Ouch

In a recent interview, U.S. Attorney for the Southern District of New York Preet Bharara took a few shots at his critics (my emphasis added):

Q: You have also received criticism from some on the left—including writer Matt Taibbi and Wall Street documentarian Charles Ferguson—who say that while you’ve convicted insider traders, you’ve missed the big guys who committed the mortgage fraud that led to the financial crisis. How do you respond to that?

A. I would suggest that some of these critics should go to law school and apply themselves and become prosecutors and make the case that they think we should be making. This is by reputation and track record the most aggressive office in white-collar crime in the country ever, and if we’re not bringing a certain kind of case, it’s because the evidence is not there. Pure and simple. 

If it wasn’t clear that we weren’t going to see Wall Street CEOs doing perp walks after the government failed to convict two Bear Stearns hedge fund managers of securities fraud after the funds they oversaw blew up, then it should have been the case after the government settled its civil fraud case against ex-Countrywide CEO Angelo Mozilo.  That the government chose to pursue a civil fraud case as opposed to a criminal fraud case, like the government’s current case against Standards and Poors, tells me how much confidence it has in securing a conviction (or settlement) on criminal charges – none.

Personally, I don’t buy the argument that the Wall Street/SEC relationship or regulatory capture played any role in the lack of convictions.  More from Bharara:

…when people are in government and they are responsible for prosecutions or for enforcing regulations, every single one of them knows that the bigger case they make, the bigger person they become and the bigger opportunities they have. That’s not a good reason to go do these things. But some people speculate that human nature being what it is, that’s how it works…

The incentives were there.  The evidence wasn’t.  Pure and simple.

Hat tip: Elias Isquith via his Facebook feed

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48 thoughts on “Ouch

  1. Well a civil conviction only requires a preponderance of the evidence. Criminal cases need to prove guilt beyond a reasonable doubt and for white-collar crime and fraud this can be pretty costly. There are also issues that it would probably be pretty easy to convince a highly-accomplished jury and Wall Street can probably afford to outspend the government on a legal defense.

    There is also the chance that Wall Street has gotten much better at not having any smoking guns or as many smoking guns. I still think it is probable that crime occurred but I can see why it would be tough to prosecute.

    That being said, there is something bitter and disappointing that the big guys seem to have basically insulated themselves from all form of liability. I get the outrage from journalists on the left.

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  2. These kind of cases won’t likely amount to a feather in a prosecutor’s cap precisely because Wall Street Bangers can afford the very best legal defense that money (literally!) can buy. So in that sense it’s very much unlike a Prosecutor railroading sometimes innocent poor folk defended by the state to receive a similar tho slightly less vibrant feather.

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  3. I’ve taken it as axiomatic that if there were convictions to be gotten out of the crash, we’d see them being pursued vigorously. The public anger was/is too great for that not to be the Great Federal Prosecutorial Whale of the era.

    Critics claim the evidence is there that officials were concerned that accountability of any l kind would crater confidence in the midst of the crisis, and that that and a nudge from the donors cause d a directive to come down from On High that there would be prosecutions. (Those critics are not only on the Left, I don’t think.)

    I agree with the OP, I just don’t give that credence. There could have been few clearer political imperatives in government in recent history than for there to be convictions coming out of this crash if possible. Either the evidence wasn’t there, or the scandal is simply what was legal. (And it’s not so much, What specific financial practice could have been outlawed that would have prevented the crisi? It’s just that, broadly, the regulatory enterprise – -agencies and legislatures both – failed to keep up with the path of the industry.)

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    • There could have been few clearer political imperatives in government in recent history than for there to be convictions coming out of this crash if possible.

      With a large segment of the American public that demanded action be taken. If it wasn’t done, there was good reason for that.

      What specific financial practice could have been outlawed that would have prevented the crisi?

      If I had to pick one – The feds could have clamped down on mortgage lending standards and didn’t even after hearing reports of substantial increases in mortgage fraud complaints (this was happening as early as 2003).

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      • , which part of the Federal government are you talking about? Treasury? Justice? Federal Reserve? FDIC?

        It seems to me that the ability and willingness to make dodgy loans would be constrained by either your ability to resell them on the secondary market or willingness to keep them on your books. Nobody wanted to hold them; regulators would slap a bank for it and it simply wasn’t the business model for the Countrywide’s. So that leaves you with selling them, which in the old days pretty much meant Fannie or Freddie. And that’s where the regulation really happened because they enforced their standards on what they would buy. Of course there was always an alternative market but that entailed a discounted price so the originator would have to make that difference up on points which discouraged borrowers. That way the dodgy mortgage market was pretty much self-limiting.

        Where that all really started to break down IMHO, was with the rating agencies. Slap a AAA on a bundle of crap mortgages and the discount magically goes away. Financial markets are perfectly capable of pricing risk. But they can’t price something they don’t know about.

        If there were prosecutable crimes committed it would be there — fraudulently rated and marketed securities. And none of the rest of the misery could have happened without that element.

        Which isn’t to say that there weren’t other bad actors. Compliant property appraisers played a similar role. The lenders knew very well what they were up to. Investors who should have known better were all starry eyed over outsized returns. Realtors were telling buyers the market could only go up and, of course buyers desperately wanted to believe them.

        But we should note that of all the players in this sad drama only the homebuyers weren’t professionals.

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      • Not sure if you’re looking to rebut there, but you’re restating my view on the political imperative.

        As far as picking one practice as the culprit, my point is we needn’t, and I don’t think any one regulation or stricter enforcement of any one regulation would have prevented the crisis. The factors contributing were more systemic, so it would have taken a more systemic, more firmly applied regulatory enterprise to prevent it. Also, possibly it would have taken more foresight into (as it turns out) likely (or at least plausible) courses of events than we could reasonably have expected from those responsible for the regulatory enterprise (again, in legislatures and agencies alike). Not that that means we shouldn’t expect adequate regulation to be and have been in place, then and now.

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      • I was referring to the Federal Reserve. Based on a number of accounts that I’ve read, the Federal Reserve had the authority to step in and address lending standards (the actual mechanism by which this could happen I don’t know specifically).

        That way the dodgy mortgage market was pretty much self-limiting.

        I agree with this. To the extent subprime loans were made, they had to made at loan standards that the secondary market would find acceptable and/or that the nonbank finance companies found acceptable in the event they were unable to sell the loans (historically, subprime loans were often held by the originating firms themselves).

        Where that all really started to break down IMHO, was with the rating agencies. Slap a AAA on a bundle of crap mortgages and the discount magically goes away. Financial markets are perfectly capable of pricing risk. But they can’t price something they don’t know about.

        My view of financial markets is that risk is a piece of information so valuable that informational asymmetries make the difference between one party making a boat load of money and the other party losing his or her ass. It makes the potential for fraud, whether through misrepresentation or deliberately withholding material information, enormous, so much so that it has to be addressed through regulation. Transparency in financial markets is not something that occurs through voluntary interaction but by law.

        If there were prosecutable crimes committed it would be there — fraudulently rated and marketed securities. And none of the rest of the misery could have happened without that element.

        It’s a foregone conclusion that we’d have to build new prisons to house the number of mortgage brokers, finance company officers, appraisers, realtors, etc. that were not only bad actors but were also likely complicit in various degrees of fraud.

        If that wasn’t bad enough, it got worse when the loans were sold to Wall Street. Bidding for loan portfolios was so competitive that the loan originators were telling firms that in order to win deals, their due diligence of the loan pools would have to be limited. They weren’t looking for bad loans but enough good loans to satisfy very minimal due diligence requirements. On paper, that’s a legalistic way of covering their asses although they were turning a blind eye to the possibility of fraud.

        The ratings agencies were grossly incompetent and/or negligent. However, if every other player down the line has done their part to obscure problems with the original loan pools, how could the ratings agencies fraudulently rate them? They would have to have been able to identify concrete issues through their ratings process and methodology and produce ratings inconsistent with that methodology. Using bad models doesn’t constitute fraud.

        This is why I think the government is going to lose its case against S&P if it goes to trial.

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  4. I think what a lot of people don’t get was that the crisis itself was the product of stupidity, not actual criminality. Not even the massive US prison system could cope with making “being an idiot” a crime.

    That’s not to say that there wasn’t some dodgy stuff going on, but it was ancilllary to the crisis itself. Much of it had been going on for a while, and the crisis just made it impossible to hide it any more; as the saying does “when the tide goes out, you can see who’s been swimming naked”.

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    • Perhaps. Stupidity and greed can probably explain a lot more about most economic bubbles and busts and various financial crisis. Never attribute to malice what can easily be attributed to stupidity, etc.

      The problem is that it is the majority that suffer for the stupidity of a few and they seem to get to never suffer any consequences for their mistakes. Maybe some banks or business people will be ruined because of their stupidity but not enough. The lectures on “moral hazard” seem to be reserved for the masses who did nothing during the bubble.

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      • I agree that this is the real problem. I believe governments nee dot find a way to credibly commit to not bailing out banks in situations like this.

        Nonetheless, I find the calls to imprison bankers for simply making a mistake (albeit one with massive effects) disturbing. Especially when the people taking out all those mortgages were active and enthusiastic participants in the exact same folly.

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      • The problem is that it is the majority that suffer for the stupidity of a few and they seem to get to never suffer any consequences for their mistakes. Maybe some banks or business people will be ruined because of their stupidity but not enough.

        If this is what drives the desire to see the “Big Fish” jailed, then it’s more about exacting a payback than it is the rule of law. Is that fair to say?

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      • My stance is that criminal actions probably occurred high up but there is not enough evidence or resources to meet a reasonable doubt standard.

        What do you make of the AIG trial where Maurice Greenberg is asking for 40 billion from the U.S. government?

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      • The Maurice Greenberg case is sour grapes and he’ll probably lose. The only nominally interesting part is the stock issuance part that enabled the deal. Though damages from that would involve a lawsuit against the BoD, rather than the government*. This article from Matt Levine covers the issues really well.

        * If someone takes your stuff and sells it to someone who thinks the seller has legitimate ownership, you don’t go after the buyer, you go after the seller.

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      • I had forgotten that Greenberg sued.

        It’s kind of silly to me to make a Takings Clause argument against the government since without any kind of government intervention, the value of Greenberg’s stake would be somewhere between $0 and $0.

        I think he has a snowball’s chance in hell of winning.

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    • Not even the massive US prison system could cope with making “being an idiot” a crime.

      The numbers that the US currently incarcerates would disagree with this assessment.

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    • Being enough of an idiot while running a systemically significant bank is indeed a crime, with “being an idiot” being fleshed out in the law just as being an idiot is fleshed out in the law in many other contexts. The issue is whether being an idiot while running a bank was at the time fleshed out in the law in a way as to cause some of the idiotic practices that led to the crisis to be prosecutable.

      It’s looking like they weren’t, but that doesn’t mean they shouldn’t have been. And had idiotic practices such as those – run at the top of major banking houses – been fleshed out statutorily at the time, the impact on the prison system would be negligible. Five, ten, twenty-five, two-hundred guys. Big deal.

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  5. Let me kick in here. There’s a line from one of my favorite movies, “it’s not what you know, it’s what you can prove in a court.” But, we all know that prosecutors factor in other things besides criminality in their case selection. Being able to WIN is part of it. If you carry a case and spend 2 years building it and lose, you just lost a lot of time you could have been burnishing your win/lose rating.

    So, is it that there wasn’t any criminality?
    Was it they couldn’t prove it sufficiently to get a conviction?
    Was it that they received political pressure NOT to pursue a case?
    Was it that the prosecutor has higher ambitions and it’s political suicide to prosecute these cases?
    Etc.

    Likely it’s a several of these factors….

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  6. There was a lot of criminality. For example, there were many cases of clearly fraudulent signatures and notarizations. There were traders recorded as laughing at products they sold, which had been presented as safe.

    As for incentives not to prosecute, they are huge. If I were that prosecutor, and corrupt, I would have done what he did – prosecute schmucks, and other small-fry ripping off their bosses and causing trouble, while letting the Big Boys walk.

    In return, when I went into politics, those same Big Boys will know whom to express their gratitude towards.

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    • Yep. The idea that maybe getting a promotion constitutes a bigger incentive than that of joining the big Wall Street money machine is laughable. And yeah, the fraudulent signatures and notarizations were widespread and thoroughly documented at the time.

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      • Apparently I’m not thinking big enough, because I find it hard to imagine incentives bigger than Wall Street money.

        You think a career lawyer can join Goldman Sachs and make Wall Street money? I was thinking that he or she would do well at a firm like Sullivan & Cromwell (probably better).

        In my opinion, a prosecutor that could take down Wall Street would become an immediate celebrity, have a more promising political career than Giuliani and Spitzer combined and multiplied by 1,000 and make shitloads of money from taking advantage of his/her newfound fame from book deals to movie deals to speaking engagements, etc.

        Someone like that just doesn’t leave public service and toil away in an office for the rest of his/her career, and I think that’s a little more lucrative than a nice salary.

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      • Agreed. But such a result is akin to winning the lottery. You can fight the inertia of your own regulatory agency, then fight Wall Street’s lawyers, then fight Wall Street’s politicians, and see where it gets you. Or you can play along with the likelihood of a well-paid comfy position after you leave. It takes a rather special person to take that chance.

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    • There is that. Politically ambitious prosecutors would not be so eager to go after large potential political donors, at least not without a very good chance of a conviction. There is the counter incentive.

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    • I don’t dispute the fact that criminal acts too place. No one should. However, there’s a difference between claiming that criminal acts took place on the trading desks (by all accounts, they did) and making the claim that the senior management at the Wall Street banks and at places like Countrywide was complicit in those acts, especially given the number of layers of organization between a Lloyd Blankfein or a Jamie Dimon and the traders executing the transactions. That the CEOs would want or need to know the details strikes me as a bit odd.

      Are you suggesting Bharara is corrupt?

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    • The incentive structure you describe is exactly backwards. If you’re a pussycat towards the banks, then they have no incentive to hire you because they want you to stay in place and continue playing nice. If you are the type of regulator that will hammer them they’ll want to make a big offer and hire you because a) if you work for them, you can’t hammer them and b) you’ll understand the tough regulations that they need to get around.

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    • For example, there were many cases of clearly fraudulent signatures and notarizations.

      This was what truly blew my mind. There are plenty of unethical but not really illegal things that go on in the financial industry (in most industries, really), but clearly fraudulent legal documents should have people doing hard time. That’s up there with cops filing false reports or judges taking bribes. It erodes our system, and the fact that there are clearly people out there who have done it who could be tried and who aren’t currently rotting in prison is appalling to me. Fining the company doesn’t cut it.

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  7. If there were a sufficiently strong case that would stand up to scrutiny, make no doubt that the next Rudy Giuliani would have been all over it like flies on poo. Look, if the threat of the mafia putting a hit on you wouldn’t deter Giuliani, how likely is it that the Wall Street executives who have little to offer other than money would deter someone similar? I mean, really, organized crime in the 80s and 90s had several very high profile scalps to its credit. I mean the assassinations of Borsellino and Falcone were very much on the minds of prosecutors going after them.

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  8. I have a friend who once insisted that there were real criminals on wall street and they needed to be prosecuted. In almost the same breath, he said that the then-current recession* was “structural” and (I suppose, because here I’m extrapolating on what I assume he meant) not merely something that America’s consumers can buy the country out of.

    That’s a lot to swallow. The one doesn’t preclude the other. There could very well be real criminals and the change can still be “structural,” but if one accepts it’s “structural,” that seems, in my opinion, to take away a bit from the charge that the “crooks brought this all on us.”

    *Actually, the recession was technically over, but unemployment was still higher than it is now.

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    • “if one accepts it’s “structural,” that seems . . . to take away a bit from the charge that the “crooks brought this all on us.””

      Not at all.
      Piracy remains piracy, even when shipping rates are low.
      The analogy is apt only to a point.
      “Crooks brought this on all of us” implicate a specific set of facts.
      “Structural” features implicate a general set of facts.
      It would seem as if the general set of facts renders the specific set of facts a substantially more likely possibility.

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  9. If I had to politicize this (and you know I must) it only illuminates the old saw about what is scandalous isn’t what was done illegally, but what was done legally.

    The facts are that the entire global economy very nearly went into meltdown due to the actions of a tiny group, perhaps as few as a thousand or so derivative traders, secondary mortgage brokers, ratings agencies, and the managers and CEOs who directed them.

    So if it wan’t a crime, what do we do about it in the future? How do we prevent it from happening?
    Or do we simply accept that our lives, our children’s lives, will be marked by wild and unpredictable cycles of booms and catastrophic crashes?

    It seems odd to me that we have a system of economic and financial engineering, which can study with brilliant precision how to extract the maximum profit out of the most subtle shifts in the marketplace.
    If a trading algorithm fails, there are all sorts of tools and protocols of forensic analysis for studying and discovering the precise reasons why the failure occurred. Efforts are instituted to prevent a failure from occuring in the future.

    Yet when the entire global economy collapses we are advised to behave like Bronze Age farmers, passively accepting a drought as the mysterious workings of the gods.

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