Stephen Reader covers politics for It's a Free Country, WNYC's interactive politics site. He joined the station in 2010 and has also worked for Studio 360, WNYC's Peabody Award-winning show about art, culture, and creativity.
Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Louise Story, New York Times Wall Street and Financial reporter, talked about why there haven't been any arrests or prosecutions of major figures as a result of the financial crisis.
Years after the worst economic disaster since the Great Depression, no legal action has been taken against any of the financial industry's major players.
Why not? The short answer is that government officials simply aren't bringing any lawsuits—suspicious, because the evidence seems to be there. For one such example of an investigator sitting on their hands, Louise Story said, look no further than New York's newly-elected governor Andrew Cuomo, who happened to be the state's Attorney General during the collapse.
Cuomo was really one of earliest to start looking at mortgage securities. He subpoenaed all of the banks and rating agencies back in the summer of 2007, before people really realized we were having crisis. There was all this information about how they were packing loans into mortgage bonds, but that's something he never brought a case in. He had all that information showing just how much banks knew about how crummy those loans were.
Story also pointed to Cuomo's prior concerns about AIG bonuses and Lehman Brothers accounting practices, two instances where the former AG didn't go as far as he might have to hold these institutions accountable.
But our enforcement problem runs much deeper than a state attorney general. Story called out the Securities and Exchange Commission as well as the Department of Justice for the way they hobbled certain investigations. By all outward appearances, it seems these institutions were operating under a policy of muted response, which began under President George W. Bush immediately following the crisis but has continued under Barack Obama.
These cases take a long time, so you have to look back at decisions from three, four years ago. In Spring 2008, the top person in the criminal division at the FBI did a big study and wanted to deploy lot more FBI agents across the country on financial fraud, mortgage fraud and to look at mortgage brokers all the way up to executives. He sent out a memo that told field agents to redeploy, and there was pushback from the Department of Justice (DOJ). A week later, he had to send out another memo saying if you want to opt out of that, call us. You needed those agents doing that work then in order to have cases now.
The SEC also had a policy not to put too heavy penalties on bailed out banks...That policy was not used all that much, and not too many cases came out of it, but again it sent out a signal to investigators at the SEC about how hard to work and how fast to go on cases against banks who got bailout money.
Banks and brokers aren't the only ones who could potentially face legal consequences, were anyone to take a shot at prosecuting them. Rating agencies, for instance, either lied or dropped the ball by giving Triple A ratings to terrible loans from big banks. Story said these agencies may be complicit in the scheme, but it's just as likely they were negligent—which highlights just how confusing and complicated this whole situation is.
The big question is whether or not rating agencies were duped by banks, who were maybe giving wrong or misleading information, or if there was wrongdoing, were they complicit? The thing to remember is, it's not absolutely clear whether there was wrongdoing at all. A lot of people say it was a crisis of stupidity, not of wrongdoing.
Story said that the federal government used to take financial sector failings more seriously. Since the savings and loan crisis of the '80s and '90s, cooperation among investigative agencies has been replaced by a whole lot of foot-dragging.
The second that crisis started, the government put a lot of resources into creating a task force with hundreds of lawyers to get aggressive on this. They required bank regulators to refer cases to the task force, and it's really the bank regulators who know what's going on in these companies. We looked at the data on referrals, and you can see that it went up a ton during the savings and loan crisis, fell during the mid-'90s, had a little spike up around Worldcom and Enron, but otherwise stayed down and has not climbed during the financial crisis. Regulators aren't sending over a significant number of things for the DOJ to check out.