One 77-year-old’s search for the truth: 9/11, election fraud, illegal wars, Wall Street criminality, a stolen nuke, the neocon wars, control of the U.S. government by global corporations, the unjustified assault on Social Security, media complicity, and the "Great Recession" about to become the second Great Depression. "The most important truths are hidden from us by the powerful few who strive to steal the American dream by keeping We the People in the dark."
January 29, 2013 Obama Admin. Fails to Prosecute Banking Fraud to 'Save the System' James S. Henry commenting on PBS documentary "The Untouchables": If one of these institutions was indicted and made an example of, it would have a profound affect on the whole industry - but Obama raises money on Wall St. Watch full multipart Obama: Rhetoric or New Direction?
Bio James S. Henry is a leading economist, attorney and investigative journalist who has written extensively about global issues. James served as Chief Economist at the international consultancy firm McKinsey & Co and as an investigative journalist his work has appeared in numerous publications like Forbes, The Nation, and the The New York Times. He was the lead researcher of the recently released report titled “'The Price of Offshore Revisited.'
The Untouchables: How the Obama administration protected Wall Street from prosecutions A new PBS Frontline report examines a profound failure of justice that should be causing serious social unrest
Eric Holder talks to DOJ Criminal Chief Lanny Breuer in 2010. Photograph: Jason Reed/Reuters
(updated below - Update II) PBS' Frontline program on Tuesday night broadcast a new one-hour report on one of the greatest and most shameful failings of the Obama administration:
the lack of even a single arrest or prosecution of any senior Wall
Street banker for the systemic fraud that precipitated the 2008 financial crisis:
a crisis from which millions of people around the world are still
suffering. What this program particularly demonstrated was that the
Obama justice department, in particular the Chief of its Criminal
Division, Lanny Breuer, never even tried to hold the high-level
criminals accountable. What Obama justice officials did instead
is exactly what they did in the face of high-level Bush era crimes of
torture and warrantless eavesdropping: namely, acted to protect the most
powerful factions in the society in the face of overwhelming evidence
of serious criminality. Indeed, financial elites were not only vested
with immunity for their fraud, but thrived as a result of it, even as ordinary Americans continue to suffer the effects of that crisis. Worst of all, Obama justice officials both shielded and feted these Wall Street oligarchs (who, just by the way, overwhelmingly supported Obama's 2008 presidential campaign)
as they simultaneously prosecuted and imprisoned powerless Americans
for far more trivial transgressions. As Harvard law professor Larry
Lessig put it
two weeks ago when expressing anger over the DOJ's persecution of Aaron
Swartz: "we live in a world where the architects of the financial
crisis regularly dine at the White House." (Indeed, as "The
Untouchables" put it: while no senior Wall Street executives have been
prosecuted, "many small mortgage brokers, loan appraisers and even home
buyers" have been). As I documented at length in my 2011 book on
America's two-tiered justice system, With Liberty and Justice for Some,
the evidence that felonies were committed by Wall Street is
overwhelming. That evidence directly negates the primary excuse by
Breuer (previously offered by Obama himself) that the bad acts of Wall Street were not criminal.
Numerous documents prove that executives at leading banks, credit
agencies, and mortgage brokers were falsely touting assets as sound that
knew were junk: the very definition of fraud. As former Wall Street
analyst Yves Smith wrote in her book ECONned: "What went on at Lehman
and AIG, as well as the chicanery in the CDO [collateralized debt
obligation] business, by any sensible standard is criminal." Even
lifelong Wall Street defender Alan Greenspan, the former Federal Reserve
Chair, said in Congressional testimony that "a lot of that stuff was just plain fraud." A New York Times editorial in August
explained that the DOJ's excuse for failing to prosecute Wall Street
executives - that it was too hard to obtain convictions - "has always
defied common sense - and all the more so now that a fuller picture is
emerging of the range of banks' reckless and lawless activities,
including interest-rate rigging, money laundering, securities fraud and
excessive speculation." The Frontline program interviewed former
prosecutors, Senate staffers and regulators who unequivocally said the
same: it is inconceivable that the DOJ could not have successfully
prosecuted at least some high-level Wall Street executives - had they
tried. What's most remarkable about all of this is not even Wall
Street had the audacity to expect the generosity of largesse they ended
up receiving. "The Untouchables" begins by recounting the massive
financial devastation the 2008 crisis wrought - "the economy was in
ruins and bankers were being blamed" - and recounts:
"In 2009, Wall Street bankers were on the defensive, worried they could be held criminally liable for fraud. With a new administration, bankers and their attorneys expected investigations and at least some prosecutions."
Indeed,
the show recalls that both in Washington and the country generally,
"there was broad support for prosecuting Wall Street." Nonetheless:
"four years later, there have been no arrests of any senior Wall Street
executives." In response to the DOJ's excuse-making that these
criminal cases are too hard to win, numerous experts - Senators, top
Hill staffers, former DOJ prosecutors - emphasized the key point: Obama
officials never even tried. One of the heroes of "The Untouchables",
former Democratic Sen. Ted Kaufman, worked tirelessly to provide the DOJ
with all the funds it needed to ensure probing criminal investigations
and even to pressure and compel them to do so. Yet when he and his staff
would meet with Breuer and other top DOJ officials, they would proudly
tout the small mortgage brokers they were pursuing, in response to which
Kafuman and his staff said: "No. Don't show me small-time mortgage guys
in California. This is totally about what went on in Wall Street. . . .
We are talking about investigating senior level Wall Street executives,
even at the Board level". (The same Lanny Breuer was recently seen announcing
that the banking giant HSBC would face no criminal prosecution for its
money laundering of funds for designated terrorist groups and drug
networks on the ground that the bank was too big to risk prosecuting). As
Kaufman and his staffers make clear, Obama officials were plainly
uninterested in pursuing criminal accountability for Wall Street. One
former staffer to both Biden and Kaufman, Jeff Connaughton, wrote a book
in 2011 - "The Payoff: Why Wall Street Always Wins" - devoted to
alerting the nation that the Obama DOJ refused even to try to find
criminal culprits on Wall Street. In the book, this
career-Democratic-aide-turned-whistleblower details how the levers of
Washington power are used to shield and protect high-level Wall Street
executives, many of whom have close ties to the leaders of both parties
and themselves are former high-level government officials.
This is a system, he makes clear, that is constituted to ensure that
those executives never face real accountability even for their most
egregious and destructive crimes. The reason there have been no
efforts made to criminally investigate is obvious. Former banking
regulator and current securities Professor Bill Black told Bill Moyers in 2009
that "Timothy Geithner, the Secretary of the Treasury, and others in
the administration, with the banks, are engaged in a cover up to keep us
from knowing what went wrong." In the documentary "Inside Job", the
economist Nouriel Roubini, when asked why there have been no such
investigations, replied: "Because then you'd find the culprits."
Underlying all of that is what the Senate's second-highest ranking
Democrat, Dick Durbin, admitted in 2009: the banks "frankly own the place". The
harms from this refusal to hold Wall Street accountable are the same
generated by the general legal immunity the US political culture has
vested in its elites. Just as was true for the protection of torturers
and illegal eavesdroppers, it ensures that there are no incentives to
avoid similar crimes in the future. It is an injustice in its own right
to allow those with power and wealth to commit destructive crimes with
impunity. It subverts democracy and warps the justice system when a
person's treatment under the law is determined not by their acts but by
their power, position, and prestige. And it exposes just how shameful is
the American penal state by contrasting the immunity given to the
nation's most powerful with the merciless and brutal punishment meted
out to its most marginalized. The real mystery from all of this is
that it has not led to greater social unrest. To some extent, both the
early version of the Tea Party and the Occupy movements were spurred by
the government's protection of Wall Street at the expense of everyone
else. Still, Americans continue to be plagued by massive unemployment,
foreclosures, the threat of austerity and economic insecurity while
those who caused those problems have more power and profit than ever.
And they watch millions of their fellow citizens be put in cages for
relatively minor offenses while the most powerful are free to commit far
more serious crimes with complete impunity. Far less injustice than
this has spurred serious unrest in other societies. [The one-hour Frontline program can be viewed in its entirety here.]
The
Obama administration is not accustomed to actual adversarial journalism
that sheds light on their malfeasance. They do not like it. And when
they see it, they respond about as petulantly as possible: we will never cooperate with you again!
It's not Frontline's fault that the Obama administration actively
shielded Wall Street from all forms of criminal accountability. If, as
seems to be the case, that fact embarrasses them, they should blame
those responsible (themselves), not those reporting it.
UPDATE II
The Washington Post is reporting this afternoon
that Breuer is planning to leave the DOJ. Don't worry: he'll be fine.
Given how valiantly he protected Wall Street and HSBC, one need not be
Nate Silver to predict with a fair degree of confidence that he'll land
on his feet. When public officials use their government power to serve
the interests of private sector elites, they are often lavishly rewarded by the faction they served upon leaving government.
That's one of the key dynamics greasing the sleazy revolving door of
Washington. Beyond that, Breuer's contacts in and influence with the DOJ
will be in high demand by corporations, banks and other assorted
oligarchs seeking to exercise the legal immunity which US political
culture has bestowed on them.
Assistant attorney general Lanny Breuer said taking away HSBC's US
banking licence could have cost thousands of jobs. Photograph: Richard
Drew/AP
(updated below) The US is the world's largest prison state, imprisoning more of its citizens than any nation on earth, both in absolute numbers and proportionally. It imprisons people for longer periods of time, more mercilessly, and for more trivial transgressions than any nation in the west.
This sprawling penal state has been constructed over decades, by both
political parties, and it punishes the poor and racial minorities at overwhelmingly disproportionate rates. But
not everyone is subjected to that system of penal harshness. It all
changes radically when the nation's most powerful actors are caught
breaking the law. With few exceptions, they are gifted not merely with
leniency, but full-scale immunity from criminal punishment. Thus have
the most egregious crimes of the last decade been fully shielded from
prosecution when committed by those with the greatest political and
economic power: the construction of a worldwide torture regime, spying
on Americans' communications without the warrants required by criminal
law by government agencies and the telecom industry, an aggressive war
launched on false pretenses, and massive, systemic financial fraud in
the banking and credit industry that triggered the 2008 financial
crisis. This two-tiered justice system was the subject of my last book, "With Liberty and Justice for Some",
and what was most striking to me as I traced the recent history of this
phenomenon is how explicit it has become. Obviously, those with money
and power always enjoyed substantial advantages in the US justice
system, but lip service was at least always paid to the core precept of
the rule of law: that - regardless of power, position and prestige - all
stand equal before the blindness of Lady Justice. It really is
the case that this principle is now not only routinely violated, as was
always true, but explicitly repudiated, right out in the open. It is
commonplace to hear US elites unblinkingly insisting that those who
become sufficiently important and influential are - and should be -
immunized from the system of criminal punishment to which everyone else
is subjected. Worse, we are constantly told that immunizing those
with the greatest power is not for their good, but for our good, for
our collective good: because it's better for all of us if society is
free of the disruptions that come from trying to punish the most
powerful, if we're free of the deprivations that we would collectively
experience if we lose their extraordinary value and contributions by
prosecuting them. This rationale was popularized in 1974 when
Gerald Ford explained why Richard Nixon - who built his career as a
"law-and-order" politician demanding harsh punishments and unforgiving
prosecutions for ordinary criminals - would never see the inside of a
courtroom after being caught committing multiple felonies; his pardon
was for the good not of Nixon, but of all of us. That was the same
reasoning hauled out to justify immunity for officials of the National
Security State who tortured and telecom giants who illegally spied on
Americans (we need them to keep us safe and can't disrupt them with prosecutions), as well as the refusal to prosecute any Wall Street criminals for their fraud (prosecutions for these financial crimes would disrupt our collective economic recovery). A
new episode unveiled on Tuesday is one of the most vivid examples yet
of this mentality. Over the last year, federal investigators found that
one of the world's largest banks, HSBC, spent years committing serious crimes,
involving money laundering for terrorists; "facilitat[ing] money
laundering by Mexican drug cartels"; and "mov[ing] tainted money for
Saudi banks tied to terrorist groups". Those investigations uncovered
substantial evidence "that senior bank officials were complicit in the illegal activity."
As but one example, "an HSBC executive at one point argued that the
bank should continue working with the Saudi Al Rajhi bank, which has
supported Al Qaeda." Needless to say, these are the kinds of
crimes for which ordinary and powerless people are prosecuted and
imprisoned with the greatest aggression possible. If you're Muslim and
your conduct gets anywhere near helping a terrorist group, even by
accident, you're going to prison for a long, long time. In fact, powerless, obscure, low-level employees are routinely sentenced to long prison terms
for engaging in relatively petty money laundering schemes, unrelated to
terrorism, and on a scale that is a tiny fraction of what HSBC and its
senior officials are alleged to have done. But not HSBC. On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important,
too instrumental to subject them to such disruptions. In other words,
shielding them from the system of criminal sanction to which the rest of
us are subject is not for their good, but for our common good. We
should not be angry, but grateful, for the extraordinary gift bestowed
on the global banking giant:
"US authorities
defended their decision not to prosecute HSBC for accepting the tainted
money of rogue states and drug lords on Tuesday, insisting that a $1.9bn
fine for a litany of offences was preferable to the 'collateral
consequences' of taking the bank to court. . . .
"Announcing the
record fine at a press conference in New York, assistant attorney
general Lanny Breuer said that despite HSBC"s 'blatant failure' to
implement anti-money laundering controls and its wilful flouting of US
sanctions, the consequences of a criminal prosecution would have been
dire.
"Had the US authorities decided to press criminal charges,
HSBC would almost certainly have lost its banking licence in the US, the
future of the institution would have been under threat and the entire
banking system would have been destabilised. "HSBC, Britain's
biggest bank, said it was 'profoundly sorry' for what it called 'past
mistakes' that allowed terrorists and narcotics traffickers to move
billions around the financial system and circumvent US banking laws. . .
.
"As part of the deal, HSBC has undertaken a five-year agreement
with the US department of justice under which it will install an
independent monitor to assess reformed internal controls. The bank's top
executives will defer part of their bonuses for the whole of the
five-year period, while bonuses have been clawed back from a number of
former and current executives, including those in the US directly
involved at the time.
"John Coffee, a professor of law at Columbia
Law School in New York, said the fine was consistent with how US
regulators have been treating bank infractions in recent years. 'These
days they rarely sue individuals in any meaningful way when the entity
will settle. This is largely a function of resource constraints, but
also risk aversion, and a willingness to take the course of least
resistance,' he said."
DOJ officials touted the $1.9 billion fine HSBC would pay, the largest ever for such a case. As the Guardian's Nils Pratley noted,
"the sum represents about four weeks' earnings given the bank's pre-tax
profits of $21.9bn last year." Unsurprisingly, "the steady upward
progress of HSBC's share price since the scandal exploded in July was
unaffected on Tuesday morning." The New York Times Editors this morning announced:
"It is a dark day for the rule of law." There is, said the NYT editors,
"no doubt that the wrongdoing at HSBC was serious and pervasive." But
the bank is simply too big, too powerful, too important to prosecute. That's
not merely a dark day for the rule of law. It's a wholesale repudiation
of it. The US government is expressly saying that banking giants reside
outside of - above - the rule of law, that they will not be punished
when they get caught red-handed committing criminal offenses for which
ordinary people are imprisoned for decades. Aside from the grotesque
injustice, the signal it sends is as clear as it is destructive: you are free to commit whatever crimes you want without fear of prosecution.
And obviously, if the US government would not prosecute these banks on
the ground that they're too big and important, it would - yet again, or
rather still - never let them fail. But this case is the opposite
of an anomaly. That the most powerful actors should be immunized from
the rule of law - not merely treated better, but fully immunized - is a
constant, widely affirmed precept in US justice. It's applied to
powerful political and private sector actors alike. Over the past four
years, the CIA and NSA have received the same gift, as have top
Executive Branch officials, as has the telecom industry, as has most of
the banking industry. This is how I described it in "With Liberty and
Justice for Some":
"To hear our politicians and our
press tell it, the conclusion is inescapable: we're far better off when
political and financial elites - and they alone - are shielded from
criminal accountability.
"It has become a virtual consensus among
the elites that their members are so indispensable to the running of
American society that vesting them with immunity from prosecution - even
for the most egregious crimes - is not only in their interest but in
our interest, too. Prosecutions, courtrooms, and prisons, it's hinted -
and sometimes even explicitly stated - are for the rabble, like the
street-side drug peddlers we occasionally glimpse from our car windows,
not for the political and financial leaders who manage our nation and
fuel our prosperity.
"It is simply too disruptive, distracting, and unjust, we are told, to subject them to the burden of legal consequences."
That
is precisely the rationale explicitly invoked by DOJ officials to
justify their decision to protect HSBC from criminal accountability.
These are the same officials who previously immunized Bush-era torturers
and warrantless eavesdroppers, telecom giants, and Wall Street
executives, even as they continue to persecute whistleblowers at record
rates and prosecute ordinary citizens - particularly poor and minorities
- with extreme harshness even for trivial offenses. The administration
that now offers the excuse that HSBC is too big to prosecute is the same
one that quite consciously refused to attempt to break up these banks
in the aftermath of the "too-big-to-fail" crisis of 2008, as former TARP overseer Neil Barofsky, among others, has spent years arguing. And,
of course, these HSBC-protectors in the Obama DOJ are the same
officials responsible for maintaining and expanding what NYT Editorial
Page editor Andrew Rosenthal has accurately described
as "essentially a separate justice system for Muslims," one in which
"the principle of due process is twisted and selectively applied, if it
is applied at all." What has been created is not so much a "two-tiered
justice system" as a multi-tiered one, entirely dependent on the
identity of the alleged offender rather than the crimes of which they
are accused. Having different "justice systems" for citizens based
on their status, wealth, power and prestige is exactly what the US
founders argued most strenuously had to be avoided (even as they
themselves maintained exactly such a system). But here we have in
undeniable clarity not merely proof of exactly how this system
functions, but also the rotted and fundamentally corrupt precept on
which it's based: that some actors are simply too important and too
powerful to punish criminally. As the Nobel Prize-winning economist
Joseph Stiglitz warned in 2010,
exempting the largest banks from criminal prosecution has meant that
lawlessness and "venality" is now "at a higher level" in the US even
than that which prevailed in the pervasively corrupt and lawless
privatizing era in Russia. Having the US government act specially
to protect the most powerful factions, particularly banks, was a major
impetus that sent people into the streets protesting both as part of
the early Tea Party movement as well as the Occupy movement. As well as
it should: it is truly difficult to imagine corruption and lawlessness
more extreme than having the government explicitly place the most
powerful factions above the rule of law even as it continues to subject
everyone else to disgracefully harsh "justice". If this HSBC gift makes
more manifest this radical corruption, then it will at least have
achieved some good.
UPDATE
By coincidence, on the very
same day that the DOJ announced that HSBC would not be indicted for its
multiple money-laundering felonies, the New York Times published a story
featuring the harrowing story of an African-American single mother of
three who was sentenced to life imprisonment at the age of 27 for a
minor drug offense:
"Stephanie George and
Judge Roger Vinson had quite different opinions about the lockbox seized
by the police from her home in Pensacola. She insisted she had no idea
that a former boyfriend had hidden it in her attic. Judge Vinson
considered the lockbox, containing a half-kilogram of cocaine, to be
evidence of her guilt.
"But the defendant and the judge fully agreed about the fairness of the sentence he imposed in federal court.
"'Even
though you have been involved in drugs and drug dealing,' Judge Vinson
told Ms. George, 'your role has basically been as a girlfriend and bag
holder and money holder but not actively involved in the drug dealing,
so certainly in my judgment it does not warrant a life sentence.'
"Yet
the judge had no other option on that morning 15 years ago. As her
stunned family watched, Ms. George, then 27, who had never been accused
of violence, was led from the courtroom to serve a sentence of life
without parole.
"'I remember my mom crying out and asking the Lord
why,' said Ms. George, now 42, in an interview at the Federal
Correctional Institution in Tallahassee. 'Sometimes I still can't
believe myself it could happen in America.'"
As the
NYT notes - and read her whole story to get the full flavor of it - this
is commonplace for the poor and for minorities in the US justice
system. Contrast that deeply oppressive, merciless punishment system
with the full-scale immunity bestowed on HSBC - along with virtually
every powerful and rich lawbreaking faction in America over the last
decade - and that is the living, breathing two-tiered US justice system.
How this glaringly disparate, and explicitly status-based, treatment
under the criminal law does not produce serious social unrest is
mystifying.
About this series
A critical, campaigning column on vital issues of civil rights, freedom of information and justice – and their enemies, from the award-winning journalist, former constitutional litigator and author of three New York Times bestsellers. Follow @ggreenwald on Twitter or email him at glenn.greenwald@guardiannews.com
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.
This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.
The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.
Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."
To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.
Just ask the people who tried to do the right thing.
Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called "disclosure violations" — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. 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.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops" to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
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 also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.
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. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would later conclude. "At worse, the picture is colored with overtones of a possible cover-up."
Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They fucked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an automated e-response.
"They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.
"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. "When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."
After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.
"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral."
A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said.
"They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.
Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.
"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."
When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that? Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.
