Virtually No One Will Ever Go To Prison For Financial Crisis Fraud

If there was any better indication that there is something seriously wrong with our economic and legal system in this country, it is the fact that virtually no one has gone to jail for all the rampant fraud and abuse that triggered the greatest financial crisis since the Great Depression. I’m pretty sure that the outrage over this fact is something both Bernie Sanders and Donald Trump supporters can actually totally agree on. And, in fact, most American would also agree. To add insult to injury, taxpayers were then required, not asked, to bail out the very companies and very people that had created the crisis to begin with. In the end, it may have actually made money for the taxpayers but it certainly hasn’t cost the financial firms and the fraudsters who ran them a dime.

Last week, the SEC wrapped up its final case against a Fannie Mae executive charged with securities fraud for understating their exposure to subprime mortgages. The result was a pathetic fine which the individual did not even have to pay for himself – Fannie Mae will make a mere $100,000 “donation” to the Treasury Department and the executive will pay nothing and receive no censure at all. He can continue in his job unperturbed.

If that wasn’t bad enough, on the very same day an appeals court refused to reconsider a ruling that absolved Bank of America and Countrywide of committing fraud. An earlier appeals court ruling overturned the conviction of Bank of America/Countrywide that had been returned by a jury in 2013. The trial court demanded a nearly $1.3 billion penalty for Bank of America and a $1 million fine for the Countrywide executive named in the suit. But the whole case was overturned earlier this year by an appeals court in a ruling that said no fraud had been committed because “willful but silent noncompliance” did not amount to fraud because no misstatement had actually been made.

These two cases represent the final cases the government has been able to mount over the financial crisis and the results are incredibly pathetic. The only government conviction that has actually held up was against a minor Goldman Sachs trader. All other cases, even where the government has reached a settlement, have resulted in either minimal fines or fines that the defendant did not even have to pay on his own and a one or two year ban on certain management positions in public companies. I’m pretty sure that did nothing to discipline the offenders and it certainly sent a very loud and clear message to others in the industry that your chances of actually having to pay for your criminal actions are pretty negligible.

Fraud was rampant in the mortgage and securities business in the years leading up to the financial crisis and everyone knows it. The fact that the government could obtain virtually no convictions stands as a testament not only to a lack of aggressiveness on behalf of prosecutors but it also points out that the laws themselves are clearly failing. So, perhaps it is time to rewrite these laws.  One of the reasons business always love “clarity” and “stability” is that it gives them a chance to plan for a fairly certain short-term future. But it also gives them the opportunity to find creative ways around the laws and regulations. And we all know that some sensitive corporate decisions and discussions get done “off-line” simply to avoid creating a paper trail. Maybe it’s time to write some broad laws that give prosecutors pretty wide latitude in whether they will prosecute or not. Certainly, lots of prosecutors will do nothing, but that’s not much different from today where regulators and prosecutors are already in the pocket of big corporations. But every once in a while, a crusading prosecutor will take these companies on and perhaps win some big judgements and real jail time for the white-collar criminals involved. And maybe, just maybe, the uncertainty created by that possibility would make these people think twice before committing fraud.