is engaged in an apparently never-ending shakedown of Wall Street motivated by the President's ardent desire to destroy capitalism. There are lots of people out there who think the financial crisis was just good capitalism and so what if a lot of people wound up losing their homes, they didn't deserve them anyway because they were losers - asin Rick Santelli's (in)famous rant fromt he floor of the Chicago Mercantile Exchange that's often credited with launching the Tea Party movement: http://opinionator.blogs.nytimes.com/2009/02/20/rick-santell... Let's not forget that this was in February 2009, after Obama had been in office less than a month. His administration has faced angry and arguably militant opposition towards its reform efforts from the very beginning, because there's a large reactionary contingent that considers the Democratic party in general and Obama in particular as agents of communism (there's a kind of reactionary foolishness on the left too, that thinks it's OK to just jack up taxes, confiscate wealth, and hold show trials - but IMHO that's a smaller and less powerful demographic). So arguably, the current regulatory regime is the result of an attempt to minimize political as well as fiscal instability.


> I think a lot of commenters here don't appreciate that prosecuting a large bank involves sifting through literally tens of millions of documents looking for patterns of intentionality, which as you say is very hard to prove, and where the subjects of the investigations in question know it's hard to prove

And to reiterate, this isn't something that you can 'solve' by throwing machine learning or data analysis behind it. It means sitting down and reading through tens of thousands of emails between potentially hundreds of people, sent over the course of years, to understand the inflection in a given sentence, or to understand if anything is insinuated through the use of a given word. Then matching that back to actions. Then explaining to the judge and/or jurors as to why it's correct, and defending again the opposing counsel saying 'Oh you're just reading too much into it'.


> The difference between a legal transaction and an illegal one is often what was in the person's head, not just things you can deduce from a paper record.

From my understand of how a straddle works, that describes it quite well.


Politically connected & Rich people do not go to Jail for White-collar crimes. Think about the revolving door between Wall street and the Obama/Bush/Clinton administrations.

Would you put your "buddy" in Jail if it meant that the political contributions would dry up and your opponent is going to get a war chest to fight you? Of course not!

But an educator? These people cheated to keep their jobs and get (minor) pay raises - by definition they cannot fight back so the full weight of the Criminal Justice system (Racketeering Laws - typically used against Mafia figures) was used to toss some of them in Jail for upto 20 years!

Let's face it - the American Criminal justice system basically preys on those least able to protect themselves from its abuses.


Charles Keating was fairly well connected: remember the "Keating Five"? (US Senators who tried to influence regulators to go easy on Keating)

He spent over four years in federal prison after being convicted of white collar crimes.


You don't have to go any farther then the fact that Navinder Sarao might go to jail for 20 years, but Jon Corzine, the CEO of the brokerage Sarao used, continues to walk free as one of the must successful failures ever.


I think prosecutors would rather fine the banks tens of billions of dollars rather than throw people into jail.

For instance, the JPM $13 billion settlement (summarized):

- $2 billion to the Justice Department, which will then deposit the money into a fund at the United States Treasury.

- $7 billion, will flow to a range of government authorities, some more obscure than others

- JPMorgan agreed to make a “lump sum payment” of $4 billion “payable to Freddie Mac and Fannie Mae, divided between them,”

- The National Credit Union Administration, the federal agency that regulates credit unions, said it would collect a $1.4 billion share of the $7 billion pie “for losses incurred by corporate credit unions as a result of the purchases of the faulty securities.”

- $515 million goes to FDIC

- $613 million to NY Attorney General (expand homeowner assistance programs)

etc, etc, etc...

[0] http://dealbook.nytimes.com/2013/11/20/where-does-jpmorgans-...


Jail is for people who can't afford to get out of it.


Apathetic, but true. In the case of teachers versus bankers, it's more about the institutions than the individuals, and the protections that come with working for those institutions.


OTOH, the teachers who got a jail sentence are the ones who didn't take a deal, even after being found guilty. Not really about money more than principles.


I was thinking that when watching a doco about western tourists to Thailand who get caught with small amounts of a drug on them. They get shaken down by the local police for a few thousand dollars, up to whatever they can afford. Those who can't pay get put in jail for a while. Not sure if it was bribery or what, but it seemed accepted by everyone involved.


That's not really an apples-to-apples comparison. Places with lots of tourists usually go pretty easy on them whenever it's possible. You don't want to scare your meal ticket into going somewhere else.


There is a huge cultural problem and the teachers and MBS scandals are just the tip of the iceberg.

When it is acceptable that results count no matter what the means. When it is acceptable that results are measured by a single number. When conflicts of interest are ignored by regulators

Then you get:

  - inflated grades

  - inflated assessments of property values
but also:

  - inflated arrests by policeman chasing quotas instead of helping citizens (in other parts of the world police are reluctant to arrest people due to dislike of paperwork)

  - inflated claims by prosecutors turning a blind eye to weak evidence (in other parts of the world prosecutors don't fear for their own job)

  - inflated money printing

  - inflated tech stock valuations

  - prolonged ignorance of default risks

  - HFT
Markets work but there is such a thing as externalized costs. Regulators have a duty to monitor and step in when the line is overstepped. If they don't the benefits accrue to the powerful who cheat and the cost are born by the powerless.

It is a good thing that the "regulator" stepped in and stopped the teachers grade inflation.

However the way the regulator did this here is another example of single minded black and white thinking. Just because the grade inflation problem is bad it does not mean one can fix it with a single blow of a heavy hammer. Fear of rare random enforcement actions will only intimidate the people but won't stop further crimes.

Hard real life problems need well planned, consistently implemented and balanced measures.


If we really cared to prevent "financial crises" like the one under discussion, we wouldn't be wringing our hands about whom to imprison. Instead, when firms went bust, we'd leave them that way. When all the money is gone, shareholder lawsuits will punish corrupt and incompetent executives more than prosecutors ever dreamed.

EDIT: for those who've forgotten what actually happened, Taibbi has a good primer:

http://www.rollingstone.com/politics/news/secret-and-lies-of...


I would hope that adults entrusted with the care of our children and betraying that trust would be punished much more severely than wall streeters engaged in some sort of shenanigans.


I would hope that adults entrusted with the care of our children would be paid more to get the top talent the job requires. Even a 1% change in a students learning is an immeasurable sum of profit to an organization and someone who can eek that out should get the compensation due.


Stewart's comparisons remind me of Eddie Izzard's riff on mass murderers. Small numbers of crimes, committed by a small number of people: easy to grasp and easy to prosecute; large numbers of crimes committed systemically: the mind boggles; medals more likely than punishment.

Izzard (NSFW): https://www.youtube.com/watch?v=Bk_pHZmn5QM


Privileged Wall St. firms can afford better lawyers than schoolteachers in Atlanta? I had no idea...


Black people get shot up by police, white people don't. What's up?


White people get shot by police. You have to look to find the cases, though, because they don't generally make the national news.

Here are a few.

http://wreg.com/2014/11/25/salt-lake-cop-cleared-in-shooting...

http://wreg.com/2015/04/22/family-of-unarmed-white-man-kille...

http://www.washingtontimes.com/news/2014/nov/27/white-teen-g...

In fact, more white people than black people are shot by police in the US. The rate for blacks getting shot is higher, but not the number.


Yet these stories don't make it onto the national news? They aren't plastered all over CNN? Where are the riots for these deaths?


What's up is it's national news when a black person gets shot by a white cop, and when it's a white person taking the bullet the story stays on the local crime blotter.


Its national news when unarmed people are shoot by cops and eyewitness reports or other early evidence suggests there is no good cause for the shooting, which for some reason happens more often when white cops shoot black people than any other combination.


You think that because those are the stories you're aware of.


No, I think that because when people who try to point to police shootings of whites that aren't getting national attention to sell the media bias stories, those other non-race elements are consistently also absent.


What about those teaching cheaters?


It's called money.


Seriously.




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