Why Bankers Have Gotten a Pass
In recent years, it has become increasingly clear that no prominent banker would be prosecuted for fraud in the run-up to the financial crisis. In the current issue of The New York Review of Books, Judge Jed Rakoff of the Federal District Court in Manhattan asks why.
The comforting answer — that no fraud was committed — is possible, but implausible. “While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies,” he wrote, “I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities.”
So why no high-level prosecutions? According to Judge Rakoff, evidence of fraud without prosecution of fraud indicates prosecutorial weaknesses.
This is not the first time Judge Rakoff has weighed in on the prosecutorial response to the financial crisis. In 2011, he rejected a settlement between Citigroup and the Securities and Exchange Commission because it did not require the bank to admit wrongdoing.
His insights on financial-crisis cases also apply to cases that have emerged since then, like JPMorgan Chase’s settlement with the government this week over the bank’s role in Bernard Madoff’s Ponzi scheme.
Under the deal, JPMorgan Chase, which served as Mr. Madoff’s primary bank for more than two decades, must pay a $1.7 billion penalty, essentially for turning a blind eye to Mr. Madoff’s fraud. It must also take steps to improve its anti-money-laundering controls. And it had to acknowledge, among other facts, that shortly before the fraud was revealed, the bank withdrew nearly $300 million of its money from Madoff-related funds.
By adhering to the settlement terms, the bank will avoid criminal indictment on two felony violations of the Bank Secrecy Act. No individuals were named or charged.
And that is the problem. Until relatively recently, it was rare for corporations to face criminal charges without the simultaneous prosecution of managers or executives. That changed over the past three decades, as prosecutors shifted their focus away from individuals and toward corporations, as if fault resides not in executives, but in corporate culture.
That shift, in Judge Rakoff’s view, largely explains the lack of banker prosecutions from the financial crisis. It also explains the JPMorgan Chase settlement in the Madoff case. A likely consequence of this approach is more wrongdoing, since, as Judge Rakoff argues, imposing compliance measures that are often just window-dressing is far less potent than “the future deterrent value of successfully prosecuting individuals.”
Even worse is the distortion of justice. In the financial crisis, prosecutors not only took a hands-off approach to bankers, but to banks as well for fear that indicting a big bank could harm the economy.
The JPMorgan Chase settlement in the Madoff case also sidesteps justice by relying on “deferred prosecution.” That tactic, wrote Judge Rakoff, makes prosecutors happy because they tell themselves that the threat of prosecution will deter future crime; it makes corporations happy because they avoid indictment; and happiest of all are the executives or former executives responsible for the misconduct who are left untouched.
In addition, he explains, deferred prosecution is “technically suspect” because, under the law, prosecutors should not threaten to indict a company unless they can prove that some company manager committed the alleged crime, and if that can be proved, why not indict the manager? He also finds it “morally suspect” because it punishes innocent shareholders and employees for wrongdoing committed by unprosecuted individuals.
As the myriad cases against JPMorgan Chase and other banks demonstrate, misconduct was not limited to the mortgage bubble. But unless prosecutorial weaknesses are remedied, justice will continue to prove elusive.
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