In a speech last year that chilled Wall Street, New York Federal Reserve President William Dudley said he feared that the tax dodging, money laundering, mortgage fraud and trampling on homeowners by America’s big banks might reflect not just a few bad actors but ethical flaws deep in the fabric of Wall Street.

In 2010, Attorney General Eric Holder Jr. warned that “mortgage-fraud crimes have reached crisis proportions.” He vowed bravely to fight back, but the Justice Department’s inspector general recently reported that, in fact, Holder’s department has made Wall Street crime its lowest priority and that, since 2009, the FBI has closed 747 mortgage-fraud cases with little or no investigation.

No wonder, writes Matt Taibbi, a reporter known for exposés in Rolling Stone on the banks’ rigging of financial markets. In “The Divide,” Taibbi offers the searing indictment that America’s wealth gap has corrupted the nation’s system of justice, fostering a “legal schizophrenia” that harshly prosecutes the poor but practices selective leniency on Wall Street. After “the greatest crime wave in a generation,” the Obama administration’s failure to jail top bankers, Taibbi contends, shows that the United States now lives by a hypocritical double standard — “letting major systemic offenders walk, bypassing the opportunity for important symbolic prosecutions and instead . . . putting the smallest of small fry on the rack for negligible offenses.”

Taibbi is a relentless investigative reporter. He takes readers inside not only investment banks, hedge funds and the blood sport of short-sellers, but into the lives of the needy, minorities, street drifters and illegal immigrants, to juxtapose justice for the poor and the powerful. How can it be, he asks, that a street drifter such as Tory Marone serves 40 days in jail after cops find half a reefer in his pocket, but not a single executive of HSBC faces criminal charges after the bank “admitted to laundering billions of dollars for drug cartels in Mexico and Colombia, washing money for terrorist-connected organizations in the Middle East, allowing rogue states under formal sanctions by the U.S. government to move money freely by the tens of billions through its American subsidiary, [and] letting Russian mobsters wash money on a grand scale”?

To those who see welfare fraud as routine, Taibbi counters that “every day on Wall Street, money is stolen, embezzled, burgled, and robbed. But the mechanisms of these thefts are often so arcane and idiosyncratic that they don’t fit neatly into the criminal code, which is written for the dumb crimes committed by common stick-up artists and pickpockets.”

’The Divide: American Injustice in the Age of the Wealth Gap’ by Matt Taibbi and Molly Crabapple (Random House)

He provides a litany of big-time financial cheating: the fraud at Countrywide under former chief executive Angelo Mozilo; the $4 billion bank swindle in Barclays’s buyout of Lehman Brothers; the fraudulent finagling of the London Interbank Offered Rate, the north star of global interest rates, that hurt billions of borrowers; and the massive mortgage fraud perpetrated by megabanks on tens of thousands of illegally foreclosed U.S. homeowners. In the 21 biggest settlements of mortgage-fraud abuses, companies paid damages of $26 billion to the government. But, Taibbi writes, “not a single individual was charged in any of those cases. Not a single individual had to pay so much as a dime of his own money in damages. Not one home was searched.”

The contrast with how the poor are treated is striking. Taibbi tells story after story of Harlem residents hauled in and strip-searched for “blocking pedestrian traffic,” or welfare applicants subjected to intrusive, humiliating searches of their homes, investigators poking into their closets, their dresser drawers, their underwear. Jail terms face those who lie about whether a boyfriend is still living at home or who receive more than the legal welfare benefit, even if the state caused the overpayment.

But on Wall Street, Holder’s hallmark has been fines and deferred prosecution, dangling hypothetical future prosecution but in fact letting the managers of massive fraud off the hook. Taibbi sees the origins of this approach in Holder’s doctrine of “collateral consequences,” which he first propounded as a White House aide to President Bill Clinton in 1999. In deciding whether to charge a bank or a corporation with a criminal offense, Holder wrote, the prosecutor should consider “the possibly substantial consequences to a corporation’s officers, directors, employees, and shareholders.”

Collateral consequences has been Holder’s mantra as attorney general, abetted by former Treasury secretary Tim Geithner’s fear that the economy was too fragile to endure criminal prosecution of a major bank. The touchstone becomes not the law but the impact on financial markets. What’s more, Taibbi suggests, social-class loyalty and legal clubbiness have affected Holder and his criminal division chief, Lanny Breuer. Covington and Burling, the revolving-door Washington law firm where Holder and Breuer worked between stints in government, was the top corporate defense firm used by virtually all the banks involved in major fraud cases. This elitist fraternity makes a semantic and legal distinction, without a real difference, between what it sees as “breaking the law” (white-collar crime, meriting fines) and “committing a crime” (petty crime, requiring prosecution). “They just can’t see certain behavior as criminal,” Taibbi comments.

More harshly, Taibbi contends that Holder and Co. were cowardly — reluctant to take on megabanks and their armies of lawyers for fear of losing and hurting their legal success record. He mocks their claim that they always lacked sufficient evidence: “Every single time, the state lands itself in that oddly enormous sweet spot between spectacular leverage (to extract fines) and no leverage at all (to hand down criminal penalties).”

“The Divide” is an important book. Its documentation is powerful and shocking. But it can ramble off track, as Taibbi falls in love with a story or a character. Its logic is sometimes diminished by his understandable rage at unethical, though probably not illegal, behavior. His periodic tirades against American justice as “a sci-fi movie, a dystopia,” distract from the force of his argument. But he drives home the telling point that the wealth-driven dichotomy in our legal system stems from our bending the law to match our social attitudes.

“The rich have always gotten breaks and the poor have always had to swim upstream,” he concedes. “The new truth is infinitely darker and more twisted.” Today, he concludes, “the rule of law has slowly been replaced by giant idiosyncratic bureaucracies that are designed to criminalize failure, poverty, and weakness on the one hand, and to immunize strength, wealth and success on the other.”

Hedrick Smith is former Washington bureau chief of the New York Times and the author of “Who Stole the American Dream?”


American Injustice in the Age
of the Wealth Gap

By Matt Taibbi

Spiegel & Grau. 416 pp. $27