Too Big to Fail/or Jail – Federal Judge Jed Rakoff Weighs In With His Views on the Financial Crisis Aftermath

by Hank Boerner

American bankers have had their share of nasty media headlines and uncomfortable conversations at congressional and regulatory oversight hearings.  And experienced the condemnation of the many for the nasty escapades that almost brought down the national economy. The excesses of the big money center banks (Citi, Bank of America, Goldman Sachs, Wells Fargo, other familiar names) have been well documented in newspapers, on cable and broadcast television, in some movies, and in a spate of best-sellers since 2008, The prosecutors in America (state attorneys general, US attorneys) have pursued some bankers in the courtroom.

But as The New York Times’ Gretchen Morgenson pointed out in her story of April 14, 2011, “…several years after the financial crisis, caused in part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned…”

So what do these actions say about the cultures or the large financial institutions – the ones bailed out by the Federal government and were deemed “to big to fail.”  (And their leaders, too big to jail.)  As I characterized in my commentary during the 2008-2009 crisis, the leaders of the big financial institutions (which are “banks++) loaded everyone in the big yellow bus and proceeded at top speed toward the edge of the cliff.  Faster, faster — bonuses are at stake!  The public treasury kept the busses from hurtling all the way into the abyss. And taking the rest of us with them.

And so now we are tuning in to the aftermath of the great party of the first decade of the 21st Century, as bankers and yes, the rest of society, pretty much gorged on easy credit, loose regulatory oversight, lax controls in the companies, boards and C-suite that ignored risk, and were drawn like moths-to-the-flame to the sources of e-a-s-y money.  The party is over — but the clean up is still underway.  And will be for years to come.

The Federal and state prosecutors have been working against statutes of limitation to put criminal cases together and bring charges against high-level financial industry players.  Right now a trial is underway for another top manager at Steven Cohen’s SAC Advisors (the firm paid a hefty fine as well).

The large bank that was considered to have weathered the storms best — JP Morgan Chase — in the sunny days of the crisis aftermath is now busily writing checks to state and Federal governments — US$40 billion to date. The Huffington Post this week had a nasty story about the accumulated fines paid by JPMC in recent months.  The question hangs in the air – what kind of culture exists at this large institution that resulted in huge financial losses and fines for various kinds of errant behavior?  No doubt in books to come we will find out more.

in a remarkable piece in The New York Review of Books, United States District Judge Jed S. Rakof wrote, “…I do not claim that that the financial crisis that is still causing so many of us so much pain and despondency was the product, n whole or in part, of fraudulent misconduct.  But if it was, as various governmental authorities have asserted, then the failure of the government to bring to justice those responsible for such colossal fraud bepeaks weaknesses in our prosecutorial system that needs to be addressed…”

He points out that companies do not commit crimes, only their agents do that.  And yet companies are being prosecuted, not the top “agents.” The judge’s article — “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” — asks,”… if the Great Recession was due, at worst, to lack of caution, then criminal law has no role to play.  But if it was the product of intentionally fraudulent practices by high-level executives, then failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.”

He points out that in the 1970s, the junk bond bubble era, those who committed fraud were successfully prosecuted, “right up to Michael Milken” (at Drexel Burnham Lambert, who was considered “King of the Junk Bond”) After the Enron collapse, senior executive Jeffrey Skilling went off to jail; after the WorldCom collapse, CEO Bernie Ebbers was successfully prosecuted.

In contrast, not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis…and with the a five year statute of limitations, it appears likely that none will be.  It may be too soon to ask why…perhaps no fraud was committed. Even though the Financial Crisis Inquiry Commission found signs of fraud everywhere it looked (and documented same in a lengthy public document that mentioned fraud 157 times).

The respected Federal jurist mentions the doctrine of “willful blindness,” where defendants cannot escape prosecution by shielding themselves from clear evidence of critical facts strongly suggested by the circumstances surrounding the crime.  But perhaps now, with so much at stake for large financial “supermarkets” that such blindness to certain behaviors is being baked into the culture…becoming part of the DNA of large financial institutions.  The Federal government itself does not escape criticism from the judge. He cites government involvement in creating the conditions that could lead to such fraud.

Judge Rakoff is well respected among other judges and among the prominent bar.  His criticism of the Department of Justice (for inaction) are stinging.  The SEC is no doubt watching closely (Chairwoman Mary Jo White is a former Federal prosecutor in NY).

I would Stay Tuned to the judge and his now very public proclamations on the subject of the ebbing financial crisis and possible wrongdoing.  Which may not be pursued at high levels in 2014…but do not rule out sweeping changes at some point in how the justice system looks at future allegations of corporate or executive level fraud calling for  thorough criminal investigation and aggressive prosecutorial action. Major changes many be in store for the U.S. Justice Department and the SEC with regard to public expectations when the next bubble occurs.

Judge Rakof’s article is worth reading – he is a judge on senior status for the Southern District of New York, and former Federal prosecutor who really know the territory of the financial industry – you can find it at: