Prosecute Now: The Justice Department Can Still Act Against Bad Bankers

It's been a grim period for American justice. Despite compelling evidence of widespread bank fraud in the run-up to the 2008 financial crisis – and despite all those billion-dollar settlements – prosecutors have not indicted executives at any major U.S. bank. This stands in contrast to the much smaller savings and loan scandal of the 1980s, which led to the conviction of more than a thousand bankers.

And as the Justice Department's criminal division remained idle in the aftermath of 2008, the statute of limitations passed for most of the bankers' crimes.

But there's a ray of hope: The bankers' own deep-seated propensity for cheating and corruption may have given prosecutors a new opportunity to indict them. With the upcoming departure of Attorney General Eric Holder, there is the chance to forge a new approach toward Wall Street lawbreaking by pursuing evidence of wrongdoing wherever it may lead.

The stakes are high. As long as the bankers' culture of corruption goes unpunished, the safety of the global economy – and of individual families' well-being – remains at risk.

Shouting 'Fire'

In a performance that was widely considered disastrous, the president of the New York Federal Reserve Bank told senators in a hearing last week that he didn't believe Wall Street regulators should be “cops on the beat.”

“It's more like a fire warden,” said William Dudley of the regulators' role, “to make sure that the institution is well run so that, you know, it's not going to catch on fire and burn down. And managed in a way that if the institution is stressed that it doesn't collapse and threaten the rest of the financial system.”

Even the normally unflappable Sen. Elizabeth Warren (D-Mass.) seemed momentarily at a loss upon hearing this response. No neighborhood in this country needs policing more than Wall Street, whose culture is rife with corruption and whose record is stained by repeated fraud.

Don't take an outsider's word for it. An expert with many years of experience spoke eloquently last year of Wall Street's “apparent lack of respect for law, regulation and the public trust,” describing “deep-seated cultural and ethical failures at many large financial institutions.”

That expert? William Dudley.

Science Says

The corruption of banking culture has been confirmed, not only by the mountains of evidence regarding bank fraud, but by independent research. The first confirmation came from a 2012 survey of British and American bankers. As we reported at the time, one in six bankers said they were "fairly likely" to commit a banking crime if they could get away with it. Forty-five percent refused to rule it out if the payoff were big enough.

Researchers noted that "nearly one-third of all financial services professionals reported feeling pressured by bonus or compensation plans to violate the law or engage in unethical conduct. Nearly one-quarter of the respondents felt similar pressure from other sources."

Those findings appeared to find confirmation in a study published this month by the scientific journal Nature. The report, entitled “Business culture and dishonesty in the banking industry,” found that bankers were significantly more dishonest than employees of other industries – once they identified themselves as bankers.

In lay terms, bankers who were reminded of their own culture and business environment tended to cheat a lot. That was not true of any other profession or industry the researchers studied.

(The study is explained in greater detail here.)

Wall Street Rap Sheet

But we don't need scientific research to know that a lot of bankers are dishonest. All we need to do is review the record. Banks have paid many billions of dollars in recent years to settle charges of widespread fraud. JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup … each of the nation's biggest banks has paid tens of billions to settle a wide variety of charges.

As many Americans intuitively understand, these fraud settlements have allowed bankers to evade personal responsibility for widespread criminal behavior. Lawbreaking bankers were allowed to keep their ill-gotten gains and remain free, using shareholder money to pay the penalties for their own actions without the threat of criminal prosecution.

The Attorney General of the United States, Eric Holder, publicly stated that he would not prosecute too-big-to-fail banks (a statement he later attempted to rescind), although even that unacceptable statement failed to explain why he wouldn't prosecute individual bankers. Meanwhile, the statute of limitations passed on many of the bankers' most egregious and best-documented criminal behavior.

Their well-documented crimes include investor fraud, consumer fraud, other Securities and Exchange Commission violations, currency manipulation, perjury (filing false statements), and – for good measure – laundering money for the Mexican drug cartels.

Repeat Offenders

The fundamental dishonesty of banking culture is confirmed by the fact that these banks have violated those agreements time and time again. A few examples:

● Standard Chartered, a British bank, apparently violated the terms of its 2012 settlement by failing to disclose the extent of its violations – which in this case covered illegal dealings with the nation of Iran, in violation of U.S. law. That has forced a reassessment of a number of bank deals, as Ben Protess and Jessica Silver-Greenberg reported in The New York Times.

● Last December, Joseph A. Smith, court-appointed monitor for the multi-bank foreclosure fraud settlement, reported that three of the nation's biggest banks – JPMorgan Chase, Bank of America and Citigroup – continued to violate the terms of the $25 million deal by depriving homeowners of the relief that agreement was intended to provide.

(While that agreement only applied to five banks, the Consumer Financial Protection Bureau found in 2013 that abuse was still endemic throughout the mortgage industry.)

● The New York Attorney General found in 2013 that Wells Fargo, as well as Bank of America, had violated the terms of the foreclosure fraud agreement.

● At least eight banks have violated the terms of their fraud agreements since 2001, law professor Brandon L. Garrett found. This confirms the findings of The New York Times, which published this graphic of repeat bank violations back in 2011, showing instances in which banks agreed to end a certain form of wrongdoing but then kept doing it anyway.

An Opportunity ...

This is not admirable behavior, but there may be an upside to it. Legal experts have noted that such violations are likely to abrogate bankers' immunity from prosecution and may set the clock ticking again on the statute of limitations.

We asked William K. Black Jr. to elaborate on this point. Black, who is associate professor of law and economics at the University of Missouri, led government efforts during the savings and loan scandal and is a leading expert on white-collar crime. Black told us via email that:

“A well drafted settlement/deferred prosecution agreement would provide that the defendant agreed that the statute of limitations was extended during the life of the agreement and that the defendant agreed that it had no statute of limitations defense to the charges and would raise no such defense.”

Black added:

“... (A) properly drafted settlement/deferred prosecution agreement would explicitly provide that any deliberate violation of the promises in the agreement would not only invalidate any releases granted by the government but also constitute a breach that would lead to imposition of a specified range of penalties.”

But were these bank settlements “properly drafted”? In some cases we can't know, because the agreements have been kept secret from the public. Prof. Garrett and his law students have filed for the release of 30 such agreements under the Freedom of Information Act. Most other agreements are public.

Black outlined another potential opportunity for prosecution that could arise from these violations:

“(A)ny deliberate violation of such an agreement is likely (not certain) to constitute a violation unless it is reported truthfully by the defendant firm. The most common example is that the defendant would report (falsely) that it had done X or not done Y. In general, lying to federal regulators or law enforcement personnel is a felony.”

… and a Challenge

Wherever a bank has violated the terms of a settlement, prosecutors have an opportunity to revisit the underlying fraud which led to the deal. They should immediately review these agreements, along with all relevant statements from the banks involved.

If those agreements were properly drafted, it should be possible for prosecutors to resume investigating the individual criminal acts which gave rise to the fraud. Prosecutors should also pursue additional charges wherever false statements have been made regarding the deal.

(If the agreements were not properly drafted, we need to know who failed to perform their duties.)

It is time once again to challenge the Justice Department and the Attorneys General of our states to uphold the law without prejudice, whether a crime's been committed on Main Street or Wall Street. The only effective way to fight the financial industry's culture of corruption is by pursuing and indicting criminals in America's banks, acting without fear or favor to protect the public – and the global economy – from lawbreaking among the wealthy and powerful.