Criminal acts did not play an important role in causing the mortgage crisis, according to an opinion piece in the Wall Street Journal written by Gordon Crovitz, a former publisher of the Journal. In Crovitz’s view, critically flawed policies and rules in the U.S. and abroad did so, and set the stage for the global shocks we see today. Crovitz did not say that crimes did or did not occur; he said that bad regulations were “worse than a crime.” (“Financial Regulation: Worse Than a Crime,” Wall Street Journal, Opinion). Other informed observers believe the subject of Wall Street crime is a very serious matter.
There is no doubt that, as Crovitz says, policies that subsidized bad mortgages in the U.S. and shaky European sovereign debt, and the “Basel rules” that called for big banks to place significant amounts of capital in investments like mortgages and mortgage-backed securities, were based on unwarranted assumptions that those investments were low-risk. When they imploded, many banks that held the same undiversified bad investments went down too. Crovitz concludes: “The reason prosecutors can’t prove criminal intent is that in many cases the bankers were simply trading in compliance with the regulations governing them.”
But many Wall Street observers have a different view. One of them is widely-read Wall Street Journal columnist Brett Arends. In his article entitled “The next, worse financial crisis,” Arends cites 10 reasons why the next financial crisis is inevitable and will be worse. One of them is this: The real culprits not only have not been punished, they have made out like bandits. Arends cites former Lehman CEO Dick Fuld and former Countrywide CEO Angelo Mozilo as examples. They walked away with millions in “ill-gotten gains” but are not facing criminal prosecution. If wrongdoers are not punished, others will not be deterred.
Gretchen Morgenson, New York Times columnist and co-author of “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon,” investigated the question many people have: in the wake of the savings and loan debacle in the 1980s, 800 bank officials went to jail. Why shouldn’t the people who committed crimes in the recent financial crisis be criminally prosecuted? Her answer: Prosecutors depend on regulators like the SEC to obtain evidence they need to prosecute, and that did not happen here.
William K. Black, law professor and the federal government’s director of litigation during the savings and loan crisis, said: “[Government] policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”
Some in a position to know apparently believe that the government is deliberately disregarding prosecutable offenses by major Wall Street players. One of them is the number one rated analyst covering brokerage firms, Brad Hintz. He told his clients: “If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department. ‘ In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.” (“Goldman Sachs ‘Too Big’ to Face Criminal Prosecution, Hintz Says,” Bloomberg, Christine Harper). In other words, if a bank is very big and very bad, the bank and the individuals that control it are too big to prosecute.
That is unfortunate because, getting back to Brett Arends’ point, if financial crimes are not prosecuted and wrongdoers are not punished appropriately, future wrongdoers will not be deterred, and the damaging cycle will continue.
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.