Why Can't Obama Bring Wall Street to Justice?
Maybe the banks are too big to jail. Or maybe Washington’s revolving door is at work.
|- Obama’s 2009 White House summit with finance titans, in
which the president warned that only he was standing "between you and
the pitchforks"
- Why, despite widespread outrage, financial-fraud prosecutions by the Department of Justice are at 20-year lows
- Attorney General Eric Holder’s lucrative ties to a top-tier law firm whose marquee clients include some of finance’s worst offenders
- How Obama’s trumpeted “task force” for investigating risky mortgage lenders—announced in this year’s State of the Union speech—is badly understaffed and has yet to produce any discernible progress
With the Occupy protesters resuming battle stations, and Mitt Romney in place as the presumptive Republican nominee,
President Obama has begun to fashion his campaign as a crusade for the
99 percent--a fight against, as one Obama ad puts it, "a guy who had a
Swiss bank account." Casting Romney as a plutocrat will be easy enough.
But the president's claim as avenging populist may prove trickier, given
his own deeply complicated, even conflicted, relationship with Big
Finance.
Obama
came into office vowing to end business as usual, and, in the gray
post-crash dawn of 2009, nowhere did a reckoning with justice seem more
due than in the financial sector. The public was shaken, and angry, and
Wall Street seemed oblivious to its own culpability, defending
extravagant pay bonuses even while accepting a taxpayer bailout. Obama
channeled this anger, and employed its rhetoric, blaming the worldwide
economic collapse on "the reckless speculation of bankers." Two months
into his presidency, Obama summoned the titans of finance to the White
House, where he told them, "My administration is the only thing between
you and the pitchforks."
The
bankers may have found the president's tone unsettling. Candidate Obama
had been their guy, accepting vast amounts of Wall Street campaign
money for his victories over Hillary Clinton
and John McCain (Goldman Sachs executives ponied up $1 million, more
than any other private source of funding in 2008). Obama far outraised
his Republican rival, John McCain, on Wall Street--around $16 million to
$9 million. As it turned out, Obama apparently actually meant what he
said at that White House meeting--his administration effectively would
stand between Big Finance and anything like a severe accounting. To the
dismay of many of Obama's supporters, nearly four years after the
disaster, there has not been a single criminal charge filed by the
federal government against any top executive of the elite financial
institutions.
"It's
perplexing at best," says Phil Angelides, the Democratic former
California treasurer who chaired the bipartisan Financial Crisis Inquiry
Commission. "It's deeply troubling at worst."
Strikingly,
federal prosecutions overall have risen sharply under Obama, increasing
dramatically in such areas as civil rights and health-care fraud. But
according to the Transactional Records Access Clearinghouse, a
data-gathering organization at Syracuse University, financial-fraud
prosecutions by the Department of Justice are at 20-year lows. They're
down 39 percent since 2003, when fraud at Enron and WorldCom led to a
series of prosecutions, and are just one third of what they were during
the Clinton administration. (The Justice Department says the numbers
would be higher if new categories of crime were counted.)
"There
hasn't been any serious investigation of any of the large financial
entities by the Justice Department, which includes the FBI," says
William Black, an associate professor of economics and law at the
University of Missouri, Kansas City, who, as a government regulator in
the 1980s, helped clean up the S&L mess. Black, who is a Democrat,
notes that the feds dealt with the S&L crisis with harsh justice,
bringing more than a thousand prosecutions, and securing a 90 percent
conviction rate. The difference between the government's response to the
two crises, Black says, is a matter of will, and priorities. "You need
heads on the pike," he says. "The first President Bush's orders were to
get the most prominent, nastiest frauds, and put their heads on pikes as
a demonstration that there's a new sheriff in town."
Obama
delivered heated rhetoric, but his actions signaled different
priorities. Had Obama wanted to strike real fear in the hearts of
bankers, he might have appointed former special prosecutor Patrick
Fitzgerald or some other fire-breather as his attorney general. Instead,
he chose Eric Holder, a former Clinton Justice official who, after a
career in government, joined the Washington office of Covington &
Burling, a top-tier law firm with an elite white-collar defense unit.
The move to Covington, and back to Justice, is an example of
Washington's revolving-door ritual, which, for Holder, has been
lucrative--he pulled in $2.1 million as a Covington partner in 2008, and
$2.5 million (including deferred compensation) when he left the firm in
2009.
Putting
a Covington partner--he spent nearly a decade at the firm--in charge of
Justice may have sent a signal to the financial community, whose
marquee names are Covington clients. Goldman Sachs, JPMorgan Chase,
Citigroup, Bank of America, Wells Fargo, and Deutsche Bank are among the
institutions that pay for Covington's legal advice, some of it relating
to matters before the Department of Justice. But Holder's was not the
only face at Justice familiar to Covington clients. Lanny Breuer, who
had co-chaired the white-collar defense unit at Covington with Holder,
was chosen to head the criminal division at Obama's Justice. Two other
Covington lawyers followed Holder into top positions, and Holder's
principal deputy, James Cole, was recruited from Bryan Cave LLP, another
white-shoe firm with A-list finance clients.
Justice's
defenders point out that prosecuting financial crime is a complicated
matter requiring the highly specialized expertise found in the
white-collar defense bar. But some suggest there is also the potential
for conflicting interest when the department's top officials come from
lucrative law practices representing the very financial institutions
that Justice is supposed to be investigating. "And that's where they're
going back to," says Black. "Everybody knows there is a problem with
that." (Two members of Holder's team have already returned to
Covington.) A spokesperson for Covington was not available for comment. (Newsweek uses the firm as outside counsel.)
Justice's
inaction regarding the big Wall Street firms is not for a lack of
suspicious activity. Three different government entities exhaustively
examined the practices that contributed to the financial collapse, and
each has referred its findings to the department for possible criminal
investigation. One such matter involved a 2007 transaction by Goldman
Sachs, in which Goldman created an investment, based on mortgage-backed
securities, that seemed designed to fail. Goldman allowed a client who
was betting against the mortgage market to help shape the investment
instrument, which was called Abacus 2007-AC1; then both Goldman and the
client bet against the investment without informing other clients (whose
investments were wagers on its success) how the securities included in
the portfolio were selected. These uninformed clients lost more than $1
billion on the investment. In 2010, the Securities and Exchange
Commission charged Goldman with securities fraud "for making materially
misleading statements and omissions" in marketing the investment. The
SEC, which conducts only civil litigation, referred the case to Justice
for criminal investigation.
A
year later, in April 2011, the Senate Permanent Subcommittee on
Investigations, chaired by Democrat Carl Levin, after a two-year
inquiry, issued a fat report detailing several transactions, including
Goldman's Abacus deal, that Levin and his staff believed should be
investigated by Justice as possible crimes. The subcommittee made a
formal referral to the department (as did the federal Financial Crisis
Inquiry Commission, chaired by Phil Angelides), and Levin publicly
stated his view that criminal inquiry was warranted. Goldman executives,
including the firm's chief executive officer, Lloyd Blankfein, started
hiring defense lawyers.
Meanwhile, Obama's political operation continued to ask Wall Street for campaign money. A curious pattern developed. A Newsweek
examination of campaign finance records shows that, in the weeks before
and after last year's scathing Senate report, several Goldman
executives and their families made large donations to Obama's Victory
Fund and related entities, some of them maxing out at the highest
individual donation allowed, $35,800, even though 2011 was an electoral
off-year. Some of these executives were giving to Obama for the first
time.
Justice
insists that political operations such as fundraising are kept strictly
distanced from the department, in order to avoid even the appearance of
political influence. But the attorney general and his team are not
unfamiliar with the process; Holder was himself an Obama bundler--a
fundraiser who collected large sums from various donors--in 2008, as
were several other lawyers who joined him at Justice.
It
would be a leap to infer these Goldman contributions were made--or
received--as quid pro quo for dropping a criminal investigation. Still,
the situation constitutes what one Justice veteran acknowledged is a
"bad set of facts."
Maintaining
public faith in the justice system is one of the reasons why people
such as Angelides continue to call for a rigorous criminal investigation
into Wall Street. "I think it's fundamental that people in this country
need to feel that the justice system is for everyone--that there's not
one system for those people of enormous wealth and power, and one for
everyone else," he says.
In
July 2010, three months after the SEC charged Goldman in the Abacus
case, the agency reached a settlement with the firm. Goldman agreed to
pay $550 million, but admitted no wrongdoing. The agency touted the
amount of the fine as the biggest ever--but to Goldman it was a relative
pittance. The fine amounted to about 4 percent of the sum that Goldman
paid its executives in bonuses ($12.1 billion) in 2007, the year of the
Abacus transaction.
Earlier
this year, it was reported that Goldman executives were feeling
optimistic that the Justice inquiry would not result in criminal charges
against the firm, or its executives. Goldman declined to comment on the
case, as did the Justice Department. But spokeswoman Alisa Finelli
said, "When we find credible evidence of intentional criminal
conduct--by Wall Street executives or others--we will not hesitate to
charge it. However, we can and will only bring charges when the facts
and the law convince us that we can prove a crime beyond a reasonable
doubt." Holder, speaking in February at Columbia University, said that
while "we found that much of the conduct that led to the financial
crisis was unethical and irresponsible ... we have also discovered that
some of this behavior--while morally reprehensible--may not necessarily
have been criminal."
Midway
through his State of the Union speech this year, President Obama
announced plans "to create a special unit of federal prosecutors and
leading state attorneys general to expand our investigations into the
abusive lending and packaging of risky mortgages that led to the housing
crisis," and he vowed again to "hold accountable those who broke the
law."
That
portion of the speech had a familiar ring. In November 2009, Attorney
General Holder, with Treasury Secretary Timothy Geithner at his side,
announced the creation of another special unit--the Financial Fraud
Enforcement Task Force--that was similarly charged with investigating
securities and mortgage fraud that contributed to the financial
meltdown. Since its creation, that task force, which critics say was
drastically under-resourced, has produced not a single conviction (or
even indictment) of a major Wall Street player related to the financial
disaster.
Some
who heard the president's State of the Union speech thought they
discerned a hidden purpose behind his new "special unit"--the
Residential Mortgage-Backed Securities Working Group, as it would be
called. The day before the president's speech, state attorneys general
from around the country met in Chicago with Justice officials to discuss
a proposed national settlement with five major banks, including
JPMorgan Chase and Bank of America, over questionable foreclosure
practices. The administration was pushing the settlement, as were the
banks. But a handful of attorneys general were resisting the settlement,
believing it gave too much away to the banks--including protection from
mortgage-related investigations that were still unfolding. These
holdout state officials were supported by a coalition of activists, who
argued that the banks would never make meaningful concessions--such as
the reduction of principal on underwater mortgages--unless they faced
the threat of investigation.
One
of those activists, Mike Gecan, of the Industrial Areas Foundation,
says he was disheartened when he heard Obama's speech, and the news that
New York Attorney General Eric Schneiderman would be co-chairing the
new "working group." Schneiderman, who is in the tough-guy mold of his
predecessors, Eliot Spitzer and Andrew Cuomo, had been a leader of the
state holdouts; now, Gecan feared, Schneiderman had been co-opted by the
Chicago Way. "I'm from Chicago, I've seen this game played my whole
life," he says.
Gecan's view seemed vindicated two weeks later, when Obama announced that the settlement had been reached.
Nearly
three months later, it is not clear what, if any, progress the "working
group" has made. The unit was only promised 55 investigators,
attorneys, and support staff--a tiny fraction of the resources afforded
to similar groups investigating the S&L and Enron/WorldCom
scandals--and it is not clear that even that commitment has
materialized. "I think what happened is what usually happens: the
administration rope-a-doped," says Gecan. "There's no office, there's no
director, there's no staff, there's no space, there's no phone."
Last month, Gecan wrote an op-ed article for the New York Daily News,
calling upon Schneiderman to quit the group in protest (Schneiderman's
office did not respond to requests for an interview). In the meantime,
Gecan said, he will work to bring pressure on Obama. "There's a little
presidential campaign that's going to start, and we're going to make
this issue central to this campaign," he said.
It
may be, as the attorney general points out, that Wall Street was
greedy, stupid, and immoral, without actually breaking any laws. But the
powers of the Justice Department are immense, and a more aggressive
prosecutor surely could have found cases to make. Black, the UMKC
professor, says the conduct could well have violated federal fraud
statutes--"securities fraud for false disclosures, wire and mail fraud
for making false representations about the quality of the loans and
derivatives they were selling, bank fraud for false representations to
the regulators."
The
absence of prosecutions, and the fact that the cops on the beat hail
from the place that represents the banks, does not sit right with many
who hoped Obama would fulfill his promise to hold Big Finance
accountable. The left's frustration fuels the Occupy movement, and
chills the Democratic base. And it gives Romney, the career capitalist,
an opening he is avidly exploiting.
Through
last fall, Obama had collected more donations from Wall Street than any
of the Republican candidates; employees of Bain Capital donated more
than twice as much to Obama as they did to Romney, who founded the firm.
By this spring, however, resolution had come to the GOP contest, and
Wall Street could see a friendly alternative to Obama. While most of
Romney's contributions so far come mainly from the financial sector,
Obama's donations from Wall Street have dropped sharply.
But
this turn may yet help Obama, playing into the Romney-as-plutocrat
theme. Just the other week, the Republican candidate quietly slipped
into a fundraiser at the home of hedge-fund king John Paulson, who made a
killing shorting mortgage futures (including about $1 billion on the
Abacus deal). The Obama campaign pounced. Obama may yet fully liberate
his inner populist--that Obama who in 2010 in an off-Prompter moment
uttered a sentence that made blood run cold on Wall Street: "I do think
at a certain point you've made enough money."
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