by Roy C. Smith
This week the Deputy Attorney General of the US, Sally Q.
Yates, “stung by years of criticism that it has coddled Wall Street criminals”
(quote from New York Times), announced new policies to place higher priority on
the prosecution of individual executives of corporations suspected of
wrongdoing. “Corporations can only commit crimes through flesh-and-blood
people, Ms. Yates, said, “and those responsible should be held accountable.”
Surely the shareholders of the world’s largest banks that
have been forced to pay many billions to settle charges against them rather
face criminal trials before uncertain juries would agree. Executives of banks,
who are selected and monitored by their board of directors, are not supposed to
commit crimes (fraud, larceny, whatever) nor do the banks’ owners
(shareholders) want them to be tempted to do so by management urging, compensation
or other incentives.
The Justice Department, however, appears unwilling to cede
the banks the benefit of the doubt that the intention of their boards is to
behave properly. Ever since 2008, the Justice Department has been the Obama
Administration’s agent for blaming the banks for the financial crisis and the
Great Recession that followed.
The public has accepted this effort to shift responsibility
for the whole mess onto the banks, and to infer that their actions could only
have been the result of criminal activity that should be punished by jailing
responsible executives.
The only trouble is that, despite serious and thorough efforts,
the government has not been able to build a case against any of numerous responsible
executives of several major banks investigated since the crisis.
Some say that the lack of indictments after 2008 is because
financial fraud is hard to prove and top executives insulate themselves
purposefully from those who actually do things. This may be true, but after the
collapse of several high tech companies in the early 2000’s, the CEOs of Enron,
WorldCom and some other companies did go to jail and for considerable periods.
The fact that the Justice Department did not find evidence
of crimes would ordinarily satisfy the public that there were no crimes, but
not in this case.
You may think that the banks acted unethically during the
mortgage-backed bubble, or that they made stupid mistakes, but neither of those
allegations are criminal. Disputes between parties in business transactions over
ethical missteps or mistakes usually are settled by negotiation or civil
litigation with compensation paid for damages. The Justice Department should
have nothing to do with such matters.
But, this time around the Justice Department elected to act
of behalf of the public by taking a highly political moral stand against the
“greedy and reckless banks.” It did so by threatening to sue the banks for
unnamed fraudulent actions knowing that the banks would settle, even for
enormous amounts. It forced the banks into a position in which they had to
choose between a large, perhaps unfair settlement and facing a possible criminal
trial, which if lost could be their end as happened to Arthur Anderson, Enron’s
accountants, in 2002.
The Justice Department’s practice of bringing such lawsuits
changed when Eric Holder, in 1999 when Deputy Attorney General in the Clinton
Administration, published the first in a series of memos by Deputy Attorneys
General offering guidelines on prosecuting corporations. For a corporation to
be indicted it had previously been necessary to demonstrate that it engaged in,
or tolerated, or failed to prevent criminal activities. Holder added the idea that the extent
to which a corporation “cooperated” with the Justice Department in its
investigations was also a factor. These criteria included turning over
information on executives, waving their rights to lawyer-client privilege, and
denying payment of executives’ legal expenses. Later some of these were deemed
too intrusive of defendants’ rights and were withdrawn.
Ms. Yates’ memo is the latest in the series, but it doesn’t
reinstate any of the withdrawn criteria, only notes that to get “credit” for
cooperating, companies have to report or identify suspected employees and turn
over evidence against them “regardless of their position, status or seniority.”
Most banks had already assumed they would have to do this if
circumstances required, so in that sense Yates’ memo emphasizing individual
wrongdoing is nothing new.
What might be new, and certainly would be welcome by the
banks, would be Justices’ subtlety deciding it was shifting ground and was
finished with its campaign of suing the banks. If so, it’s very subtle, and
indeed may only be reassurance to the left that the Obama Administration has
not given up on going after the bad guys.
Almost all of the senior-most executives serving in the
major banks in 2007-2008 have been replaced and suffered considerable financial
losses in the bank shares they held. Some have also been disgraced and left
unemployable. They attract little sympathy, however, because, looking back, the
banks clearly did turbo-charge their activities in a giant mortgage market
bubble that ultimately burst.
But they didn't cause the bubble (low interest rates and
enormous institutional demand for mortgage-backed securities did), or the
liquidity collapse that forced the mortgage-backed securities to absurdly low
levels that caused mark-to-market write offs, that in turn imperiled some of
them sufficiently that they had to be bailed out. The government’s actions to rescue
Bear Stearns and AIG but not Lehman Brothers further confused the markets and
drove prices even lower.
It is now clear that the blame-the-banks posture taken by
the government has hurt the banks and the financial system. Not only have the
banks faced the huge legal settlements, their regulatory constraints have been
tightened to the point that they are struggling to earn enough to cover their
cost of capital, not a viable position for the country’s most important banks
to be in.
We need strong and healthy banks to help us recover from the
too-low economic growth rates we have experienced in the seven years since the
crisis. It is time for the government to contribute to the effort to improve
the banks rather than to continue to prosecute them.
Let’s hope that that is what Ms.Yates was really trying to
say.
