Exploring Wall Street's 'Dirty Business'

George Packer's article in The New Yorker follows the U.S. attorney for the southern district of New York during an insider trading case. In "A Dirty Business," Packer explores why it's been difficult to build prosecutions directly tied to the financial crisis. Packer talks to Steve Inskeep about what he's learned during his investigation.

STEVE INSKEEP, host:

In a New York City courtroom last month, a billionaire hedge fund manager became a convicted criminal. A jury found Raj Rajaratnam guilty of securities fraud in conspiracy. It's considered the largest insider trading case in history. And yet as large as this case was, the financial crisis of recent years was far larger. As reporter George Packer of the New Yorker magazine sat in the courtroom, he thought of people who have not gone on trial.

What did you learn about the culture of Wall Street and the way it changed in the last few years, if at all, from watching this trial?

Mr. GEORGE PACKER (Reporter): I learned that the level of casual corruption, at least in the world of hedge fund traders and managers, is astonishingly high.

INSKEEP: Casual corruption, what does that mean?

Mr. PACKER: Just the way in which people would make the decision to break the law, to commit a felony, to trade on inside information almost without thinking very hard about it, as if it was part of the way they did business. And I think it was the way many of them did business before the crash.

And there's just so many examples in this case of people who Raj Rajaratnam, the defendant, reached out to corrupt, and who allowed themselves to be corrupted. I think it suggests that it was a part of the culture of this world, such that it's not a big leap for a law abiding person to begin to break the law.

INSKEEP: That was the genius of this man, Raj Rajaratnam, wasn't it? As you describe it he would do it gradually. He'd start paying a guy as a consultant and not ask for anything illegal at the beginning. And then sooner or later they guy would realize that he owes Raj Rajaratnam, and then suddenly Raj Rajaratnam is asking him for inside information.

Mr. PACKER: He was a very shrewd read of human nature. He knew not just who to corrupt, but how to corrupt them. The case you just mentioned is a Anil Kumar, who was a McKinsey consultant, saw himself as a serious man of business, not a trader on Wall Street. And so Raj Rajaratnam had to gradually ease him into it with the sense that this was just another form of consulting that he was doing, and then gradually the consulting turned to law breaking and into big sums of money being exchanged. But Kumar was able in a way to protect himself from this knowledge throughout the years of his crimes, until finally when he was placed under arrest in the fall of 2009. He fainted and I felt that the fainting was a kind of - the blow of reality hitting him in a way that suggests he had been living in this world of crime without quite admitting it to himself.

INSKEEP: So in examining this case, which is not too directly tied to the financial crisis, but certainly happened at the time of the financial crisis, you came away thinking that this was not an isolated case?

Mr. PACKER: One former prosecutor said to me, the relation of insider trading to the practices that lead to the financial crisis is the relation between street level drug dealing and international narcotics trafficking. And making the case against the street level drug dealer, as hard as it is and it took several years for them to make the case against Raj Rajaratnam, is a lot easier than making the case against bank executives who might have mislead investors on securities that they were selling. And that became an interest of mine, why has so much gone into insider trading, and from the public's point of view, so little into the financial crisis, which affected the entire country in a way that insider trading didn't.

INSKEEP: OK, you've posed the question. Why?

Mr. PACKER: Well, I have to say there's no single answer that explains it all. But I would say that one: the nature of criminal law. It is very hard for a prosecutor to prove beyond a reasonable doubt that there was criminal intent. Two: the Justice Department did not make this priority, either under Bush in 2008 or under Obama in 2009. It did not do what several prosecutors or financial fraud experts told me it should have done. Which was, to establish task forces in key districts around the country who would have been dedicated to investigating a given institution in a way that is necessary to be able to begin to unravel a case. And that never happened, and instead there were some stabs made at AIG, at Countrywide Financial, at Lehman Brothers, and they never amounted to anything. And apparently, at least two of those, have been dismissed or the investigations have been closed, and I think partly because it just wasn't given top priority in Washington.

INSKEEP: Did you ever get a sense that there's some rocks that people in the government, of whichever party, don't really want to look under?

Mr. PACKER: You know, it's hard to prove that there was, in a sense, a conspiracy to avoid pursuing these cases.

INSKEEP: I don't even want to say conspiracy. I'm thinking about the same kind of protecting yourself from realty that you just described in some of the criminal defendant's minds, if there are people that are just a little reluctant to go everywhere that the facts might lead them.

Mr. PACKER: I think probably that's true. It is true that the Obama administration and the Bush administration were more focused on stabilizing the banks than they were on investigating the banks. And those two might have even seemed like they could be contradictory and could have gotten in each other's way. And when it came to choosing, they chose to stabilize. It would have taken leadership from the top to say we still want to make this a priority and we're going to dedicate the resources to it.

INSKEEP: You just spoke in the past tense, it would have taken immense resources. Do you think it is too late now to make cases against some of the leading figures in the financial crisis?

Mr. PACKER: I think it's unlikely that it's going to happen. The statute of limitation is five years in these case. The cases aren't getting any warmer. And I think it's really a crucial matter of our politics, because it gives the public the impression that certain people are too big to be prosecuted. Not just too big to fail, but too big to be sent to jail.

INSKEEP: I can imagine, though, if a banker were sitting here talking with us, he might jump up and say what are you talking about? You know, a lot of us, meaning the banks involved and the investors involved lost hundreds of millions of dollars, or billions of dollars, reputations were ruined, companies failed. It's not like people really got away with things. And he might even suggest that the reason there have been so few prosecutions is that nothing criminal really happened. Is there a case to be made for that?

Mr. PACKER: Well, I don't quite accept it. I think at the core of the crisis that's true. It was stupidity and greed. It was not criminal activity. But on the margins when investment products were being marketed so that banks could get out of the housing market when things were south, or when financials were being misrepresented so that stocks didn't plummet as the crisis worsened in 2008. There's a lot of evidence that fraud was involved.

Now proving that it was criminal is another matter, and it's a very high hurdle to pass. And the other thing I would say is it's true that people paid a price, but Wall Street is still basically the beast that it was during the years of the Raj Rajaratnam insider trading dealings. And one reason is, I think civil penalties and bad press just are not a deterrent given the amount of money being made. The only real deterrence, the only thing that would concentrate the mind of someone at the top of Wall Street, is the possibility of going to jail. And that hasn't happened. And so, in a sense, as as one banker said to me, the financial crisis amounted to a speed bump for Wall Street.

INSKEEP: George Packer writes for the New Yorker magazine where his latest article is called "A Dirty Business."

Thanks very much.

Mr. PACKER: Thank you.

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