And The Academy Award for Cowardice Goes To….

Date: 1 Mar 2011 | posted in: Banking, From the Desk of David Morris, The Public Good | 5 Facebooktwitterredditmail

From all accounts, Charles Ferguson’s acceptance speech was the highlight of the Oscars. After winning an Oscar for Best Documentary for Inside Job, a compelling and searing indictment of Wall Street’s role in the economic crisis, Ferguson injected some much-needed real world relevance amidst the fabulously glitzy proceedings. “Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail — and that’s wrong.”

That bears repeating.  Not a single financial executive has gone to jail.

The government was not always so cowed by Wall Street.  In the 1980s, after deregulation led to the takeover of Savings and Loans by aggressive entrepreneurs who committed fraud on a massive scale, the federal government swung into action.

Joe Nocera in the New York Times recalls, “There were a dozen or more Justice Department task forces. Over 1,000 F.B.I. agents were involved. The government attitude was that it would do whatever it took to bring crooked bank executives to justice.”

Nearly 1,000 savings and loans — a third of the industry — collapsed, costing taxpayers over $200 billions. And the Department of Justice won 1,000 felony convictions in major cases.

The Department of Justice still prosecutes cases of financial malfeasance, as long as the perpetrators are not heads of major financial institutions. Consider its vigorous prosecution of Martha Stewart, who was convicted in March 2004, not even of insider trading but of lying to the SEC and the FBI about insider trading.  She served five months in a West Virginia federal prison.

Compare that to the way the Department of Justice approached the investigation of John Mack that same year.  Mack had just stepped down as President of Morgan Stanley and would soon become its CEO and Chairman of its Board.   Matt Taibbi relates the story in the most recent of what are rapidly becoming iconic pieces of an era in Rolling Stone.

One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. “It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller,” Aguirre recalls. “And he wasn’t just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day.” A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.

Aguirre identified Mack, a close friend of Samberg’s, as the person most likely to have tipped Samberg off. Mack had been begging Samberg to cut him into a potentially lucrative deal involving a spinoff of the tech company Lucent.  “Mack is busting my chops” to give him a piece of the action, Samberg told an employee in an e-mail.” A few days after Samberg sent that e-mail, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank’s clients was Heller Financial.

As soon as Mack returned from that trip, he called Samberg. The next morning, Mack was cut into the Lucent deal, an investment that made him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share he could, right before it was snapped up by GE.

The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn’t likely to fly, explaining that Mack had “powerful political connections.” (The investment banker had been a fundraising “Ranger” for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)

Aguirre was contacted by Morgan Stanley’s regulatory liaison, a former top aide to Eliot Spitzer. A few days later, another of the firm’s lawyers, Mary Jo White, formerly U.S. attorney of the Southern District of New York, called the SEC director of enforcement.

Taibbi caustically and accurately assesses the situation.

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target’s firm is being represented not only by Eliot Spitzer’s former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC’s enforcement division — not Aguirre’s boss, but his boss’s boss’s boss’s boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

Aguirre didn’t stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued.

In 2011 neither Congress nor the White House has much stomach for prosecuting Wall Street.  Indeed, the four Republicans on the Financial Crisis Inquiry Commission (FCIC) voted to strip the following words from its report: “Wall Street,” “deregulation”.

As Finance Guy writes on his blog, “Which is sort of like writing the history of apartheid in South Africa and not being allowed to use the words “race,” “white,” “black” and “prejudice.””

President Obama did not use the words Wall Street in his State of the Union Address.  The final report of the FCIC did.  But it drew the line at using the “F” word:  fraud. William Black, currently Associate Professor of Economics and Law at the University of Missouri – Kansas City and formerly the key person in the prosecutions of S&L executives in the 1990s slammed the FCIC, telling Real News, “They’ve drawn the picture of the horse, but they refuse to call it a ‘horse'”.  Black notes that by the Commission’s own evidence, the financial crisis could only have occurred with fraud by the most senior ranks of the big banks.  He estimates the incidence of fraud on their liars loans, mortgage where the lender does not verify the borrower’s income, was upwards of 90 percent and insists, “The only reasons you’d have millions of liars loans was to create fictional accounting income and loot the institutions

This latest financial crisis is some forty times as large as the S&L crisis. But the number of FBI agents assigned to look at white collar crime is only a fraction of those working in this area in 1992.

As for the Executive Branch, in January President Obama named William M. Daley as his Chief of Staff.  Until his appointment, Daley had served on J.P. Morgan & Co’s Executive Committee since 2004.

At a November 2010 conference attended by hundreds of Wall Street lawyers, Robert Khuzami the SEC’s current director of enforcement, who had served as general counsel for Deutsche Bank proudly announced to Mary Jo White who introduced him,  “You’ve spawned all of us”.  Recall that White, the former U.S. attorney of the Southern District of New York, one of the top cops on Wall Street., was a Morgan Stanley lawyer in 2005 when she intervened to stop the investigation of John Mack.  In December 2005, in an interview with Russell Mokhiber, editor of Corporate Crime Reporter, she effectively said that criminal cases should not be brought against financial corporations.  “In the vast majority of cases, they should not be seeking anything from the company itself except its cooperation.

Lynn Turner, the former chief accountant for the SEC, told Taibbi,  “I think you’ve got a wrong assumption—that we even have a law-enforcement agency when it comes to Wall Street.”

As the successful prosecutions of Savings and Loan executives in the early 1990s proves, the federal government has the tools to put in jail dozens if not hundreds of those responsible for millions of foreclosures, millions more unemployed and unprecedented federal and state deficits.  It simply lacks the inclination to do so.

The Academy Award for Cowardice must be shared.

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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.