Sunday, January 31, 2016

Will Those Who Led the Financial System Into Crisis Ever Face Charges?

The American Bar Association (ABA) Journal has just published an article that asks the question whether any of the individuals that crashed the housing market and engaged in fraudulent behavior leading up to the financial market crisis, will ever face charges?  This is particularly timely as the statute of limitations for securities fraud in many of those cases will run in 2016.  Corporate Justice Blog contributor Dean Steven Ramirez asks this question pointedly in his upcoming book with the NYU Press entitled "Corrupted Justice" where he along with his co-author Mary Kreiner Ramirez describe the behavior of corporate executives at Countrywide, Lehman Brothers, Bear Stearns, and AIG, amongst others, and conclude that fraud was one of the primary causes of the Great Recession of 2008.

According to the ABA Journal, quoting law professor William Black, big banks handed out lousy loans while selling to outsiders that the loans were quality products suitable for packaging into investment offerings.  From the article: 

"[Professor] Black has been a constant critic of the Justice Department’s failure to prosecute lenders with the same verve they’ve gone after borrowers, and his testimony reflected that concern. The lenders didn’t care about misstatements on loan documents, Black testified and the defense argued, because they intended to make the loans no matter what. They wanted to push through as many mortgages as possible and collect their fees and bonuses, and then claim the loans met rigorous underwriting standards, selling them in large lots to other financial institutions and investors."

The article continues: "In the years since the crash, federal prosecutors have used splashy press conferences to announce top banks’ multibillion-dollar settlements (typically paid by shareholders) in cases arising from the subprime mortgage mess. But criminal prosecutions have been reserved almost exclusively for the borrowers. . . . 'Not to excuse wrongdoing by some borrowers, but clearly these were the business plans of large financial institutions, undertaken by human beings within them and, I presume, at the direction of senior executives in furthering the business plan,' says Phil Angelides, a former California state treasurer who chaired the federal Financial Crisis Inquiry Commission’s probe of the causes of the meltdown of 2007-2010.  The Financial Crisis Inquiry Report, released in 2011, was particularly pointed in its criticism of Wall Street, which it found had taken advantage of unprepared regulatory agencies that had been methodically defanged through deregulation over several years. The report noted a term coined on Wall Street that captured the carefree wheeling and dealing in the run-up to the meltdown: “IBGYBG”—”I’ll be gone, you’ll be gone.” The term, the report states, “referred to deals that brought in big fees up front while risking much larger losses in the future.”

Whether any corporate leaders that engaged in loan writing while being influenced by IBGYBG thinking will be prosecuted may be one of the important questions of 2016.


  1. It is appalling to think that no one is being held accountable. It seems to me that senior executives were (and probably still are) being incentivized to take great risks lending money. There does not seem to be legal liability for their extreme recklessness. I have heard of “clawback” provisions. However, I’ve read there are ways to get around them. Do you think criminal prosecution will likely turn this risky behavior around? In other words, something that involves personal liability for the decisions being made.

    A naive law student – Nick Fisher

    1. great question nick. thanks.

      so, during both the enron era scandals and the savings and loan era scandals, the government conducted serious investigations and hundreds of individuals responsible for accounting fraud, securities fraud and bank fraud were prosecuted and imprisoned. while this does not seem to have dissuaded the mortgage crisis perpetrators from engaging in reckless fraud (see the book Lawless Capitalism by Professor Steven Ramirez), we at least upheld the rule of law in those scandal periods. laws on the books exist and the fact that the obama administration has refused to prosecute bankers that engaged in criminal fraud is frankly astonishing. i can think of at least a dozen bankers from lehman brothers, bear stearns, countrywide, goldman sachs, jp morgan chase, and AIG that should be serving time right now. evidence of this is that many of those big banks have entered into settlements with the government, hundreds of millions of dollars in settlements, to make amends for their reckless and fraudulent behavior in the run-up to the mortgage crisis. the problem with settlements is that shareholders pay the fines, not the recalcitrant corporate leaders.

      so, yes, i do think that criminal prosecution could at least have some deterrent impact.

  2. Having recently seen yet again a reference to the movie "The Big Short", I remain surprised very little has been done to prosecute the Wall Street offenders in light of what the movie exposed to the general public. Even before seeing that movie, I personally felt the bond ratings companies (S&P, Moody's, Fitch) were the most blatant offenders who should have been held financially and criminally liable. (I would have put them out of business and required new companies to be formed.) But the corrupt concept of "pay to be blessed" appears elsewhere in our economic system -- from public accountants to real estate appraisers to binding arbitrators. The real solution is to make "blesser" choice, result, and payment determination independent from the influence of the parties benefiting. Otherwise, honestly, its a pretty silly system!

    Phil - a senior law student with accounting, real estate appraising, and arbitration experience