Why Are No Bankers in Jail?

It’s the lingering question about the financial crisis, writes MoneyShow.com editor-at-large Howard R. Gold.

Why are no top executives of major Wall Street banks in jail more than three years after Lehman Brothers collapsed? Why have none even been charged with crimes?

Surely, someone must be guilty of something. Enron and the corporate scandals of the 2000s and the savings & loan failures of the early 1990s each resulted in more than 1,000 criminal convictions.

But this time is different, and I wanted to find out why. So I spoke with several federal prosecutors from the S&L and Enron eras, the people who actually brought successful criminal white-collar cases.

They told me it boils down to proving criminal intent beyond a reasonable doubt, resources, and commitment.

Let’s start with the first point, which was made on 60 Minutes last week and in The Wall Street Journal, where a former FBI official, David Cardona, said the Justice Department had decided to let regulators “take civil-enforcement actions”—like, say, the SEC’s actions against Citigroup (C), which Judge Jed S. Rakoff threw out last week—rather than go for criminal prosecutions, which have a much higher burden of proof

• Read Howard’s piece on why the SEC needs to do more to take on big Wall Street firms.

Samuel Buell, a professor at Duke University School of Law who was a lead prosecutor on the Department of Justice’s Enron Task Force from 2002 to 2004 told me the challenge in these cases is “coming up with strong evidence of criminal mental states.”

In other words, “you knew that you were putting out [material] that was false and misleading and you did it anyway” he said.

That was what the government did with Enron top executives Kenneth Lay (who died after being convicted),! Jeffrey Skilling (who is appealing his conviction), and Andrew Fastow (who co-operated with the government, pled guilty, and served time).

Enron’s finances were in some ways as complex and sophisticated as the derivatives trades made by the big banks, and the consequences were huge.

“Everybody recognized at the time that this was a cataclysmic event for the financial system. We had never seen a Fortune 10 company blow up overnight,” Buell explained.

But at Enron, there were blatant misstatements by top executives who clearly knew things were worse than they said they were.

There were also clear victims—investors and employees who lost their life savings in the company’s 401k plan. “In any fraud case you need a victim,” said Buell. “In Enron, you could tell a story of mom-and-pop investors who were deceived.”

During that time, CEOs of companies like WorldCom and Adelphia Communications also were convicted and sentenced to long prison terms.

But in the financial crisis, the questionable transactions were conducted by big banks with other large institutions, whose executives presumably should have known what they were buying—and even that the banks might short the very instruments they were purchasing. The rest of us were just collateral damage.

• Read Howard’s piece explaining Goldman Sachs’ (GS) many conflicts of interest.

Linking top executives to specific instances of fraud is a big problem, says Joshua Hochberg, who ran DOJ’s fraud section during Enron and is now a partner at McKenna Long & Aldridge in Washington, DC.

 “How do you tie them to the actual fraudulent mortgages or sale of products they knew were bad?” he asked. (Obviously that could be different for the mortgage originators themselves, like Countrywide, if the allegations in the 60 Minutes piece were correct.)

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That wasn’t a problem with the savings & loans. “The thrift savings cases largely involved people [profiting] directly from the loans they were authorizing” said Hochberg.