In the four-plus years since the 2008 financial crisis, the Securities and Exchange Commission has brought charges against more than 150 people and institutions, and won $2.68 billion in penalties.
For critics of the government’s response, though, a far more telling number is zero — the number of Wall Street executives who have been prosecuted for fraud related to the financial meltdown that left 8.8 million Americans jobless and led to a $700 billion government bailout.
The question is: How does that compare to past crises?
The Great Depression
Virtually no bankers were jailed in the wake of the Great Depression, though not for lack of trying. Beginning in 1932, the Senate Committee on Banking and Currency opened a public inquiry into the stock market crash. The Pecora Commission, as the investigation came to be known, led to indictments for several of the era’s finance titans. However, because banking laws did not guard against the kind of speculation that fueled the crash, mostescaped prosecution.
Among those brought before the commission was Charles Mitchell, president of the National City Bank, now Citibank. Mitchell built the bank into the nation’s largest by splitting it into two branches. One half of the firm became its investment arm, while the other was its banking arm. The former sold what would prove to be shoddy investments to clients, often financed with money borrowed from the latter. When the market crashed, clients lost millions and the bank nearly collapsed. Mitchell resigned and admitted to the Pecora Commission he knew his bank was pushing bad investments. He went on to be indicted for tax evasion, but was ultimately acquitted. He paid a $1 million civil fine instead.
The utilities magnate Samuel Insull also appeared before the commission, but then fled the country in June 1932, eight months before prosecutors brought fraud charges against him. Insull pioneered the concept of a holding company, in which one company holds partial or complete interest in another company. At the height of his success, Insull controlled businesses worth as much as $500 million in assets with just $27 million in equity. When the crash hit, 65 of his businesses failed, ruining 600,000 investors. Insull was eventually returned to the U.S. nearly two years later, but beat the charges.
Despite the lack of prosecutions, the Pecora Commission showed the nation that “real people, not just institutions” were behind the crash of ’29, said Robert McElvaine, a Great Depression scholar and professor of history at Millsaps College.
The resulting public backlash translated into meaningful reform. The Pecora Commission endorsed the creation of the Securities and Exchange Commission, predicting it would “materially abate, if not eradicate, abuses that caused much economic distress.” It also endorsed the Glass-Steagall Act, which until its repeal in 1999, required a strict separation of commercial and investment banks.
Savings & Loan Crisis
A more aggressive response followed the savings and loan crisis of the ’80s and early ’90s, when more than 1,000 bankers were convicted by the Justice Department. Among those jailed were Charles Keating Jr., whose Lincoln Savings and Loan cost taxpayers $3.4 billion, and David Paul, who was sentenced to 11 years in prison for his role in the $1.7 billion collapse of Centrust Bank.
One key tool used during the S&L crisis was criminal referrals from regulators to government prosecutors, explainedWilliam Black,who served as the government’s point man for litigation in the S&L crisis. Such referrals “are absolutely essential,” said Black, becausethey provide a road map for aJustice Department already short-staffed in the area of white-collar crime. According to Black, criminal referrals have been missing in the response to the 2008 crisis.
Black, now a professor of law at the University of Missouri at Kansas City, said theFederal Home Loan Bank Board — the predecessor to the Office of Thrift Supervision (OTS) — passed along thousands of referrals to prosecutors. “Flash forward in the current crisis, the same agency made zero,” he said.
In a statement, a spokesman for the Office of the Comptroller of the Currency, which merged with OTS in 2011, said that referrals are a “poor indicator of the quality of supervision” because they ignore the Suspicious Activity Report process, in which banks are required to report known or suspected criminal offenses.
The statement said that “using the number of referrals to compare the crisis of the 1980s to the most recent economic crisis is comparing apples to oranges.” It continued: “A significant number of thrifts failed in the 1980s because of fraud and insider abuse. That has not been the major factor behind the most recent crisis.”
Equally important in the S&L crisis was a much tougher framework of banking laws, according to Black, who is critical of the deregulation that began during the Clinton administration.
“Deregulation was bound to produce widespread fraud,” Black said. Quoting from the 1993 research paper, Looting: The Economic Underworld of Bankruptcy for Profit, he added, “We know better. If we learn the lessons from this, we need not have these fraud epidemics.”
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