No Time: Feds Have Given Up Trying to Send Bankers to Jail

(MoneyWatch)  Remember "perp walks?" After the string of corporate fraud cases that followed the tech blowup, we witnessed a rogue's gallery of white-collar criminals getting arrested.

Sure, it was tawdry (and often political) spectacle to watch guys like former Enron capo Jeffrey Skilling and ex-HealthSouth boss Richard Scrushy try to dodge the cameras. But such theater served an important symbolic purpose -- you knew the bad guys were getting nailed. And it sent a message to the business community that if they couldn't do the time, they shouldn't do the crime.

Not so after the financial crisis. Forget perps -- no one is even shouldering the blame, other than by engaging in the minor self-flagellation we've gotten from many of the prime suspects. These apologies, cheap as tin, are also couched in the ready alibi that while "mistakes were made," everyone made them. In that moral equation, collective guilt amounts to collective innocence.

That stands in stark contrast to what happened after the savings and loan debacle in the '80s, when more than 1,500 financial execs went to prison. But anyone waiting to see bankers modeling orange jumpsuits should quit holding their breath, because it's not going to happen.

The U.S. attorney for the southern district of New York, one Preet Bharara, this week announced that his office is going to rev up civil litigation against Wall Street. Although the Justice Department initiative is supposed to complement criminal actions, there have been paltry few of those. That leads me to conclude that this new "front" on financial malfeasance, as the FT called it, is more a face-saving avenue of retreat.

"Not every case is a criminal case," Mr. Bharara told the Financial Times. "It's important for us that we deploy all the tools we have, even in cases where a criminal prosecution is not appropriate."

Ok. But in wake of a crisis that shook the world, you'd expect at least some cases to be criminal. Certainly that's the impression you get from President Obama's ballyhooed Financial Fraud Enforcement Task Force, which Bharara's office describes as waging an "aggressive, coordinated" effort to punish such crimes.

The SEC did have Goldman Sachs (GS) in its sights there for a while, but it ultimately blinked. The squid paid a fine without admitting guilt. As for Joe Cassano, until 2008 the ringleader at AIG's infamous Financial Products unit, he's walking away scot-free -- and rich. It also looks doubtful whether Countrywide CEO Angelo Mozilo, who may soon go to trial on allegations of securities fraud and insider trading, will ever face criminal charges.

Another reason to question the seriousness of Bharara's effort are the puny resources he has to pursue an aggressive, coordinated campaign targeting financial fraud. The new division charged with pursuing civil cases against Wall Street consists of six people. Oh, and the unit isn't only supposed to root out financial fraud; it's also expected to go after health care, pharmaceutical, procurement and a range of other schemes. While they're at it, why not finish off the Cosa Nostra and clear out those annoying double-parkers on 23rd Street?

Whatever these attorneys' professional competence and dedication, it hardly sounds like Eliot Ness and his "Untouchables" patiently lying in wait for Al Capone.

Pursuing justice in a civil trial is, of course, better than nothing. But on the Street, paying even large financial penalties has always been the cost of doing business. There's no evidence that such monetary awards do much to stop misconduct, given that they're dwarfed by the potential gains of skating the legal edge.

By contrast, it's reasonable to think that the prospect of a few years behind bars has the same deterrent value on CEOs as it does on the law-abiding population at large. It's one thing to forfeit profits, quite another to forfeit your freedom.

The crux of the question, of course, is whether mortgage brokers, lenders, investment bankers and others that helped inflate the housing bubble actually broke the law. It would be unjust to retroactively criminalize acts that were legal at the time. But given the rampant level of mortgage fraud during the real estate bubble, among other dubious activities, it's hard to imagine that the law wasn't so much broken as trampled into submission.

Meanwhile, sometimes a corpse goes missing to conceal an even larger crime. The paucity of criminal prosecutions of financial execs suggests that the law itself needs fixing. Amazingly, for example, it's not a crime for lenders -- which consumers consult for advice from financial experts, after all -- to deliberately push borrowers who qualify for cheaper loans into pricier ones. That's absurd.

Here's what needs to happen. Congress should back legislation that criminalizes predatory lending and otherwise prescribes sanctions for financial misdeeds known to harm the public. The feds should give financial regulators greater resources to investigate and prosecute such acts. The courts must have stiffer sentencing guidelines for white-collar violations. Legal scholars also may need to revisit what constitutes financial fraud. And perhaps it's time to seriously consider a corporate death penalty for companies that repeatedly break the law. The "three strikes" principle doesn't only have to apply to potheads.

What won't work is for our elected leaders to leave the task of restoring law and order in financial services to task forces and to the discretion of individual government attorneys, no matter how steely. Justice -- for all -- demands more.

Image from Wikimedia Commons
Related:

• Better Than Bernie: How Wall Street Used CDOs to Perpetrate a Massive Ponzi Scheme
• Ex-AIG Exec Joe Cassano is Free, Rich and -- in His Mind -- Innocent
• The Goldman Sachs Settlement: Is This Justice?
• Street Fight: Time to Send Bankers to Jail
• Why the Financial Crisis Inquiry Commission is Better Than Valium
• Sure Bet: How Wall Street is Dodging the Volcker Rule