TOPICS > Economy

In Aftermath of Financial Crisis, Who’s Being Held Responsible?

November 24, 2011 at 12:00 AM EST
As anger over the financial crisis lingers, questions remain as to who has been held accountable for their role in creating the conditions that led to the meltdown ... and who has not. Ray Suarez reports.
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JEFFREY BROWN: From the beginning, one theme of the Occupy Wall Street movement has been anger over the financial crisis and whether those responsible have been held accountable.

Ray Suarez explores that question.

RAY SUAREZ: To date, the government has demanded financial settlements from some of the major firms, including $550 million from Goldman Sachs. It also decided this fall to take some of the country’s largest banks to court on charges they misled investors about risky mortgages before the housing bubble burst.

There have been no prosecutions of high-profile figures involved with the financial crisis. One of the most prominent cases initially pursued by the Justice Department, Angelo Mozilo, the former head of the largest mortgage lender, Countrywide Financial, was ultimately dropped.

We get four perspectives now.

Lynn Turner is a former chief accountant for the Securities and Exchange Commission. He’s now a managing director at the consulting firm Litinomics.

Anton Valukas is a former U.S. attorney. He’s now in private practice and issued a bankruptcy report examining the collapse of Lehman Brothers.

Yves Smith is a financial writer who covers these issues on her blog, Naked Capitalism. She’s the author of the book, “ECONned.”

And Mark Calabria is a former Republican staff member of the Senate Committee on Banking, Housing and Urban Affairs. He’s now at the libertarian think tank, the Cato Institute.

Anton Valukas, let me start with you. You have considerable experience on both the prosecution and defense side of the courtroom, why have there been very few meaningful prosecutions of high-ranking officials to date?

ANTON VALUKAS, former U.S. attorney: I think the underlying factor is the complexity of many of these cases where you have failure of a major corporation and you are now looking to identify individuals who are responsible.

And to a large extent what you find is that the responsibility is defused so that a chief executive is able to say, well, I relied on my accountants. The accountants are able to say we relied on the lawyers.

If you’re not able to establish that an individual had criminal intent, then you can’t bring the prosecutions in the first place. The cases where you’ve seen successful prosecutions are cases, for instance, like the insider trading cases where you had tape recordings which specifically identified conversations which you could consider criminal in nature.

But absent that type of evidence of course these cases are very difficult to bring, very complex and, frankly, are often daunting for the prosecutor. And so, they don’t get– they don’t come.

RAY SUAREZ: Lynn Turner, does that sound right to you — defuse responsibility and hard to prove intent?

LYNN TURNER, former SEC chief accountant: I probably differ with Tony on that one. I think there’s a number issues here. You’ve got to keep in mind that during the S&L crisis, we had 1,000 people charged or convicted and we’ve only got about 39, 40 to date.

We also had very complex cases in Enron, WorldCom, many of the corporate scandals. Those were just as complex as these are this time, and, yet, there was prosecution then. A decade later, no prosecution.

I think it runs to the heart of some of the problems in Washington. I just think there’s a lack of resources for prosecutors. And I think there’s a lack of willingness on the part of prosecutors to bring cases.

RAY SUAREZ: A lack of resources? Does that mean your old agency, the SEC, isn’t capable of bringing these kinds of cases any longer?

LYNN TURNER: When you look at the case they brought against Goldman Sachs, the investment banking firm, on the large transaction called Abacus, they had a grand total of about four attorneys to work on that case. On the flip side, on the Goldman case, they would have had dozens backing up the defense. So, it’s almost like a David versus Goliath type battle.

The other thing, though, that also enters into it is there’s a tremendous revolving door between the attorneys at the SEC and the law firms who defend these people and people at the SEC know that ultimately they’d like to get a job in one of those firms. So, at times, it’s been demonstrated that they’re reluctant, really, to take on and go very aggressively against those firms.

RAY SUAREZ: Yves Smith, when you look back at the half several years, companies run into the ground, the economy almost run off the rails — what should have happened that didn’t happen?

YVES SMITH, Naked Capitalism blog: Well, I would agree with Lynn on this one. I think this is a matter of will rather than ability to perfect cases. There were– and it’s interesting that he mentioned specifically the Enron prosecution. There was a series of laws put into place after Enron called Sarbanes-Oxley. And those really have not been used in any serious way in prosecuting executives.

One of the provisions of the Sarbanes-Oxley rules is that senior exclusive and — it’s typically at least the chief executive officer and the CFO — have to certify that internal controls are adequate, for a big financial firm that has to include their risk controls. Willful violation is — sorry, a knowing violation is punishable by up to five years in jail time; willful violation is 20 years of jail time. But no one’s gone after these theories seriously.

And the big reason, it’s even worse than Lynn alludes, is although what he says about the revolving door is 100 percent true, is the role that big banks play in campaign finance. They’re the second biggest donors in Washington, second only to the health care industry.

And for any case to be pursued as a criminal case, it isn’t just the Securities and Exchange Commission, they can’t pursue criminal cases on their own. They have to be pursued in conjunction with the Department of Justice. And the Department of Justice has been noticeably absent on this beat.

RAY SUAREZ: Mark Calabria, when you look at the system and the way it’s behaving so far, have people who committed crimes actually been in some jeopardy after the fact?

MARK CALABRIA, Cato Institute: Well, not that we can tell for those who have committed crimes. I don’t think it’s an either/or. I do think there’s a very high level to prove intent in criminal cases and as somebody who cares about the rights of the accused, I think that that’s something that there should be a high level.

But I would agree as well that there’s a difference in will. And part of this, of course, is many of the firms are still getting tremendous taxpayer assistance. So, you have this conflict of interest essentially from the regulators, from the bank regulators saying I don’t want this institution to fail on my watch. So, of course, I don’t want the SEC to go after it for instance. Or if you look for instance at the taxpayer, for instance, has paid the defense fees for former executives of Fannie Mae and Freddie Mac.

So, of course, if the SEC is going to look at this and say I might get a judgment. But if the taxpayer is going to pay it, you know, where is the justice in that?

And, of course, there’s a revolving door issue that I think is very real, but there’s also an issue where from the perspective of the firm and perspective of the SEC, the Securities and Exchange Commission, sometimes getting the settlement, they look at that as a win-win for themselves. They can have a big press conference, the number sounds very impressive, even if it’s actually quite small compared to the size of the firms, but the lawyers at the SEC can say we got a settlement. We won. The company in question can say, well, we didn’t admit wrongdoing and made this go away.

So, one, I think if more of this resources — if you ended up having to take less cases but take those cases further to get them to court because in the case of settlements, it’s really he said/she said. We never really know the facts of the case, we never know whether if there’s any real wrongdoing.

And, of course, for instance, one judge in New York has said I’m not going to sign off on this. I need to see some fact here’s and I think we need to see more of that where the facts get out before the public so we know whether there was criminal behavior or not. And in these numerous settlements, we simply don’t ever get to see the facts.

RAY SUAREZ: Mr. Valukas, there is a poster making the rounds on the Internet that says: Imagine if they went after corporate criminals the way they go after people who set up tents in a park.

Is there a public role here that prosecutors understand, that they keep one eye on the law books, but they also understand that they operate in a — in an arena where there’s public will and then there’s the black-and-white letter of the law?

ANTON VALUKAS: Well, I think that the — you can’t confuse the issue of investigations with prosecutions and successful prosecutions. Most prosecutors, people in the Department of Justice, U.S. Attorney’s Office, that I’ve had experience with, would be stunned to hear that someone thinks they’re being less than aggressive because they may go out and work for a firm afterwards.

By and large, the most successful prosecutions are brought from the sophisticated office, involve enormous resources and a commitment by people that they’re going to do their best to represent their client, the U.S. people.

The difficulty is that if the proof isn’t there in proof beyond a reasonable doubt — and that’s the standard you’re talking about — no matter what you want to do, unless you’re going to play to the crowd, you’re not going to responsibly bring a prosecution that you don’t think should be brought. And that’s the difficulty here. If the evidence isn’t there, you can’t bring the case.

Now, these cases are brought, and you’ll hear people saying as you did, for instance, in the situation involving the insider trading cases that they wanted to send a message, same reason the Department of Justice will bring prosecutions in tax cases in April so as to send a message.

So, there’s a desire to send the message in these cases but the question is can they prove it beyond a reasonable doubt? And if they can’t, then no matter what it is people are clamoring and no matter what people are saying in television, they should not be responsibly bring those cases.

RAY SUAREZ: Well, I’ve been at enough news conference where’s you announced white collar prosecutions and sending a message was certainly part of the formula. Does the public faith in the operation of a marketplace depend on some confidence that it is being regulated, is being watched, is being policed?

ANTON VALUKAS: Critical to what’s going on, both from the standpoint of believing that miscreants will be punished for their conduct. But I think equally important — and I think this is where we get off what is really significant here. What’s significant is in the first instance is to try to prevent these activities from taking place — that is to say, undue risk being incurred. People willing to gamble with the public’s money and being able to say afterwards, well, I relied on my accountants or somebody else to tell me whether or not what I was doing was within the chalk lines and frequently finding that in fact they were give than advice.

If the regulations aren’t in place which aren’t specific to the issues which are being faced by these institution, then all of the prosecutions in the world afterwards are not going to prevent the disasters that we’ve seen, including Lehman and the most frequent — the matters coming up most recently.

So that’s where the focus needs to be in the first instance, on the regulation and the regulators. And there, I think, there’s been failure.

RAY SUAREZ: Yves Smith, one of the most frequently cited points of anger from the Occupy demonstrators in cities around the country is that lack of prosecution. Is that a fair comment? Is the public right to be angry?

YVES SMITH: No, I think that’s correct. In fact — and as I indicated before, there’s been a failure to pursue theories and ways of getting information that appear to be very viable.

You know, Lynn discussed how under-resourced the SEC is, yet you have Catherine Cortez Masto in Nevada, a state prosecutor —  state attorney general, and they don’t even remotely have the resources that any federal agency has. She has started by launching a criminal case — now admittedly it’s against two lower level employees at a vendor to bank servicers.

But this is a classic — the same strategy they used in mafia prosecutions. You know, if these two individuals who are — who have been charged are actually found guilty, they face 30 years each in jail time. They’re going to roll. And they — and they in turn — and the firm that’s — where they worked provides all of the software for the bank servicers.

There have been allegations from foreclosure attorneys that these firms engaged in systematic abuse of homeowners in the way they charge fees, that they charge impermissible fees, double charge investors, as well as the homeowner, and charge the fees in an illegal manner. And it’s hard coded in the software. There are theories out there that no one has gone after. If you see state attorneys general are able to prove them, that calls into question the notion that these aren’t viable, that people can’t be brought to justice.

RAY SUAREZ: Lynn Turner is there still time to go after people who have demonstrated to be bad actors in the meltdown?

LYNN TURNER: Well, certainly, we’re going to be running up against statute of fraud limitations here, which say that within a reasonable period of time, you’ve got to bring the cases. So, the clock is ticking here, and the longer we get past when someone might have actually committed a violation of the law, the chances of seeing something happen are going to disappear. And it appears that the government has already decided on some of these companies, such as an AIG, that required $150 billion, $250 billion bailout that they’re not going to do anything.

And so, I think time is quickly passing us by here, which I think is also frustrating to the public.

RAY SUAREZ: Would people behave differently, Mark Calabria, if they had a reasonable expectation that they might be prosecuted for operating on the edge of the law, let’s say?

MARK CALABRIA: Well, I think it’s certainly important to go after wrongdoers. I do think there’s a real risk to be run that we paint this as bad people — a few bad people did a few bad things, and if we clear that up everything is all right, because I think the problems in our financial systems are systemic. I think they went far deeper than just a few bad people. I think the bad incentives you have– and it was mentioned earlier, regulations is one set of incentives and another set of incentives is market discipline, whether the firm itself would be able to go out of business, the monetary loss of an individual, an executive might suffer if they are engaged in fraud or just engaged in bad management.

So, I think we need to focus on — and I’ll be very clear — I don’t believe that the Dodd-Frank Act fixed too big to fail and fixed other problems in our system, so I think we need to go back and look at the systemic problems because I think even if not one criminal action happened, we’d still be largely where we are today.

So, again, we need to be able to fix those systemic things and that’s not to say we shouldn’t go after prosecutors.

I will say, I disagree slightly that state attorneys general don’t have resources. As we’ve seen in the past with tobacco cases, they have no reluctance to outsource their jobs to trial bar firms that are more than happy to do that work for them if there’s actually a potential payoff at the end of the day for them.

So, there’s tremendous amount of resources there. But, again, I think the focusing on the criminal behavior, while appropriate, should not make us lose sight of what was essentially irresponsible behavior driven by perverse incentives.

RAY SUAREZ: Mark Calabria, Yves Smith, Lynn Turner, Anton Valukas — thank you all.