New York Times: Lopsided Approach to Wall Street Fraud Undermines the Law

After the failures that led to the financial crisis, many taxpayers expected that the government would take a hard stance against those who had committed egregious violations.
With that in mind, Congress passed the Fraud Enforcement Recovery Act in May 2009. When I was chairman of two FERA oversight hearings by the Senate Judiciary Committee in December 2009 and September 2010, the goal was to provide the F.B.I. and the Justice Department with additional resources to pursue potential criminal violations by individual Wall Street executives related to the financial crisis.
Today, Justice Department and bank regulators are wrestling with the question of whether the government can criminally indict a foreign bank, to show that no bank is immune from prosecution. In my view, this question has taken the Justice Department down a rabbit hole.
The department first strayed from the correct path when it began years ago to resort to nonprosecution and deferred prosecution agreements with banks, focusing on enhancing bank compliance programs. Instead, it should have stayed focused on investigating senior managers and holding them accountable for lawbreaking, however difficult the consequences may be.
What’s far more troubling, however, is that the recent inspector general’s report and accounts from former department insiders show that the Justice Department never made mortgage origination fraud – much less the financial crisis-related investigations of high-level Wall Street executives – a priority.
The department’s Southern District of New York, for instance, chose instead to focus on insider-trading cases. The two task forces that the Obama administration formed (which never had a significant investigative capacity) were more for public show than substantive criminal investigations.
And according to the inspector general’s report, the F.B.I. ranked complex financial crimes as “the lowest of the six ranked criminal threats” and ranked mortgage fraud as “the lowest subcategory threat” within that category.
The Justice Department simply never organized a centralized and aggressive effort with sufficient resources, as FERA envisioned and the circumstances plainly required.
It is true that congressional appropriators substantially shortchanged FERA, providing only a portion of the promised $165 million. But the inspector general’s report also found that the F.B.I. diverted FERA funds to other priorities. The report said that “significant mortgage fraud cases were being closed due to the diversion” of these resources.
If the F.B.I. and the Justice Department didn’t undertake the necessary spadework at the mortgage origination level (the focus of the inspector general’s audit), they were doubtlessly devoting even fewer investigative resources at the higher levels of mortgage-backed securities fraud.
In retrospect, misleading public statements by Justice Department officials that the investigations underway on Wall Street were “comprehensive” and “robust” are deeply troubling, as the agency and Congress should have had a “meeting of the minds” on how much money and how many investigators and prosecutors were required to do the job right.
Years ago, the Justice Department should have assembled well-staffed prosecutorial strike forces to investigate each of the obvious potential defendants. If prosecutors had brought no indictments against more than one executive after that, the department could credibly claim that no other provable crimes had been committed. Congress bears its share of this responsibility.
It’s also concerning that conversations took place between Justice and Treasury officials about whether it was appropriate to proceed criminally against particular banks. Under the department’s guidelines, prosecutors are supposed to consider “collateral consequences.” Again, I consider that to be a false issue, as the focus of the investigations should have been on individual executives, not institutions.
But these discussions also raise questions about the extent to which Treasury officials were warning the Justice Department not to let aggressive approaches upset the recovery of a fragile banking system, perhaps partially explaining the department’s failure to make these investigations a priority.
If so, that too was a false choice. Senior bank executives could have been investigated and, if found culpable for criminal acts, prosecuted, without affecting the ability of the banking institution to recover. That is what the administration proved when it removed auto executives before successfully bailing out the auto industry.
Congressional oversight only works when the Justice Department is honest about its strengths, weaknesses and systemic obstacles it must overcome. In hindsight, the department was far too interested in publicly mouthing generalities and platitudes while trumpeting its record of success against smaller players. The legal profession as a whole should participate in this discussion; so far, I’ve heard almost nothing about the ethics and professional responsibility of lawyers in what many Americans consider to be a complete breakdown in effective white-collar law enforcement against the most powerful in the wake of a devastating financial crisis.
We will never know what the department could and should have accomplished in uncovering and proving crimes beyond a reasonable doubt. Another prospective round of large civil fines paid by the shareholders of megabanks is not going to put those questions to rest.
But the fact that the Justice Department has failed to even try to adequately hold individual Wall Street bank executives accountable has deeply eroded trust in equal justice under the law.

Ted Kaufman is a former U.S. Senator from Delaware