The Justice Department's Wall Street Settlement Deals Are Shameful

I really liked Dean Starkman's piece in the New Republic, The Justice Department's Wall Street Settlement Deals Are Shameful. "It bears saying one more time: It’s a disgrace that the Justice Department has failed to bring a single criminal charge against any Wall Street or mortgage executive of consequence for their roles in wrecking the economy, despite having managed to make arrests in the comparatively piddling schemes of Enron and the Savings & Loan flimflam. (The latter resulted in more than 800 convictions, including those of many top executives.) These settlements are wan consolation. The sums being surrendered, for starters, are large only until compared with the $13 trillion or so the public lost in the financial crash—or, for that matter, with the banks’ own coffers. (Citi’s pure profit in the two years before the wipeout was more than triple its penalty.) Not to mention that the money won’t be paid by any parties actually responsible, but by the banks’ current shareholders, who pretty much had nothing to do with the misdeeds in question. And the bulk of the settlements will be tax deductible. For destroying trillions in wealth and thousands of jobs, banks will get a write-off."

But he points out, the real problem is that the DOJ is settling without issuing complaints. Unlike the DOJ, New York’s Department of Financial Services brought a civil action against BNP Paribas and named names.

In announcing the BNP penalty, New York’s superintendent of financial services, Benjamin M. Lawsky, made the following observation: ‘In order to deter future offenses, it is important to remember that banks do not commit misconduct—bankers do.’ Many of his predecessors in white-collar law enforcement also understood the corrective power of publicity. Ivan Boesky and Michael Milken became household names in the 1980s because of the riveting civil complaints brought by the Securities and Exchange Commission (SEC), an agency that evoked a fear on Wall Street that is hard to imagine today. Robert M. Morgenthau, the legendary Manhattan district attorney, is legendary partly for actually sending bankers to prison, but he also pursued devastating civil suits against wayward financiers. The sweeping white-collar civil complaints that Eliot Spitzer filed as New York’s attorney general read like detective novels; his blockbuster settlement with American International Group was preceded by a lawsuit that explicitly targeted the titan Maurice R. ‘Hank’ Greenberg, to Greenberg’s everlasting fury.

Detailed airing of past wrongdoing doesn’t just put would-be malefactors on notice. It does more than bolster public confidence in the legal system. It can also force structural change. In 1933, the Pecora hearings hauled banking chieftains (including those who ran the predecessors of J.P. Morgan and Citi) before the Senate banking committee to scrutinize their actions before the 1929 crash. These hearings led to the Glass-Steagall reforms and the Securities Exchange acts, the foundations of U.S. financial stability for half a century. Later in the century, the Savings & Loan prosecutions led to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that, among other things, effectively disposed of failed thrifts. The Enron debacle was followed by the Sarbanes-Oxley accounting and governance reforms of 2002. Spitzer’s suit against Wall Street banks produced a global pact to reform bogus stock research, and so on. But in the current cases, in which institutions are accused of systematic wrongdoing with historic consequences, the government is letting banks discreetly settle out of court, as if the facts at issue were some kind of fender bender."

I feel the same way about Obama's handling of the rationale for the war in Iraq and torture scandals. Sweaping the past under the rug does nothing good. Nelson Mandela's Truth and Reconciliation Commission should have proved that.