From “Qui Pro Domina Justitia Sequitur” to “Elite Frauds Go Free”
posted by Frank Pasquale
Should they change the motto at the Department of Justice? John Ashcroft modestly covered a statue of lady justice during his tenure as AG. But a series of reports suggests that, at least when it comes to financial heavyweights, Domina Justitia has left the building.
Consider first Morgenson & Story’s article, “In Financial Crisis, No Prosecutions of Top Figures:”
As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.
To be sure, the DOJ has talked a good game here, unleashing Operation Broken Trust to catch the small fry. But even in December of last year, Andrew Ross Sorkin was ringing alarm bells:
To hear Eric H. Holder Jr. tell it, the Justice Department is aggressively cracking down on financial fraud. . . . But after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”? Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)
What’s the rationale here? Morgenson and Story claim that Tim Geithner worked behind the scenes to get Andrew Cuomo (when he was NY Attorney General) to lay off suspicious financial institutions in order to stabilize the markets. Given how close the highest levels of the Obama administration have been to the TBTF banks, we can imagine similar sentiments expressed to political appointees at other agencies. The same rationale has watered down the proposed settlements over foreclosure fraud, which “leave it largely up to the banks to investigate themselves” on many issues. Justice, we are told, must take a backseat to the whims of bond traders, who might be spooked if officials did something as outrageous as follow legally required procedures.
House Republicans are getting the same Geithner “sky is falling” treatment this week over the debt ceiling. The Administration is quite fond of emergency rationales in foreign affairs as well. Where process threatens order, it must accede to stability.
Stability is Destabilizing
Stability may be quite tempting in the short term. But, as Hyman Minsky observed in a related context, “stability is destabilizing.” How better to tempt our Wall Street nontrepreneurs to cut corners, betray trust, and misrepresent tail risk than to assure that there are no serious consequences for those who did it the last time?
Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City, is deeply disturbed by these developments. He is no mere ivory tower academic; he worked extensively on the S&L crisis, and has a deep understanding of the criminological, accounting, and legal literatures that have developed out of it. He is incredulous at the lack of sustained government attention to problems revealed in court after court, document after document, report after report:
[Geithner’s “elite frauds go free” doctrine] . . . represents the intersection of the curves of injustice and stupidity at their respective maxima. . . . It is stupidity of truly epic proportions to leave felons in charge of banks. Doing so cannot stabilize a financial system – it is certain to cause recurrent, intensifying crises. When I was a regulator during a financial crisis our agency’s top priority was to prevent frauds from controlling S&Ls. Our second priority was to support the prosecution of those fraudulent leaders.
The injustice of Geithner’s “elite frauds go free” doctrine is every bit as extreme as the stupidity of believing that giving fraudulent CEOs de facto immunity is the road to financial stability. It is a travesty that I have to defend the importance of integrity and justice. No nation can be great if it allows its elites to loot with impunity and prosecutes its whistleblowers. Geithner is destroying the things that made America great. He did so as part of Bush’s wrecking crew and he is doing so now as part of Obama’s wrecking crew.
So we continue to build toward another crisis. Bank executives will capture the upside of whatever “innovations” they can devise, leaving a distended Fed to pick up the pieces with new TALFs, TARPs, TLGPs, and secret discount windows. Perhaps that is why a major university is now taking delivery of $1 billion in physical gold. As Diane Coyle observes in the introduction of her book, The Economics of Enough, “The financial system is the pinnacle of the trust on which all economies and all societies have to operate—and that trust almost evaporated” in 2008. It is rapidly dissipating again.
Image Credit: Chrisafer.