Introduction

Three months ago, then-Attorney General Eric Holder gave his prosecutors 90 days to determine whether they could charge individual Wall Street executives with crimes related to the 2008 financial crisis.

“I’ve asked the U.S. attorneys … over the next 90 days to look at their cases and to try to develop cases against individuals and to report back in at 90 days with regard to whether or not they think they’re going to be able to successfully bring criminal and or civil cases against those individuals,” Holder said in a Feb. 17 speech at the National Press Club.

Holder is gone now, and this week that deadline passed. The Justice Department, however, is dodging questions about the former attorney general’s pledge.

“It is our policy not to publicly discuss on-going investigations,” said Justice spokesman Patrick Rodenbush.

In the seven years since the financial crisis, none of the top executives at the giant Wall Street banks that fueled and profited from the housing bubble have been personally held to account. These bankers, who were the architects and major traders in mortgage-backed securities, have been largely immune to criminal charges and personal liability even as their institutions have admitted wrongdoing and paid billions in fines and restitution.

A review by the Center for Public Integrity of the enforcement actions and civil lawsuits filed by the Justice Department, Federal Deposit Insurance Corp. and Securities and Exchange Commission reveals that these agencies have been far more likely to charge or sue individuals who work at small and medium sized banks, and foreign financial firms, than those that work at domestic banking giants such as J.P. Morgan Chase & Co. or Citigroup.

Of the criminal cases tied to the financial crisis that the Justice Department lists on its web site, none are related to the five biggest U.S. banks. Two defendants who were unsuccessfully prosecuted ran a hedge fund for the now-defunct investment bank Bear Stearns. About a dozen others are from smaller banks or foreign institutions. Of the more than 100 bank executives named in lawsuits by the Securities and Exchange Commission, only four were from the top five banks, according to cases listed on the SEC web site.

“There’s no question that these banks have admitted that they’ve violated laws and regulations,” said Camden Fine, president and CEO of the Independent Community Banker of America, a trade group that represents more than 6,000 small- and medium-sized banks.

Fine says executives and directors of community banks have been routinely targeted by the FDIC and Justice. The FDIC has sued 1195 bank executives and directors to recoup money for bank failures since 2009. A handful are from major banks such as Washington Mutual. None come from the Wall Street giants, all of which were saved by a federal bailout. Dozens more have been targeted by the inspector general of the Troubled Asset Relief Program, the bailout watchdog.

“These guys on Wall Street get their checkbooks out and write a check,” he said. “This is an issue of unequal enforcement. It just drives me crazy.”

He has a point.

The Justice Department in recent years has settled civil charges against the biggest banking giants for violations related to the collapse of the housing market and subsequent implosion of the U.S. financial markets.

In November 2013, J.P. Morgan acknowledged it misrepresented the quality of securities it was selling that were backed by home mortgages. The bank paid $13 billion to settle the charges. Its CEO, Jamie Dimon, was rewarded with a 74 percent pay raise that year.

The following July, Citigroup paid $7 billion to settle Justice’s complaints that it sold mortgage-backed securities even though it knew the mortgages were not of the quality the bank claimed. A month later Bank of America shelled out $16.65 billion to make similar charges by Justice go away. It was the second Bank of America settlement in a year.

Still, nearly seven years after Lehman Brothers Holdings Inc., went bankrupt – the signal event of the crisis – many wonder why the bankers who benefited most from the boom have seen few consequences from the crash.

Some financial crisis background: During the early years of the last decade, U.S. home values were soaring, fueled by ultra-low interest rates.

Wall Street investors, eager to get in on the party, developed an enormous appetite for bonds backed by the mortgages of everyday homeowners. Firms like Lehman would buy up thousands of mortgages, pool them together into a security, and sell the cash flow from the mortgage payments to investors, including pension funds and hedge funds.

Among the biggest sponsors of mortgage- backed securities were the banking giants, including J.P. Morgan, Goldman Sachs, Bank of America and their subsidiaries.

The bonds were thought to be almost as safe as U.S. Treasuries, even though they paid out more interest.

The demand was so great that mortgage lenders loosened their underwriting standards and made loans to people who couldn’t afford them to satisfy hungry investors.

In 2007, homeowners began to default on their loans and home prices began to fall sending the whole system into a tailspin.

In March 2008, Bear Stearns almost collapsed and was sold to J.P. Morgan. Six months later, Lehman failed, setting off a chain reaction that killed dozens more banks and mortgage lenders. Weeks later, Congress approved a $700 billion bailout of the financial system and soon nearly every major financial institution was on the dole.

The ensuing recession destroyed as much as $34 trillion in wealth and sent the unemployment rate soaring above 10 percent for the first time in 25 years.

The causes of the collapse are interconnected and complex, and Justice officials have suggested criminal prosecutions would be difficult because prosecutors would have to prove that individuals intended to commit fraud. The agency failed in its efforts early on to prosecute those managers of two Bear Stearns hedge funds.

Since then only two executives from mega-banks have been named by Justice, both in civil suits.

“It’s easier to go after institutions than individuals because the institution will settle to get itself out of the public eye,” said Robert Hockett, a professor at Cornell University Law School who is also a consultant for the Federal Reserve Bank of New York.

Hockett said Justice has also appeared hesitant to go after banking giants and their executives because of fears of destabilizing the economy. The former head of the criminal division, Lanny Breuer, admitted a few years ago to “losing sleep at night” because he worried that if he sued a major bank it might have negative ripple effects on the economy.

Holder has tried to change that impression.

“We have exacted or extracted record penalties from banks who we have found to have engaged in inappropriate practices,” Holder said in the February speech. “To the extent that individuals have not been prosecuted, people should understand that it is not for lack of trying.”

Earlier this month, however, a federal judge in New York laid out how it might be done.

The Federal Housing Finance Agency, unlike many other government entities, has been aggressive in suing companies and people as it tries to recover some of the billions of dollars lost by the housing finance agencies Fannie Mae and Freddie Mac on investments in faulty mortgage backed securities.

The agency has sued 18 financial institutions and named individual defendants from among the top executives in each case. Most of the banks have settled rather than go to trial. J.P. Morgan settled with the agency for $4 billion and Goldman Sachs paid $3.15 billion.

In a 361-page ruling earlier this month, U.S. District Judge Denise Cote found Nomura Holding America Inc., and RBS Securities Inc., along with five Nomura executives, liable for losses because they made false statements in offering documents about the quality of the home loans underlying the securities they sold.

“The magnitude of falsity, conservatively measured, is enormous,” Cote said.

But she went beyond that.

The judge, after a three-week trial, dismissed arguments that losses in the securities could only be blamed on the overall collapse in the U.S. economy. Instead, she said, that economic collapse and the mortgage market meltdown were inextricably intertwined, and were directly caused but the actions of the players at every level of the housing market – from appraisers to mortgage lenders to the investment firms that bought the loans and repackaged them as securities.

“Shoddily underwritten loans were more likely to default, which contributed to the collapse of the housing market, which in turn led to the default of even more shoddily underwritten loans,” Cote wrote. “Thus, the origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses, but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”

Hockett, the Cornell law school professor, called the ruling “like The Emperor’s New Clothes.”

“Judge Cote said what many were thinking for a long time but were getting afraid to say because nobody else was saying it,” he said.

The Justice Department could use the same logic, along with the meticulously detailed evidence the FHFA compiled to show that the companies that packaged and sold mortgage backed securities knew that they loans were shoddy and likely to default, to pursue criminal fraud cases as well.

“The upshot there is that this whole notion of it being impossible to prove criminal malfeasance is absurd,” said Dan Alpert, an economist and investment banker who has written extensively about the financial crisis.

Hockett believes that tide may be turning.

Earlier this week, Holder’s replacement Loretta Lynch announced with great fanfare that the agency had extracted guilty pleas and billions in fines from five major banks, including Citigroup And J.P. Morgan, for manipulating currency markets. It was the first time Justice has extracted admissions of criminal wrongdoing from the major banks.

Lynch hasn’t charged any individuals in the case, but she pointed a finger at the traders involved and strongly suggested such charges could soon follow.

“This behavior by traders who were very senior, who were acting on behalf on the parent company… was so systemic and so egregious that we felt the entire institution had to take responsibility,” Lynch said in a press conference Wednesday. “I’m not able to comment on the status of individuals involved except to say the situation is ongoing.”

That case was not related to the mortgage meltdown and financial crisis. But the tone makes Hockett believe that Justice may be getting more aggressive.

“Now that we’ve finally crossed that rubicon might mean there’s more to come.”