http://www.nytimes.com/2011/04/14/busin ... nted=printArchived here with original link for strictly non-commercial fair use as an example in the context of a larger educational discussion and debate.April 14, 2011
In Financial Crisis, No Prosecutions of Top FiguresBy GRETCHEN MORGENSON and LOUISE STORY
It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?
Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.
At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.
Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.
Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.
His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.
Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”
Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.
But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.
Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.
As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force. 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.
A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.
“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,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis.
“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.” Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.
To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.
But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.
Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.
Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.
Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.
Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.
But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.
Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned by JPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.
Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.
“If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much,” said David A. Skeel, a law professor at the University of Pennsylvania. “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”
The Countrywide Puzzle As nonprosecutions go, perhaps none is more puzzling to legal experts than the case of Countrywide, the nation’s largest mortgage lender. Last month, the office of the United States attorney for Los Angeles dropped its investigation of Mr. Mozilo after the S.E.C. extracted a settlement from him in a civil fraud case. Mr. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations.
White-collar crime lawyers contend that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators — the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Fed, in Countrywide’s case.
“When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions,” said Henry N. Pontell, professor of criminology, law and society in the School of Social Ecology at the University of California, Irvine. “If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases.”
Financial crisis cases can be brought by many parties. Since the big banks’ mortgage machinery involved loans on properties across the country, attorneys general in most states have broad criminal authority over most of these institutions. The Justice Department can bring civil or criminal cases, while the S.E.C. can file only civil lawsuits.
All of these enforcement agencies traditionally depend heavily on referrals from bank regulators, who are more savvy on complex financial matters.
But data supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously.
The university’s ’Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.
Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud.
The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed.
The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.
The comptroller’s office declined to comment on its referrals. But a spokesman, Kevin Mukri, noted that bank regulators can and do bring their own civil enforcement actions. But most are against small banks and do not involve the stiff penalties that accompany criminal charges.
Historically, Countrywide’s bank subsidiary was overseen by the comptroller, while the Federal Reserve supervised its home loans unit. But in March 2007, Countrywide switched oversight of both units to the thrift supervisor. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush.
Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Mr. Reich about Countrywide’s reckless lending.
“We saw that people were getting bad loans,” Mr. Gnaizda recalled. “We focused on Countrywide because they were the largest originator in California and they were the ones with the most exotic mortgages.”
Mr. Gnaizda suggested many times that the thrift supervisor tighten its oversight of the company, he said. He said he advised Mr. Reich to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators.
“I told John, ‘This is what any police chief does if he wants to solve a crime,’ ” Mr. Gnaizda said in an interview. “John was uninterested. He told me he was a good friend of Mozilo’s.” In an e-mail message, Mr. Reich said he did not recall the conversation with Mr. Gnaizda, and his relationships with the chief executives of banks overseen by his agency were strictly professional. “I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false,” he wrote.
After the crisis had subsided, another opportunity to investigate Countrywide and its executives yielded little. The Financial Crisis Inquiry Commission, created by Congress to investigate the origins of the disaster, decided not to make an in-depth examination of the company — though some staff members felt strongly that it should.
In a January 2010 memo, Brad Bondi and Martin Biegelman, two assistant directors of the commission, outlined their recommendations for investigative targets and hearings, according to Tom Krebs, another assistant director of the commission. Countrywide and Mr. Mozilo were specifically named; the memo noted that subprime mortgage executives like Mr. Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed.
However, the two soon received a startling message: Countrywide was off limits. In a staff meeting, deputies to Phil Angelides, the commission’s chairman, said he had told them Countrywide should not be a target or featured at any hearing, said Mr. Krebs, who said he was briefed on that meeting by Mr. Bondi and Mr. Biegelman shortly after it occurred. His account has been confirmed by two other people with direct knowledge of the situation.
Mr. Angelides denied that he had said Countrywide or Mr. Mozilo were off limits. Chris Seefer, the F.C.I.C. official responsible for the Countrywide investigation, also said Countrywide had not been given a pass. Mr. Angelides said a full investigation was done on the company, including 40 interviews, and that a hearing was planned for the fall of 2010 to feature Mr. Mozilo. It was canceled because Republican members of the commission did not want any more hearings, he said.
“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.”
