Five years after Lehman fell, taking the global economy along with it, a roll call of Wall Street CEOs serving time for their role in the crisis looks something like this:
So, yeah. Zero Wall Street CEOs are in jail. But we did promise you a list:
1. No one.
3. Wall Street's lawyers are amazing.
4. Etc. Etc.
It's not that federal government tried to prosecute a bunch of them but lost the cases. There were no serious efforts at criminal prosecutions at all.
Which isn't to say nobody is in jail. There have been prosecutions of various mortgage brokers and other small fish who lied or encouraged clients to lie on their applications for a home loan. The crisis exposed some outright fraudsters who are now in the slammer, such as Bernie Madoff and Allen Stanford. And, yes, major banks have been working through billions of dollars in civil settlements for shady behavior in the runup to the crisis.
But it's shocking that for a crisis that drove the global economy off a cliff, caused millions of people to lose their homes and generally spread mass human misery to almost every corner of the earth there is no defining prosecution. No man or woman who led one of the firms directly culpable for the catastrophe has been put in a prison-orange jumpsuit. You might think that by now we could say that orange is the new charcoal pinstripes. But we can't.
So, what’s going on? Of the rogues gallery who led the major Wall Street firms to the brink of the abyss, only to have a multitrillion-dollar taxpayer bailout pull them back, why have none become familiar with our nation’s federal prison system?
One theory is that prosecutors have been reluctant to take on these cases out of timidity, perhaps cowed by the power of these deposed CEOs, the skill of their high-priced legal teams, and even the risk that more aggressive prosecution could spark more financial instability.
U.S. Attorney General Eric Holder seemed to acknowledge the last factor earlier in the year, saying that “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” (In a later hearing, he said that his comment was misconstrued and that he was arguing that no bank is in fact too big to jail.)
But that's not all there is to it.
No CEOs even came particularly close to facing criminal charges. The closest would probably be Angelo Mozilo, who was chief executive of Countrywide, one of the most aggressive mortgage lenders during the boom years. It was bought up by Bank of America in late 2007 and has caused the bank no end of trouble since.
The Securities and Exchange Commission charged Mozilo with insider trading and securities fraud in 2009 for selling shares of his company while publicly proclaiming it was in fine shape. But those were civil charges, which Mozilo settled with $67.5 million in fines and a lifetime ban from serving as an officer of a public company. A criminal investigation was dropped.
And that’s about it. A fraud prosecution of managers of two Bear Stearns hedge funds resulted in a jury finding them innocent. Fabrice “Fabulous Fab” Tourre was found liable for misleading investors in mortgage securities issued by his firm, Goldman Sachs, but it was a civil case, and no one could accuse Tourre of being a senior official at Goldman.
The CEOs -- including Lehman’s Richard Fuld, Bear Stearns’s Jimmy Cayne, Merrill Lynch’s Stan O’Neal, Citigroup’s Chuck Prince -- all roam the streets free to wreck the global economy again (if, in the unlikely event, anybody wants to give them a job running a gigantic financial firm).
Yes, the men mentioned above ran firms during a time they were taking unwise risks, using too much borrowed money, and packaging securities that turned out to be pretty much worthless. Yes, in some cases they argued publicly that their companies were in sound shape even as they were falling apart.
But SEC enforcers, federal prosecutors and state attorneys general spent years investigating these cases, searching for the incriminating e-mail or evidence of illegal activity that would allow them to land a major prosecution. By all appearances, they didn't find anything. There’s a plausible case that the “too big to jail” problem might make prosecutors wary of going after a mega-bank itself. But it’s not at all clear why it would make them wary of going after some long-ago deposed chief executive on criminal charges.
America doesn’t criminalize bad business decisions, even when they lead to business failure; if we did, Silicon Valley would be a penal colony. The fact that the collapse of financial firms can cause so much collateral damage for the economy doesn’t lower the legal bar for throwing CEOs in jail, no matter how much a basic sense of fairness makes a person wish it were so.
That means that our system needs to address the risks financial firms can create for the whole economy through other means. Higher capital requirements and stricter limits on the kinds of risky activities banks can take on will do a lot more to create a stable economy and financial system in the decades ahead than marching Lehman's Dick Fuld to a Lower Manhattan courthouse in an orange jump suit — all the more so knowing that Fuld would have a very good chance of being found innocent if prosecutors' reluctance and the "not guilty" verdict in the Bear Stearns hedge fund case are taken as indications.
Higher capital requirements may not satisfy blood lust the way a CEO in chains would, but they're are going to do a lot more to keep what happened five years ago this fall from happening again.
Hat tip: Some GIFspiration from Nick Wing's excellent post on marijuana deaths.