The Wall Street Journal has an important story tonight: . It does a fine job of assembling the facts. But as one might expect, it treats this crappy track record as defensible.
First, the scorecard:
The Wall Street Journal examined 156 criminal and civil cases brought by the Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission against 10 of the largest Wall Street banks since 2009. In 81% of those cases, individual employees were neither identified nor charged. A total of 47 bank employees were charged in relation to the cases. One was a boardroom-level executive, the Journal’s analysis found.
The analysis shows not only the rarity of proceedings brought against individual bank employees, but also the difficulty authorities have had winning cases they do bring.
Most of the bankers who were charged pleaded guilty to criminal counts or agreed to settle a civil case, with those facing civil charges paying a median penalty of $61,000. Of the 11 people who went to trial or a hearing and had a ruling on their case, six were found not liable or had the case dismissed. That left a total of five bank employees at any level against whom the government won a contested case. They include Mr. Heinz, the former UBS employee.
One of the few successful government cases was overturned Monday. A federal appeals court tossed civil mortgage-fraud charges and a $1 million penalty against Rebecca Mairone, a former executive at Countrywide Financial Corp., now part of Bank of America Corp. The court also threw out a related $1.27 billion penalty against Bank of America. Representatives of Ms. Mairone and the bank this week welcomed the verdict, while the Justice Department, which brought the cases, declined to comment.
We then get the standard defense:
There are plenty of possible explanations for the small number of successful cases. For starters, much of the institutional conduct during and after the financial crisis didn’t break the law, said law-enforcement officials. Even when the government has been able to prove illegal activity, it has rarely been traced to the upper echelons of big banks.
“The typical scenario is not that the bank has this plan for world domination being cooked up by the chairman and CEO,” said Adam Pritchard, a law professor at the University of Michigan. “It’s some midlevel employee trying to keep his job or his bonus, and as result the bank gets into trouble.”
This is utter rubbish. In order to spare you a 10,000 word exegesis, let’s stick to a few high points.
The Obama Administration saw its job as protecting the legitimacy and profits of the banking sector. Remember how Obama whipped for the TARP? That he dumped Paul Volcker, who he dragged around during his campaign, with the implication being that Tall Paul would stare down the banks? And then Obama dropped him like a hot potato once elected and brought in Tim Geithner and the Clinton economics team? How Obama told the bankers he was the only thing standing between them and the pitchforks? How he failed to use the $75 billion of TARP money that Hank Paulson had courteously left aside for borrower relief? How Geithner told Neil Barofsky that he’d never intended for the mortgage program to work (as in save borrowers); its real purpose was simply to “foam the runway” as in space out the foreclosures better over time?
You are not going to succeed in any endeavor if you don’t expend real effort. This signals from the top were very clear, not to pursue senior bankers since that would hurt the image and stock prices of banks, which the Administration was desperate to shore up. It falsely saw the survival of senior bankers and the banks themselves as identical. By contrast, the Bank of England forced out the top three executives of Barclays in what amounted to a power struggle over the Libor bid-rigging investigation.
One proof is the histrionic reaction when Benjamin Lawsky, a former Federal prosecutor operating from the bank regulatory boonies of the New York Department of Financial Services, demonstrated how it wasn’t all that hard to be effective. He was welcomed with a full bore media attack when he dared show up Federal officials in pursuing Standard Chartered over money laundering violations. His efforts eventually forced the resignation of its CEO, Peter Sands. , he secured the resignation of 13 individuals, one of them one of the most senior members of the bank.
Mind you, Lawsky had very little in the way of staff attorneys, made it clear he intended to punish individuals, and scored real wins.
The “top execs knew nothing” excuse is nonsense. Some of the abuses occurred in retail banking or lending operations. If you’ve ever worked in retail banks, you will know that they are factories. Everything is highly routinized, from the scripts in call centers, the procedures used for identifying and qualifying borrowers, the materials used to pitch, close, and document loans, and the post-closing activities (sale and transfer of loans; the processes used to service mortgages).
Since everything is so highly standardized, which is necessary from a systems perspective, bad stuff can’t happen with any frequency without at least pretty senior mid-level people obtaining internal waivers (and either lying about why or securing senior approval for the misconduct) or the process having been designed from the get-go to be abusive. Indeed, the article gives an example that confirms this observation:
Going after junior staff can create its own difficulties. Judy Wolf was a compliance officer at Wells Fargo, which in 2014 paid the SEC $5 million to resolve civil charges it lacked adequate controls to prevent one of its brokers from insider trading. Soon after, the SEC charged Ms. Wolf with altering a document during the agency’s investigation, to make a review she had done appear more thorough than it was.
Dismissing the case last year, an SEC administrative law judge said Wells Fargo “clearly had much deeper and more systemic problems” than one employee who “notably low-ranking…relatively low-paid, supervised no one, and worked in a cubicle.”
And on the wholesale banking/capital markets side, it is equally ridiculous to contend that the banks didn’t break the law. There was no serious effort to use the law designed precisely to end the “I’m the CEO and I know nothing” pretense.
Sarbanes Oxley requires at a minimum for the CEO and CFO to certify personally the accuracy of financial statements and the adequacy of internal controls. Banks dropping multi-billion loss bombs and having to go on the government drip to survive is prima facie evidence of a massive failure to have adequate risk controls in place.
We were writing before the crisis, based on no inside knowledge, that risk controls at capital markets firms, meaning then investment banks (save possibly Goldman, which did have a much better run risk management function than any other firm and thus would be more difficult to sue) and the big banks with international trading operations (JP Morgan, Citi), all had risk management functions that were designed to be weak. People like Nassim Nicholas Taleb would go further and say anyone who had the statistical chops to be the head of risk management would know that his job was an exercise in charlatanism. And that’s before you get to issues that were widely known in the marketplace in the runup to the crisis (as in if yours truly was hearing about them, anyone who was anyone, including regulators, had to be aware), such as widespread mis-marking of illiquid positions (trading them in itty bitty sizes with friendly counterparties to establish phony high prices). It would have been relatively easy to bust a whole bunch of traders, trading desk heads, and risk managers on this issue alone just to make a point.
And the Sarbanes Oxley violations also apply to the retail side of the house. If you have a bunch of wild stuff going on in the mortgage lending, and the senior exec swore up and down they knew nothing about it, that’s a massive internal control failure. Again, the CEO and CFO are responsible.
And Sarbanes Oxley is designed so that the civil and criminal provisions are parallel, so that an investigation could start out as a civil case, but if the government got strong enough evidence in discovery, it could easily flip it to criminal.
The SEC and DoJ have been deliberately enfeebled. SEC whistleblower Jim Kidney pointed out that the SEC has been severely diminished by the 1996 decision to stop growing talent from within and instead relying heavily on the revolving door. The result is predictable: attorneys too inculcated to sympathizing with company executives, as opposed to the public at large, and too attentive to not alienating future meal tickets. Neil Barofsky is an object lesson. After his stint at SIGTARP, he should have gotten prominent private sector offers. He didn’t. He landed reasonably well, but his payoff pales compared to t Mr. “I lie awake at night worrying about banks” ex DoJ Assistant Attorney General Lanny Breuer got when he returned to Covington & Burling.
The reality is that an entire, large class of people is not accountable for their actions from the perspective of career performance or legal liability. Yet because they went to the right schools and worked for big brand name institutions, they can pass off failing upwards, or even outright predatory conduct, as the proper workings of a meritocracy. This is a blueprint for widespread delegitimation of authority. And if it does not produce a Trump presidency in 2016, it has high odds of yielding something even worse in 2020.