While we typically think of the rule of law as being designed to protect the weak against the strong, and ordinary citizens against the privileged, those with wealth will use their political power to shape the rule of law to provide a framework within which they can exploit others.They will use their political power, too, to ensure the preservation of inequalities rather than the attainment of a more egalitarian and more just economy and society.
Joseph Stiglitz, “The Price of Inequality,” p. 191.
SIGTARP’s January 27, 2016 Executive Summary Quarterly Report to Congress breathlessly claims “significant criminal prosecutions and civil fraud enforcement actions against bankers.” (p. 3 of the 520-page report). Sorry, SIGTARP, but this is bullshit. Please note that SIGTARP, unlike some of the other so-called “regulators” (SEC? Please. OCC? No. Dep’t of Justice? Really, no. Just follow Lanny Breuer,¹ former US Attorney General Eric Holder (really?) and friends all the way home to famed cushy K Street lobbyist/powerbroker law firm Covington and Burling² ), has at least tried to prosecute and to hold Treasury accountable to do its damn job (see, e.g. former SIGTARP chief, Neil Barofsky’s book and record of fighting with Timothy Geithner, remember “foaming the runway?”), but this is not “significant.”
To be fair, SIGTARP’s mission³ is to protect the taxpayer-sponsored bailout fund TARP from abuses. But a key mission of the TARP was supposed to be homeowner assistance and foreclosure prevention (it didn’t turn out that way, thank you, Geithner, see Barofsky). Anyway, notably missing from the freshly unveiled perp list are any whales. No too-big-to-fails or TBTF celebrity executives. They are all probably basking at Davos or off buying some elections (how ’bout that Citizen United decision…yes!). Do you spy any? No, you don’t, with the exception of “3 former officers of Bank of America.” I haven’t scratched this surface yet but I blindly guess that either (1) these guys had enemies within Bank of America or within other powerful bank circles; (2) DOJ didn’t really do it; the New York Attorney General probably forced it or all of the above. This is just the big guys picking off the small guys.
This quarter, SIGTARP’s investigations resulted in significant criminal prosecutions and civil fraud enforcement actions against bankers. Highlighted enforcement
actions against bankers this quarter include: the first indictment of a TARP institution by the Department of Justice; SIGTARP’s arrest of the former CEO
of a bank still in TARP; the guilty plea of a TARP bank CEO; the conviction by a federal jury after trial of a TARP bank chairman and his wife who was also a
TARP bank senior officer; the conviction by a federal jury after trial of a bank CEO for fraud involving a TARP application; the sentencing to prison of a TARP bank
senior officer; the sentencing to prison of a bank CEO for fraud involving a TARP application; and the Securities and Exchange Commission’s filing of fraud charges
against 11 officers and directors of a failed TARP bank. Already, nearly 100 bankers investigated by SIGTARP have been the subject of a government criminal prosecution or civil fraud enforcement action by DOJ, state and local prosecutors, two state Attorneys General, and the SEC.
These charges related to bankers’ conduct leading up to and during the financial crisis.
• The total number of bankers/banks charged with a crime investigated by SIGTARP is 75 (74 individuals + 1 bank).
• DOJ agreed to defer prosecution for criminal conduct for 2 bankers who cooperated with the investigation.
• DOJ and the New York Attorney General have brought civil fraud charges against 3 former officers of Bank of America investigated by SIGTARP.
• The SEC has brought civil fraud charges against additional bankers (in addition to SEC actions against those criminally charged) investigated by SIGTARP.
Already, 30 bank officials investigated by SIGTARP have been sentenced to prison, including 11 officials at banks that received TARP. The remaining 19
officials were at banks that applied for TARP using fraudulent bank books, but did not receive TARP.
SIGTARP has been successful in finding the evidence needed to support conviction, resulting in a 99% conviction rate of criminally-charged defendants who
were investigated by SIGTARP.
Recently (as in too late), on September 9, 2015, the DOJ earnestly vowed it would start doing its job by noticing its obligation to police Wall Street “aggressively,” perhaps with investigations and prosecutions of individual employees and executives. It seems the Department of Justice had an epiphany that “seeking accountability from the individuals who perpetuated the wrongdoing” might be an “effective” way to “combat corporate misconduct.” Dep’t of Justice, Memorandum, Sept. 9, 2015. You think?
Well, hello, Lady Justice, you late bloomer, you! Did you blackout from September 2008 to September 2015? Or is it maybe, just maybe, an election year?
I have bad news for the sleepyhead Lady. During your nap, there was a huge financial crisis and America was foreclosed. The rule of law aged poorly. Suffice it to say that your ordinary stewards of the law failed. The situation is damaged. As in severely damaged. Botox will not help. A facelift will not help. Organ transplants and blood transfusions will be necessary.
Given the success of the financial sector and corporations more generally in stripping away the regulations that protect ordinary citizens, the legal system is often the only source of protection that poor and middle-class Americans have. But instead of a system with high social cohesion, high levels of social responsibility and good regulations protecting our environment, workers and consumers, we maintain a very expensive system of ex post accountability, which to too large an extent relies on penalties for those who do injury (say, to the environment) after the fact rather than restricting action before the damage is done.
As one banker friend put it to me, anyone, even his twelve-year-old son could have made a fortune if the govt. had been willing to lend money to him at those terms. But the bankers treated the resulting profits as if they were a result of their genius, fully deserving of the same compensation to which they had become accustomed.
One chapter, entitled “Justice for All? How Inequality is Eroding the Rule of Law” explores the example of the “robo-signing” frauds that were a fraction of the overall frauds banks have visited upon American homeowners in the foreclosure epidemic:
While a good “rule of law” is supposed to protect the weak against the powerful, we’ll see how these legal frameworks have sometimes done just the opposite, and the effect has been a large transfer of wealth from the bottom and middle to the top.
Early on in the housing bubble, it became clear that the banks were engaged not only in reckless lending—so reckless that it would endanger the entire economic system—but also in predatory lending, taking advantage of the least educated and financially unsophisticated in our society by selling them costly mortgages and hiding details of the fees in fine print incomprehensible to most people.
That’s why “power”—political power—matters so much. If economic power in a country becomes too unevenly distributed, political consequences will follow. While we typically think of the rule of law as being designed to protect the weak against the strong, and ordinary citizens against the privileged, those with wealth will use their political power to shape the rule of law to provide a framework within which they can exploit others.They will use their political power, too, to ensure the preservation of inequalities rather than the attainment of a more egalitarian and more just economy and society.
The immensity of the task led the banks to invent “robo-signing.” Instead of hiring people to examine records, to verify that the individual did owe the amount claimed, signing an affidavit at the end that they had done so, many banks arranged for a single person to sign hundreds of these affidavits without even looking at the records. Checking records to comply with legal procedure would hurt the bank’s bottom line. The banks adopted a policy of lying to the court. Bank officers knew this—the system was set up in a way that made it impossible for them to examine the records, as they claimed to have done.
This brought a new twist to the old doctrine of too-big-to-fail. The big banks knew that they were so big that if they lost on their gambles of risky lending they would have to be bailed out. They also knew that they were so big that if they got caught lying, they were too big and powerful to be held accountable. What was the government to do? Reverse the millions of foreclosures that had already occurred? Fine the banks billions of dollars—as the authorities should have done? But this would have put the banks again in a precarious position, requiring another government bailout, for which it had neither the money nor the political will. Lying to a court is normally a very serious matter. Lying to the court routinely, hundreds of times, should have been an even greater offense. There was a pattern of crime. If corporations had been people in a state that enforced a “three strikes” rule these repeat offenders would have been sentenced to multiple life sentences without parole. In fact, no bank officer has gone to jail for these offenses. Indeed, as this bank goes to press, neither Attorney General Eric Holder nor any of the other U.S. district attorneys have brought suits for foreclosure fraud. By contrast, following the savings and loan crisis, by 1990, the Department of Justice had been sent 7,000 criminal referrals, resulting in 1,100 charges by 1992, and 839 convictions (of which around 650 led to a prison sentence). Today the banks are simply negotiating what their fines should be—and in some cases the fines may be less than the profits that they have garnered from their illicit activity.
What the banks did was not just a matter of failing to comply with a few technicalities.This was not a victimless crime. To many bankers, theperjury committed as they signed affidavits to rush the foreclosures was just a detail that could be overlooked. But a basic principle of the rule of law and property rights is that you shouldn’t throw someone out of his home when you can’t prove he owes you money. But so assiduously did the banks pursue their foreclosures that some people were thrown out of their homes who did not owe any money. To some lenders this is just collateral damage as the banks tell millions of Americans they must give up their homes—some eight million since the crisis began, and an estimated three to four million still to go. The pace of foreclosures would have been even higher had it not been for government intervention to stop the robo-signing.
The banks’ defense—that most of the people thrown out of their homes did owe money—was evidence that America had strayed from the rule of law and from a basic understanding of it. One is supposed to be innocent until proven guilty. But in the banks’ logic, the homeowner had to prove he was not guilty, that he didn’t owe money. In our system of justice it is unconscionable to convict an innocent person, and it should be equally unconscionable to evict anyone who doesn’t owe money on her home. We are supposed to have a system that protects the innocent. The U.S. justice system requires a burden of proof and establishes procedural safeguards to help meet that requirement. But the banks short-circuited these safeguards.
In fact, the system we had in place made it easy for them to get away with these shortcuts—at least until there was a popular uproar. In most states, homeowners could be thrown out of their homes without a court hearing. Without a hearing, an individual cannot easily (or at all) forestall an unjust foreclosure. To some observers, this situation resembles what happened in Russia in the days of the “Wild East” after the collapse of communism, where the rule of law—bankruptcy legislation in particular—was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality operates at a higher level. It is not particular judges who are bought but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.” In some states judges are elected, and in those states there’s an even closer connection between money and “justice.” Monied interests use campaign contributions to get judges who are sympathetic to their causes.
The administration’s response to the massive violations of the rule of law by the banks reflects our new style of corruption: the Obama administration actually fought against attempts by states to hold the banks accountable. Indeed, one of the federal-government controlled banks, threatened to cease doing business in Massachusetts when that state’s attorney general brought suit against the banks.
Massachusetts attorney general Martha Coakley had tried to reach a settlement with the banks for over a year, but they had proved intransigent and uncooperative. To them the crimes they had committed were just a matter for negotiation. The banks (she charged) had acted both deceptively and fraudulently; they had not only improperly foreclosed on troubled borrowers (citing fourteen instances), relying to do so on fraudulent legal documentation, but they had also, in many cases, promised to modify loans for homeowners and then reneged on the promise. The problems were not accidental but systematic, with the MERS recording system corrupting the framework put into place by the state for recording ownership. The Massachusetts attorney general was explicit in rejecting the “too big to be accountable” argument. “The banks may think that they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”
¹In its documentary, “The Untouchables,” PBS’s Frontline interviewed Breuer, then DOJ Chief, who told reporters that he could not pursue criminal charges against Wall Street executives or banks because the proof was just too difficult to find. Frontline’s edited transcript of Breuer is here.
²When Holder ran home to Covington, it sent out a gushing press release and was covered by the New York Times Dealbook, “Covington already employs a number of former Justice Department officials, including Lanny Breuer, the former assistant attorney general for the department’s criminal division under Mr. Holder; Mr. Breuer’s successor, Mythili Raman; and Michael Chertoff, a former assistant attorney general and secretary of Homeland Security.” Deal Book, N.Y. Times, Eric Holder Returns to Covington & Burling (July 6, 2015). Covington is bragging about its revolving door with the government, y’all. Access begets power begets riches! Get it? Nobody is even hiding any of this.
See also Matt Taibbi, Eric Holder, Wall Street Double Agent, Comes in From the Cold, Rolling Stone (July 8, 2015).
³Newcomer regulator Consumer Financial Protection Bureau (CFPB) has also tried to promote justice for consumers, by promulgating consumer-protection-oriented rules and regulations, writing amicus curiae briefs, and creating a complaint system and searchable consumer complaint database. So of course, the powers-that-be are trying to get rid of these regulators-who-regulate-for-ordinary-people, God forbid. See, e.g., As CFPB Advances Consumer Protection, Attacks on CFPB Escalate.