On September 15, 2008, investment bank Lehman Brothers filed for bankruptcy, igniting a financial firestorm that sent the global economy careening toward the abyss. Four years on, not a single senior Wall Street executive has faced prosecution over the disaster.
This absence of criminal accountability for a crisis that cost the U.S. economy trillions of dollars in GDP and wiped out billions more in personal wealth amplifies the risk of a similar financial meltdown in the future, according to securities experts and former regulators.
The U.S. government’s “entire response to 2008 suggests this could happen again someday,” said John Coffee, a professor at Columbia Law School in New York and a prominent expert on securities law and white collar crime.
“It’s clear that the Justice Department has not been able to find criminal charges it could prosecute, either because it is very hard to prove complex criminal cases in the financial world or because they were under pressure not to bring such cases, or simply because no one committed fraud,” Coffee said. “I think that last explanation is a little too simple.”
At the heart of the crisis were complex financial instruments based on “subprime mortgages” – housing loans with a high risk of default – that generated enormous profits for major Wall Street investment banks. Many of these institutions were rescued with billions of dollars of taxpayer money when the underlying value of these instruments collapsed.
The crisis, which began in 2007 and was accelerated by Lehman’s filing for bankruptcy protection, has cost the U.S. economy at least $12.8-trillion, according to a report released this week by the independent financial reform watchdog Better Markets—which called its estimate conservative.
The Securities and Exchange Commission has extracted several settlements from major Wall Street players—including a $550-million settlement from Goldman Sachs over charges that the firm defrauded investors in its subprime mortgage products. Goldman, however, was not required to admit wrongdoing as part of the deal.
The U.S. Department of Justice last month said it would not prosecute Goldman because the "burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time.”
The Senate Permanent Subcommittee on Investigations had made a criminal referral to the Justice Department accusing Goldman of misleading investors in mortgage products, prompting a harshly worded statement from the committee’s co-chair, Sen. Carl Levin.
“The integrity of our financial markets and the strength of our economy demand that we make sure that actions such as Goldman Sachs’ and other recently discovered misdeeds by financial institutions are ended,” Levin said in the statement.
The Justice Department did not respond to a request for comment Friday about the lack of prosecutions of top executives involved in the financial crisis or about the possibility that such prosecutions may be coming in the future.
Regulatory bodies like the SEC do not have prosecutorial powers, though they can exact civil penalties and make criminal referrals to the Justice Department. But a revolving door between Wall Street and the SEC has created a situation in which regulators are hesitant to vigorously pursue investigations of malfeasance by companies that could be their future employers, said former SEC staff lawyer Gary Aguirre.
“If we were to have a war on drugs, and you wanted to bring some tough prosecutors into the Department of Justice, would you reach out to the cartels and ask them for their recommendations?” Aguirre said.
SEC officials can take leave the agency and take their expertise to Wall Street firms, where they are paid tenfold what they earn as public servants, Aguirre said.
Aguirre was acrimoniously fired from the SEC in 2005 after he began investigating insider trading at the major hedge fund Pequote Capital Management. The investigation was dropped the following year, and in 2010 the SEC agreed to pay him a $755,000 wrongful termination settlement.
The SEC declined to comment on criticism that it maintains a revolving door personnel policy. But its director of enforcement, Robert Khuzami, said in comments to Reuters last month that his staff “would not risk reputation and career and even jail by undermining an investigation for a possible future job prospect.”
Khuzami served as general counsel at Deutsche Bank from 2002 to 2009.
President Barack Obama told CBS News in an interview last December that while many of the practices that precipitated the crisis were unpalatable, “some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn't illegal.”
“That's exactly why we had to change the laws. And that's why we put in place the toughest financial reform package since F.D.R. and the Great Depression,” Obama said, citing the Dodd-Frank financial reform act he signed into law in 2010.
The deluge of Wall Street money pumped into political parties creates a political atmosphere in which officials may be unwilling to push for criminal prosecutions of the financial elite, said William Black, a former federal bank regulator and a professor of economics and law at the University of Missouri-Kansas City.
Wall Street has contributed $154-million to political candidates and campaigns this year, while Obama and his Republican challenger, Mitt Romney, have received $4-million and $11.5-million, respectively, in contributions from Wall Street in this presidential campaign, according to the Center for Responsive Politics, which tracks money in politics.
“None of these people was bribed—no prosecutors were bribed,” Black, who served as the U.S. government’s director of litigation during the savings and loan crisis—which resulted the conviction of more than 1,000 financial executives.
“But they didn’t have to be. It’s very convenient not to see a leading donor as a potential criminal,” Black added.
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