IN WRITING BAILOUT, I was given the opportunity to relive the tumultuous twenty-seven months of my life that are recounted in the pages that follow. It was a harrowing time, both for me and for the country, but it was an experience I will always treasure. As a line prosecutor in Manhattan, I never dreamed I would have the opportunity to serve my country at such a crucial time, and while I certainly had more than my fair share of setbacks, I believe that the work we did at the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) played an important role in protecting TARP from greater abuse and in bringing to justice those who sought to criminally profit from it.
Although I was initially reluctant to take the job in Washington, I felt it was my duty, and I felt a similar call to write this book, in order to bring attention to what I saw as a hijacking of both the bailouts and the government itself by a handful of Wall Street financial institutions and their executives. I saw how they were able to exert their power and influence to protect and reinforce a dangerous status quo that worked brilliantly for them but has left the rest of the country behind. In writing this book, I wanted to send a warning about what I see as a treacherous future given the banks’ continued dominance.
Events that have happened since I finished the original hardcover version have unfortunately only further confirmed my fears about where we are headed as a country if we continue to ignore the dangers presented by banks deemed “too big to fail.” Specifically, in the past several months we have seen a parade of banking scandals that have reflected just as poorly on the government and its captured regulators as on the banks themselves.
First, we learned of what appears to be a global conspiracy among several of the largest banks to manipulate one of the most important interest rate benchmarks in the world, the London InterBank Offered Rate (LIBOR), which is used to set interest rates for everything from complex derivative contracts to home and auto loans. A few banks are supposed to send in estimates of their borrowing costs each day to the British Bankers’ Association, which then averages the reported numbers and issues the official LIBOR rate for that day. One of those reporting banks, Barclays, settled allegations that its employees had taken part in cooking the rate. The bank lied about its estimated costs in order to manipulate this number, originally so that its traders could rip off its counterparties and earn illicit profits, and then later to make it appear that the bank was in better financial shape than it actually was, thus potentially lowering its costs and fooling potential shareholders, regulators, and others.1 A number of other banks are also apparent subjects of the ongoing investigation, including the all-too-familiar triumvirate in banking scandals: JPMorgan Chase, Bank of America, and Citigroup.2
As damning as the breathtaking arrogance, size, and scale of the alleged misconduct by the banks were the allegations indicating that one of the banks’ primary regulators, the Federal Reserve Bank of New York, and its president at the time, Timothy Geithner, were made aware by Barclays by April 2008 both of the ongoing manipulation and that other banks were involved.3 But rather than immediately alerting the Department of Justice or even calling in the banks subject to his jurisdiction and warning them that they needed to cease the manipulation immediately, Geithner took far more modest steps. He apparently did little more than send a memo to his regulatory counterparts in England, recommending that the rate-setting process be changed,4 and call a meeting of U.S. regulators, during which the New York Fed generally reported that the LIBOR process was vulnerable to potential manipulation but reportedly did not cite the actual manipulation to which Barclays had confessed.5
This regulatory response was so remarkably tepid that Barclays actually continued to manipulate LIBOR for a full year after Geithner took the actions he later defended as “necessary and appropriate” which apparently included relying on the British regulators to “fix this.”6 Indeed, although at the time some suspicions were reported in the press that LIBOR was being manipulated,7 rather than alerting the public, Geithner effectively endorsed the rate by baking it into several bailout programs, using it as a benchmark to determine the interest rate that taxpayers would receive from AIG and in certain TARP programs. According to news reports, it wasn’t until 2010 that a referral was made to the Department of Justice, and even then it came from the U.S. Commodity Futures Trading Commission, not the New York Fed or Treasury.8
A number of other banking scandals have also broken since Bailout’s completion. Standard Chartered joined JPMorgan Chase in settling charges that they illicitly processed monetary transactions for institutions in nations such as Iran and Cuba,9 and a Senate Committee detailed HSBC’s apparent facilitation of financial transactions for rogue organizations, including those potentially involved in terrorism or narcotics traf-ficking.10 The Department of Justice has also brought civil charges against Wells Fargo and Bank of America for defrauding the government of more than a billion dollars in connection with fraudulent mortgage activity that continued through 2009, well after the banks had accepted TARP funds. These cases, brought in October 2012, followed the settlement of similar charges against Citigroup and Deutsche Bank. Also in October, the New York State attorney general brought a broad civil case against JPMorgan Chase for fraud committed by Bear Stearns in the assembling and sale of mortgage-related securities during the run-up to the financial crisis, and he filed a similar case against Credit Suisse the following month. The SEC also settled cases against both JPMorgan Chase and Credit Suisse over the packaging and sale of similar securities.11
To date, however, all of these cases and scandals have one thing in common. Not a single institution or senior executive has been criminally charged for the underlying conduct. And while there have been leaked news stories suggesting that some of the lower-level Barclays traders may in fact be charged criminally in the LIBOR case, it seems as if the likelihood of high-level criminal charges for cases related to the financial crisis or actions taken in its aftermath has diminished to close to zero. As the New York attorney general told reporters, he chose civil over criminal cases not necessarily because of a paucity of evidence, but because the authorities had waited too long to file criminal charges.12 The five-year statute of limitations in New York for criminal cases (as opposed to the six-year statute for civil cases) had run its course. Similarly, it now appears to be too late for the president’s Financial Fraud Enforcement Task Force, originally announced in October 2009, to do its promised job “to hold accountable those who helped bring about the last financial meltdown.”13
There are a number of potential explanations for the failure to bring criminal cases, some of which are detailed in the pages that follow. After the terrorist attacks of September 11, 2001, federal law enforcement personnel and resources were understandably redirected toward counter-terrorism efforts, creating a significant shortfall in white-collar criminal investigative expertise. As a result, as I saw firsthand, by 2008 the Department of Justice lacked sophistication when it came to investigating complex accounting fraud cases.
But there was another reason for the lack of cases: a staggering absence of referrals from regulators—such as Geithner’s New York Fed—to the Department of Justice. As William K. Black, a banking regulator during the savings and loan crisis of the 1980s and 1990s, has explained, prosecutors back then leaned heavily on banking experts at the regulatory agencies to refer and shape the cases, with Black’s agency making 30,000 referrals to the Department of Justice relating to frauds committed by the banks.14 In contrast, Black reported that the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the two bank regulators housed at Treasury, had made only a handful of referrals in connection with the current crisis.15 Also, despite the promising announcement of the president’s Financial Fraud Enforcement Task Force, there was never a significant commitment of investigative and prosecutorial resources to focus exclusively on sophisticated crisis-related crimes.
The absence of cases is likely also related to the power, influence, and control in Washington of the largest banks. The entire federal regulatory and political apparatus coalesced during the crisis and in the aftermath around one goal—to rescue the “too big to fail” banks by any means necessary, with trillions of taxpayer dollars flowing out the door with few conditions and little accountability. With Treasury having invested so much time, effort, and treasure into saving the big banks, it was simply inconceivable that the Department of Justice could have sought criminal indictments against any of the largest banks or their top executives. Doing so would have risked causing them to fail, thereby undoing all of Treasury’s and the Federal Reserve’s efforts and putting the entire financial system at risk once again.
These problems, of course, endure, with the largest banks now nearly 25 percent bigger than they were before the crisis. If they were too big to fail in 2008, they became too big to jail in 2009. Worst of all, Wall Street knows this to be true, and each settlement of a civil case on favorable terms, and with no accountability for the individuals who committed the fraudulent acts, reinforces the most dangerous perception of all: for a select group of executives and institutions, crime pays. Why not risk crossing the line and continue to perpetrate fraud in the assembling and sale of mortgages if the penalty for getting caught is a fine that can be paid off with a few days or weeks of earnings? Why worry about violating sanctions in order to profit illegally by laundering money for terrorist-sponsoring states? Why not rip off investors by selling bonds that are designed to fail so that you can profit from your bet against them?16 Why not spend ten years defrauding the Federal Housing Administration? You know you’ll get to keep all of the ill-gotten profits if you go undetected, and on the off chance that you’re caught, your shareholders will pay a minor fine that will not affect your bottom line. In other words, the complete lack of meaningful consequences—financial or penal—for those committing these frauds encourages future fraudulent conduct.
Ultimately, the financial crisis was a game of incentives gone wild, and the lack of accountability in the aftermath of the crisis only reinforced those bad incentives. We had a chance to bring real accountability to the system in 2009 with the announcement of the Financial Fraud Enforcement Task Force, but it was left underfunded and under-resourced. We had a second chance to fix the system in 2010 by breaking up the largest banks through regulatory reform, but the banks—with a healthy assist from Geithner and the Treasury Department—won that battle too. And we had an election in 2012 that could also have been an opportunity for meaningful change. But both candidates staunchly defended the status quo, which maintained the size and power of the banks, even as they made the incredible claim that they would never bail them out again. I fear that we may not have many more opportunities left before it is too late, and that meaningful reform will arise only out of the ashes of the next economic conflagration. That is a sequel I would prefer not to have to write.