Taxpayers Lost Billions in the Recent Financial Crisis – “Where are the Criminal Prosecutions?”


Gretchen Morgenson and Louise Storey have investigated the question so many people have ? why no prosecutions have been undertaken in the wake of the financial disaster ? and published their findings in a revealing ten page New York Times article entitled, “In Financial Crisis, No Prosecutions of Top Figures.”

In the wake of the savings and loan debacle in the 1980s, 800 bank officials went to jail, according to the article. Why shouldn’t the people who caused the recent financial crisis go to jail?

After noting that answering such a question is complicated ? akin to explaining why a dog did not bark (“Why the Dog Didn’t Bark” might be a catchy title for a book on the subject), they concluded that one reason, perhaps the main reason, the prosecutorial dog didn’t bark (or bite) was because it was not fed.

Prosecutors depend on regulators, who have the expertise, to obtain the evidence they need to make their case. But that did not happen here. In the authors’ words: “Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis ? weak regulation ? also made it harder to pursue fraud in its aftermath.”

Why did regulators fail? One impediment to aggressive SEC enforcement, according to the article, was its reluctance to seek big monetary penalties from banks that had received bailout money for fear of having taxpayer money used to pay settlements.

Another situation involves Angelo R. Mozilo, the CEO of Countrywide Financial ? the biggest and most reckless mortgage lender at the time ? and John M. Reich, a former banker appointed by George W. Bush in 2005 to head the Office of Thrift Supervision (“OTS”). In March 2007, Countrywide began to be regulated by OTS and Mr. Reich.

According to the article, Robert Gnaizda, a consumer advocate, spoke with Mr. Reich about Countrywide’s reckless lending and tried without any success to interest Mr. Reich in setting up a whistleblower program to help it supervise Countrywide. “I told John, ‘This is what any police chief does if he wants to solve a crime,’ ” Mr. Gnaizda was quoted as saying, adding: “John was uninterested. He told me he was a good friend of Mozilo’s.” (Mr. Schneider denies all of this.)

In another example, two assistant directors of The Financial Crisis Inquiry Commission, created by Congress to investigate the financial disaster, accused the commission chairman Phil Angelides of putting Countrywide and Mr. Mozilo “off limits.” Mr. Angelides denies it: “It got as full a scrub as A.I.G., Citi, anyone,” Mr. Angelides said of Countrywide. “If you look at the report, it’s extraordinarily condemnatory.”

Who do you believe? The answer to “why no prosecutions” may be just as complicated (maybe more so) as the answer to “why did the financial disaster happen?”

William K. Black, law professor and the federal government’s director of litigation during the savings and loan crisis, was quoted as saying: “This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity. But their 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.”

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