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Home Publications Blogs Beat the Press Prosecutors Could Send Bankers to Jail

Prosecutors Could Send Bankers to Jail

Wednesday, 20 August 2014 04:24

William Cohan had a column in the NYT noting that the Justice Department's settlements with the major banks over their securitization of fraudulent mortgages largely let the banks off the hook. His alternative route would have been criminal (as opposed to civil) prosecutions of the banks. While this may have led to more severe consequences for the banks and their current shareholders, it still would have allowed most of the people responsible off the hook.

In most cases, the top executives who set the course for the banks during the housing bubble years have moved on. They are either retired or employed elsewhere. Therefore they would not be affected by harsh punishments directed at their former employers. If the point is to have a sanction that will provide a serious disincentive to illegal actions then the Justice Department should have been trying to criminally prosecute the bankers themselves.

Knowingly packaging and selling fraudulent mortgages is fraud. It is a serious crime that could be punished by years in jail. The risk of jail time is likely to discourage bankers from engaging in this sort of behavior. The risk that their former employer may face serious sanctions years after they have left will not.

Comments (9)Add Comment
Let's replace bank regulators with chimpanzees.
written by Ralph Musgrave, August 20, 2014 6:06

Also, punishing bank shareholders for the crimes of others simply raises the return that shareholders will demand in future for holding bank shares. And that will bump up the cost of mortgages. All in all, Justice Department officials and bank regulators might as well be replaced with chimpanzees.
written by Last Mover, August 20, 2014 6:31

Meanwhile back at the Obama ranch, Eric Holder himself is paying a visit to Ferguson Missouri to demonstrate just how serious the administration is ...

... about lagging behind as far as possible in the feckless political parade of America before pretending to lead it - and lift a finger to enforce the law.

You see America, when the choices are among hope, change and the law, the law always comes last if it comes at all, because hope and change springs eternal until the next election.
Criminal Prosecution and Fraud
written by Ellis, August 20, 2014 9:28
"If the point is to have a sanction that will provide a serious disincentive to illegal actions then the Justice Department should have been trying to criminally prosecute the bankers themselves."

If this was correct, then there wouldn't have been a subprime scandal in the first place, given all the prosecutions following the Enron scandal, the internet bubble, and the Savings and Loans crisis. Thousands were prosecuted, including several high profile chief executives.

The idea that criminal prosecutions will stop fraud is a fraud in itself meant to assure the public that the problem is solved, when the next set of frauds are already being carried out.
The justice system failed while under the influence of a Constitutional Law Professor
written by Dave, August 20, 2014 10:45
If this isn't a sign of a major shift of American democracy and justice, I don't know what it is. Our justice system has failed. Completely. It failed as a direct order from the top.

Our leaders made their decision: they favor riches over justice. It isn't valid to say that prosecuting bankers would have caused a lot more damage. This is a fantasy of the bankers and those who believe them.

The failure of a justice system seems much worse in the long run than a failure in our private retirement plans.

Unfortunately, I think our leaders had bad economists informing them. These were the very economists that helped eliminate the last protections of Glass-Steagall and have yet to admit their mistakes.

It might be political suicide to admit mistakes these days. Well, so what? Is a political career more important than our justice system?
Require professional licensing
written by river, August 20, 2014 8:29
I am an engineer, and pretty much everything I do I have to affix a stamp and signature which is a testament that I have reviewed the work that was performed and that I certify that it meets specifications. If I make a mistake, or somebody below me makes a mistake And I fail to catch it, and I am professionally and personally liable. I could lose my license, my money, or my house if I make a mistake. I could even go to prison if the mistake was bad enough.

I get paid way less than a banker and for some reason willingly accept this risk.

Simple question is why not just require bankers have the same sort of licensing requirements. You put together an abacus deal, you affix your professional bankers stamp to the front page stating that you personally have reviewed the underwriting and certify that it meets universally accepted standards. If and when it goes bad, you are professionally and personally liable for any faults found in the original underwriting. You can lose your bankers license, you can lose your mansion in the hamptons, you can lose your yacht in the Florida keys. And if the fraud was bad enough, you can still go to jail. But it gets away from the hard to prove ill-intent.
So, Ellis, please do explain ...
written by John Puma, August 21, 2014 7:06
what, exactly, is the purpose of the legal system?

Is it only the already obscenely rich whose propensity to crime cannot be effected the prospect of conviction and punishment?

Or should the whole third branch of government be scrapped?
An Explanation
written by Ellis, August 21, 2014 9:09

One lesson is that the Republicans are a lot tougher at prosecuting bankers and fraudsters than Democrats -- given Obama's record, compared to the two Bushes.

But seriously, I believe the entire economic system is anarchic and unjust. And it is riddled with fraud and crisis. That's what I take out of the miserable news every day.
Still Confused
written by Kevin Mc, August 22, 2014 7:03

I might agree with you regarding the nature of the "entire economic system", but how does the nature of the economic system obviate the need to prosecute known, or suspected, criminals? If we're going to have law and order (which I do prefer over anarchy), why should we just allow prosecutions of "non-economic" crimes? (Need I spell out the racist nature of only prosecuting crimes that Wall Streeters won't be likely to commit?) And where can the line on the (f)utility of prosecuting crimes in general be drawn?http://www.cepr.net/index2.php?option=com_jomcomment&no_html=1&task=img&jc_sid=87d3c8332337
To Ellis: your tap dance was exquisite ...
written by John Puma, August 24, 2014 1:21
but you haven't answered the question.

If, as you claim, the prospect of legal penalty has NO effect on (potential) financial criminals, then it is of absolutely NO consequence which administration prosecutes more toughly than another.

How is a system that is "anarchic and unjust" to be changed without use of law and penalties for breaking it ... a formula you say simply can't work?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.