Like so many other cases of egregious financial fraud over the past several years, regulators used softball tactics to go easy on the banks. No bank was even forced to admit wrongdoing in the orders by the US Commodity Futures Trading Commission and the Office of the Comptroller of the Currency. Regulators avoided court and settled for cash, which the traders won’t pay – the bank’s shareholders will. Officials presented a minimal amount of evidence, lacking the full details of the traders’ misconduct. They sought no judicial review.
In short, banks got away with their crimes for a pittance; their stocks even rose on the news of the settlements because the market believes the trouble is over.
The DoJ has increasingly used a relatively new and declawed method to deal with the aftermath of the financial crisis: the deferred prosecution agreement (DPA).
No one goes to jail and no one ever gets prosecuted. Under a deferred prosecution agreement, the Justice Department allows corporations to pay a fine, then agree to some enhanced supervision and monitoring. The Justice Department appears to admit this in the US Attorney’s manual, when they describe these deals as “agreements not to enforce the law under particular conditions”.
Each deferred prosecution agreement is negotiated individually. There is no thought to creating a future record: no trials, no jury verdicts, no appellate court decisions, no case law and no binding precedent. This makes it impossible to determine the boundaries of the law. The same conduct can be treated differently, depending on the prosecutor.
Pulitzer-Prize winning journalist Jesse Eisinger is currently on leave from his day job as he finishes a book about “white collar crime & (non)punishment.” He recently sat down with ProMarket to discuss some of what he’s learned.
What follows are some choice excerpts, but I also suggest reading the entire thing here:
Q: You describe the financial history of the United States as a series of boom and busts, followed by crackdowns. Before the financial crisis of 2008, we saw the biggest boom, followed by the biggest bust—but no crackdown. We saw a significant crackdown after Enron, which was a scandal on a much smaller scale. Is it a lack of will or a lack of ability that leads to executive impunity, or do the two go hand in hand?
I think it’s both, they do go hand in hand. Over the last 15 years or so, prosecutors have lost a lot of tools that they used to combat corporate crime. For instance, one of the things they had was a charge they used to convict Jeffrey Skilling and Ken Lay—the two top corporate executives from Enron—called “honest services fraud.” The Supreme Court overturned that and threw out the charge, and as a result, a lot of prosecutions of top corporate executives got thrown out as well.
That’s a small example of the kind of tools that prosecutors were losing. Nothing was particularly cataclysmic, but there was a slow erosion. There were resource shifts as well: the FBI, which is charged with investigating these kind of cases, shifted away from white collar crime to domestic and international terrorism, and that affected the skill set.
Which brings up the obvious, but almost always conveniently overlooked point. That the white collar financial crime committed in the 21st century alone has done infinitely more damage to the U.S. economy and society than all terrorist attacks combined.
We have this notion in our culture that prison would deter criminals. When it comes to street crime, this is possibly less true, but in a white collar setting it seems very true. White collar executives have a lot to lose: their stakes in society, assets, reputation, families. They also pay attention to the news—if their colleagues go to jail, they’ll pay attention. But it doesn’t work if a faceless piece of paper, their corporation, is paying in a way that doesn’t touch them at all, because the shareholders are shouldering the fine. Then they’re just untouched.
Of course, this is 100% accurate. This is the demographic I grew up around and worked with professionally. A prison sentence is the scariest thing they could ever imagine, and the threat of it would absolutely deter the sort of systemic white-collar crime we have today.
They think they went too far, and they think there was collateral damage, that they damaged the lives of innocent employees. I think that yes, they did damage the lives of innocent employees, but prosecutors are not economic ministers. They’re not in charge of employment, and it’s not their job to take care of collateral damage. When a murderer is charged, we don’t think about what’s going to happen to his children or his wife, because there’s a societal import to prosecuting that murderer that outweighs the economic damage wrought upon his extended family when he goes to prison.
That might be the best paragraph of the entire interview. Prosecutors are supposed to be concerned with one thing and one thing alone: justice.
Q: You’ve spoken to dozens of regulators and prosecutors for your book. How did they explain this?
The first mantra you hear generally is well, there was a lot of recklessness and stupidity, but recklessness and stupidity are not crimes. There was indeed a lot of recklessness and stupidity in the lead-up to the financial crisis. Not everybody on Wall Street was guilty of a crime, there’s no question, but it is clear that crimes were committed. We now have evidence that huge percentages of the mortgages did not conform to what they were supposed to be according to their official filings. They’ve settled these cases for billions and billions of dollars.
Did no one know that the filings were misleading? I just don’t believe that. We’ve seen emails from executives saying “what we’re selling is shit, it will blow up.” It’s very hard to find an honest prosecutor who will say he doesn’t think there were crimes committed in the wake of the financial crisis. What they’ll say is “I didn’t see any evidence personally, but that guy over there, I can’t believe he wasn’t prosecuted.”
The other thing they say is it’s very complex. That’s not really an excuse. You’re not allowed to say your job is hard, therefore you couldn’t do it. It is highly complex to prosecute international drug rings, but we do it anyway. Also, some of these cases are actually not that complex when you simplify them for the purposes of distilling what the crime was. I don’t think these things were aggressively investigated, I don’t think they tried to understand the evidence, and I don’t think they tried really hard to bring cases.
Finally, someone states the obvious. If it’s too complex, find a new job.
Q: And even when you do find people who are willing to go through this, you still run into a problem: they might be priced out of the city they work in?
There’s this other problem, which is you’re topping out at roughly $150 thousand per year as a prosecutor. And you’re wondering what you’re going to do next and trying to preserve your career viability. You have a very lucrative path to become a partner at a major law firm, where you can make 10 times what you’re making. As a partner, you can make $1.5-2 million.
But to do that, you have to preserve your reputation. You have to ultimately be seen as reasonable. You cannot be seen as a glory hound, or overly aggressive. You want to conform to these expectations. You want to show you’re smart and a tough negotiator…
The above is also why Donald Trump appeals to so many people. He doesn’t need or want the cushy job after the White House, so there isn’t much of a carrot the corrupt establishment can dangle in front of him. Which is precisely why they are immediately coming out with the stick.
Q: You want to be successful, but not too successful?
Exactly. A man of proportion that is able to sit at the right side of the person you’re negotiating with, as a future partner at a law firm. And so it’s easier to negotiate a settlement.
Q: Is it fair to say that in a way, either consciously or subconsciously, you’re auditioning?
What they’re doing now is recruiting young people, at the beginning of their careers, who are trying to make their reputation early on. They see the DOJ as a resume builder. They got high SAT scores, they went to the best colleges, the best law schools, did good internships, prestigious clerkships, then go to the Department of Justice. They build this perfect little tower, and the only thing that would upset the tower is if they really piss off the partners from Debevoise & Plimpton or Davis Polk.
Career prosecutors are looked down upon, so if you spend your career at the DOJ you’re seen as mediocre and a hack. Also, you can’t really raise a family in Washington, DC or New York on a prosecutor’s salary. You’re making this giant financial sacrifice to look like a schmuck, when you can go and be a well-to-do partner at a law firm.
There you go. If you uphold the rule of law and protect the public, you’re a poor hack. However, if you devote your time and energy to protecting status quo criminals, you’re exalted as an upstanding member of the community. Ours is a culture near its ethical nadir.
Q: Top lawyers and prosecutors all went to the same schools and the same clubs long before Enron. What changed that the culture and norms got distorted to such a degree that, as you say, prosecutors today have little incentive to do their job?
A lot has changed. One of the things that changed dramatically is the business of law: law firms used to have their own corporate clients for decades. There used to be fewer law firms and very little shuffling of clients. It used to be more of an oligopoly. At the top of the firms you had the lawyer-statesmen, who really had a much greater sense of social obligation. That started to erode in the eighties, and as it got eroded, firms became much more mercenary. That’s why the best law firms are paying much more money, but they also have a much less developed sense of civic responsibility.
He’s being generous. I’d put their conception of civic responsibility somewhere around zero.
The second thing that changed is the money. In 1990 or 2000 you could maybe get paid two to three times the amount of money as a partner at a law firms than as a top prosecutor. Top lawyers were living nicely, but it wasn’t insane, and you could still live in a nice apartment and afford to send your kids to college. Now they make 10-15 times what top prosecutors make, and you’re being squeezed. You can’t live in the nice apartment, can’t send your kids to college. And the leap you would make as a partner is so much greater.
The incentive structure has really changed. A sense of monetary opportunities has really eroded civic sensibility. The class you are in now is much more elite and lucrative. Going to Harvard Law School in 1990 and prosecuting top corporate executives is different from going to Harvard in 2015 and trying to prosecute top corporate executives.
Q: The US has more people in jail than any other country in the world, yet executives who cause enormous economic devastation not only go unpunished, but are incentivized to do it again. Isn’t this is a huge inequality?
When we talk about inequality in this country, often we’re talking about jobs and wealth and economic opportunity. But I would say that the greatest perquisite of the power class in America is the ability to commit crimes with impunity. I think this profoundly undermines the sense that we live in a just and fair society when we see top corporate executives getting the kinds of protections from out legal system that are not available to people of lower means.
One again, I totally agree. People aren’t fuming mad because others have more money than them, people are angry because the entire economy and society is unquestionably rigged.
In one of the cases I am looking at in my book, corporate executives are found guilty, but their criminal charges are overturned because the prosecutors put up the wrong stock chart. They put up a stock chart that prejudiced the jury because the chart went down, when maybe it didn’t go down as much as they thought. For that, these guys get their charges thrown out. The courts have been very interested in reversing white collar convictions.
Q: Would you say the press is also captured?
In general, the business press is very captured by interests and is not in the kind of adversarial role it needs to be. There’s another problem that you can’t simply assert things in journalism. The odds are stacked against a journalist who thinks a crime was committed and wants to demonstrate these things.
Q: Another problem seems to be that big corporate settlements are seen as great accomplishments. If you manage to get a billion dollar fine, you’ll get great press.
They have these press conferences when they have these big settlements, and they get bigger and bigger because they want them to be especially attention-getting. But they’re still a fraction of the profits made by these businesses. In fact, companies often have profitable quarters despite some of these payments, because they are tax deductible. Their stocks also go up after settlements, because it clears the uncertainty.
Prosecutors have become so worried about collateral damage that they go to all the regulators and ask, “Are you going to pull your license if we charge this company criminally?”
Q: So prosecutors make sure they don’t cause too much damage before reaching a settlement?
Right. They take the teeth out of their settlements before actually implementing them.
I’ve been saying over and over for years now that the number one cancer in American society at the moment is the disastrous and uncivilized two-tiered justice system. Nothing is more destructive to a society than the realization that a small group of people are above the law, while others remain fully exposed to its brutal and unyielding gavel. Until this situation is remedied, this country will continue to spiral down the oligarch toilet bowl.
For more on America’s Banana Republic justice system, see:
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