Our Morally Bankrupt Government, Justice Edition Part I: Enforcement Against Financial Meltdown Perpetrators

Perhaps the clearest window into a nation’s soul is its criminal justice system. Criminal law is legislated morality: certain acts are so vile, we exile the perpetrators to prison. But not every criminal. America will never have enough resources to catch and prosecute all criminals. As a result many guilty go free without ever being pursued, simply because the government decided spend its limited resources elsewhere. Looking at whom the government prosecutes, therefore, is an easy way to see law enforcers’ priorities in action.

Sadly, when it comes to the Financial Meltdown perpetrators, scrutiny reveals those priorities are deeply distorted. Our law enforcers chose to become the protection detail of our wealthy-beyond-dreaming-crooks-in-chief, while throwing the book at their guilty but less destructive subordinates.

Who should we be prosecuting? Well, there’s Dick Fuld of Lehman; James Cayne of Bear, Stearns; Joseph Cassano of AIGFP; Angelo Mozillo of Countrywide; and E. Stanley O’Neal of Merrill Lynch, just to name a few. There’s also all the bailed out top bankers still in power, such as Lloyd Blankfein, Jamie Dimon, and the meltdown era executives at the other biggest bailout recipients: Citigroup, Bank of America, Wells Fargo, Morgan Stanley. And that’s not an exhaustive list.

As I lay out below, AG Holder and President Obama have abandoned the cherished American principle–the core democratic principle–of equality before the law. That’s a kind of moral corruption that strikes at the heart of our national identity. And as best I can tell–again, the evidence follows–this corruption flows from Treasury Department/Wall Street fear mongering and revolving door conflicts of interest.

Worst of all, our top law enforcers abandoned equality before the law precisely when our democracy desperately needs it. Our only defense against the growing tyranny of the 1%, the only means we have of policing the bounds of their power, is the vigorous and equal enforcement of the law.

The Buck Stops with Holder and Obama

A couple of housekeeping notes first: Many at Justice and in the FBI are ethical and moral people who try very hard to do right by the American people. So even though I use the word “Justice” as in Justice Department throughout, my critique does not apply to the people below the very top. Fundamentally only Attorney General Eric Holder and President Obama are responsible our Department of Justice’s enforcement priorities.

Attorney General Holder runs the show, but President Obama gave him the job, and can fire him at any time. Holder’s enforcement priorities and strategies therefore must reflect Obama’s priorities. I realize that’s a very formal take, but it’s the only defensible one. I don’t care how much who knew about what, how decisions are or were in fact made, or any other framing or excusing of AG Holder & President Obama’s responsibility for our criminal justice priorities. In our democracy the only political control We, the People have on our national criminal enforcement priorities is our vote for President. And an incumbent President’s strongest advertisement of his enforcement priorities is his Attorney General and his record. The buck stops with them, period.

Judging Justice

Another important caveat about this critique: I’m only looking at all things Financial Meltdown. In this part one, I’m looking at the prosecution of perpetrators, bankers and the companies they run. In part two I look at Justice’s defense of our legal system, of the rule of law itself. While Justice is responsible for many other topics–combating terrorism, for example–the Financial Meltdown devastated our economy, deranged our democracy and destroyed trillions of dollars of ordinary Americans’ wealth. So though I’m only grading one subject, it’s not a gotcha quiz. Nor does it say anything about Justice’s performance in those other areas.

Nor am I rigging the test: Justice itself defined the standard for judging it. The Justice Department’s Mission, as spelled out in its “Performance and Accountability Report 2011” is:

“To enforce the law and defend the interests of the United States according to the law, to ensure public safety against threats foreign and domestic, to provide federal leadership in preventing and controlling crime, to seek just punishment for those guilty of unlawful behavior, and to ensure fair and impartial administration of justice for all Americans.

And Justice cites these core values in guiding its mission:

“Equal Justice Under the Law….”Honesty and Integrity….
“Commitment to Excellence….”Respect for the Worth and Dignity of Each Human Being….”

This mission and these values are animated by “Strategic Goals” and the “strategic objectives,” under each (at p. I-2). For Part 1, this is the only strategic goal and objective that matters:

“II Prevent Crime, Enforce Federal Laws, and Represent the Rights and Interests of the American People

…”2.5 Combat public and corporate corruption, fraud, economic crime, and cybercrime.” [I'm not going to talk about cybercrime.]

Giving Credit Due

Let’s start with Justice’s self-assessment (at p. II-15). Basically, Justice thinks it’s doing a great job: ”the FBI obtained the most convictions in the history of its Corporate and Securities Fraud programs” and took down 340 “criminal enterprises engaging in white collar crimes”, hugely exceeding the target of 250. More; Justice reports it won 93% of its criminal prosecutions, including financial frauds and other categories. (at pp. II-17 to -21) That win percentage shows that when Justice puts crooks on trial, the bad guys don’t really stand a chance. Justice is more dominant than the Steel Curtain. Just ask Jeff Skilling, ex-CEO of Enron.

A closer, and still positive look at Justice’s work on all things Financial Fraud comes from the news pages of the Financial Fraud Enforcement Task Force. That task force was set up by President Obama “in November 2009 to hold accountable those who helped bring about the last financial crisis as well as those who would attempt to take advantage of the efforts at economic recovery.”

Highlights from the task force’s 2011 include winning important convictions for bid-rigging that defrauded municipalities; insider trading; executives’ embezzlement from their banks; multiple mortgage fraud schemes; and many other financial crimes. Justice even convicted a major CEO of securities fraud (ex-Duane Reade CEO Anthony Cuti) and took down Lee Bently Farkas, ex-Chairman of Taylor, Bean & Whitaker for bank and securities fraud. Finally, Justice has filed several important civil suits, like one against Deutsche Bank and its mortgage subsidiary MortgageIt, for defrauding HUD.

Those Successes Highlight the Big Failure

So yes, our Justice Department is prosecuting financial fraud on a large scale. But these cases are all against small and medium fish, or at best, are token cases. Why not take on the Great White Sharks, and do system-wide prosecutions? If the excuse is resources, well, that’s a leadership decision, not an insurmountable problem. And the decision is deeply flawed: the failure to target the sharks and clean up fraud systematically has damaged our nation deeply, and leaves it very vulnerable.

Here’s what I mean about small and medium fish: Justice considers 14 people who scammed $47 million using 22 Florida properties a “Large-Scale Mortgage Fraud Conspiracy” and $23 million in fraudulent loans for 44 NY properties a ”Massive Mortgage Fraud Scheme“. If those cases are “large scale” and “massive”, what’s the appropriate superlative to talk about the mortgage fraud conspiracy at Countrywide or WaMu or any of the others? What superlative would Justice use if it convicted their executives? SuperMegaGigantoNormous Fraud?

Similarly, the Financial Fraud Task Force went after mortgage modification scams like this not-quite-a-million dollar California loan modification fraud. The crooks in that case targeted homeowners with letters filled with false promises about modification help, and took the money of homeowners who relied on those representations. Now, those crooks deserve what they got; thanks, Justice, for nailing them. But as Massachusetts AG Martha Coakley and Nevada AG Catherine Cortez Masto’s lawsuits detail, the banks have done similar things themselves. (See Coakley’s suit starting at paragraph 124, and Masto‘s whole complaint.)

That is, the banks made and make numerous representations to homeowners that prove false–most devastatingly, that the foreclosure is on hold while the modification is in process–and they take money based on those representations, called trial payments. Under Massachusetts and Nevada law the banks’ practices are illegally deceptive. How come they’re kosher under federal law but the guy in California deserved jail?

So that’s the small fish/shark problem. And no, the Farkas conviction isn’t sufficient to address the issue. Farkas wasn’t one of the biggest boys. If he were one of many, fine. But on his own it’s not enough to matter.

By critiquing token cases, I mean suits like the one against Deutsche Bank. Deutsche Bank, through MortgageIT, was not the only major bank that defrauded HUD, according to HUD itself. Last May Shahien Nasiripour broke the story on HUD’s internal report essentially indicting Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial for precisely MortgageIT-type claims. Not coincidentally, the Deutsche Bank suit was announced May 3, and Nasiripour’s story hit on May 11–I’ll bet people inside HUD were outraged only Deutsche Bank was charged. Since then only one other defrauding-HUD case has been filed, and it also is relatively small fry: Allied Home Mortgage.

Consider that MortgageIt and Allied Home don’t even rise into the top 25 subprime lenders. When looking at the list, remember that Countrywide and First Franklin/National City/Merrill Lynch are now Bank of America (BofA); Long Beach Mortgage/Washington Mutual and Encore Credit/ECC Capital/Bear Stearns are now part of JPMorgan Chase (JPM); and Wachovia is now part of Wells Fargo (WFC). The liability those banks have surely dwarfs what MortgageIT created for Deutsche Bank or Allied Home created. Since Justice was given the HUD report and its veritable indictments of the biggest banks, why haven’t suits followed? Big, big money’s at stake.

The SEC has taken a similar approach to its CDO cases. Nail each of the big banks for one of dozens of similar securities. Tokenism is just as destructive in that context. Token suits in the face of such widespread wrongdoing have zero deterrent effect.

Recidivism Risk: Why The Failure To Prosecute Matters So Much

Look, AG Holder might say, why are you being so harsh? All the medium and small fry we’ve convicted hurt many people and deserved what they got. Each “token” case is a big deal, a major resources suck, but we’re bringing them anyway.

Well, on the token cases, if MA AG Coakley can sue several big banks at once, so can you. Don’t tell me the Massachusetts AG has more resources than Justice. More: win the cases and they more than pay for themselves. Can you win? Well, consider this case in which private investors beat Citi badly. With facts like those, how could you lose? And there’s similarly damning facts under any part of the Wall Street sidewalk you turn over.

Right now top bankers are so confident no one will prosecute them that they show absolutely no respect for the law. I mean, all the big banks, which means, all the top bankers, have repeatedly violated injunctions they’ve agreed to with the SEC. And why not? As Judge Rakoff noted, the SEC hasn’t enforced a single injunction “against a financial institution for at least the last 10 years.” But it’s more than that; the bankers’ disdain for the law is most clear in the fraudulent documents and the deceptive practices that are part of the banks’ current business model.

New York City hasn’t seen such lawlessness since its murderous 70s, 80s and early 90's. Residents lived in constant fear, and graffiti marring every inch of every subway car reminded everyone that law enforcement had lost control. NYC’s gold-collar crooks are just as brazen now, wreaking economic violence across our planet. And like the subway graffiti, fraudulent documents defacing every inch of our courts and land records show law enforcement’s impotence.

Law enforcers took back the subway by frisking turnstile jumpers, arresting people for outstanding warrants, seizing guns and drugs. That’s important: police and prosecutors didn’t incarcerate little perps, turnstile jumpers. NY incarcerated violent felons by frisking and identifying turnstile jumpers. In addition, NYC visibly reasserted its control by cleaning the graffiti. The government can regain control of Wall Street by vigorous law enforcement against the Great White Sharks and cleaning up document fraud until not a visible trace remains, and the courts and land records are rendered harder to deface.

One key difference between the two crime waves, however, makes thorough prosecution of this gold-collar one crucial. Violent criminals are not easy to deter, because their decision to commit crime is often fueled by drugs and/or rage. Crime reduction comes more from incapacitation than deterrence. With rational people, however, deterrence is possible. All it takes is for the crook to perceive a high likelihood of getting caught and punished. And Wall Streeters are nothing if not rational, at least in the economic sense. Systematic, consistent, and punitive prosecutions of top gold-collar crooks would have a broad deterrent effect. But it has to be the top guys; the next Angelo Mozillo is not deterred by the prosecution of Angelo Rossi.

And frankly, we can’t afford not to deter gold-collar crooks. Wall Street financial frauds suck up so much wealth, nations are brought to their knees. Madoff’s money pile is an ant hill to banksters’ Burj Kalifa.

Is Holder Kowtowing to Geithner?

Part of Justice’s strategic objective is to “Combat public and corporate corruption”. If Justice were serious about achieving this objective it wouldn’t stop until it had incarcerated Darrel Dochow and his former boss, Scott Polakoff, and perhaps Polakoff’s boss too. Who are these people?

Well, they were top regulators at the Office of the Thrift Supervision (OTS). The OTS was a mindbogglingly bad bank regulator. OTS oversaw AIG, Washington Mutual, Countrywide, IndyMac, and BancUnited, to name a few. In fact, the Financial Crisis Inquiry Commission used OTS as a case study in regulatory failure. Dodd-Frank put the agency out of its misery, merging it into the better though still awful OCC.

But I don’t want Dochow and Polakoff prosecuted for mere incompetence. See, these “regulators” allowed (Dochow) and even ordered (Polakoff) banks they oversaw to lie about their financial health. These guys knowingly let the banks under their supervision cook their books. And it’s even worse when you consider Dochow’s history; he was part of the last great banking regulatory failure–the Keating scandal.

And yet Justice has to date declined to prosecute. When Louise Story and Gretchen Morgenson broke the story last November, they reported that the Dochow case had been referred to Justice for prosecution in 2009, so it’s not like Justice hasn’t heard of the situation. So what gives?

Story and Morgenson quoted a Texas law professor explaining that Treasury was blocking the prosecution because OTS was a subdivision of Treasury. If this case went forward, what else would Justice find to prosecute in Treasury’s actions? But if Justice doesn’t prosecute out of deference to Treasury, well, doesn’t that make Treasury and every bank regulator above the law?

There’s nothing inevitable or necessary about Justice’s deference to Treasury. I mean, Attorney General Robert F. Kennedy not only went after the mob, he went after a mobster–Sam Giancana–that had helped elect his brother president. The American people need and deserve an attorney general with that much integrity always, but particularly now.

So that’s where we are on holding the perpetrators of the Financial Meltdown accountable: Small to medium fish incarcerated; big fish and their conspiring regulators not even indicted. Two token cases brought over defrauding the government, but at least five viable cases against bailed-out banks worth many more billions not filed. Add to that dozens of cases brought by the SEC and securities fraud victims that Justice could pick and choose from for targets, but hasn’t. I mean, even if it was something of a joke because he kept his cash, the SEC went after Mozillo.

In all, the record above adds up to the law applied unequally, our economy left at the mercy of banker and regulator recidivism, our Justice system corrupted. But it gets still worse.

Much has been made of a national effort to negotiate with the bailed-out banks over their illegal loan making, servicing and foreclosing practices, their end-run around the public land record system, MERS, and their securities fraud. As the discussions have worn on, it’s become clear that not only is the settlement a hush money effort–look, the banks say, we’ll pay you some billions and you’ll hush up about all the wrong we did–but it’s also now clear that the driver for a quick and dirty settlement is the federal government. At least 14 AGs are so sick of this “law enforcement” charade they’re exploring how best to take effective action together. Why is the Justice doing the bankers’ bidding?

And it’s not just AGs committed to enforcing the law that are realizing Justice is playing for the other team. The FHFA–Fannie & Freddie’s overseer–has also split with Justice. As Nasiripour reported for the Financial Times, FHFA is now working the the NY AG’s office instead of Justice. See, FHFA filed major, evidence-backed lawsuits against all the big banks, but apparently it wants even more negotiating leverage before cutting a deal. (Note to Iowa’s AG Miller, this is how it’s done.)

The NY AG has criminal laws at his disposal, and if the alliance is fruitful, he can use that leverage to get a better deal for FHFA. And the NY AG gets all the documents and evidence FHFA has, simplifying its own enforcement efforts. Yves Smith points out what a slap this alliance is to Justice, since normally it would be the FHFA’s natural ally.

In short, law enforcers serious about enforcing laws and regulators serious about protecting taxpayers are bypassing the Justice department as useless and unhelpful.

So What’s Going On?

I see two basic reasons why Justice has displayed such distorted priorities, and I believe the truth is a combination of both. One possibility is that Secretary Geithner and President Obama’s various Wall Street donors and advisers have convinced AG Holder and President Obama to do this distorted enforcement to avoid another Financial Meltdown. The claim is the Great White Sharks must swim free and their companies be patted on the wrist because the banks’ balance sheets can’t handle the liability, investors can’t handle the uncertainty, and if these guys go to jail, who will run these companies?

But that’s crap. If the banks’ balance sheets can’t handle the liability, liquidate and/or restructure the banks. Since when must we operate in a world with SuperMegaGigantoNormous banks? If Holder and Obama bought this idea, they’ve given in to blackmail.

The other reason doesn’t run through Treasury or Wall Street directly, but from the lawyers that serve them. That is, the revolving door between Justice and the law firm of Covington and Burling meant the people designing the enforcement approach–the Financial Fraud Enforcement Task Force itself– otherwise made their careers and fortunes defending the banks and bankers Justice isn’t prosecuting.

Here’s some highlights, excerpted from my reporting for DailyFinance last Feburary:

AG Holder: Before becoming AG, Holder was a litigation partner at Covington & Burling in its D.C. office for eight years. His practice involved “high stakes civil litigation and white collar criminal defense.” In 2008, immediately before he became AG, Holder was one of six Covington attorneys ranked top in the country in white collar criminal defense.

Assistant AG Lanny Breuer, Head of Justice’s Criminal Division: Just prior to joining Justice, Breuer was co-chair of Covington’s white collar criminal defense department and also an award winner.

James Garland, who joined Justice with Holder but left in 2010: At Justice, Garland

“advised Attorney General Eric Holder on a range of enforcement issues, with an emphasis on criminal…matters, and helped to spearhead the Department’s response to the ongoing economic crisis. He was deeply involved in the creation of President Obama’s Financial Fraud Enforcement Task Force… He worked closely with senior officials at the White House, Main Justice, the U.S. Attorneys’ Offices, and other federal, state, and local enforcement agencies.” [Bold added]

NOTE: the bolded language is no longer in Covington’s bio of Garland. But it was when I wrote the piece last February.

Steve Fagell, who joined Justice with Holder but also left in 2010:

“a member of the Criminal Division’s senior leadership team, [and] a key advisor to Assistant Attorney General Lanny A. Breuer …[Fagell] was integrally involved, for example, in the formulation and communication of Division policy in connection with...corporate and securities fraud, and other forms of financial fraud.…Mr. Fagell also coordinated the Division’s work with the Financial Fraud Enforcement Task Force and the Financial Crisis Inquiry Commission…[Bold added]

And that’s just a piece of the connections between top Justice folks and Covington.

See, our top prosecutor, his top criminal enforcement deputy, and two key architects of Justice’s approach to Financial Meltdown enforcement all worked or now again work for the very people and companies Justice is failing to prosecute. How much of a coincidence can that be?

Robert F. Kennedy must be spinning in his grave.

AG Holder and President Obama, because you have turned our democracy into a de facto aristocracy, I call you morally bankrupt. However, it’s not too late: you can redeem yourselves at any time. Just indict the big boys, prosecute those epitomes of public corruption, ex-regulator Darryl Dochow and his former boss Scott Polakoff, and sue the heck out of all the big banks.

In short, you can redeem yourselves at any time by starting to vigorously and equally enforce the law. Will you?