Why Aren’t Any Bankers in Prison for Causing the Financial Crisis? (2016) | Hacker News Reader

Why Aren’t Any Bankers in Prison for Causing the Financial Crisis? (2016)

theatlantic.com

407 pointssidcool221 comments

Causing financial crisis wasn't illegal. Unethical but not a crime. Except for some cases of misselling products, banks playing against the customer etc. Bailout was.

For $3 trillion less than bailout, we could have paid off every U.S. mortgage! http://www.jameslavin.com/articles/2009/04/16/for-3-trillion... [need better source??]

Without bank bailout we'd buy banks for pennies. Market forces would work and banking sector would be incentivised to behave properly.

The bailout was loan rather than gift though, and I believe eventually made a small profit?

The same way if someone steals your car, you buy a new one and the economy as whole (GDP) is in profit.

What bailout did (also via QE + ZIRP/NIRP) is prop-up property & asset prices effectively legitimising the prior speculation. This prevented resetting of prices to the levels where people would start buying again for non speculative reasons. Effect is young generation sees houses at 10x earnings whereas the average is 3-3.5x. Boomers sit on tons of unearned house equity that is only there because land prices are inflating like crazy.

For capitalism to work well there needs to be a mechanism for wealth destruction, at least for the "unrealised wealth".

> mechanism for wealth destruction

Well, that's never going to be popular, to the extent that all lobbying is going to be diverted to making sure that it's not your wealth that gets destroyed. Have you seen how unpopular even tiny amounts of inflation are?

Getting wealth redistribution would be a start.

inflation isn't wealth destruction, it's wealth redistribution from everyone into the financial industry.

He means that the government literally made a profit off of the bailout loans. One Source: https://www.washingtonpost.com/business/economy/bailout-high...

Depends on exactly what you mean by "the bailout". In dollar terms the fed's actions were much much larger than TARP.

The source is a bit misleading - the 12.8 trillion includes money the fed spent to buy assets, driving interest rates down. They've been slowly unwinding that position, and it's not as if they were giving the money away.

It doesn't have to literally be equivalent to paying off people's mortgages for them. It could have been in the form of buying up housing that was in default or foreclosed upon. The government was in the perfect position to profit off of the crisis while allowing people to keep living in their homes. I realize this is simplistic because of the unemployment associated with the crisis, but a 12 or 18 month lease with discounted rent would have been one potential solution. The government would be unloading the housing stock 3-5 years later, depending on when it looked like the market was starting to recover but not all at once so as not to flood the market.

why would the government need to profit ? they could evem do it in a loss

Any alternative scheme to the bailout ought to cost less than the bailout. I am under the impression that they profited from the bailout but if that's not the case, then they could do it at a loss so long as the loss is smaller than the bailout loss. And both of these profit/loss comparisons would be based off of projections rather than what actually happened.

I used to think this way, you see, the fed actually made money in the process, how is this a bad thing?

What actually happened was that major banks were facing a mix of liquidity and solvency crisis, meaning that they were going to go under, but not only they got a cash bailout to deal with liquidity crisis. They also got a QE policy that prop up asset prices they hold, which is equivalent of giving them money and not getting it back.

It's financial wizardry that both the banks and fed made money, where does their profit come from? There are 2 possible scenarios:

1, as fed unwind its balance sheet, the market is going to correct and eventually the fed ends up losing money (to the banks who cashed out first)

2, fed successfully controls the pace of unwinding, so instead of crashing the market it keeps market at a subdued level, absorbing economic growth in the next few years. In this scenario, the profit fed and the banks made are coming from today's and future investors.

> In this scenario, the profit fed and the banks made are coming from today's and future investors.

I think you mean today's and future taxpaying workers, which, sure, some of whom are/will be retail investors. But retail investors are the subset of victims with the best relative outcome, because at least they have something invested.

The impact on labour is difficult to predict, but most people will have invested in something, either a house, 401k, pensions, etc. Returns on those assets will be lower in the next cycle (I'm not predicting when it'll start), and that would impact people's ability to accumulate a nest egg for retirement.

As I see it the Fed put assets into a weird sort of freezer to maintain liquidity and asset prices and they have been unfreezing them at about the same rate as the GDP has been growing such the net impact on asset prices is unchanged.

That's an interesting and much more optimistic angle to describe the same thing.

It would be the case if fed has been accurate at setting prices.

> It's financial wizardry that both the banks and fed made money, where does their profit come from?

From an accounting standpoint it's very simple. Asset prices collapsed during the crisis. The Fed held onto them. Asset prices return to normal levels, and everyone profits overall.

Except a massive amount of money was printed in order to make this happen. That money went into the pockets of the 1%, but the money coming back to the FED comes from the taxpayer (which is mostly income tax) and small-time customers of the banks.

This is the sort of reasoning like the one defended in the article. Of course it's hard to pin blame ... as many individuals worked together to commit the fraud. To me, that seems trivially easy, that means the institution itself, and it's officers (directors and up) are responsible. Because it's fraud, which is criminal, it's not the institution, but the officers directly. Criminal law also has the provision that if you didn't know it was a crime, that doesn't matter : you should have known.

Furthermore this does not mesh with the fact that none of the banks have been forced to make the victims of their fraud whole. None of the CDS investors have received the theoretical value of their investment from the courts, and only very few have even received the amount they paid back. Most got pennies on the dollar. None of the people who lost their house due to foreclosure got it back, BUT when the banks started getting losses because the market dropped when they foreclosed too much, THEN the government stepped in. Then Obama took radical action. Trillions of dollars. Trillions. I don't even know how many zeroes that number has.

Nope, sorry. The Obama government directly, and knowingly decided to legally protect the banks, and even to protect the banks from the consequences of their own fraud (because this fraud they committed resulted in loans not getting paid off ... no worries ! Obama stepped in. Not to protect homeowners, of course, but to protect the banks, make them whole [1]).

And yet ...

When 5 youths rob a store (only one of them, of course, actually stealing anything) ... there doesn't seem to be any problem convicting all 5 of them. There was no proof whatsoever that more than one did anything wrong at all (I'm still thinking the odds of some of them just happening to be in that store not actually in on the crime are pretty good). Happened just this week. Somehow the same reasoning does not apply to banks.

When a 20000 person protest is going on, and 2 of them throw rocks at stores, there is no problem with the police using serious violence against everyone, with them knowing full well that the vast majority have done nothing wrong. Needless to say, broken bones caused by the police are not in fact paid for by the government, not even when there isn't even the slightest claim that the owner of the leg did anything wrong. Not the slightest thing. And of course, prosecutors and courts side with the police.

And let's just not mention what I found when looking into wiretapping. The police has THOUSANDS of internal complaints about abuse of wiretapping. ZERO cases were prosecuted. Zero. Worse: the police actually defended 2 stalkers where the fact that they were being stalked by police officers who got wiretaps on them became obvious to the victims. Bush/Obama/Trump: all the same. They weren't just fraudster-in-chief, but also sexual-abuser-in-chief.

When I get victimized by a fraudulent transaction, the bank is quick to pin it on me. And yet I keep hearing no end of stories that the reverse is also true: when there are fraudulent transactions it is ALSO pinned on the merchant (and I've since come to know how this system works, this is actually true: it results in punishment (financial loss) both for the customer and the merchant. Not, of course, for the bank). Needless to say, courts nearly always side with the bank.

You see, pinning blame is not hard. Even when "it is hard to pin fault on any individual" somehow the justice system seems to find the small guys, and have unreasonable demands on them (see the fraud example above, for some reason both the customer and the merchant get forced to make a big effort to prove they're not at fault. If they don't make this effort, they get screwed, hard. If they do, nobody cares).

[1] http://peoplespolicyproject.org/wp-content/uploads/2017/12/F... (and many other papers)

You're assuming the CDS buyers were victims of fraud. A lot of the time they weren't.

On the impact of QE, that's not entirely correct. Banks found themselves flush with deposits (that's good) but low interest rates also killed their profitability (banks are structurally net receivers of interest rates). And negative rates cause further problems as you can't always pay negative interest rates on deposits, but that's what the bank will receive.

Saying "there's no legal way to go after them!" I find kind of upsetting when bankers can hire great lobbyists to ensure they set up the law favorably for themselves.

Definitely agree we should have paid off mortgages instead though.

> Definitely agree we should have paid off mortgages instead though.

So if Donald Trump has a mortgage on a penthouse apartment worth $25 million the government should have paid that off, but some family making $15,000/year that can't get a mortgage in the first place should get nothing? Pay off all the mortgages is a terrible idea.

Thanks to zero interst rates for 10y his apartment is now worth $50 so effectively we paid of his mortgage.

Agreed. The more sensible forms of debt jubilee I've seen proposed would give money to everyone equally, but with the proviso that if you have debt you have to use the money to pay that off first.

It's a terrible idea mainly in that it is unfair to everyone who didn't drink the kool-aid and buy a house because the value was supposed to always go up. Not just because wealthy people might profit.

If there's ever another bailout, they should heavily regulate the people who gain something from it. Not as a punitive measure, but more like a statement of good faith. "If you bought these homes, surely that meant you intended to live in them. So as a condition of the bailout you can't sell them for more than X or rent them for more than Y." It seems drastic, but I can't see many other ways to approach fairness in that situation.

But I don't think we've learned because people are still arguing over whether we should have just thrown the bankers in prison, like the system wouldn't just replace them with more bankers.

> It's a terrible idea mainly in that it is unfair to everyone who didn't drink the kool-aid and buy a house because the value was supposed to always go up. Not just because wealthy people might profit.

It's a terrible idea for a lot of different reasons. Above all because it isn't a good idea. It doesn't come out of any kind of problem solving or optimization logic, just "wouldn't be awesome if I didn't have a mortgage anymore".

> But I don't think we've learned because people are still arguing over whether we should have just thrown the bankers in prison, like the system wouldn't just replace them with more bankers.

People are influenced by fear as well as greed. Of course the system would just come up with more bank executives. We'd want it to. But those bank executives would have something more to fear than just an earlier retirement than they had hoped for. Their greed would push them in one direction and their fear in the other. Hopefully the two would balance out to something closer to the social optimum. At the very least we should expect it to be closer than when there's nothing to fear at all.

Yes it’s a terrible and immoral idea. It basically means giving people with mortgages free houses. What about people who are renting? I wonder how they would feel if other people except them were given free houses from the government.

It also means rewarding fiscal irresponsibility as people who took 90-100% mortgages on big houses and could barely afford repayments are going to be rewarded while fiscally responsible people who were renting and maybe saving for a deposit down the line get nothing.

They get more house supply, at a much cheaper price. What tended to happen (at least in places without non-recourse loans) is that all of the people in houses pay way too much towards their mortgage, have to make sacrifices in other areas of their spending, and loads of retail/service employees get fired.

Then rent like the rest of us. Don't take a mortgage if you can't afford it. Rent and save a bigger deposit so you can take mortgage with lower repayments.

The idea that people should be rewarded for making poor choices / taking loans they cannot afford is really worrisome.

But I don't think we've learned because people are still arguing over whether we should have just thrown the bankers in prison, like the system wouldn't just replace them with more bankers.

Yes it is far better to let the banks fail. Then the system replaces the bankers, with no cost to taxpayers!

Obviously target houses below 400k or what have you.

If you can target tax breaks to wealthy and companies, you can target benefits to other groups.

I just don't understand what the point or justification purpose of this massive give away is supposed to be in the first place. Why are people with about twice the median income (=can qualify for a mortgage on $400,000 home) getting a multi-hundred thousand dollar check from uncle sam?

If we are going to do wealth distribution why not start at the bottom and work our way up, instead starting in the middle and working our way up to the upper middle?

Why was our solution to bail out the ones that caused the crisis and allow them to just get richer thereafter?

Sure, universal income and taxing the richest more, re-enacting glass-steagall is better I'm just saying in that situation it would have been more moral to just forgive mortgages than what we ended up doing.

Do you have an example of a law you think should’ve been used to put people in prison that we didn’t pass because of lobbying?

What the bankers are accused of doing is classic civil fraud: lying about the quality of assets they sold to investors. These sorts of transactions between sophisticated parties has always been the subject of civil rather than criminal enforcement. (Criminal fraud tends to come into play only where the misrepresentations are more clear cut and egregious, and the victims are ordinary consumers rather than sophisticated counterparties.)

I meant more the idea that we have a financial system that allowed this to happen. Since the repeal of the Glass–Steagall act there's been greater and greater instability and more opportunities for banks to reap large sums of money. Eating away at these protections allows for more exploitation basically.

In terms of protections from prison, basically controlling the firms that are meant to police them seems sufficient. No real accountability from the financial crisis seems to show that...

Since the repeal of the Glass–Steagall act

Don't forget Bill Clinton's Community Reinvestment Act too. This lies squarely in his lap.

None of the troubled firms were horizontally integrated in the way the gs would have prevented.

Not OP, but to chime in with a concrete example.

Glass-Steagall stands out, not in that they'd necessarily have gone to prison, but specific regulation likely could have softened the blow. I realize this is debated, but I wanted to counter the undercurrent of your post that the finance industry isn't working to undermine protective regulation for their own benefit, leaving us in a situation with very little pragmatic recourse for damages.

Glass-Steagall prohibited the combination of investment banks and commercial banks. Interestingly enough, during the financial crisis, these combined entities actually fared pretty well. It was the stand alone investment banks that had the most problems and caused the most instability.

On one hand there's some intuitive sense to that; by nature of being combined entities with a less risky business class you have less exposure to the fallout.

On the other hand, when you say "fared pretty well" do you mean insofar as "they didn't totally implode"? because at a glance every "bog standard bank" I'm pulling up #'s for over 06-08 did pretty terribly.

That all being said, I'll echo, I agree that glass-Steagall wouldn't have prevented the financial crisis; and potentially had minimal mitigating effect, but stand by my core thrust that it's a datapoint of consumer-serving regulation being overturned by the interested parties to leave us in a situation where instituting even stronger regulation that might impose criminal consequences is politically infeasible.

You’re talking about two different kinds of things. Regulations exist to address conduct that isn’t inherently wrongful, but may be undesirable. Criminal laws exist to address conduct that is inherently malicious. They’re not on a spectrum, they’re two different things.

We repealed Glass-Steagall for the same reason we deregulated airline fares. It was part of a larger, mostly positive trend of deregulating major sectors of the economy. That really has nothing to do with whether there are criminal laws we could’ve instituted. Were we going to put people in jail for trying to combine a commercial bank with an investment bank? Were we going to put people in jail for shoddy underwriting of mortgages?

The fact that people always call for bankers to be jailed, but never specific bankers for specific conduct, is telling. When you’re talking about an anonymous our composite of an entire industry of people, it’s easy to project all the bad intent we consider necessary to prosecuting someone for a crime. It’s much harder when you’re talking about a specific person and his or her specific conduct. “We should send someone to jail because 35% of mortgages in this portfolio should’ve been valued this way if you used these different underwriting standards. No, he didn’t do the underwriting or tell anyone which standards to use. But he was higher on the org chart than the people who did!”

You seem to be selectively ignoring my core point.

You're touting a narrative that distracts from the actual failure mode of these systems, repeatedly asking for the singular responsibility or legal culpability for the crisis, when that's not what I'm addressing.

My focus is instead on the systemic patterns that allow for these decisions to be made _without liability_. Of course no one person decided, "let's go out and screw over mortgage holders," there was simply no natural incentive to look too hard at if that was happening; and in a political situation wherein even basic protections can't be maintained, _of course_ there wouldn't be laws to assign personal liability.

It's funny that you bring up airline deregulation, as I consider that a wonderful example of exactly the pattern I'm citing. Although costs dropped, service quality followed alongside massive consolidation, soon accompanied by drops in employee pay and benefits, to the point that airlines now regularly file for bankruptcy and use that opportunity to further divest themselves of employee commitments while still giving massive bonuses to executives. (and similarly to the banks, in most of these cases _no one did anything illegal_)

Yet; there is still no hope of even re-instituting regulatory regimes, let alone punitive regimes. (look at recent airline behaviors in the news re: bumping and consumer abuses, and the extremely muted responses for examples of this. While that might not directly result from deregulation, it speaks towards an extremely un-empowered consumer base)

I would cap this rebuttal with a quote to directly shut down your assertion that deregulation has been "mostly positive", especially in light of your airline context, from the former CEO of American Airlines:

"The consequences of deregulation have been very adverse. Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable."

To bring this ramble back to the point, I believe it's the wrong question to ask "what specific law did they break" when we've had a combination of conscious choice to trade worker and consumer protections for lower costs, and incentives aligned behind the powers that be to encourage that, such that even the most basic protections are non-existent, let alone a specific system of accountability.

This isn't your main point but service quality hasn't dropped on airlines. You can still receive gold plated service if you are willing to pay the prices that used to be paid (or just fly enough to get sufficient status). What has happened is that the market has provided what people actually want: cheap flights with no frills.

Airline deregulation has been an unmitigated success for customers.

Yes, and I think something else has happened to flying as well. Computer modeling has gotten so much better. I have flown a lot over the years (just under 2 million miles on American alone), and I notice a huge difference between the number of empty seats on flights in the 1990's vs today. Back then, one of the perks I was given for being a frequent flier on American was that I was usually seated with an empty middle seat next to me. Now, with even higher status, I never have an empty middle seat next to me; boarding is more difficult, fitting my carry-on overhead is more difficult, getting attention from an attendant is more difficult, etc.

Just to add a little perspective, American Airlines used to fly with a grand piano in their airplanes (in the 747 upper deck lounge). There is absolutely no way that would ever make financial sense without the heavy cost of regulatory capture being integrated into the ticket price. Modern day luxury personal airliners aren't even that austentacious with regards to weight (which directly translates into cost to operate).

> The fact that people always call for bankers to be jailed, but never specific bankers for specific conduct, is telling.

The only telling thing about is that the system is so incredibly opaque, and responsibility for harm is so diffused in it, that it's a criminal's dream.

What sort of redress should we seek for their reckless behaviour? Criminal convictions, debt forgiveness, nationalization. Not a single one of them took place. Just because the public was not directly being defrauded (even though plenty of actual fraud did take place), doesn't mean that we were not impacted by the fraud that was taking place.

Who was responsible for the Iraq war? Everyone was involved in the lies that lead up to it, but nobody - nobody has been held accountable. Does that mean that there wasn't a thing wrong with how the GOP dragged two countries into it? It's just an unfortunate accident that bad behaviour in bad faith brought about bad results, and we should throw our hands in the air and say: "Well, shucks! What an unfortunate accident! It would be terrible if we sought redress for it... Or changed the rules so that it wouldn't happen again."

    > Do you have an example of a law you think should’ve been
    > used to put people in prison that we didn’t pass because
    > of lobbying?

Aside from the topic at hand, this question shows a great deal of ignorance about how laws are written.

It's not like there's some independent agency or submission process where people can submit completed bills, which'll only get picked up or not depending on special interests. So we could somehow review the difference between laws that got picked up and passed v.s. those who didn't as some check on corruption.

Rather, the laws don't get written to begin with if they don't align with special interests, that's how pervasive they are.

Are you joking? People propose laws all the time. Maybe not in the specific legislative language that you need before you actually pass a bill, but certainly the general idea. Journalists do it. Think tanks do it. Advocacy organizations do it. Even regular people do it. Haven't you ever heard someone say "There should be a law against that!" ?

So whenever someone says "there should be a law against that" that's something that should count against the GPs request for examples of laws that didn't pass?

Then "annoying children in restaurants" or something equally absurd would be the #1 most requested law by that metric.

I was referring to laws that would actually get presented to the legislature to vote on, which the GP is proposing as some metric, but as I'm pointing out can't be used as such because the very fact that it's made it that far is a function of special interests, think tanks etc.

GP didn't ask about the most requested law. He asked for some examples of laws that, if they had been on the books in the financial crisis era but were prevented from being there by lobbying, would have ended up with people in prison due to their actions.

He didn't say anything about "being presented to the legislature." As you make clear, the actual legislative votes aren't really all that important compared to everything that comes before that point.

That request is just rhetorical grandstanding. There's no way for anyone to know what laws would have been realistically proposed and passed if the universe wasn't in the state that it's currently in.

If you attempted to collate such a list you'd end up with an infinite amount of garbage, including but not limited to a proposed law that anyone suspected of wrongdoing be beheaded.

marricks asserted that no one went to jail because bankers hire lobbyists to make sure that laws are written in such a way as to make the jailing of bankers impossible.

Asking for a specific example of when that has happened isn't rhetorical grandstanding, it's just asking for evidence to support a claim.

Think tanks and advocacy groups are synonymous with lobbyists. It’s like a “rebels vs freedom fighter” thing.

The "people" proposing laws all the time are in fact paid shills.

Writing laws is hard work.

It's fine to use civil fraud for that when the torts can be litigated by the entities involved.

The fact that the government had to come in, and the taxpayer took the hit, materially changes things in my view. That's when the bar needed to shift from civil to criminal.

I'd be happy if laws sat on the book and weren't enforced until just this sort of occasion arose, than the opposite, where we didn't have the laws and can't retrospectively enforce them.

That is a very bad idea. Basically a dictatorship or oligarchy where those in power do what they want by selectively enforcing laws when they want. "Rule by law" is the phrase used to describe this system, most famously used in China.

The fraud was clear cut, though. Bankers were treating mortgage pricing in different areas as independent, and that was the entire underpinning of CDO risk tranching. That assumption is obviously wrong, and it was obviously wrong before the crash. The reason I know that is that it was obvious to my entire class of interns at Citi in 2006 during the bank's training sessions, and we asked our lecturer how you could assume a lack of correlation in housing prices in different areas and even nationwide. If it was obvious to a group of quant interns, I don't buy that the people structuring them didn't know on some level. At best it was financially-induced blindness.

By pay off mortgages, do you mean essentially giving free houses to people (e.g. rewarding them for making incredibly poor choices and financing homes they can't afford)? Or do you mean pay them off temporarily and have those people pay the government back?

If it's the former, what kind of message would that send to those of us who were responsible enough to avoid getting in over our heads?

It depends how you see the situation. Do you think it's closer to people acting irresponsibly, or closer to people getting scammed on a massive scale by institutions they trusted to provide good risk estimation? I'd go with 80% scam loans, where the scammers should lose the money and the scammed should get some kind of help. (Possibly not a full free repayment though - maybe maintaining the fixed introductory rate?) Because what kind of message are you sending otherwise? And how would more people in debt help the society at the moment?

So what about people who are renting? Will they get a 300k cheque from government since people with mortgages are getting paid off? Or will renters get totally screwed over?

So what about whataboutism? They're not a part of the risky buyer / scammy lender scenario. There are loads of issues with the properties market, but this situation didn't apply to all of them. As long as the solution doesn't make the property prices raise even more, renters should not be affected.

Also, I specifically mentioned that some of the blame is on the buyers, so instead of free houses, they could be given the opportunity to continue paying off at the original terms, or a similar form of help. Remember that if the buyers don't get the houses in the end, the banks do instead. And why would we want that to happen?

The way I understood you is that all mortgages should have been paid off by the government. So if people keep the houses and their mortgages are paid off by a gov bailout that is essentially like giving free houses to half of population while the other half that is renting gets nothing.

That is a huge moral hazard. It is essentially same as giving 300k cheque to a selected part of population based on arbitrary logic. How can that be fair to do that? The only fair way to do it would be to just write a cheque for everybody. So all people get the same handout. Any other way is super discriminatory.

I understand that it's appealing for people with mortgages but you have to see how massively discriminatory and unfair that would be.

Many of the people we're talking about were dumb enough to buy $500k+ homes on "stated income loans", when they had little or no actual income to speak of. While I do think the people who were offering those loans should have been punished both financially and criminally, I don't think the people who were foolish enough to use them to buy homes they couldn't afford should have been rewarded.

Definitely agree we should have paid off mortgages instead though.

Wow, OK. Let's think this through a bit further. What effect on the housing market, to say nothing of civil society, would you expect if the government were to stop the music and pay off everyone's mortgages using everyone else's taxes?

The bailout was a loan and the US taxpayers actually made money from the bailout loan itself.

So the banks make shady moves and need a bail out because of their bs. They get the money, and since they just got caught, and actually use it the way it should have been the whole time. From that they made a profit. Technically, wouldn’t they have made more profit if they had been behaving the whole time? So technically they did lose money.

Surely we lost money if you include how much we overpaid for assets, land / housing and services of bailed out industries. And then how much was lost in pensions / savings due to zero interest rates.

How much money would US taxpayers had made on the bailout loan if that money were used to buy the failed banks? Or invested into equities? Or used to buy up the underwater assets directly?

"Making" 1% interest in a world where inflation is at 2% is not a good use of taxpayer money.

> Causing financial crisis wasn't illegal. Unethical but not a crime. Except for some cases of misselling products, banks playing against the customer etc.

The exception there swallows the rule. Prosecutors could have, and in previous financial crises did, prosecute top executives under the laws against, for example, wire fraud.

They didn't this time for reasons outlined in the excellent book: Chickenshit Club (https://www.amazon.com/Chickenshit-Club-Department-Prosecute...)

I think the top review of this book summarizes it all pretty well:

With George W. Bush, Justice deteriorated under Secretary Alberto Gonzalez, who was forced to resign, and the SEC deteriorated under Christopher Cox, whose intent appeared to be to simply let it collapse from inactivity. Budgets were slashed and staffs reduced at the same time as demand for action increased. This is standard procedure for discrediting an institution. The stories of confusion, conflict, lack of direction, leadership or policy are all detailed here. The frustration of the prosecutors is palpable. In the current administration, you can see it real-time at Education, State, and the EPA for example.

The answer to the question is that everything changed. Prosecutors today are actually afraid to file suit, fearing they might lose and have black marks on their CVs. (James Comey famously called them chickenshits.) They have little or even no trial experience any more. Everything is a negotiated fine (never paid by the perpetrators). They have been battered by the collapse of Arthur Andersen, which put a lot of employees on the street, and has given us ridiculous arguments over “too big to fail” and markets that “self-regulate”. They no longer work for the “public good”. They work to get better jobs in big law firms. They want to take their faultless experience in government to make themselves millions from the other side. The revolving door makes this one huge club. This is so far removed from their predecessors as to be unrecognizable. And Eisinger makes this shockingly clear as he proceeds from decade to decade.

Considering people like Preet Bharara are now out, I'd say deterioration is only further accelerating.

Causing financial crisis wasn't illegal

Risks were grossly and knowingly understated, which was against the law. People were betting with other people's money, with all of the upside but very little of the downside, so it isn't surprising that the market as a whole completely twisted the risk profile, as a largely corrupt industry.

Except for all the illegal stuff they did to cause the crisis, it wasn’t illegal?

No, you couldn’t prosecute people just for causing the crisis. But there was plenty of crisis-causing illegal activity that could have been prosecuted.

Like? The most obvious would be falsifying documentation in connection with mortgages ultimately sold to Fannie/Freddie. But that’s just capture a bunch of loan agents, not satisfy anyone’s blood lust.

Robo-signing definitely was illegal, and everyone involved in it (especially the supervisors) should have been jailed for fraud.

The Quinn family who blew up Anglo-Irish bank eventually did get short jail sentences in addition to their personal bankruptcy: http://www.bbc.co.uk/news/uk-northern-ireland-20167760

All those loan agents were falsifying loan documents with zero direction or knowledge from above?

Multiple fraud violations[1][2]? It's interesting how Martha Stewart was put in prison for insider trading, but the financial industry's Culture of Fraud lead to practically no one going to prison.

There really needs to be a way to hold top executives accountable for the culture they've created, such as at Well Fargo where millions of fraudulent accounts were opened due to the intense pressure created by executive growth targets. This is similar to financial firms bundling shitty loans, paying off a ratings agency to call it gold while knowing full well it's full of shit, and then passing those loans off golden investment opportunities. Yet the people who get caught are those at the bottom.

If you create a culture that encourages bad things(fraud) and do not have checks and balances in place to catch bad behavior(fraud), then you should be held accountable. Typically the executives state they had "no knowledge of what was going on" in the company/department they were supposed to be running and were paid handsomely to do.

1. http://www.nytimes.com/2011/11/08/business/in-sec-fraud-case...

2. https://www.sec.gov/spotlight/enf-actions-fc.shtml

Fargo perhaps not the best example - they weren't punished because the company as a whole lost money, the targets had effectively set up the frontline employees to defraud both the company and the customers.

So if you don't make a profit from a crime, you shouldn't be punished for that crime?

That's like saying if I attempt to steal something from a store, security stops me, retrieves the item, then I shouldn't be punished because I didn't get anything from my crime, in fact it cost me money, in gas, going to the store to steal from it...

The "they were defrauding us too" is a weaselly argument - it can be argued that when you are an executive, you represent the company, and directing people to do something, can they really be said to be deceiving/defrauding you by _doing as you directed_?

My mistake, they actually got fined too https://www.nytimes.com/2016/09/09/business/dealbook/wells-f...

Not true, executives pushed their high-pressure upselling scheme downstream without properly following up on if the goals of the program were realistic or viable. They fired or punished employees calling into the ethics line. Their high-pressure policies created this culture of fraud, and they looked the other way. So long as the money kept rolling in, they didn't care how it was getting done.

The incidents you point to were rightfully prosecuted as civil fraud. Fraud can be either civil or criminal. Criminal fraud is something like taking investments from the general public and just blowing the money on cocaine. Lying to sophosticated counterparties in a business transaction is classic civil fraud.

Did Madoff blow all the money of his ponzi scheme on cocaine? Is that why he's behind bars? I don't think it's as clear cut to just say that purposefully deceitful fraud that collapsed the world economy is simply a civil matter.

Yes, basically. He took in money and gave people forged trade reports showing how much their investments had made. It’s the difference between a car salesman lying about the “180-point inspection” they put their used cars through and simply delivering you a set of tires instead of the car you paid for.

The aggregate impact of such conduct on the world economy is irrelevant to criminal prosecution of individuals. It’s antithetical to criminal law to punish people more harshly because unrelated other people happened to engage in the same wrongdoing.

..and how is that different than selling people AAA rated investments, knowing the investments were failing, while bundling them further, so they could be fraudulently re-rated as AAA again? They knew these investment vehicles were failing and a sham, but continued to misrepresent their stability to investors.

To use a car analogy, it's similar to VW cheating on emissions testing. They knew they could not keep up, so they just lied instead. Guess what? People from VW are actually getting arrested and likely going to prison.

As far as the impact of their actions on the world economy, there could be a lot to be said about firms colluding with each other to hide and obfuscate the problems they were creating from their fraudulent activity, so that they could continue to enrich themselves. All of these firms failures at accountability being completely isolated events is simply not true.

Madoff isn't behind bars because he blew the money on cocaine. He's behind bars due to: securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and making false filings with the SEC.

Martha Stewart was convicted of lying to federal investigators, not insider trading.

You're correct, although Stewart actually had to face a jury trial, unlike practically everyone with major involvement in the financial crisis.

In the US it's easy to build charges off of nothing. Not committing a crime is no barrier to arrest, deprivation of property and punitive actions outside the normal scope of settled statute.

There's nothing stopping bankers from being locked up for their social crimes other than a lack of will or politesse on the parts of the people.

The French tried that around 1800, and while it likely was very satisfying to guillotine the rich, ultimately it didn't do anyone any good.

The Russians tried it again in 1917, didn't work out well for the lower class then, either.

Pol Pot did it too, with similar results.

Wow that's impressive. GP suggested that rich people with access to great lawyers are subject to a different legal process than poor folks without that access... You went straight to the Killing Fields! Bravo!

It's funny how everyone is deeply concerned about due process of law when it comes to celebrities, the very wealthy, and cops.

I'd like to see some of these people getting on their high horse go to down to their local criminal part and see how they justice system they are so proud of actually works for people that aren't in one of those categories.

It is better that everyone be subject to the same system, even if that system is unjust, than for there to be two justice systems. Otherwise how the worse one ever going to get better?

Agree, it’s like asking why techies aren’t in prison for causing the 1999 .com bubble and subsequent crash.

But bank bail out didn’t cost 13, let alone 3 trillions.

Wasnt it the bankers who were publicly saying that the company going for an IPO is going to change the world but privately saying its full of shit.

The questions stands regardless of the legality of causing a crisis.

> Unethical but not a crime. Except for some cases of misselling products, banks playing against the customer etc. Bailout was.

I've never understood the argument that betting against your customers should be illegal. If you're buying something from me then I think that selling it is better than buying it and you think that buying it is better than selling it.

Depends on the relationship with your client. If you're giving advice from one department whilst other departments are betting against it then somethings gone weird.

It seems even less controversial when two different departments do it.

I assume you're talking about something like your ECM doing a follow on and your ER putting out a positive report?

I'd argue that it means your compliance department is doing a great job. You generally don't want the two to talk to each other...

Sure: for things like securities, it seems like every transaction is a bet each way: the seller is betting that the customer will be worse off, and the customer is betting that the seller will be worse off.

But sellers and buyers are different entities, and the fact that they're different means they can value things differently. If I'm a cobbler and you're a tailor, it's natural that we'd want to trade; I have a surplus of shoes and scarcity of suits, and you vice versa. We value our relative products differently, so when we exchange them, we're both better off.

This doesn't justify me knowingly selling you crap shoes. In fact it's even worse than that: because I know more about shoes than you do, if I sell you faulty shoes, I'm even more of an asshole. Or I'm incompetent.

There are slightly more subtle arguments as to why different entities would value securities differently: different appetites for volatility, different time horizons, different liquidity, and sometimes, yes, different information. If the buyer has better information than the seller, people don't complain as loudly as the opposite.

To me, the whole thing was a mixture of assholes and incompetence. I subscribe to the idea that taking someone's money because you're smarter than them is just as morally wrong as taking it because you're stronger than them. So some clever people took money off some not-so-clever people, and all along the chain a bunch of incompetent people were left holding the bag, and had to be helped out.

I can personally say that every time I've traded with a bank I've absolutely thought about it from the perspective of them taking a view contrary to mine. It would be bizarre if they thought that it was a good time/price to buy and instead they sold it to me.

I guess I think that every time I've given someone money it's because they're stronger (smarter/better connected/etc.) than me or because they're willing to do something that I don't want to do or because we value things differently. The last case might be the result of different utility functions or might just be the result of a mistake.

It seems like in any other circumstance there wouldn't really be a reason for me to give money.

I'll give money to a cobbler because they're stronger than me in the sense that I physically can't make shoes as well as they can. I'll give money to my house cleaner because they're willing to clean my apartment and I'm not.

Exactly. We should have said to the banks "oh you need our help, let's see - what do you guys do when that happens? That's right, we are going to take you for everything you have".

We should own all the banks, all the land. We are renting our own countries back off these guys after bailing them out.

> For $3 trillion less than bailout, we could have paid off every U.S. mortgage!

I seem to recall the "bailout" was a purchase of bank assets (including stocks, etc.) which was subsequently repaid as the market healed. Which sounds more like lending money rather than giving it away.

Is that correct? And if so, how is that similar to paying off mortgages?

It pangs me to see this sort of garbage logic on a site like HN.

This whole "it wasn't illegal" mindset is just so far removed from reality.

Do people honestly think that Goldman Sachs paid 5 billion dollars in settlement money because they did nothing legally wrong?

No, they agreed to pay such a large settlement to avoid criminal convictions, because what they did was a crime.

This is a whole other topic of conversation regarding Eric Holder's justice department techniques of going after settlements instead of convictions, and sadly the end result is that after all of the settlements are done, and the companies profit off their crimes, somehow people get the idea in their head that the actions were never crimes to begin with.. which is not even remotely true.

> Do people honestly think that Goldman Sachs paid 5 billion dollars in settlement money because they did nothing legally wrong? No, they agreed to pay such a large settlement to avoid criminal convictions, because what they did was a crime.

Not saying your facts are wrong, but it is very hypocritical of you to accuse others of "garbage logic" with such a terrible argument.

Due to incentives in the U.S. justice system, particularly with regard to prosecution, many, many innocent actors settle or plead guilty even if they're innocent. This problem is well-known and documented.

The garbage logic is nobody is in jail == nothing was illegal.

I agree that someone asserting that a plea deal equals undeniable guilt is also faulty logic, but that was not the argument presented.

My only point is that it's not possible to say that because nobody was convicted that nothing was illegal.. and should be not stated as such.

The term you used "actors" is disingenuous.

Please don't equate a poor person with no resources to a company with billions of dollars and massive political clout.

The asymmetry in power makes all the difference.

GS didn't throw away $5B because they were innocent.

1. You accuse me of being disingenuous. Yet the purpose of my comment was to challenge the assumption that someone is guilty because they settle. Whether a person is poor or not makes no difference to that point. Please tell me why you think I was being disingenuous.

2. If I'm interpreting your comment correctly, you're claiming that anyone who is (a) wealthy and (b) settles to avoid further legal costs is automatically guilty. Is this correct?

> Whether a person is poor or not makes no difference to that point.

It absolutely does, though. A poor person can't get a crack team of lawyers to defend them, they get an overworked public lawyer that doesn't have the time to make a decent defense, so it's very risky for that person to go to trial, even if they're completely innocent.

For an entity like Goldman it's the other way around, you only settle if you know you're guilty beyond reasonable doubt, because you can otherwise afford great, dedicated lawyers working full time for years on your case.

No, this doesn't mean that you're automatically guilty if you're wealthy and settle, but the two situations are far _far_ from being equivalent.

Fraud is a felony offense.

It's simply not possible to sell subprime loans as AAA investments without a liberal sprinkling of fraud.

https://www.huffingtonpost.com/william-k-black/the-two-docum...

Some other reading on the subject:

>the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior.

>As the commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising twenty-fold between 1996 and 2005 and then doubling again in the next four years.

>As early as 2004, FBI Assistant Director Chris Swecker was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgage-backed securities.

http://www.nybooks.com/articles/2014/01/09/financial-crisis-...

There's no question the ratings agencies played a huge part in the collapse. Part of the problem, politically, is these agencies were set up by the government.

> Causing financial crisis wasn't illegal. Unethical but not a crime.

I don't know why people keep repeating this. It feels like brainwashing of some sort. Why do people repeat this? Did Obama repeat it a lot at the time, and because many people liked Obama, they just bought that excuse?

It just feels so strange to see people argue against their best interest. Do you want another financial crisis to happen because of the bankers once again? Because that's how you're going to get one - by ensuring nobody gets punished for the last one.

Also, in his final years, Eric Holder admitted that the main reason he didn't go after bankers wasn't because "they did nothing illegal" but because he (and Obama) "thought" (or got paid to think) that jailing the bankers would "hurt the economy". I've never seen a more bullshit excuse.

Also, Holder, but only after he quit the administration, had some "regrets" that he didn't go after the bankers.

https://www.huffingtonpost.com/2013/03/06/eric-holder-banks-...

https://www.theguardian.com/money/us-money-blog/2014/sep/25/...

https://theintercept.com/2016/07/12/eric-holders-longtime-ex...

The entire government system in the U.S. is corrupt from top to bottom. Everyone in an legislative or executive position seems to either only ever do the bidding of their rich donors or ensure that whatever actions they take while in government doesn't hurt their private employment after working in the government (especially when they intend to work in the industries they regulate).

>For $3 trillion less than bailout, we could have paid off every U.S. mortgage

That comparison makes no sense. We didnt pay off the bank's debt. It was a temporary loan from the government and every penny was paid back. In addition the government, and tax payers, benefited enormously from the interest accrued.

How is that? As part of stabilization program government bought toxic assets from banks. Is there any evidence that those assets paid back?

I think that is entirely disingenuous. The banks have been borrowing from the Fed and lending to the Treasury for a profit.[1] The taxpayers have essentially recapitalized the banks. Now we are in a trap of low interest rates trying to edge our way out. We’ll see how it goes.

Free markets would have let the banks fail. Instead we’ve created a world with champions for free markets for trade, free markets for labor, but protected markets for capital. Absolute self-serving hypocrisy. FDIC was designed to protect the little guy. The bailouts protected the richest americans and excellerrated the growing inequality in this country.

I believe in capitalism, but 2008 was the crony variety. It still angers me thinking about watching the crying pundits talk about risk on monitors next to Americans taking real risks in Iraq. The bailouts were bipartisan fraud at a grand scale and epitomize the corruption of establishment politics and the revolving door between government and the private sector. But sure, “americans got paid back with interest.” Believe it if you want to.

[1] https://www.pbs.org/newshour/economy/are-banks-borrowing-fro...

>Free markets would have let the banks fail. Instead we’ve created a world with champions for free markets for trade, free markets for labor, but protected markets for capital.

Because the government was afraid failing banks would take everything else with them.

The problem was banks were allowed to become too large and to sell risk to each other. If I were running things I'd break them all up into regional entities and separate them financially.

> For $3 trillion less than bailout, we could have paid off every U.S. mortgage

No thanks, I prefer people pay their own debts. The bailout was a loan and the banks paid it back with interest, which means the government actually made money while stemming further chaos. Regardless of whether that was the right solution, mass forgiveness of housing debt certainly isn't.

I had those same thoughts. Bailout the people and let the banks burn and then buy them up for pennies since that’s how an efficient market would have worked. Well an efficient market would have done so sans any bailout but still.

Tremendous amount of fraud. Not just unethical behavior, but fraud. Lying on financial documents, fraudulently altering loan documents are two starts.

Paying off the mortgages would have been another bailout, just more diffuse from what we saw.

And while the existing bailouts incentivized banks to misbehave, paying off mortgages would have incentivized a generation (or two?) to misbehave.. and also further screwed the people who did play by the rules.

Of those two scenarios, I prefer the bank bailout.

If the economic system could speak, which it cannot, a crisis would be it saying 'hold on! we're giving scarce resources to people who are not using productively'.

Now there are really only two ways this can play out: 1) Organically, whoever was making the (economically) poor decisions is removed from the system by virtue of going broke. 2) The government steps in and the taxpayer settles debts.

Once you enter (2) territory, which is what the US did in the '07 crisis, it really doesn't matter who you give the money to. You are still going to have economic mismanagement. It will continue unless it somehow gets so catastrophic that not even the government can settle it.

Now, the US government is pretty powerful, so maybe that day will never come. But if they are going to get involved at all, why into give the money directly to the little people? They are already throwing out the principles of good economic management.

It sounds like your reasoning is "if you're going to have your leg broken, better your left than your right!"

I would have gone for the more short term painful but long term better option of letting them fail. What would have replaced it would not have been as fragile in this regard. (The replacement would have had other weaknesses.. but not these.)

Fraud is illegal.

Banks willingly hired workers to change records

For the other side of this argument, see Bill Black.

http://neweconomicperspectives.org/category/william-k-black https://www.cato-unbound.org/contributors/william-k-black https://twitter.com/williamkblack https://en.wikipedia.org/wiki/William_K._Black

He was one of the group which brought successful prosecutions during the Savings & Loan crisis in the '80s, and he has very little sympathy for the failure to bring similar prosecutions in response to the GFC.

https://www.youtube.com/watch?time_continue=221&v=J8CqaHTygS...

This suggestion keeps popping up as though 'do nothing' and 'destroy some randomly selected lives, at additional cost to society, by way of revenge' were an exhaustive list of options. I think a much more constructive response would be to claw back all the bonuses the bankers were awarded in the years leading up to the crash. If the losses must be socialized, the gains should not stay privatized.

why stop at bankers? millions of Americans flipped homes, took out loans to buy baubles and then benefited when their loan papers became lost in the resulting chaos...and almost everyone knew damn well what they were doing

the government CHOSE to bail it all out, and they will probably be doing something similar one day for Uber, Bitcoin and maybe even Tesla.

we have CHOSEN the bubble/bailout cycle

You can't sink a big investment bank with bad mortgages. not even securitized bad mortgages. Not even corruptly rated bad mortgage securities (and we are already far from the retail borrower's culpability).

To blow up the global banking system, you need a cascading set of bets that goes bad and creates orders of magnitude more counterparty risk than retail lending could possibly create.

I don't think most people realize that i.e. it wasn't the mortgages themselves that caused the crises - it was the wall street's bets on the mortgages that made things blow up.

What you need is any pool of securities that is devalued by more than the capital base of the company. It was the way that the post partnership, publicly traded investment banks were financed that ultimately led to their collapse. When you borrow short and lend long with 30X leverage you can never have a serious market correction. Otherwise your counterparties get nervous and their refusing to continue to lend becomes a self fulfilling prophecy. Its not the first time we have seen this and it won't be the last.

Of course you can. Your government simply takes it from its owners, without compensation and personally billing them any fine for fraud or whatever. Then it auctions a zero asset version of the bank, and pays for the rest of any protected debit.

Overall I agree with your sentiment about the options not being either of two extremes. In the case of bankers and financiers who seemingly engaged in fraud on a grand scale it’s about the idea that justice should in some sense be blind with regard to the amount of money you have. There are lots of cases where people steal things on the order of a $1000 going to jail for lengthy periods of time.

The anger about the lack of prosecutions for bankers, at least in part, is the frustration that comes from realizing things aren’t right in the U.S. The justice system works very differently for the 1% than for everyone else. I think with growing inequality comes growing anger and resentment.

> There are lots of cases where people steal things on the order of a $1000 going to jail for lengthy periods of time … The anger about the lack of prosecutions for bankers, at least in part, is the frustration that comes from realizing things aren’t right in the U.S.

The thing is, it's very much not clear that they did anything actually illegal. In that sense, not throwing them in gaol for not violating the law is exactly how the justice system is supposed to work, for the rich and the poor alike.

Last year I got kicked off a jury for (they don’t say why, but I’m pretty sure) saying I couldn’t possibly consider a 20-year sentence for the crime of receiving stolen property worth $500 or more.

In case anyone is curious, Virginia Code 18.2-108 states that "If any person buys or receives from another person, or aids in concealing, any stolen goods or other thing, knowing the same to have been stolen, he shall be deemed guilty of larceny thereof" and the following section states "Any person who commits larceny of property with a value of $200 or more with the intent to sell or distribute such property is guilty of a felony punishable by confinement in a state correctional facility for not less than two years nor more than 20 years". https://law.lis.virginia.gov/vacode/title18.2/chapter5/secti...

Whoops, it was indeed $200. Thanks for the source!

FYI, my comment wasn't intended as a correction. The limit of $200 is even more extreme than your stated $500, and the law even includes a minimum sentence of two years.

Regardless, it was a welcome correction. Especially since, as you note, it just makes the point stronger.

I don’t recall the two year minimum. I wonder if it’s changed or my memory is just faulty (again).

Exactly, where is all this concern for not unjustly punishing people when we are locking up poor black teenagers.

Clawbacks sound good in theory, but there's one giant barrier: the legal system and due process.

To justify taking away someone's bonuses, you still have to accuse them of some sort of wrongdoing and malfeasance, and then prove it.

The barrier is lower (preponderance of evidence vs. no reasonable doubt), but the same basic question remains: what do you charge them with, and can you prove it? Note that bonus clawbacks were instituted at many banks after the crisis, but they weren't in place before then.

I just want to note that many bankers did lose their jobs and their life savings in the crisis themselves. A lot of bankers had much of their savings (unwisely) in their own company stock. Everyone at Bear, Lehman, MF Financial, and a bunch of other places found themselves out of a job and often out of much of their wealth at the same time. Most of these weren't people greedily rubbing two coins together while thinking of how to screw the American people -- they were people who deluded themselves and thought their money machines stable and impregnable and never thought they would blow up.

Taxes.

If Congress tried to restructure what would otherwise be a taking in the form of a retroactive tax on past earnings, I suspect the Federal courts would see right through it.

> Clawbacks sound good in theory, but there's one giant barrier: the legal system and due process.

You haven't heard of "Civil Asset Forfeiture" ? Where's the "due process" there??

Are you arguing that such a lack of due process should be extended to other areas of law? If you think civil asset forfeiture is wrong, the solution is to get rid of it, not to create more wrongness in other places.

The "lack of due process" is used against the poor all the time, and continues to be; so why not the rich too? "Equal protection under the law" and all that, right? Why is CAF a problem when it's brought up for the rich??

It's a problem when it's brought up for anyone. The fact that some people are unfairly victimized does not justify extending that victimization to others.

>>This suggestion keeps popping up as though 'do nothing' and 'destroy some randomly selected lives'

"Randomly selected"? Not sure what you mean by that. We know which companies acted in shady ways.

I mean sure, there was no way to trace wrongdoings to specific individuals. But that's OK. C-level executives make tens of millions of dollars every year. In return, they must carry the burden of responsibility when their underlings do shady shit. Gotta earn all that money, you know?

I don't see why any smart person would want to be a CEO when they could go to jail when one of their employees, who they may have never met or even heard of, committed a crime.

More broadly, it's wrong to punish people for wrongdoing that they did not commit. That kind of thing should not happen in a free society.

This article falls back on the "I was just following orders" excuse. It doesn't matter if there was no intent of fraud: the issue at hand is that there is currently no downside risk for engaging in these profitable but destructive behaviors, so banks will continue to risk harming the economy as long as they are making money this way. Other professions where screw-ups tend to have disasterous effects, like medicine, law, and engineering, have legal liability frameworks in place to hold businesses and individuals responsible for the negative impact of their actions. I don't see why our financial system should be any different.

The reason why there aren't any bankers in prison is Enron.

Enron and Arthur Andersen were aggressively prosecuted. Many top execs went to prison, Fastow and Skilling. Lay would have gone but 'died' before sentencing. But Arthur Andersen also lost 85,000 jobs. Enron lost 4000+. Employees pensions were wiped out.

Politicians and prosecutors do not have the stomach for that. Citizens don't have the backbone to elect politicians who have that stomach. (US Attorneys are appointed by an elected politician and confirmed by elected politicians.)

This is really just one more wrinkle on too big to fail. That and regulatory capture. And also Citizens United. And a few other things.

Why the scare quotes around 'died'?

Because by 'dying', Lay's conviction was vacated. Of course, that meant he didn't go to jail but it also meant that he didn't pay any fines, leaving his rather large estate secure as an inheritance. W even went to his funeral.

Do you imply that Lay was not present at the funeral? I think that could be a pretty good idea for a movie...

You didn't really answer the question.

I don't know why this is being downvoted, because it is quite accurate.

Jesse Eisinger's "The Chickenshit Club" - is a book written entirely about the OP subject. I remember a podcast with the author, and this was a key point.

Judge Jed Rakoff has an interesting article on the same subject, which brings to bear his experience as the former chief of the securities fraud division of the southern district of new york’s US Attorney’s Office: http://www.nybooks.com/articles/2014/01/09/financial-crisis-....

I don't know if anything they did was even illegal in the sense that there was a crime involved. I think the big mistake was to bail them out. The should have lost all their money and their companies should have been allowed to go bankrupt.

I also would question the existence of large corporations where the owners get all the upside but can avoid the downside.

If they had lost all their money and their companies went bankrupt, the american people would've lost all their savings as well. As much as it sucks to have the banks bailed out, it may have been the only way to relief the people and not cause a depression.

The government could have bought the banks for cheap, stabilized them and resold them on the market. That way shareholders and employees would have lost but not bank customers.

Preet Bharara, former US attorney for the Southern District of NY, discussed this on his podcast recently.

He basically pointed out that there wasn't evidence to support the notion that individuals had the intention of committing a crime, which is what prosecutors need. It's aggravating because I see similarities in other ways that the law falls short (Equifax, Sony, etc.)

Acting stupidly or neglectfully in these scenarios just doesn't seem to have consequences beyond the damage of data exposure, market collapse, etc. as long as you can argue that you weren't aware that you were doing anything wrong.

So how do we properly deal with people that don't willingly commit crime but are so bad at what they do that the damage can be catastrophic?

It is still gross financial negligence, when you build a house of cards and rent out all the rooms, you are responsible for the ensuing collapse even if it isn't want you intended.

IANAL

My understanding is that proof of intent to break the law is not the legal standard needed to move forward with prosecution[0]. It's being used as cover for insufficient political will to prosecute a powerful protected class - Wall Street executives.

https://www.leagle.com/decision/199634380f3d2631296 § II A

IANAL too, but believe that in common law systems like the U.K. and most of the U.S. that intent is required. In the jargon: Mens Rea is required in addition to Actus Rea. https://en.m.wikipedia.org/wiki/Mens_rea

That isn’t always true for certain laws that create “strict liability” which removes the requirement to prove intent: https://en.m.wikipedia.org/wiki/Strict_liability

That's why the legal barrier to a search warrant is only "probable cause". No one is expecting that prosecutors can prove all elements of a crime by reading a bunch of public material.

So how many executives have had their "no-knock" raid?

Unless they did something illegal, or took taxpayer money illegally, why would they be? We choose to use their services. If you don't like it, start paying cash (or Bitcoin).

Apologies to the HN readers who felt the need to downvote me for implying due process is necessary for a civilized society.

I'm not aware of any reason being relayed to the person being downvoted. What leads you to believe that that was the reason you were downvoted?

I'd love for this to be the case, but your options are severely limited if you only accept physical cash or bitcoin as payment. Pretty sure my company only allows direct deposit or paper checks, for example, which means I wouldn't be able to keep that job. Furthermore, as seen in the past few months, the alternatives to banking (e.g. cryptocurrencies, and bitcoin transaction fees/delay) would not be able to handle all the people currently using banks. So for the time being, using a bank isn't practically a choice, because one option comes with the loss of many social opportunities that are otherwise assumed.

But in the long term, this is all the more reason to develop alternatives to the current banking system. And maybe in the next 15 years, or perhaps a few years after the next crisis, we'll have an alternative that can support the volume of the current system. It's no coincidence that bitcoin was launched so shortly after the last financial crisis.

So...for those of you saying "benefitting from a financial collapse is not illegal" I present to you Magnetar Capital.

Yes, folks that's right, some asshole named their hedge fund after the magnetic field caused by a collapsing star. If someone were to name their company Human Piles of Shit Inc. it could not be any more obvious that this company was founded in order to cause harm.

What they did was to buy up CDOs and then short the positions during the height of the bubble. So if, when the bubble was waning, a $90 million CDO needed an extra $10 million to come to offer on the market they would take that position. Then they would turn around and short the position to 20x. Classic pump and dump with the original long position clearly made in bad faith.

And if you think I'm kidding:

The hedge fund Magnetar helped create billions of dollars’ worth of risky deals called collateralized debt obligations, many of which failed spectacularly in the financial crisis. Magnetar, meanwhile, had taken positions that allowed the firm to profit when many of those same CDOs collapsed.

https://www.huffingtonpost.com/2012/05/17/magnetar-roundup-h...

More here: https://en.wikipedia.org/wiki/Magnetar_Capital

The founders Alec Litowitz and Ross Laser still run the fund and are worth millions and millions of dollars. How many lives did these people ruin? They literally killed people from suicide, depression, economic ruination. If there is a hell I hope they burn in it.

EDIT: And yes, offering a contract in bad faith is illegal.

The 'bankers' most responsible are Greenspan and Bernanke. Everyone loves a witch hunt, but blaming the financial crisis on private bankers for legally following misaligned incentives created by the government is ridiculous (and the norm, unfortunately).

You do realize that most banking regulations and misaligned incentives are written and lobbied for by those same private bankers?

It's still politicians that pass laws. Politicians are voted for by American people. Those people just can't help themselves voting for the most well funded candidates. They're blind to the fact that their so called free will choice is determined by lobbyist's payments and refuse to vote for underfunded candidates.

I don’t want to live in a world where an engineer and QA team could get jail time for signing off on a feature release like Apple Maps which wipes out $30bn in equity value on release day because it is loaded with bugs. Almost every time we miss a deadline or every time bugs go into production, losses are incurred somewhere by someone.

These were human beings like us that were doing the job they were mandated to do to the best of their ability. Many lost their livelihoods in the process. It created trillions of dollars in wealth (and losses) and anyone who has looked at their 401k lately can see that they are at it again.

The banking crisis is a very different situation from a bad product launch. The banking executives knew exactly how bad things could be if the subprime markets failed.

Because the rule of law means we have to make clear rules beforehand, and it's hard to make rules about some kinds of bad behavior.

This a great quote:

But convicting bankers—or any other white-collar workers whose decisions at work have ostensibly damaged the economy—is difficult because while it is easy to identify systematic wrongdoing, it's much harder to pin blame, at least in the way a court might approve of, on an individual within that system.

So you can find a bigger issue with collective behavior but it becomes difficult if everyone is doing it.

Generally speaking bad business decisions and losing money are not against the law. Do you think they should sometimes be against the law for businesses that receive substantial government guarantees (say to the tune of hundreds of billions of dollars or more)? Sure, that's probably a good idea. But did those laws exist before the Financial Crisis? Not really, as far as I can tell. So what are you going to throw the bankers in jail for? You can't pass new laws and apply them retroactively in the U.S. since the Constitution doesn't allow ex post facto laws.

There is a discussion we could be having about new laws that will apply to financial institutions in the future, to prevent, or at least reduce, the consequences of financial institutions behaving recklessly. But for some reason we're not having that conversation.

> I think we have an ambivalent relationship with the large corporation and with capitalism. It's a relationship that involves need and dependency and some level of celebration but also resentment, anger, and victimization.

Sounds like an abusive relationship to me.

It would have been easy to root out the rot; let the bad banks fail, and let the good banks stay afloat. “Lend without limit, to solvent firms, against good collateral, at 'high rates' - Bagehot's rule. Geithner and company argued that doing so would destroy the system. If it turned out that all the banks were bad, maybe it would serve the citizens best to have a new system.

Unfortunately Bush the Lesser, for all his strutting around in flight suits, turned out to be a chickenshit when the big bad Treasury Secretary barged into his office and hollered that he had to "act now!" Anyone with a spine would have kicked that corrupt asshole to the curb immediately. Instead, we got bailouts.

no bank would stay afloat

A bank's purpose is to manage credit risk. If a bank's management can't make money on the spread between the Fed lending rate and the mortgage lending rate, they should get out of the business. I don't know whether the top echelon of circa-2007 bank management should be in prison or not, but I do know they ought to be working as baristas or something rather than continuing to run businesses they aren't competent to manage.

Finance sector is 40% of US GDP so while it's cool to throw around theoretical "solutions" they would need to account for this simple fact. So let them fail was not a realistic solution.

Free-market fundamentalism, as I have advocated for above, may be too much to ask of capitalism. I do think it's fair to ask whether US citizens, who have been asked to spend Trillions on the 'free market's' behalf (see the Fed's balance sheet pre- and post-crisis [0]), were best served by the way in which it was done. Keeping housing prices high and the existing management in place was not the only way to use those new funds.

[0] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

The financial crisis has many facets. I was deeply interested in the subject at the and in the ensuing years afterwards. I highly recommend Michael Lewis' books on the subject, especially "The Big Short." The film was decent, but didn't go into the same amount of detail as the book.

There was much fraud, especially in two places: At the ratings agencies who turned garbage bonds into A+++ good to go, never-gonna-lose investments. They should have all gone to jail for that.

The second place was at the banks doing no-doc mortgages because the bankers had huge demand for the crap bonds and the result was that lenders were both outright fabricating loans or lending money to illegal immigrants who couldn't speak any English and didn't even have jobs. Tons of un-prosecuted fraud all over the place there. A few people went to jail, not many. Look at Wachovia Bank and Countrywide as two examples.

The other place there was not fraud but enormous unethical behavior was in the sale of CDOs--the "insurance" policies that backed up all the garbage bonds with huge leverage. CDOs took down Bear Stearns and in all honesty, should have taken down all the big players including Goldman Sachs, but the Fed stepped in and bailed them out to the tune of trillions of dollars.

The American public paid the price. If you recall the $4-5+/gal gasoline from 2009 and on? That was all part of the bailout scheme. And your 401K took a huge hit, some people still haven't recovered from that time period.

Regular people paid literally out of their own pockets so that a bunch of shitbirds could stay billionaires. We allowed corrupt politicians to bail out their pals and we didn't do anything. We the people should have revolted and shot every one of those stinking crooks. Instead, we the people are treated for what we are--a bunch of doormats.

And yet, strangely, no one blames the SEC.

Bankers aren't the cause of the financial crisis. Societies have always had a scapegoat to conveniently break societal tensions, previously with physical sacrifices, and presently with sacrificing the money of scapegoated individuals.

It's unlikely that a single sector of economy could suddenly cause a widespread collapse, especially without unrecoverable failure. A more cogent explanation is the behavior of the Federal Reserve. Similar to the Great Depression, the growth rate of the M3 was reduced by around 10 percent during the peaks of the recessions.

Reading: https://iea.org.uk/blog/a-monetarist-explanation-of-the-grea...

I've always assumed the reason was that the bankers could point fingers and name names of people in government who facilitated the fraud. If there was some better reason, the SEC would have given it to us a long time ago. The silence speaks loudly enough IMHO.

The assumption in the headline is very questionable.
Was the cause of the crisis really that bankers happened to be extra criminally minded in the early 2000-s?
I don't doubt crimes were committed, but I think the root causes are found in government and Fed policies of the era.

But isn't the policy set by the banks by specifically telling the government to remove laws and restrictions?

Oh, please. Federal statutes are so broad, prosecutors could literally pick the people they want to bring down and do so. While this is not a good thing generally, it should have been done here and the perpetrators prosecuted. Federal prosecutors just weren't interested in doing their job and potentially, eliminating some of the biggest political donors ever. But don't tell me that they don't have the tools given our extremely vague federal laws. Hell, many of our federal laws don't even require that the prosecutors prove criminal intent, something the author seems unaware of.

Why aren't Bernanke and Greenspan in prison for causing the financial crisis?

Because lowering interest rates and pushing for deregulation is not illegal.

I keep seeing the "we made a profit on the bailouts" line repeated. Usually these comments would end up partially sourced, but I got a bit tired of hearing the line repeated ad nauseam, so I did a bit of googling and came up with this Pro Publica scorecard: https://projects.propublica.org/bailout/
Taking them on faith alone, it'd seem that in the aggregate, we did alright. Is there any reason why I should believe otherwise?

In case of the banks, fed cut the fed rate to 0%, then banks preceded to massively buy 10 year treasuries. Banks were speculating the fed wouldn’t risk raising rates too fast and bankrupt already weak banks that were speculating on the 10 years in the first place.

There are some in Iceland, and one NASDAQ founder was jailed as well.

So that's in the past and now we have a cryptocurrencies bubble coming up. Who should be punished and why? Here there is no intermediary, just the greed of the people and their stupidity. Let the markets punish or reward them.

Why aren't the politicians?

Energy physicist Jean Marc Jancovic says that the subprime crisis was due to shifts in energy productions, so somehow maybe bankers weren't directly responsible, or not more than other eras where energy kept growing

Do you think anyone will go to jail for causing the next great financial crisis?

I don't know enough about finance or law to know what should have been done. But I can clearly see that what was done did nothing to restore public faith in our banking institutions.

Because if you were smart enough to understand that the banks own quite literally everything as they control currency itself and they're not going to put themselves in jail.

The bailout was necessary but a tough pill to swallow. My understanding is that there was really no good way to provide direct relief to citizens. AIG and others failing posed a systematic risk and the most effective way to stabilize the economy was to directely lend them hundreds of billions. I think most economists agree that letting the banks fail would have resulted in a depression. Sure the bankers would have lost everything but so would normal people. Instead your average American was spared the worst of it but at the cost of bankers not going to jail and a truly alarming amount of future debt.

There was the Swedish solution (pushed during the crisis as I recall by Krugman among others): nationalize the failed institutions, with an eye to spinning them back off after the crisis had passed. That would have wiped out the shareholders, including employees with stock holdings, and caused losses on bonds, but would have kept the institutions running on a go forward basis in order to continue to provide financial services to the real economy.

Financial sector is 40% of US GDP one would imagine wiping out 20-30% of everyone's retirement accounts would not go over too well with voters.

> The bailout was necessary but a tough pill to swallow
Capitalism for profits and socialism for losses.

Because they "caused" it by complying with irresponsible "fair" lending regulations. Unfortunately, they had to; it was the law.

Why aren’t any congress people in prison for causing the financial crisis?

Like who?

Any of them who voted for laws that forced banks to lower, or ignore, existing standards for giving out home loans.

In the US, like most countries, the justice system is pay to play.

Governments across the world are DEPENDENT on Banks.

IIRC it took 10 years after the Great Depression for anyone to go to prison. The US economy is largely unregulated.

this reads like longform apologia for government inaction and banker exploitation...
at one point the interviewee makes it seem like the government didn't do prosecutions because it would have taken a lot of paperwork.
why do we pay taxes?

The government is restrained by due process and the rule of law. "Paperwork" should not be able to overcome that.
The much more reasonable explanation is that there simply were not laws clearly written to prevent this behavior, or that some attempt was made to write such laws but they are unenforceable for some reason.

As others have pointed out, the actions taken by the financial firms' employees were not illegal. In hindsight some were harmful and perhaps should have been, but the question should be why weren't they illegal in the first place.
The answer is that regulators did an abysmal job of understanding the perverse incentives that plagued the industry. Among the biggest causes of bad judgment was the incorrect price signaling created by GSEs that were not following proper accounting and disclosure procedures.
On one hand the financial firms had significant regulatory capture and had been enjoying lots of profits due to their success influencing regulators.
But on the other hand, the entire system of "markets" that were most relevant to the crisis were the most heavily regulated and tied to specific policy goals.
It seems odd that we'd ever expect a system that is so politicized to ever be regulated in a rational and appropriate way.
Broadly viewed, we can see that the combination of regulations and areas loosely regulated and left up to the discretion of firms constituted a significant degree of centralized control, which turned out to be "corrupt" enough to result in a lot of bad decisions and the crash that ensued.
If we assume that all systems are prone to this sort of "centralization risk" we can better appreciate the benefits of decentralized governance that exist with some block chain systems.
Forget about jail for what happened in 2008, why should we ever trust financial regulators of financial firms again to regulate our financial system responsibly? Are we supposed to believe that the perverse incentives for regulatory capture, socializing risk, etc., suddenly ceased to exist?
I'd argue that we should not. We should realize that human institutions typically require participants to have some trust in other participants, but that the more trust is required the more vulnerable the institution is to the kind of problems that plagued the finance industry.
We trusted the GSEs to be acting responsibly even though no financials were released. Regulators trusted ratings agencies to apply disciplined processes to rating generation in spite of the profit motive not to do so, the public trusted regulators to ensure adequate underwriting of risk capital, etc., etc. All these things, many of them not even measurable due to the significant accounting slop involved, were vulnerabilities waiting to be exploited.
When a building has marble pillars outside and everyone inside is wearing expensive suits, what we are seeing is signaling of trustworthiness. When the banker is wearing $1500 Italian leather shoes and a $50K watch we can assume he's earned those things by being trustworthy over time. When we enter the high ceilinged room and see the marble we are meant to trust the institution itself. After all, how could this structure, meant to last thousands of years in the elements, not indicate the highest level of accountability and honesty?
We must realize that even the most well-intentioned institutions are vulnerable to centralization risk, aka the corruption of the inner workings and mechanisms in a way that is not at first noticeable but benefits insiders.
The finance industry used to be simply about risk, money and time. But in today's world it typically follows the pattern of taking money as an input, and producing as an output financial products that foist off some of the risk to society so that the owners can make a profit, with the downside risk being borne by society as a whole.
We see this process in action time and again, and it will continue to happen as long as our regulatory approach rewards massive firm size, prevents competition, and socializes losses.
Let's hope that we see an emergence of an alternative system that relies on a lot less trust and is much less vulnerable to centralization and corruption.

"The answer is that regulators did an abysmal job of understanding the perverse incentives that plagued the industry."
My cynicism kicks in here. They did not fail to understand. They actively ignored, downplayed and dismissed clear evidence and demonized everyone that failed to participate in the fiction. There are powerful pressure groups and special interests that support from the debt driven, government incentivized mortgage system. They have captured the necessary regulators and legislators and expect these people adopt the appropriate blind spots.

Mine too. I am not attempting to let regulators off easy in this comment, merely pointing out that regardless of their specific motivations or their specific level of human integrity, systems that rely upon the good judgment of a small number of people often trend toward corruption... not necessarily through willful graft but due to human nature.

They did their jobs. They got a pay rise.

leave them without Jobs as they left us, use crypto, a crypto address is like a bank account.

most of the financial instruments expolited prior to the crash were completely legal even though they were "toxic".
Martha Stewart and Bernie Madoff are proof that actual crime can imply prison time

Martha Stewart was a fall guy for people to feel like something was being done. What she was actually guilty of was, "lying to a federal agent."
http://corporate.findlaw.com/litigation-disputes/how-to-avoi...

And Al Capone went to jail for tax evasion. The prosecutors use what tools they have at their disposal to get the desired outcome. Sometimes, it is an overall good, and sometimes it is not.

> Why Aren’t Any Bankers in Prison for Causing the Financial Crisis?
Two words: Chuck Schumer.
He's the Democrats lifeline to the Wall Street, and he'll be damned if the Democrats do anything to jeopardize that relationship.
Of course, Republicans are even worse.

No worries, Cyrpto will be their prison.

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