Ted Kaufman: Wall Street Prosecutions Never Made a Priority


January 22, 2013
Appointed to fill the remaining two years of Joe Biden’s term, Sen. Ted Kaufman (D-Del.) helped usher the Fraud Enforcement and Recovery Act through Congress. He told FRONTLINE that the effort to prosecute Wall Street executives following the financial crisis “was not made the priority that I thought it was going to be made. And I don’t think cases were followed to the extent that they should have been.” This is the edited transcript of an interview conducted on Nov. 20, 2012.

Let’s begin by talking about your career as a senator. You took an unusual path to the Senate. Describe that for us.

I worked in the Senate on the Senate staff for 22 years for now-Vice President Joe Biden when he was senator. And 19 years I was his chief of staff. People ask me, “Did you ever dream about being a senator?” I never once did. So it was … completely unexpected. … I never ran for anything in my whole life.

… Then when Sen. Biden was taken as vice president, … I was on the transition [team]. … And we just got talking about who was going to take the senator’s place, and Hunter Biden, who is one of Vice President Biden’s sons, said, “Well, Ted, why don’t you do it?” …

The fact that you weren’t going to run for re-election, you weren’t going to have to raise money, put you in a unique position.

It put me in a unique position. One biggest thing was I could spend all day every day just worrying about being … a good senator. …

How did you reach the decision to focus on Wall Street accountability?

… When I got there, I was really upset about what went on with what I consider fraud on Wall Street that brought about the financial crisis — not only almost destroyed the financial system in the United States, almost destroyed the financial system of the world. … That doesn’t happen with real smart people involved if there isn’t something bad going on. …

What was the Fraud Enforcement and Recovery Act [FERA]?

… The Fraud Enforcement and Recovery Act was basically designed to increase the number of prosecutors and FBI agents and people on the ground to actually work on this. …

We had a hearing on this bill. The deputy director of the FBI, named [John] Pistole, … came to the hearing, and he gave incredible testimony. What he said was essentially during the savings and loan crisis, there were 1,000 FBI agents working on fraud. He said what happened was after 9/11, the government had transferred a great deal of the FBI agents … over to do anti-terrorism, which made sense.

Mistake they made … [was] they didn’t replace them. So we’re basically down to 200 FBI agents. We had more fraud convictions in 2001 than we had in 2007. This is what John Pistole said. …

So the FERA bill was to start out I think with $165 million designed to create more FBI agents and prosecutors to do one thing: not deal with the financial crisis in general, but to deal with the financial crisis as it relates to just Wall Street. …

But there was no impetus coming out of the White House at that point, out of the administration, to prosecute fraud?

… One of the big problems which runs through this whole thing is that you had an administration under President Bush which admittedly was a laissez-faire administration. It basically was not that concerned about [the] prosecution of financial fraud. …

They basically were laissez-faire in terms of let the market work it out; nobody’s going to do bad things because it’s going to hurt the company. You still hear that today: Who in Wall Street would do something that isn’t in the market’s interest in order to feather their own nest?

Well, we found out there were loads and loads of people that did things to feather their own nests that were not to help what was going on in the marketplace.

So you look in that environment. Obama gets elected. Confirmation process; the Republicans basically shut down the confirmation. But it wasn’t just gridlock. They didn’t just shut down moving on bills. They also shut [down] the confirmation process.

So you have this incredible position that I think it was two or three months in the administration, the only confirmed person in the Treasury Department is the secretary, [Timothy] Geithner. And the same thing went on [in] the Justice Department. It was a fistfight to get Eric Holder approved [as attorney general], to get Lanny Breuer approved [for assistant attorney general for the DOJ’s Criminal Division], to get all the people. …

Now the world was going through all sorts of pain. There was the sense that banks were fragile. There was a sense that if we rock the boat too much, institutions could go down and innocent people could suffer as a result. And the prosecution of frauds was in competition, in a sense, in some people’s view.

… The decision on who to prosecute and not to prosecute and what to follow up is really left in the hands of the prosecutor, whether it’s U.S. attorney in an area or the assistant U.S. attorney or someone in main Justice. That is the decision that’s made.

And we’ve learned the Justice Department is separate. You don’t kind of oversee the Justice Department. The president sets up, and the attorney general says, “This is going to be our priority,” but that individual prosecutor is on his own.

So I think those prosecutors were out trying. Their basic job is to go out and do prosecutions. How it affects what’s going on in terms of the fragility of the banks or anything else should not be their purview.

So you’re saying the Justice Department has autonomy over these things and does what they choose to do and think is correct to do.


But in the Senate and in the House, when this legislation is going through, were you finding those that were resistant to the idea of, as Geithner put it, “Old Testament justice” versus getting on with getting the world right again?

No, our problem was totally, “Should we spend money on this?”

So you authorized $165 million.

We authorized $165 million. It passed the House and Senate. I never thought in just two years that I’d ever be at a signing of a bill where I’d actually be on the podium with the president and the rest on that bill. And that’s what happened on that bill. It was really quite extraordinary. …

… What did you think was going to happen at that point?

I thought that we were going to really make a difference. I genuinely thought that one of the problems was we didn’t have enough FBI agents and we didn’t have enough prosecutors. This was going to give us the money to do it and that we were going to start having convictions and putting people in jail.

… Remember the savings and loan crisis? I forget how many, but all the major players went to jail.


Hundreds. … It sent a clear message that you engage in this behavior, you’re going to go to jail. What happened on Wall Street was a lot of people engaged in what clearly in my opinion was fraudulent behavior and appeared to be fraudulent behavior and didn’t go to jail.

So what happens in real life, especially with people that are engaged in white-collar crime, they sit there, and you have a meeting — this is after this crisis — and they say: “Well, I’ll tell you what we’re going to do. We’re going to take these derivatives. We’re going to wrap them up. We’re not going to care whether they’re good or not or how they work. I’m going to work with these other people to do it. We’re all going to get a piece of the action. We’re going to sell it out there. We’re going to send it off to a bank in Iceland or someplace like Iceland, and we’re all going to make a fortune.”

It’s fraud from top to bottom. And somebody sits at the meeting and says: “Wait a minute. Last time somebody did that, Harry went to jail. I’m not going to be involved in anything that has to do with that kind of stuff. That’s fraud. I don’t want to go to jail.”

“How come you can steal five dollars and have a penalty and steal $500 million and get off absolutely scot-free?”

We find that criminal penalties are extremely effective in dealing with white-collar crime, even more than non-white-collar crime. … So it was really important to me that we send a message that this kind of behavior would not be tolerated.

The second message I thought was really important to send was everybody suffers under the law. If you go into a store and you rip off a five-dollar sweatshirt and you’re going out the door and they catch you, there’s a penalty that you’re going to have to pay for that.

How come you can steal five dollars and have a penalty and steal $500 million and get off absolutely scot-free? What kind of message does that send to the basic of democracy? Remember, democracy operates because of the will of the governed, and the will of the governed is that there’s a level playing field here, that everybody is applied the same laws. …

And your sense was that your colleagues in the Senate and in the House were with you.

Oh, yeah. And the vast majority of the public was with me. The only people that weren’t with me were the Wall Street banks and folks who subscribe to the opinion that the banks were fragile, that they were just making it out, that we shouldn’t do anything to hurt them. There were people in the administration and people without the administration who were not on Wall Street who basically believe that.

But the vast majority of people I talked to, the vast majority of my colleagues really wanted something to happen to the folks that had been involved in causing this financial crisis. … I can’t tell you how many people on Wall Street came up to me and said: “You’ve got to do something about this. God bless you for doing this. Thank you for doing this” — Wall Street people, hedge fund managers.

But others from Wall Street gave you another message.

Oh, others from Wall Street said: “What are you doing? You’re trying to destroy the banks. It’s all better. It’s fine here. All the bad guys are gone.” … So there are lots of people on Wall Street who basically believe that they’re brilliant masters of the universe, Tom Wolfe’s book Bonfire of the Vanities.

There’s still plenty masters of the universe walking around who basically believe that: Just get Washington off my back and just let us go free and do whatever we want to do. We don’t need regulations. … We didn’t commit any crimes. There’s no reason to come up here and start talking about crimes. Plus, we’re very, very fragile, and something could happen if in fact you start talking about crime — which was just totally completely ridiculous. … These banks weren’t fragile. They had a gigantic system to make sure that nothing ever happened to them. They were totally being helped by the United States government. They were borrowing money for no cost. They were in great shape, not because of anything they did but because of the incredible amount of subsidy they got from the American taxpayer. …

In March of 2009, freshman senators met with [Federal Reserve Chairman Ben] Bernanke and Geithner. Remember that?

I’d never forget it. It was incredible. It was scary. … It’s clear that both Bernanke and Geithner were scared to death about where this is all going to go.

It’s kind of like a big walnut tree. A friend of mine had a big tree out in front of his house, and he had a driveway, and the driveway started buckling. They went in and they tried to find the roots, and the roots went everywhere.

I mean, when you pick up a paper and you find out that AIG’s lost $60 or $80 billion in a quarter, how does a company like AIG lose $60 or $80 billion? They didn’t know where the credit default swap went. You’ve got Iceland declaring bankruptcy. … Nobody knew what was going on with these derivatives, and so they were everywhere.

So when I met with both Geithner and Bernanke, they were both very, very concerned, you could tell, about where this was going to go. And you could tell that there was fear in their eyes in terms of just, “How are we going to get to the bottom of this?” …

You’re familiar with the “pitchforks” meeting at the White House? This is where Obama has 13 bankers come to the White House. … What message was being delivered to Wall Street by the president?

I think the president was someone who was concerned about the fragility of the banks. He was trying to figure out what was going on. …

There’s a bit of schizophrenia, it seems, from an outsider’s perspective. On the one hand, the president is saying to the bankers, “Look, I’m the only thing standing between you and the pitchforks.” On the other hand, he signed FERA into law. So where was he?

I think he was very concerned about fraud on Wall Street.

But he was also concerned about rocking the boat.

He was also concerned about rocking the boat. The administration supported FERA. He made a big deal when we passed FERA; it was the Fraud Enforcement and Recovery Act. But he was not with me when I was proposing the Brown-Kaufman amendment [to Dodd-Frank Wall Street Reform and Consumer Protection Act] with the senator Sherrod Brown, [Democrat] from Ohio, which would have skinnied down the banks, made them shorter, smaller, made sure that they were [not] too big to fail. He and the administration was totally opposed to that. …

And my experience is he delegated the vast majority of this. I’m not saying he didn’t check up on them, but he delegated this all to Secretary of Treasury Geithner. And Secretary of Treasury Geithner had a very distinct view that the banks were fragile and that we should not do anything to upset the banks and hurt the banks. And I think that President Obama obviously was sympathetic to that. …

Were there any other opportunities to get a feel for what the president thought about the need to drill down, as was said, to figure out what had happened?

… It never occurred to me, and I do not believe that the president of the United States spent a lot of time concerned about whether the Justice Department was prosecuting cases or things like that.

Was that a problem?

No, I don’t think so. He’s president of the United States. The government of the United States is incredibly, incredibly complex. I’m sure it came up when he met with the attorney general as one issue. I’m sure he made it a priority.

“I do not believe that the president of the United States spent a lot of time concerned about whether the Justice Department was prosecuting cases.”

Everything I had heard from the attorney general and from the people that work for the attorney general, this was the highest priority in what they were doing. … They never once said they weren’t getting support from above and this wasn’t their highest priority.

I think the president was concerned. … But the day-to-day operations had to be done. The key to the success of this is the head of [Justice’s] Criminal Division, Lanny Breuer, the head of the Enforcement Division at the Securities and Exchange Commission, Rob Khuzami, and the head of the FBI operation, Kevin Perkins in the Justice Department.

… You do run into resistance when you try to draw down on the authorized $165 million. What happened there?

What happened is the same thing went on [for] everybody else. Every day you go before the United States Senate, and you heard members of the Senate, and you’re concerned about the deficit. …

That is the same argument we got to the appropriators. The appropriators are sitting there. They have a shrinking pot of money. Remember, you authorize the money first, but then the actual distribution of the money is in the hands of the [House] Appropriations Committee. …

It’s the same thing you had whenever you went to the Appropriations Committee, because look, we only have so much money. These are the things we have to spread it between, this and this, so this is all we can give.

But still, I think it ended up being close to $30 million. That was a lot of money. When you’re hiring prosecutors, FBI agents, $30 million is a lot of money.

But $30 million is a lot less than $165.

Yeah, but go back and look at any authorization. … That’s where the rubber hits the road. It’s much easier to get the authorization through than it is to actually get the appropriation. And I felt no kind of hesitancy by anyone on the appropriating committee to the objective. It was just, “How much money do we have that we can put into this particular pot?”

Was $30 million enough to really make anything happen?

Absolutely. Well, let me put it this way: $30 million is a lot more to happen than what ultimately happened. …

At the time you thought that $30 million could do a lot.

I thought it could get us started. … I felt that this was going to send a clear message to everyone that this is a priority, because if you look at the budget, that’s where the priority is. Here’s an additional $30 million going into this pot.

Was that as much as I like? No. Is that sufficient to have some successful prosecutions? Absopositively.

… Did you have to bang the table to get the $30 million and say, “Look, during the S&L crisis we had all these agents working at the FBI. We had extra attorneys assigned at Justice”?

If you’ve ever been engaged with the Appropriations Committee, it’s kind of like trying to convince your mom that you need an extra $5 this week on your allowance. They say, “Look, Ted, we’ve only got this much amount of money, so if I give you more than $30 million, that means I’m going to have to cut this, this or this.” And I say, “Yeah, but this is really, really important.” But I guarantee you, every other senator that had an interest in that pot of money was down there, … doing the same thing. …

So you got your $30 million. You’re the front guy. You’re writing editorials. And the reception you’re getting: a little pushback from Wall Street, but basically popular support.

Oh, a lot of pushback from Wall Street. …

… You set up some meetings in the summer of 2009.

The first thing we did was we set up an oversight hearing. … What happens in the Congress is after a bill is passed, you have what are called oversight hearings. One of my pet peeves is the Congress doesn’t do nearly enough oversight hearings. If we’d done more oversight hearings, I think we would have done better in terms of the fraud on Wall Street and in terms of the financial meltdown. …

And how did that meeting go?

Went very well. Now, it went very well in terms of they were very clearly energized. They clearly understood this was important. … It was on the mind of the administration and on the mind of the American people. So they came really ready. …

And we made it clear to them, I made it clear to them, that absolutely positively FERA is not about L.A. It’s not about Washington Mutual in Seattle. This is totally about what went on on Wall Street. That’s what the bill says, and that’s what the emphasis is. …

So they quickly got the idea that this as a priority is what went on on Wall Street, on the securitization. What happened during the securitization of these mortgages when they came in? Was, in fact, Wall Street going out into California and saying: “Hey, just put the mortgages together. Don’t worry whether they’re good or not. You get a fee. I’ll take them. I’ll [bundle] them up. I’ll sell them off to somebody else. I’ll make my money on that. And whatever happens to the mortgages doesn’t really matter”? Were there people saying that on Wall Street?

Were there people on Wall Street saying, after they got started, “Where can you go and find people who will sign up for mortgages?” … How much of that was the idea of the mortgage broker on the ground? And how much was the idea of somebody from Wall Street saying: “Hey, you put together the mortgages. This is great. We’re making a fortune. Go out and find anybody. Go out into the highways and the byways”?

“And here’s the money.”

“And here’s the money. … You made your money on signing the whole thing up. Send it to me. I make my money on putting the residential mortgage-backed securities together. And then we ship them out to somebody else.”

To a pension fund.

To Iceland.

To Iceland, to Germany.

… They understood we were really going to put these prosecutors that we got under Fraud Enforcement Act. We were actually setting things up. What happened, though?

One of the things that was a little discouraging was they had had in the books this idea of a fraud task force. … It was going to put all the different sections of government together to really go after this fraud, and all kinds.

Well, from what I gather, they could never come to resolution on who was going to include, what was going to be involved and everything.

A week before our hearing, they announced the fraud task force. This is the value of oversight hearings. Somebody had to come to that hearing and talk about what they were doing, and so that was the impetus. I am convinced to the day I die that the only reason that fraud task force was announced at that point was because somebody had to go to the hearing. And how many more months could they have languished on without someone doing it? …

The second thing I heard from someone I knew who was involved with one of the offices … that would be looking into fraud enforcement in terms of Wall Street, and I had a friend tell me that they were called like six days before the hearing, and they said: “Have you guys [been] doing anything on this fraud enforcement and getting the guys that created the fraud on Wall Street? If you’re doing anything about that, please let us know. We need some cases.”

In other words, they were looking for something that they could … offer up to you.

… And I understand that that’s why the oversight hearing is so important. They bring you to do it. But the fact of the matter was there was the beginning of a feeling that in the rush for all the other things that people were doing — this was for a lot of reasons, some of them good reasons — they were not putting the effort into this that I thought they were at the time, that they said they were doing, and what I could have expected.

What you found out, in other words, was that until you decided to hold an oversight hearing, you really hadn’t gotten the attention of the Justice Department.

I had not gotten the attention of the Justice Department that I would have expected. But in the end, this was always easy to look back on. … Just like if you look at the end of the football game, you know the score. You go back and look, well, where did we make the mistakes? Should we have thrown on third down? Those kinds of things.

We go back based on the result, which turned no criminal prosecutions. You go back and look at how did it happen. The first indication that there was trouble was leading up to that hearing, and regardless of what people said, [there] clearly was not the effort being made that needed to be made in order to reach the objective of the fraud enforcement administration and the objective that I had set as a United States senator. …

You were told that there were 38 different investigations at one point? Where did you get that?

I can’t remember the numbers, but we were told there was a lot of investigations going on. They couldn’t tell us about the investigations.

This is Breuer telling you.

Yeah, Breuer, but also all three of them saying that there’s stuff going on. “We’re really operating on this. We’ve got a bunch of possibilities, but we don’t know how they’re going to turn out,” I mean at the time.

But you believed it at the time, that they were working hard on this thing.

I believe they went with a lot of cases. For instance, if we want to get into the specifics, it was clear that they were doing a major investigation [into] Washington Mutual in Seattle.

It wasn’t that they didn’t have the agents. It wasn’t that they didn’t have the priority. It was a priority to do it, but they never came with a prosecution.

They were also looking hard at Countrywide, at Angelo Mozilo.

Absolutely right. You could figure out where they were going to look. Where are the places where there was clearly major problems with bad mortgages being generated? But again, the Countrywide was really much more of a not-Wall Street-related problem. …

During this period, were you ever aware of any investigation of a Wall Street CEO?

No, but I wouldn’t be. They wouldn’t tell me that. …

But you were asking them if they were looking at Wall Street. You told them that the bill’s purpose was to go after Wall Street.

And even more important than me telling them that, they said back to me that’s what they were doing. …

… You didn’t want to go after small fry. You wanted to go after the big fish.

I said specifically, “Wall Street is the target of the Fraud Enforcement and Recovery Act.” What went on on Wall Street at the very top? What decisions were made? What was the normal operating procedure on Wall Street that was fraudulent? …

We were very much in agreement that this had to be done quickly. They had to go out and look at what potential they had for successful prosecutions. …

… So you get a window working with the [Sen. Carl] Levin [D-Mich.] [Permanent Subcommittee on Investigations] on what had gone on at Goldman Sachs.

Oh, my God, Goldman Sachs, what had gone on at the rating agencies, and what had gone on at Washington Mutual Bank in Seattle.

And this has an effect on steeling your resolve to make sure that people are actually brought to justice.

… It was suspicions confirmed. A lot of the things that I suspected that went on actually did go on.

For instance, just looking at the Washington Mutual case — Long Beach Bank was a section of Washington Mutual — there’s a thing called a stated income loan, which is popularly known as a “liar loan.”

You come in, you want to get a mortgage from me. I ask you, “How much are you making?” You say $500,000. Great. Do I want to see your W-2 form? No. Do I want to do any indication? No. Just $500,000, that’s fine.

Would you know that at Long Beach on their regular equity loans, over 90 percent were stated income loans? On their option ARMs, which are a little more risky than that, something like 60 percent, in that range, were stated income loans. But the killer is subprime loans: 52 percent were liar loans. They had no paperwork to justify what the person said their income was.

Now, we got finished with that, I asked the head of the thrift oversight [Office of Thrift Supervision, which is now part of the Office of the Comptroller of the Currency]  — Chairman Levin had asked in the beginning, “What do you think about liar loans?” And he said, “It’s an anathema to the banking industry.”

So when it came to my time to question — and I went through these numbers — I said, “Do you have any idea how much of equity loans are stated income loans at Long Beach?” “No.” “Do you have any idea?” And I went through the three of them. This is a man who said they were anathema.

This is the chief regulator of the thrifts?

Chief regulator of the thrifts. And by the way, Washington Mutual was their single biggest client. This is a guy who, when Sheila Bair and the FDIC wanted to investigate Washington Mutual. quashed their investigation, OK?

We had the inspector general from Treasury, and we said to him, “What do you think?” I asked him, “What do you think about the stated income loans?” He said — and you go back and look at the hearing record, and you will see it — “This is a target-rich environment for fraud.”

… One of the things you hear continuously from the Justice Department is how difficult it is to mount a criminal investigation, because you have to prove everything beyond a reasonable doubt.


You have to prove materiality, and you have to prove intent.

It really is extraordinarily complex, because when you’re doing drug cases, they usually don’t clean up after themselves. Basically what went on with these cases, when you have very incredibly well-qualified and expensive lawyers and accountants for major banks, they clean up after themselves.

I knew this from the beginning there was going to be a lot of problems. First thing is nobody was monitoring this while it was going on. … Anyone who watched Law & Order on television hears time and again, “If we don’t get a criminal in the first 24 hours, they’re going to get away.” …

The former administration did nothing, didn’t think they should do anything. They came into power. It was six, eight months before they had everybody up and running. We had our first hearings. Lanny Breuer had been in office for, I don’t know, month, two months or something like that, and Khuzami the same thing. So the trail was dead.

But the biggest problem in my opinion to this whole thing, looking back in retrospect with 20/20 hindsight, was we had all these convictions during the savings and loan crisis. Why did we have so many in savings and loan and we didn’t have any in this?

Because in the savings and loan, we had active regulation going on. And most of the criminal prosecution, or many of the criminal prosecutions of the savings and loan executives, came from referrals from the regulatory agency.

So the people that were in there doing the books, checking out the books and everything else, said: “Oh, wait a minute. This doesn’t look right.” … And they’d send it up to Criminal Division. Criminal Division would have their case right there. And they’d be contemporaneous. They were doing it right as that hit, so they got the case.

Do you know how many referrals there were from those kind of organizations for this? As far as I know, none. …

And the final thing was, one of the biggest problems they had — in retrospect it’s clear — is if in fact you’re the CEO of a bank, and you go to your accountant and your lawyer, and your accountant [or] lawyer says what you’re doing is legal, they have reasonable belief that their lawyer and accountant told them, it’s very difficult to get a prosecution of that CEO and any consequences.

That is awful. One of the concerns I heard time and time again is that we’re leaving the prosecution of criminals up to the standards of lawyers and accountants. Now, I think the world of lawyers and accountants, but they should not be the ones who determine … or be able to give a CEO of a bank immunity from ever being charged with a crime because they told him that it was OK or told her it was OK.

So I went in[to] this eyes wide open. This was extraordinarily different. Late to the scene, no referrals from the Criminal Division. There’s reasonable belief standard from the lawyers and accountants. The ability of the lawyers and accountants to go and clean up after themselves, that is all mitigating circumstances. It still doesn’t explain why not one single person went to jail because of the fraud that was committed on Wall Street in 2008, 2007.

What about the idea that this was simply a big bubble, sort of mass hysteria, [that] everybody believed the music was going to continue? And there was a market for the things that they were selling, however faulty these mortgages were, however many defaults there were. Even when they were selling them, it was a mass delusion. It was greed, it was wrong, but it wasn’t criminal.

Yeah, right. That’s Wall Street. Basically what happened, there was this hurricane. There was this natural disaster that swooped down on Wall Street and caused all that. “This was nothing. We didn’t do anything. It was just this gigantic case that you have laid out very well on what’s gone on.” The facts just don’t support that.

And I think the Permanent Subcommittee on Investigations, when you listen to what went on in Goldman Sachs, those discussions, and we learn about what went on with Washington Mutual, when you learn what went on in the rating agencies, all three cases, this was not a natural disaster.

They may say that, like [Goldman Sachs CEO] Lloyd Blankfein argued: “It was perfectly OK to essentially not tell our customers that we were selling our securities to get rid of them at the same time we were selling securities to you. We were betting on the fact these securities were going to go down. But that’s OK, because we’re a market maker, and we’re allowed to do that.”

That is not a natural disaster. That is something where somebody is engaging [in] behavior that in any other business in America is criminal. …

Are you saying Lloyd Blankfein was engaged in criminal activity?

No, it is not criminal activity because [of] the law; they’re allowed to make this market maker thing.

But you said it’s criminal.

I’m saying it’s wrong. I’m saying it’s not a natural hurricane. I’m saying it’s something that happened directly because of behavior by these folks. People think because there’s laws that somehow they’re given by some kind of divine intervention. If you try to put a law forward in the Congress and there are people in important constituencies that don’t want that law, they shape that law.

The reason why we have insider trading cases time [and] again where nobody ever gets convicted of insider trading, they get convicted for obstruction of justice. That’s because the law on insider trading is ridiculous.

The reason why Lloyd Blankfein can say that is because there’s a provision of law that says market makers don’t have to abide by what everyone else did.

So what went on? The second thing with Goldman Sachs was, on the record, I asked Lloyd Blankfein: “When did you have your meeting? You had all these residential mortgage-backed securities that you were selling to your customers, and you also had in your warehouse, you were inventorying, because you were making money off them. You had a meeting, probably weekly, of the top people in Goldman Sachs, at least monthly of even the top people, and you talk about what’s going on. You had hundreds of billions of dollars invested in the housing market through different kinds of derivatives.”

I said, “When did you have the meeting where you said, ‘You know, the housing market’s gone south; we should start unloading’?” And he said to me, and you can look at the record, “We never had that meeting.” The reason he’ll not say they had the meeting is because clearly they did it. And while they were doing it, they were selling their own securities out from under while they were selling their clients other securities.

And if you go back and look, I think it’s the third quarter of 2007, you find out that all of a sudden Goldman Sachs started unloading all of its residential mortgage-backed securities. So they were basically selling, and beyond that, they were selling residential mortgage-backed securities and credit default swaps to their clients.

Goldman will say that was their take on the market, where the market was going. There was nothing wrong with what they were doing. They simply made a call that this stuff was going to decline in value, so let’s unload it. What’s wrong with that?

… If that’s true, why are you so hesitant about saying when that decision was made?

So why are they?

Because they behaved in all kinds of, I think, fraudulent ways after that in order to unload these securities: not telling their clients what was going on, putting in the fine print things that got around the law.

But if their argument is, “Look, we just reached a point where we decided it was time to get out of the market and done,” well, why don’t you tell me when that point is? Because let’s see what your behavior was after you made a conscious decision.

After that behavior, did you then tell clients something totally different? After you’d made the decision the housing market was going south, [you’re] still telling clients: “Oh, the housing market’s great. Hey, I’ve got a bunch of residential mortgage-backed securities I’d like to sell over here out of my inventory.”

That’s not a market maker. … That sounds like fraud to me.

Then there’s the bankruptcy examiner’s report on Lehman Brothers, another window for you.

Absolutely. Outrageous. Lehman Brothers had a thing called “Repo 105” where they took liabilities, moved them off their balance sheet in order to make their balance sheet look better, and did not tell the public. But not only that, [they] didn’t tell their stockholders.

Now, one of the things, as a stockholder and one of the [people] that invests, is you’ve got to count on the fact that when you get an audited account, that at least the assets and liabilities are right, the simple assets and liabilities.

… I’m thinking about investing in Lehman Brothers, and I look at this thing, and it says they’ve got these assets and liabilities, but really $50 billion in liabilities are not on the assets, so the balance sheet looks great when it’s really lousy. That seems to me to be fraud.


Criminal fraud.


Oh, clearly intentional. I don’t understand why we could not get a criminal prosecution on the Repo 105s.

Nobody paid for that. Nobody was held accountable for that.

… There’s all kinds of behavior that went on that clearly was fraudulent in my opinion, looking back on it, for which no one paid a penalty. And that has severe consequences for the country.

“There’s a lot of talk in the Senate about our grandchildren when it comes to the deficit and the budget. What went on on Wall Street really I think will have every bit as much consequence.”

If people genuinely believe on Wall Street that they can get away with fraudulent behavior, that strikes at the very center of our history and our success. And one of the big reasons we’ve been successful is because we have the most credible markets in the world. People come from all over the world to invest in our markets because they’re credible.

There’s big markets developing overseas in Frankfurt, [Germany], in London and Singapore that are competitive with ours. If in fact we lose the fact that our markets are honest, that it’s credible, that you can pick up a balance sheet on a Fortune 500 company and you don’t know what’s in it, you don’t know whether there’s $50 billion in liabilities or not, that goes to our basic [credibility]. Or if you don’t know that a company [with] the history and tradition of Goldman Sachs is selling securities they know are bad, that has great impact on our grandchildren.

There’s a lot of talk in the Senate about our grandchildren when it comes to the deficit and the budget. What went on on Wall Street really I think will have every bit as much consequence on our grandchildren if in fact our markets and our financial system is seen as corrupt.

So you get to the end of September. Why do you decide to hold another oversight hearing? …

Because it was the end of my term, so what I wanted to do is I wanted to have another oversight hearing since this was one of my top priorities.

And how had your views changed at that point?

I was a little disturbed that we’d been going a year and I hadn’t seen anything. I’d been through the Permanent Subcommittee on Investigations. I’d seen what went on in Washington Mutual, what went on in Goldman Sachs, what went on in the rating agencies up close and personal, you know, hundreds of pages of reports and then testimony. …

So you were in a very different position. At this point you’ve gone to school; you’ve done your homework. What you suspected was happening on Wall Street, you’ve seen evidence that it in fact had happened.

Exactly right. …

So you gaveled the second FERA oversight hearing, … and you say, “I will say it right now that I am frustrated.”

Exactly. That’s the way I felt. The whole time I was a senator I said exactly — I mean, I hope I was tactful — but I said what I thought. And I was very frustrated that nothing was going forward from the Justice Department or the Securities and Exchange Commission.

… Were you reassured? Were you given the sense that there —

I was past reassurance. Remember, this is the end of my term.

You were past reassurance. What does that mean?

All I wanted to see was facts. … I was totally interested in results. I want to see some criminal prosecutions being brought by the Justice Department or by Securities and Exchange Commission. That was the only thing that was going to reassure me, because I sure wasn’t going to be reassured at talk. …

So you were frustrated. You were beyond accepting verbal reassurances. You wanted to see action, and you saw none.


Your chief of staff said that at this point [you] felt that [you] had been gamed.

I didn’t feel gamed. I just felt frustrated, disappointed. I felt that it was very bad for the country. It was very bad for the economy and for the markets that none of this had gone forward.

How it happened and the rest of it, there are a lot of different reasons that went forward. But clearly, in my opinion, this was not made the priority that I thought it was going to be made. And I don’t think cases were followed to the extent that they should have been.

And it was a bunch of individual decisions that people made, in my opinion, a bunch of different prosecutors that found the cases were too complex to deal with. … I was very upset that they had not brought any criminal cases, and I am to this day.

If they felt that they couldn’t win a criminal case, do you think they should have brought criminal cases anyway?

No, I don’t think you should bring a criminal case that you can lose, because I think one of the reasons we have the problem in the beginning is because they brought a case against two people with Bear Stearns. They lost the case, and that really I think scared the Bush administration, scared them that they didn’t want to go forward, maybe a little reticent to come forward with a case it could win. …

Lanny Breuer tells us that “Look, you’ve got to prove intent. You’ve got to prove beyond a reasonable doubt to get a criminal conviction.” And they have not been able to do that. Why is that?

… I don’t know for a fact. I haven’t gone into each one of the cases. I’m not privy to all the files and everything else that went on, how the decision was made, which is the way it should be. …

I [was] just incredibly disappointed. The result was not what I frankly expected when we started on this. I thought that because of the outrage in the country, because of the incredible cost to Americans and lost jobs, lost homes, [or] the fact that we almost created a financial crisis around the world — I mean, when Iceland fails because of what we’re [doing] — that there had to be fraudulent behavior going on. …

Your conclusion is what, that they didn’t make this a top priority?

I feel uncomfortable kind of, you know, characterizing what went on. These are very difficult cases and all the rest of that.

But you’ve got to spend a lot of time thinking about this.

Oh, I do.

You spend two years pushing this bill up the Hill.

I do. And I don’t understand. I’ve worked in Washington for 22 years on the staff, two years United States Senate. I’ve been around Washington for 40 years. I’ve taught about it at the Duke Law School for over 20 years. I think I’ve got a pretty good indication of how the Congress works, how the administration works and how those things works.

I cannot figure out why in the end they didn’t bring one prosecution. They couldn’t find one case in all the things that went on and all the rest of it? …

“There’s two levels of justice in this country. Clearly people can steal millions of dollars … and get away with it, and the rest of the folks have to pay for whatever crimes they commit.”

We just had the settlement on the BP case where people are going to be prosecuted, where there was major fines, criminal behavior. … Based on what I can see at BP and what I’ve seen on Wall Street, there was a lot more bad things went on on Wall Street than ever went on in BP, and we brought a case against BP.

Why not a case? Not one? If we brought five cases or 10 cases, would I have been disappointed? Yes, I would’ve been disappointed. But the fact that we brought none sends a clear message that there’s two levels of justice in this country. Clearly people can steal millions of dollars — which I think is what went on — and get away with it, and the rest of the folks have to pay for whatever crimes they commit.

So you must leave the Senate then in 2011 with a sense of having failed on this score.

… If you go to work every day like I did in the Senate, every day for eight, 10, 12, 14 hours, and work as hard as I can and try as hard as I can, and I can go home at night and know that I’ve done everything I possibly could to reach something, there’s a peace that comes from that.

It isn’t about winning. It’s hard to explain to younger people. It isn’t all about winning. It’s about knowing you gave your very, very best. And I gave my very, very best on this. Was I successful? No, but that doesn’t mean that I feel I was a failure or I failed or anything like that. …

In September of 2011, Occupy Wall Street starts demonstrating in lower Manhattan and spreads around the world. By January of 2012, the president goes before Congress for a State of the Union address and announces the formation of a working group on mortgage fraud. What was that about?

I have no idea because we already had a fraud task force. And when I looked at what was in the fraud task force that was announced at the State of the Union and the fraud task that was announced a week before my first hearing on the oversight of the Fraud Enforcement Act, I couldn’t find a whole lot of difference.

I don’t know what happened to the first fraud task force, and I don’t know why they ever announced the second fraud task force. They could just bring back the first fraud task force and actually have put all the resources they were talking about in the second fraud task force into this. I didn’t get it.

Was this just political show?

I have no idea what their motivation is. I try not to question other people’s motivation. I don’t know what it is.

But when you watched it — I assume you watched it on TV — what did you think?

I didn’t know what to think. I just was like, as they say Yogi Berra said, “This is déjà vu all over again.”

I think you’ve said here that the Justice Department never made investigating financial crimes a high priority. Is that a fair —

No, I didn’t say that. I say that it appears that [way] because of several things. First of all, it appears because of lack of results, but also things along the road that happened that it was not ever made as high a priority as I thought it should be. …

If you listen to what the president said and others said, they were primarily interested in looking forward as opposed to back. I think that went on in a lot of areas during 2009. I think the feeling was kind of go back and look at what happened and spend a lot of time over that, or, this is a brand-new administration; we’re interested in change. You know, we should look forward at what’s going on. So I think there was a feeling throughout the administration of not looking back.

Now, that should not have affected this, because clearly, how do you know what’s going forward if you don’t know what went wrong in the past? I mean, how do you go forward? It’s like building on faulty ground.

So basically my feeling was I felt very comfortable with looking forward — I looked forward when I was a senator — but we had to go back. Like on the Dodd-Frank, we had to go back and look in detail about what happened during the meltdown in order to write the laws so that it never happened again.

As one person put it to me, the government ought to be able to walk and chew gum at the same time.

Well, that’s easy to say, but the government is doing a lot more than walking and chewing gum. …

… And there’s a lot of people, good people, professionals who ought to be able to both look forward and write new regulations as well as prosecute past crimes.

They could, and they should. And I think this is a separate thing from look forward. But that’s where the word “priority” comes in. OK, we can do all these things. They did a whole thing on fraud task force. They hired people. They got accountants. They went out, and they did a whole bunch of things.

That’s the whole point of their doing these things. They’re walking and chewing gum. The federal government every day worries about everything from what’s going on in the Middle East to what’s happening on Wall Street to what’s happening with individual people with their mortgages, what’s happening in terms of jobs. I mean, we went through a campaign, whether there’s global climate change or not. …

We have to figure out what our priorities are. And I think in many places they were saying: “Let’s not go back and castigate the Bush administration. Let’s not talk about all the bad things the Bush administration did. Let’s look forward and figure out what we’re going to do to straighten it out.”

Now, this is one area of the government … where you have to go back and look at what happened before, because it’s absolutely critical to determine how you’re going to move forward. …

And when you walked out of your office and turned out the lights for the last time, did you feel like the game was over, that there wasn’t ever going to be a prosecution of a Wall Street executive?

Absolutely. … I think after the Bear Stearns case and the fact that nothing went forward, the government really lost one of its major weapons, which was the ability to go after small fry and then work your way up the chain.

And by the time I left in November of 2010, that became an article of faith. Everybody on Wall Street figured they’d gotten away and that the government had moved on. And I think that’s really what happened.

… We’ve now seen a number of civil cases being filed, and in some of these the banks have settled for hundreds of millions or even billions of dollars. Is that not a sufficient deterrent?

Is it a deterrent? Yes. Is it a sufficient deterrent? Not at all, for two big reasons. Number one is shareholders end up paying for it. … If I’m in a bank and I engage in risky behavior, fraudulent behavior, bad behavior that creates this incredible problem, nothing on my skin. I’m making money. …

So the first thing is the fact that you bring these civil cases and you get the fines. They’re not paying for it. The second thing is in every one of these cases, the bank is allowed to say, “We do not admit to any criminal behavior or any bad behavior.” That is absolutely, in my opinion, outrageous. I know they’ve been doing it for 30 years. It was time for it to stop a long time ago.

You’re down in Washington. These bankers really don’t believe they did anything wrong. I don’t see any indication in Jamie Dimon’s behavior that he believes anything that JPMorgan Chase — I don’t care how many fines they pay the federal government — they never did anything wrong, because then they go to the bar, and they sit around the bar and they say, hey, we never admitted to doing anything wrong. I didn’t do anything wrong. It was that federal government. You know what the federal government’s like. They’re coming in on regulations. They’re coming in and doing all this bad stuff. It’s all Washington. It’s not us. So I had to pay the fine, and sure, I paid the fine. So you know our dividend was down by two cents or whatever it was. I paid the fine, and I walk away, but I never said we did anything wrong. …

I think after two or three months, one of my favorite sayings is, “Never underrate the ability of the human mind to rationalize.” I absolutely believe at the bottom of [my] being that those bankers who were involved and paid those fines at first, maybe they had two or three months they genuinely believe, “I didn’t do anything wrong.” Well, if you didn’t do anything wrong, why are you paying $400 or $500 million in a fine or more?

To avoid a trial.

… If we have to go to trial, let’s go to trial. We have a case. They wouldn’t pay $400 million if we didn’t have a case. Now, maybe we’d only get $250 million, but they would get $2 billion. Who knows? The idea is to make it a policy of the regulators that they will never ask in whatever case they have. They will settle, and no one will ever have to claim they’re guilty. …

Does anybody else in America get an opportunity to [do] something that costs so much to the stockholders, to shareholders, to the economy and the rest of it and be able to walk away say, “Hey, the federal government gave me a Good Housekeeping blue ribbon of approval. I never said I did anything wrong”?

Jason M. Breslow

Jason M. Breslow, Digital Editor



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