Elizabeth Warren is still mad about the financial crash, and we should be too

As we pass the eight anniversary of the crash, the senator is rightly demanding that the government explain why it has failed to prosecute those responsible

Let bygones be bygones? Not if Elizabeth Warren has anything to say about it.

This past week marked the eighth anniversary of the bankruptcy filing of Lehman Brothers and the near collapse of the entire US financial system. And Warren, the crusading Democratic senator from Massachusetts, still hopes to bring some of the individuals responsible for the debacle to justice.

When the Financial Crisis Inquiry Commission (FCIC) wrapped up its work investigating the causes of the cataclysm, it referred nine individuals to the justice department, noting commission members believed they had identified serious violations of securities laws or other offenses.

Warren wants to know why the justice department has been twiddling its thumbs for eight years, while citizens confidence in both government and the financial system dwindles.

She points out that of the nine individuals named referred for possible prosecution, only one has ever faced any penalties. Even then, when the Securities and Exchange Commission fined former Fannie Mae CEO Daniel Mudd for misleading investors about the degree to which the mortgage funding entity was at risk of collapsing due its exposure to risky mortgages, it was Fannie Mae itself that wrote the $100,000 check on Mudds behalf, to a special US Treasury account that accepts gifts.

Thanks to the National Archives, we know the identities of the other individuals the FCIC panel referred to the DoJ to be considered for criminal charges. Among the most notable figures is Robert Rubin, the former treasury secretary who oversaw Wall Streets deregulation and has held top jobs at two of the biggest beneficiaries of that move, Goldman Sachs and Citigroup.

Rubin, the FCIC members suggested, may have been responsible together with fellow top Citigroup management for keeping the value of the mortgage securities that were stuck on the banks balance sheet and for which they couldnt find buyers, inflated. That meant they could hide the extent to which Citi was exposed to subprime mortgages, declaring at one point it was 76% lower than the actual levels. That may rise to the level of fraud.

Former treasury secretary Robert Rubin in 1998. Photograph: Ken Cedeno/REUTERS
Another name on the list is that of Charles Prince, Citis CEO, who achieved fame/infamy for his comment that as long as the music is playing, youve got to get up and dance. At the FCIC hearings,
he tried to argue that no individual bank had the power to stop the madness that led up to the financial crisis: as long as his competitors kept making more reckless loans, he had no choice but to follow suit and keep dancing.

The problem is that whining that well, Joey was doing it, too, and he made me do it is the kind of excuse that goes out of fashion by the time youre a teenager. Its inappropriate in a middle-schooler, much less a middle-aged man.

And yet, as Elizabeth Warren points out, the DoJ has been sitting on a list of middle-aged bankers for several years now. Its unclear to what extent any wrongdoing can still be prosecuted, given that the statute of limitations will apply to many of these cases.

But at the very least, the DoJ can explain why they failed to act, as she has requested.

True, financial crimes can be tough to prosecute: the issues are complex and lend themselves to finger-pointing, with everyone pointing to someone else as the culprit.

And some of the trials that have taken place havent had results that would necessarily have encouraged the DoJ. Most recently, several the traders accused of being involved in rigging the key Libor interest rate, affecting the cost of trillions of dollars of loans, mortgages and other financial deals, and who were known by names like Lord Libor and Big Nose, were acquitted in trials. A Swiss private banker was acquitted of helping his US clients duck taxes in a Miami trial.

In one of a handful of cases directly linked to the financial crisis itself, the managers of a Bear Stearns hedge fund that collapsed in 2007 after investing in subprime mortgage securities were accused of securities fraud. It was supposed to be an easy win for prosecutors in the immediate aftermath of the crisis, but jurors acquitted the two men in late 2009. In fact, one of the only major courtroom victories came in 2013, when the fabulous Fab, aka former Goldman Sachs trader Fabrice Tourre, was found liable by a federal jury for defrauding investors in a mortgage deal that made hedge fund managers who took the other side of the deal a lot of money but cost the investors millions.

But this was a civil, not a criminal case, and Tourre had to pay monetary damages, not spend any time in jail. Goldman Sachs, too, forked over $550m to settle related charges, neither admitting nor denying any wrongdoing in the matter, a phrase calculated to drive Warren and all of Wall Streets other critics around the bend. No one has gone to jail.

Perhaps this would matter a little less a little, a very little if Wall Streets arrogance had been dimmed by the events of 2008. Or if it the Libor trading scandal hadnt flared up, or if JP Morgan Chase hadnt experienced the London Whale derivative trading losses, the latter ultimately costing the bank $6bn. In neither case has anyone been marched off to jail. Two of the colleagues of Bruno Iksil, the derivatives trader who orchestrated the trades the whale in question have been charged with criminal conspiracy, but havent set foot in the US to face those offenses.

Meanwhile, Iksil resurfaced and in true whale-like fashion, made a big splash earlier this year by objecting to his moniker. He also insisted, in a letter sent to Bloomberg, that his managers told him what to do; that it was a bank-designed strategy that ran amok. The losses were not the actions of one person acting in an unauthorized manner, he wrote. My role was to execute a trading strategy that had been initiated, approved, mandated and monitored by bank management.

In other words, if we want to comfort ourselves by thinking of Iksil and others like him as rogues, were demented.

Ex-Goldman Sachs trader Fabrice Tourre had to pay monetary damages, but did not spend any time in jail. Photograph: Richard Drew/AP

Thats something to ponder now as we read the headlines about the revelations at Wells Fargo, where some 5,300 middle-ranking and junior employees were fired for opening sham accounts in the name of existing customers. The employees met the banks sales targets and their own productivity targets; the customers didnt have a clue about what was going on until they realized they were hit with a fee for an account they hadnt opened, or saw their credit was downgraded for some unknown reason.

The good news is that the Consumer Financial Protection Bureau exists; stopped this and collected a penalty.

But Carrie Tolstedt, who ran the consumer banking division that was busy doing all this, will walk away with $124.5m in pay, while being called a standard-bearer for our culture by John Stumpff, the banks CEO.

Thankfully, federal prosecutors are already looking at Wells Fargos sales practices but the investigation cant stop at the lower level.

At some point, the cultural standard bearers the bosses the people who put in place trading strategies and policies that others implement will have to do more than simply sign the checks made payable to the SEC and other regulators.

From dipping into their own (very, very healthy) bank accounts, to defending their actions in a civil or criminal court, its time to hold top managers accountable for what happens within their firms. They cant just scoop up the profits and pretend they dont know the risks that the institution is running to generate those returns, or ignore the possibility that earning them required abusing the trust of clients, or even putting the financial system at risk.

The events of eight years ago remind us what happened when Rubin, Prince, and others forgot. Its time to rally behind Warren and demand an accounting for those events, so that we have a precedent for holding Stumpff responsible for what just took place at Wells Fargo.

Never again.

Read more: https://www.theguardian.com/business/us-money-blog/2016/sep/17/elizabeth-warren-financial-crash-letter-doj

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