Why didn’t any Wall Street CEOs go to jail after the financial crisis? (2019) | Hacker News Reader

Why didn’t any Wall Street CEOs go to jail after the financial crisis? (2019)

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122 pointsmgh2131 comments

Articles like this never seem to make the case for which crimes were specificly commited. They always talk about the fallout of the financial crisis (losing money on wall street isnt a crime afaik). Idk much about this topic, so im sure crimes could be involved, but its weird how these articles dont start with why didn't someone go to jail for <specific crime here>.

It's not weird, it's just populist grousing. Reduce your discontent to a meme, and it will spread to every discussion that ever mentions 2008.

I have some opinions about who should have gone to jail (I'd start with the ratings agencies), but that doesn't rabble-rouse quite as well as 'Burn Down Greedy Goldman Sachs!'

I seriously disagree in that there were innumerable thoughtful, measured, and nuanced critiques at the time and they had very little impact. Yes, memes are crude, but they get to the point. And it's a legitimate point; there was a great deal of corruption exposed in numerous markets around the time of the financial crisis, and few of those who profited therefrom suffered any consequences.

I could give a long list of examples and detailed analyses, but my secondary point is that a culture of corruption is enabled partly through talking things to death in abstruse legalistic terms, until everyone is so tired that they become demoralized and lose any motivation to do anything about it.

The US Constitution (not the only operative document, but an important one given the financial industry's very deep roots here) contemplates judicial powers to examine questions of both law and equity. Law is complex and if you have the resources you can hire legal specialists to problematize and pull apart just about any legal assertion. In many respects, a dense thicket of petty legalism surrounds a moral vacuum at the heart of society in which substantive questions about fairness and decency as eschewed as too political for judicial engagement; if you'll forgive my stretching a metaphor, much of our 'shining city on a hill' is just elaborate topiary growing atop crumbling foundations.

How about we start with massive amounts of loan fraud?

https://themreport.com/daily-dose/12-08-2020/the-role-of-len...

Worth noting that if you were going to go after loan fraud you likely would be charging low level folks in the mortgage pipeline (appraisers, mortgage brokers, etc) or even the borrowers, not Wall Street CEOs.

Not at the scale noted in the article I linked:

> Mortgage originators that emphasized profit-fueled quantity over loan quality, which resulted in the misreporting of key financial information in 48% of loans securitized by nongovernment agencies;

If 48% of your company's financial transactions were fraudulent, would you expect the CEO to bear responsibility for that? At that point, I'd expect to see a RICO case, or something come out of it.

The corruption may be rampant but those aren't "Wall Street" jobs. Countrywide was based out of Calabasas, California.

There's no way half the loans in a portfolio are fraudulent, and that doesn't get noticed. That includes by the Wall Street firms that are repackaging and securitizing them as CDOs and CDSs. At some point, in a functioning system, that does attract the attention of the CEO.

I probably would but proving that they acted _criminally_ would be hard. You can’t just wave your hands and make up a law they broke.

Meanwhile, that number likely means that the borrowers lied on those same applications. That’s where the fraud actually occurred. And would be easy to prove.

I told you the law: RICO.

> The Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering and allows the leaders of a syndicate to be tried for the crimes they ordered others to do or assisted them in doing, closing a perceived loophole. For example, before RICO, a person who instructed someone else to murder could be exempt from prosecution because they did not personally commit the crime.[1]

https://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corru...

You’d need to prove that a “Wall Street CEO” told someone to commit mortgage fraud. That almost certainly didn’t happen.

Quite the opposite you’ll find all manner of examples of the CEO’s enabling things like anti-fraud and risk management teams.

The issue was the implicit organizational pressures between those parts of the companies and the lending/revenue arms.

Making a new class of law that makes those implicit conflicts a criminal responsibility of company CEOs seems extremely fraught, but more importantly those laws didn’t exist at the time.

> You’d need to prove that a “Wall Street CEO” told someone to commit mortgage fraud.

For it to be RICO, no you do not need to prove that. You need to prove more. You'd need to prove that the "Wall Street CEO" told someone to commit mortgage fraud, and then used the proceeds of that mortgage fraud to take control of an enterprise (which would presumably have to exclude the company of which he is CEO).

(https://www.law.cornell.edu/uscode/text/18/1962, for reference)

RICO requires as predicate acts other laws to be broken before it can even kick in. So if there's no fraud in the first place, then there can be no RICO.

More importantly, there's a specific sequence of connections between the original predicate acts of racketeering and the control of the enterprise that has to be established for it to happen. 18 USC §1962 has the gory details, but I just don't see how the CEO can possibly be guilty of RICO.

As Ken White says, it's never RICO: https://www.popehat.com/2016/06/14/lawsplainer-its-not-rico-...

It's hardly a coincidence that we're missing laws that would be useful in this case. The bankers and politicians are too similar for this to be probable.

You dont necessarily need to charge the Wall Street CEOs. You can charge the Senior Managing Director of Structured Products. Or MD of Structured Products banking/trading/risk/whatever. There were plenty of individuals who set policy to enable this. No need for a scarecrow argument about CEO or bust. I could literally look thru Linked In or a Bloomberg Terminal and figure out who the responsible parties are. Too bad they all go to the same country clubs as the folks at the SEC and NY Times

At the same time, convicting a low level work in his 20s as the ring leader (https://www.theguardian.com/business/2013/aug/01/fabulous-fa...) is disingenuous.

>You can charge the Senior Managing Director of Structured Products

... like Kareem Serageldin. Who went to prison.

https://en.wikipedia.org/wiki/Kareem_Serageldin

He was literally the ONLY single person who did.

What do you charge them with? They were effectively lied to about the underlying assets that went into the securities.

> You dont necessarily need to charge the Wall Street CEOs. You can charge the Senior Managing Director of Structured Products.

You can delegate authority, not responsibility.

This fundamental rule of hierarchical organizations is why CEO's need to be held accountable. CEO's are responsible for creating the environment, culture and rules that allow such activities to take place. Failure within an organization on a CEO's watch is that CEO's fault. That's why CEO's deserve high compensation - because the difficulty and risk are so high. If there's no CEO penalty for failing (or worse, breaking the law), than all companies in society suffer.

The problem is that it is impossible to delegate authority, but no responsibility. Realistically, the CEO of a large company cannot know everything that happens under the umbrella, much like the President of the USA cannot know what every government employees does. In both situations, some subordinates will inevitably commit crimes in the name of the organization (eventually), and holding the person at the top completely responsible is totally unreasonable.

>> In both situations, some subordinates will inevitably commit crimes in the name of the organization (eventually), and holding the person at the top completely responsible is totally unreasonable.

My entire argument was that someone somewhere along the chain was indeed responsible and it doesnt have to be the CEO. Youre arguing that the CEO cannot be completely responsible, which totally sidesteps the 14 other layers of people responsible and also conveniently ignores the other 14 layers that could be held responsible, investigated, and prosecuted.

Fine, the CEO cant be responsible -- is absolutely no one responsible at all within the organization? If so, how did tens of billions of dollars of profits pour in? How can no one be responsible and yet the companies be so profitable?

Probably has something to do with the upper-crust NY culture where those at the SEC, NY Times, SD-DoJ, and Walls Street are all friends. It is also not surprising that the two individuals on whom most issues were hung were a French trader with a deep french accent and an Egyption desk head at a Swiss bank.

https://www.usatoday.com/story/money/business/2013/08/01/gol...

https://en.wikipedia.org/wiki/Kareem_Serageldin

And this is why exactly none is ever held responsible for any crime done by an organization with more than two levels of authority. In my opinion, the problem is not the organization, but the lack of legal framework to put them all in jail. Then you'd see how all subordinates and CxOs would scramble to fix their shady practices. But I guess a clean business environment wouldn't be "competitive" or what's the word of the month...

This reminds me of the documentary film Abacus: Small Enough to Jail about how a tiny community bank became the only financial institution criminally charged in relation to the subprime mortgage crisis.

https://en.wikipedia.org/wiki/Abacus:_Small_Enough_to_Jail

This sounds very Mafia-esque.

We created RICO to convict the Mafia. Not sure why we can't create a new type of crime to hold financial companies responsible for massive fraud.

I mean - we already have Securities Fraud - for which bank CEOs should be held accountable. I'm not sure how they escaped from that.

Yes, it's bad populism to talk about crimes and then never bother to explain them.

There's nuance in explaining systematic failure, but not one that most people couldn't grasp if well written in a few paragraphs.

A lot of 'small bad decisions' at the loan level encouraged by an aggressive culture, a failure in ratings, and CEO's to mild to look too intently into the VP Retail Banking's mortgage profits ... and the whole thing can go sideways.

But it'd be nice if the experts gave us more detail when the talked about it.

When you're talking about something as vast as the Great Financial Crisis that led to a monetary policy with no historical precedent (still in effect btw), you simply cannot summarize it in an article.

It is simply Too Big To Describe, to paraphrase the favorite mantra of the era.

I've noted certain articles and books in another comment above. Those should help get up to speeed.

If we started putting politicians in jail for bad economic policies...

The article assumes knowledge of facts surrounding the financial crisis. There's plenty written elsewhere about that.

Here's a sampling of books and blogs to comprehend what led to the Great Financial Crisis.

* Griftopia by Matt Taibbi

* https://www.rollingstone.com/politics/politics-news/the-9-bi...

* https://jpmadoff.com/

* https://wallstreetonparade.com

Here's some more for you too:

https://www.thisamericanlife.org/355/the-giant-pool-of-money (text transcript: https://www.thisamericanlife.org/355/transcript )

https://www.thebalance.com/what-caused-the-subprime-mortgage...

https://www.reuters.com/article/us-how-aig-fell-apart/how-ai...

https://finecoiitg.wordpress.com/2018/08/16/credit-default-s...

Sure. Lets start with an easy example. Why didnt any Directors at Goldman Sachs serve prison time for knowingly bundling Synthetic CDOs with bad CDS that they internally know were garbage? They sold these to pension funds, and other public entities. There were documented losses. There are documented emails with full internal discussion on how bad these investments were.

(documented with emails.) Note there was a civil case (https://www.theguardian.com/business/2013/aug/01/fabulous-fa...) and a low-level fall-guy in his 20s, and conveniently French, did face civil charges.

Note, non-connected, poor people go to jail for $500 thefts. Lets be honest about what happened here.

The message that was drilled into people during the financial crisis was: punishing people for these actions would stifle innovation and risk taking in the financial services, which could threaten US financial hegemony.

There is a pretty clear line between innovation, risk taking, and fraud. Intent can be shown based on firms' internal positions and emails (e.g., Goldman Sachs was internally short these products and make a lot of money both by selling the bad products, and then again on their bet against the products.: https://www.nytimes.com/2009/12/24/business/24trading.html)

They were taking toxic waste, putting it into cleanly packaged securities, and selling them to pension funds and others who then lost over a $1B: https://www.reuters.com/article/us-goldmansachs-abacus-factb...

(Plaintiffs claim over $13B in losses: https://www.investorlawyers.com/blog/investors-continue-go-g...)

https://www.ft.com/content/4798ae22-f552-11e2-b4f8-00144feab...

Internally it was a joke they were selling this garbage:

QUOTE: " Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour. https://www.ft.com/content/4798ae22-f552-11e2-b4f8-00144feab...

Former Goldman Sachs trader Fabrice Tourre said he “deeply” regretted an email in which he joked about selling subprime mortgage bonds “to widows and orphans” following a grilling from lawyers for the US Securities and Exchange Commission."

Are you suggesting it's fraud to try to sell something for more than you think it's worth?

It's fraud to materially misrepresent a security [1].

EDIT: In Goldman's case (from the URL citation):

Goldman Sachs - SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. (4/16/10)

Goldman Settled Charges - Firm agreed to pay record penalty in $550 million settlement and reform its business practices. (7/15/10)

Fabrice Tourre (mentioned above) Found Liable - A jury found former Goldman Sachs Vice President Fabrice Tourre liable for fraud relating to his role in a synthetic collateralized debt obligation tied to subprime residential mortgages. (8/1/13)

A U.S. judge ordered former Goldman Sachs Group Inc trader Fabrice Tourre to pay more than $825,000 after a jury found him liable for defrauding investors in a subprime mortgage product that failed during the financial crisis.

[1] https://www.sec.gov/spotlight/enf-actions-fc.shtml

Selling bad assets isn’t illegal. I worked for a startup. After seeing how the sausage was made I knew they were a bad company. When they IPO’ed I sold all shares as soon as the lockup hit. They have yet to exceed the price I sold at. Should I be in jail for selling what I knew was a crappy, over-valued company?

(Mind you I had no MNPI as I hadn’t worked there for 6 years.)

> Should I be in jail for selling what I knew was a crappy, over-valued company?

If your job was to sell these things to people as a professional service, and you set things up so that a supposedly impartial ratings agency would give a high rating to something you know is shit? Absolutely. It’s not the same thing though is it?

Because they are market makers. They routinely trade low credit quality instruments that they wouldn't buy and hold in large volumes. The fact that they don't have the credit appetite to hold that position doesn't mean they can't make a market for it.

It's like if you were telling your car salesman that if he doesn't own a couple of Toyota Yaris himself, you wouldn't trust him to buy a Toyota Yaris from his dealership. He's a dealer, what he thinks of the car personally isn't the question.

That "low level fall guy" made $1.7 million in 2007. Unless if there was evidence that the higher ups at Goldman knew that Tourre was defrauding investors, but chose to ignore that evidence, I don't see how they can convicted of a crime.

N.B. Fabrice Tourre himself was not convicted of a crime.

There are buy side and sell side. And the financial world and regulation make them more like two separate entity. When the world simply known them as one called GS.

Their counterparties are all sophisticated institutional investors and these things are generally traded on a buyer-beware basis. Sure there may have been some actual wrongdoing that went unpunished, but the nature of these transactions is that the cases are likely be civil rather than criminal.

The real reason for the lack of convictions is that there just weren't many cases of big bad wall street bankers defrauding ordinary people. That's typically what results in criminal convictions because 1) the law is far more protective of unsophisticated individuals than of institutional investors and 2) prosecutors have a much easier time winning cases and also benefitting politically from pursuing cases with relatable victims. And the reason why people wanted bankers to go to jail is because they thought wall street bankers did bad things to ordinary people. In reality though, the best cases against Wall Street folks are ones where the victims are also institutional investors (which is often included within the broader definition of Wall Street). The traders at Goldman Sachs outsmarting the traders at AIG just doesn't make for a particularly good fraud case, the same way Enron defrauding individual investors including their employees. And from the public's perspective, they are all part of the same class of people. And where ordinary people were directly involved, they were the ones defrauding lenders (and by extension, Wall Street and so on) by lying on their loan applications.

You are right that ordinary people were not defrauded directly, but pension funds are basically ordinary people's money. There just happened to be a middleman (the pension fund admin.)

Plenty of pension funds lost plenty of money

The closest general-purpose crime I can think of would be some variation of fraud. Except that to be criminally fraudulent, you have to meet the requirement of knowingly making false statements of fact. That's quite difficult for the prosecution to prove in a criminal trial, especially given that the bar is to prove it beyond a reasonable doubt (although I doubt that juries actually adhere to that standard in practice). And honestly, I'm not sure I even believe it to be true--a lot of the failures (especially by the time we're talking CEO-level here) feel a lot more like plain hubris rather than specific fraud.

How wasn't this blatantly securities fraud? That's already a crime. And they're already supposed to be accountable for that.

Again, securities fraud has a pesky knowingly requirement. To my understanding, in most cases, the sellers themselves believed the securities to be far less risky than they actually were.

The focus on whether specific crimes were or were not committed is weird to me — as if people from these companies didn't help write the laws that are supposed to regulate this stuff in the first place.

These people gambled with the economy, lost trillions of dollars and destroyed the lives and savings of millions of people… and then got bailed out by the federal government. Who cares whether they committed specific crimes? The issue is the "heads we win, tails you lose" system, in which if you're wealthy enough you can break the world economy and get rewarded for it.

> as if people from these companies didn't help write the laws that are supposed to regulate this stuff in the first place.

So what instead? - just arrest people based on public sentiment? Or rewrite the laws later, ex post facto-ly?

I'll take the rule of law, despite the failure case of regulatory capture, over just punishing people because they're unpopular, any day.

What is the point of respecting a system literally designed to oppress you?

The problem was that everyone was in on it. I spoke to quite a few people in that time period, from mortgage brokers to borrowers to bankers. They all knew what was happening. A friend tried to sell me on getting a NINJA loan (No Income, No Job, No Assets) where, I was told "just tell them any number for your income on the application." It was all done with a wink and nod and everyone in the pipeline knew what was happening.

When there's a collective acquiescence to large-scale fraud, who gets thrown in the clink? The bigger question should be how did the sytem evolve to the point where all of this was made possible?

It's almost as if there's a kernel of truth in the criticisms of capitalism. Incentives rule the world.

Who gets thrown in the clink? How about "as many as possible, and the higher up the better"?

"We can't jail them all" does not imply "therefore jail none of them".

Precedents matter. The precedent that was set is "widespread fraud is fine; if enough people are in on it, nobody can be jailed". Is that really the precedent we want?

The underlying question I ask is who set the precedent? Why was the system designed to allow this to happen?

The primary underwriter of Marketplace has long been GE Capital. That is, the industry the programme is supposed to be watching, pays it.

It is not in the interest of the financial industry to support advocacy for strong regulation against itself.

https://idioms.thefreedictionary.com/He+who+pays+the+piper+c....

John Kenneth Galbraith's The Great Crash: 1929 gives interesting insights into prosecution and hearings following the Wall Street Crash which precipited the Great Depression and previous illegal and self-serving behaviours. I cannot recommend the book highly enough: it's short, highly readable, quite informative, and exquisitely researched.

https://www.worldcat.org/title/great-crash-1929/oclc/1222806...

People really need to watch Margin Call.

These stories all seem to ride on similar popular sentiments: 'bad things happened, and rich people were involved, so they should go to jail'. Having read a few of the books cited at the bottom, I have been repeatedly surprised at how these financial disasters came to be; it often seems like the people at the top were deceiving themselves more than anyone else. Bethany McLean's other book, "The Smartest Guys in the Room" (relevant but not cited here) was a particularly good example of this, and I came away from it with a very different view of Enron than I'd had going in.

In many other jobs, gross negligence resulting in billions of dollars of property damage can get you jail time. Why is it ok for the people at the top of these financial disasters to be immune? Whether they're deceiving themselves is irrelevant. Drunk drivers deceive themselves about their ability to drive safely, we still put them in jail.

If the "property damage" is to your own shareholders, that's a fuckup, not a crime (on its own).

If that starts a market rout, or bank collapses, that sucks, but it's still not a crime

If that leads to the collapse of the US dollar, it's a catastrophe, but it's still not a crime.

US policymakers are responsible for the stability of the US economic system. CEOs are responsible for their own companies. Congress calling for CEOs to be put in jail is in large part simply trying to deflect from the fact that they are not doing their own jobs, and are simply trying to offload responsibility for US economic policy onto the private sector.

Sure, but write a bad check or mess up your cash flow such that you fail to meet some court-ordered financial obligation and watch how much finger-wagging accountability and social opprobrium rains down upon you. You can get in much worse trouble for some transgression involving a thousand dollars than a million or billion.

There's a guy in the US Senate who used to be CEO of a healthcare company until he was forced out by the board, and the company had to pay out billions in settlements and fines for defrauding medicare. https://en.wikipedia.org/wiki/Rick_Scott#Columbia/HCA

I agree with you that many in legislative and executive positions are negligent and or corrupt, but let's not pretend that the private sector doesn't aggressively lobby for its own financial interests or that it is populated by angels brought down by wicked politicians.

In many of these instances, it seems more like multiple layers of ‘rose-colored glasses’, than one person being willfully ignorant. This is somewhat similar to engineering situations where each reviewer adds some safety margin, and the end product becomes bloated.

Enron is a particularly interesting case, because the filings and statements were all truthful, but almost nobody ever read them. They also had one or two good businesses, but were dragged down by liabilities from the others, so it wasn’t a total fraud. That said, I do think the Enron CFO was guilty of criminal fraud, though I think Lay and Skilling should have only been held civilly liable.

Do you have (many) examples?

And I very much doubt many drunk drivers end up in jail. AFAIK they are not even prosecuted for manslaughter or murder if they kill.

> In many other jobs, gross negligence resulting in billions of dollars of property damage can get you jail time.

Can it? Say I design a bridge, it falls down and kills people, and does a large amount of economic damage in the process (maybe it falls on a chemical factory which explodes, or something). I'm fired, sure. I probably never work as an engineer again. I'm very unpopular, and my name becomes an insult. But do I go to jail?

What if someone grossly negligently screws up a $1000 smart contract that convinces the public that bitcoin sucks and the value plummets? It's gross negligence resulting in billions of dollars of losses for others. Are you going to call that property damage in the same way?

You mean like incompetent programmers who leak millions of records of personal information? When is the last time one went to jail for that?

If I "deceive myself" by thinking I can drive with my eyes closed, and I crash my car and destroy someone's property, aren't I then required to pay the damages or face jail time?

It's odd that we can all agree on cases where the number of participants is small, but for some reason, if an entire economy is affected, we have to pretend that the people responsible weren't actually responsible and shouldn't be punished in the same way.

I would agree that the self-deceiving fiduciary should be held financially responsible for the impact of their blindness, but I’m not sure all these cases are actually crimes.

I'm sure you know this but a broker-dealer (which is what we're primarily talking about in the context of Wall St banks) doesn't have a fiduciary duty to their counterparty.

I was still addressing Enron case where many of the people charged were fiduciaries, but you're right re: the investment banks.

"we can all agree on cases where the number of participants is small,"

It was definitely not small, the fraud was top to bottom including the home owners lying on their loan applications, the loan officers, the managers of the loan operations, the VPs, the ratings agencies, those not doing their due diligence and just assuming that the ratings agencies were perfect etc..

It was a mania more than anything, where regulations were bent and the system lost all of it's checks and balances.

It's illegal to drive blindfolded, it's not illegal for Bear Stearns to make most kinds of stupid bets in real estate.

This was not 'executives do fraud, or at least something like it and banks fall'.

It was more like a bad housing bubble where all the limiting parameters were bent out of shape.

...it often seems like the people at the top were deceiving themselves more than anyone else.

Whose interest does it serve, for that to be a common narrative?

I think the sentiment is more "The rich have created this financial system that's essentially a giant casino, where if they make a bet and are right, they profit, and if they make a bet and are wrong, the general public loses their jobs and 401(k)s while the government pays to bail them (the rich) out. The fact that none of it appears to even be criminal is just icing on the cake and shows who the law really protects.

If none of the actions that caused all that misery are actually crimes, that's the problem.

>"If none of the actions that caused all that misery are actually crimes, that's the problem. "

Why? Why should the stock market be further de-risked? Why should the government's poor impulse control be encouraged? Why should mistakes be criminalized?

I didn't say anything about the stock market. Reckless decisions made by rich banks and financiers should not effect anyone but themselves, let alone cause economy-wide crises that hurt regular people.

Could you imagine if I went off to Macau to play a high stakes game of poker, lost, and as a result, you lost your job and the government staked me in my next poker game? That's pretty much what happened.

You said "401(k)s", so I assumed you meant investments in publicly traded equities; my apologies if I was mistaken.

>"Could you imagine if I went off to Macau to play a high stakes game of poker, lost, and as a result, you lost your job and the government staked me in my next poker game? That's pretty much what happened."

I understand what happened, I just don't see it the same way you do. It's not your fault if I lose my job because it relied on your gambling, and it's also not your fault that my government makes stupid bets.

You conveniently cite the case where the perpetrators were also fooling themselves. What about the case where the perpetrators were saying on thing publicly and privately betting against their products?

https://www.nytimes.com/2009/12/24/business/24trading.html

(fast forward to real life -- Princeton grads at Goldman Sachs dont go to jail...)

Excerpt from article:

A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.

Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.

Mr. Egol was a prime mover behind these securities.

The simplest answer is that the people/companies have money. It's easier to go after them in the civil courts where it's easier to secure a judgement and collect huge fines than to pursue them in criminal court with a higher chance of losing (some of these actions might not even be crimes) and a lower return. They could do both, but if the government is collecting billions in fines, they don't really care about sending "productive" people to jail.

a good book to read about this lack of prosecution is called "the chickenshit club" by Jesse Eisinger. In it the author explores prosecution paralysis brought on by a fear of destabilizing markets, and that this fear ultimately led to fines being preferred over jailtime. it also dives into the revolving door between prosecutors of these organizations and the organizations themselves, and the fact that no prosecutor wants a losing case on their record as it may adversely affect their chance of career success.

Its also interesting to note from the book that a CEO fired from a company and indicted may continue to receive payments or parachutes from that company in order to fight government charges and keep quiet about improprieties, whereas other types of criminals see all assets frozen upon such criminal proceedings.

FYI The actual article is audio/podcast. I skimmed through it and it was considered more effective to go after individuals by civil suite.

My personal understanding is a lot that the fraud was widespread among low level mortgage officers (not sure if that's the right word) who were doing things like exagerating a loan applicants income, assets, etc. These individuals may or may not have known the extent of their crimes and most likely were pressured by institional policies. Also proving that the loan/mortgage officer doctored the application and not the mortgage applicant would be difficult to do but it is easy to prove that the bank itself failed to perform due diligence.

When it's a handful of people, you go after the individuals. When it's wide spread, you go after the institution [1]. The challenge is that the DOJ appears to continue to insist on going after white collar crimes like these with civil penalties against the company rather than piercing the corporate veil & starting to criminally prosecute the officers responsible. Talk about moral hazards they're constantly hand wringing over.

[1] https://www.justice.gov/opa/pr/wells-fargo-bank-agrees-pay-1...

You see the same pattern of behavior with the IRS, where they've determined it's easier to go after individuals committing tax offenses rather than massive corporations.

"piercing the corporate veil" generally refers to going after owners/shareholders or their assets, rather than going after employees; that's the level of liability that a corporation protects.

IANAL so I'm not sure what level of legal "protection" employees have vs managers etc. for which levels of crimes (obviously, the janitor is not allowed to shoot people, while the accountant's assistant is not going to bear the brunt of some fraud)

> Piercing the corporate veil refers to the act of holding a company’s owners and executives liable for the company’s debts. This can include either debts owed to commercial creditors, debts owed to judgment creditors, or both. [1]

In a c-corp, everyone is generally absolved of all wrong doing personally. That's the point of the corporate structure. The company & its assets are held liable instead. Peircing the corporate veil is the main way you can go after people & to my knowledge only the board of directors (maybe some shareholders?) & officers are liable. A common short-hand is "C-level executive" but the latter is often a title the company makes up & may not designate an officer. CEO & CFO I believe are statutorily required to be officers but I'm not sure if all statutory C-level positions are required to be officers & I'm not clear if there can be officers who don't have some kind of C-level title. That's why they have to carry personal (expensive) liability insurance to cover their legal costs if that ever happens (in these situations the company can't/won't cover your legal costs) & is one of the justifications they use for having large salaries (to be able to cover these costs).

The link below has instances when an officer may be held personally liable even without piercing the corporate veil but generally can be thought of as the officer did something intentionally illegal that can't be excused as "just doing my job". I don't think gross negligence is generally prosecuted, especially in nuanced technical fields like tech or finance and in larger companies that'll throw lawyers at the problem to maintain the shield (looks bad for you if your CEO is being investigated for fraud).

I'm not a lawyer but I've picked up a bit of (flawed/imperfect) knowledge here & there over the years.

[1] https://www.natlawreview.com/article/how-ceo-can-be-liable-n...

It's astonishing how banks (saved with your money) can go home scotch-free, and hedge funds (that will die for their recklessness) get all the blame.

You see this through policy. Why ban short selling? It's really dumb if you ask me.

The banker investors that are used to taking risk and not caring precisely becuase they get their comission and the bank is saved (too big to fail) are the irresponsible people here.

A hedge fund manager will ride or die with their risk tolerance.

Lehman Brothers, a bank founded in 1847 and the very epitome of investment bank, went out of business and was not bailed out due to the 2008 events.

Nor was it a bank. It was a broker dealer, no banking license.

Wachovia went under. So did Bear Stearns and WaMu.

but income taxes have continued to fall in spite of such bailouts, suggesting that no one actually had to pay for it. It was not anyone's money but rather printed off with 0 percent yielding bonds. The huge post-2009 bull market and economic expansion in hindsight makes the bailouts one of the most successful govt. programs ever even if maligned.

>> but income taxes have continued to fall in spite of such bailouts, suggesting that no one actually had to pay for it.

I would strongly disagree with this. Taxes would go up with fiscal bailouts, not directly with monetary bailouts. A huge amount of the bailout was via monetary policy -- i.e. "print money and buy bonds to drive bond prices up and rates down."

We all feel it in the form of asset bubbles. Some people benefit (asset holders) while others lose out (young people, those without assets, renters, fixed-income retirees with almost no yields on their 401ks.

Taxes are a very simplistic way of judging payment.

>> It's astonishing how banks (saved with your money) can go home scotch-free, and hedge funds (that will die for their recklessness) get all the blame.

The rationale is (not saying I agree with it) that broker dealers' and banks' can cause systemic risk and cause a domino effect.

Note that one hedge fund was indeed saved -- AIG-FP, and was given a record $180 billion dollar bailout, albiet on initially punitive terms. Incidentally they were so large (1Trillion USD of exposures, much of it leveraged) that they fell under the category of systemic risk.

https://en.wikipedia.org/wiki/American_International_Group#2...

That $180B wasn't all though, one could argue that the QE buy-back program purchasing securities at arguably inflated prices was also an additional bailout, but the amount for that is difficult to quantify and difficult to segment beneficiaries for.

There are three ways corporate America protects its executives from jail:

1) they allow their low level people to do the dirty work. They say “compensation will be a percentage of your sales” knowing what will happen, and put the disclaimers in a required training class that you can click though in 10 seconds.

2) they diffuse responsibility over a large set of companies with complicated ownership and partnership relationships

3) the Department of Justice never seems to extract the maximum punishment they can. They settle out of court for money, while bloodthirsty juries might happily hand down a 30 year sentence.

The effect is that the tycoons know they can get away with anything. Look at the recent Sackler family message that they would reject the paltry $4.5 billion settlement if they were not indemnified from other lawsuits. That’s the act of a party with a good alternative, not a party begging for his life while the crowd erects a gallows.

Citigroup selected most of obamas cabinet so that should give you an inkling of how likely it was any bankers were going to be held responsible for anything:

https://wikileaks.org/podesta-emails/emailid/3560

People tend to go to jail for malice (willful intent), not mistakes. The financial crisis was viewed as just a giant mistake in risk management. having a 20-sigma event when your financial model says it is an impossibility, is not a crime.

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” --Upton Sinclair (1934)

I love how 20-sigma events happen every 8-10 years on Wall Street. Sounds like no statistics I've ever seen.

Conveniently, money is extracted along the way in the form of generous fees, everyone apologizes for the thousand-year event they couldnt predict, and we repeat the cycle. People on the outside make excuses while those on the inside craft brilliant tales of hard work and rugged individualism.

One encouraging thought here is that humanity has come a long way since the gallows of the revolutionary period.

But the article doesn't answer its question. The financial crisis here was system failure due to myopia of a sector, not concerted criminal fraud.

They likely do a risk assessment before engaging in borderline illegal things and try to offset liability to underlings. Best to ask the prosecutors, they know best i suppose. Maybe we have some lawyers here who can chime in?

We were selling to willing buyers at the current fair market price.

Margin Call quote, iirc...

So that WE may survive.

... because none of them were convicted of crimes, in turn because none of them were indicted or tried, presumably because prosecutors either didn't believe they were guilty of any crimes or because they didn't believe the cases against them were strong enough.

Fortunately, we by-and-large do not send people to jail without that kind of due process just because large numbers of people are angry at them for whatever reason.

Are the cases "not strong enough" because A- prosecutors believe that these types of legal battles will be an uncertainty due to the massive wealth CEOs can use to leverage their legal teams, have massive potential political fallout, and/or are an undue burden on the taxpayers; B- the actions perpetuated are not singular and specifically provable, despite their obvious intent and illegality, but instead spread out over a network of subordinates/proxies creating a fig-leaf of plausible deniability; C- the laws were written by a state deeply indebted (on both sides of the aisle) to the funding provided by exactly these types of citizens and their massive personal wealths?

My point is: While I am a deep and firm lover of due process, I think there's alternative explanations for why these people weren't convicted of crimes that don't solely point to "they were 100% blameless and these accusations are without merit".

That's why people are writing these articles/still want blood from the investor class.

The worst thing is, that the core of capitalism had to be rescured by socialism.

Not that socialism is bad, or capitalism is bad. But the core of capitalism stand on, what isnt profitable, isnt sustainable. The system hasnt been provitable, but had been rescured by all the goverments and the money they gather from the inhabitants.

Socialism "for me but not for thee" isn't socialism. That's capitalism, although it does edge toward the super-capitalism that some call fascism rather than sharing any important characteristics with various systems of free enterprise that many people imagine when they encounter the word "capitalism".

Socialism is not when the government does stuff.

Socialism is when all the people of a country put theyr money together to pay for a system. Such as your taxes or a goverment healthcare. The banks have been rescured by such money.

No, that's called paying taxes and funding a government. I'd suggest you crack a political science textbook if you want to actually know what socialism is.

So goverment healthcare is not a socialistic system? The public infrastructure that is built using taxes and can be used by anyone and is owned by the goverment which represents the inhabitants is not socialistic?

wikipedia: While no single definition encapsulates the many types of socialism,[12] social ownership is the one common element.

what, if not a socialistic system, is it then in your opinion?

No, those things are not socialist. As I said, if you want to learn what socialism is, go crack a book.

just because you say doesnt make it right. If you know so much better, you would be able to write down what it is instead.

maybe read jcranmer's response above. citing him: "government provision of services (are) a hallmark of socialism"

"You keep using that word. I do not think it means what you think it means."

* Inigo Montoya

i'd love to hear your side, but i have to assume there is none from your explanation.

I'm not here to educate you; I don't want the downvotes I'd get from attempting to do so. I just want you to stop spreading misinformation.

Uh...

The problem with socialism is that there are so many definitions of the word that it's actually rather meaningless (this is generally true of every -ism in political theory).

Nevertheless, if we're discussing socialism in the context of the contest between different economic and political organizing philosophies in the 19th century, then rspoerri would in fact be correct to call what he did socialism. The demand for the government to provide various social functions (including things like healthcare or pensions), adding progressive taxation to provide some measure of wealth redistribution, and the limitation of corporate rights over workers (e.g., child labor laws, minimum wage laws, working hour laws) are all hallmarks of the socialist movement that were eventually pretty universally adopted, in contrast to the activists for capitalism.

While there is definitely room for disagreement of what constitutes socialism, I would be surprised to find any political science textbook that wouldn't consider government provision of services (especially as opposed to private provision) a hallmark of socialism.

Someone also needs to put to rest the "The Banks were bailed out using taxpayer money!" scandal.

Based on what I heard, TARP the Troubled Asset Relief Program, bought a small percentage of those hedge funds and investment banks that were in danger of going under, then let them slowly buy their own shares back over a number of years ... ..... and the "taxpayers" got all their money back.

"Troubled Assets Relief Program (TARP) | U.S. Department of the Treasury Troubled Assets Relief Program (TARP)" . Seems very goverment to me...

It doesnt matter if its a loan. A lot of businesses would be profitable if you would give them 2 billion dollars. Just invest them in a diverse portfolio and real estates. And you are profitable in a short time. Getting that money in the first hand is whats difficult.

how exactly is this not using taxpayer money? It carried a ton of risk and likelyhood said companies would default and the money would never have been repaid.

The government pooling resources (collected from the people) to control an industry (either by mandate or by providing an option that out-competes the private sector) for the benefit of the people is socialism. An industry collapsing and telling the government "give us money with no strings attached or we'll take the economy down with us" is a hostage crisis.

Nationalizing industries is also not socialism.

You know, you keep saying what socialism isn't. I agree with you that rspoerri's definition is too expansive, but we could have a more useful discussion if you supplied a definition, instead of just saying "no, that isn't it". (And "crack a book" isn't a definition.)

Sorry, but I'm not in the mood to get flagged today. I cut it off with "crack a book," because if you go one more step down the road beyond that, that leads to something you can't discuss rationally on Hacker News.

Fine. Then I will. (Been downvoted plenty lately, what's some more?)

Socialism is social ownership of the means of production. It's not government healthcare. It's not government bailouts (unless the government keeps ownership of the businesses). It's not "government doing things". It's not government using taxes to pay for doing things. It's government owning the means of production, or else the people owning it in some other way (mandatory profit sharing would qualify).

Now, can we prove the parent wrong and have an actual, reasonable discussion?

Thank you AnimalMuppet for your point of view.

I do agree that "Socialism is social ownership of the means of production" is one aspect of socialism. But its only one of many aspects that fall under socialism. Socialism has been reduced to that aspect in the recent years, but that doesnt invalidate the other aspects. (see my above post with the 4 aspects of socialism)

Id argue govermental healthcare does produce something and it's govermentally owned. So especially that should, even under the "Socialism ... means of producton", be socialistic.

A loan is usually a product that banks provide. Afaik usually the goverment does not give loans. So id assume even that qualifies as "Socialism ... means of producton".

You could argue that the goverment is not "social ownership". But in my opinion that is exactly the base of what a democracy constitutes.

I'd wonder where you dont agree.

I agree that government is social ownership. But it's mainly about the bulk of things. Does the government own 1% of the factories? Probably not really socialism. Does it own 30%? 70%? 99%?

So, to your examples, the government giving out a loan might be considered socialism for that one loan. But what percentage of the banks does the government own? Or, what percentage of the loans does the government originate? Not a very high percentage. (And, when the government takes over a failing bank, they usually do it not to own the bank, but to get it off their hands as soon as they can.) So I don't see lending as being socialism, even if the government does a few loans here and there.

Medicine... there's Medicare and Medicaid. That's not really socialized medicine. How many doctors' offices does the government own? How many hospitals? What's really socialized is a big section of medical insurance.

Another thing that's largely (but not totally) socialized is higher education. Also airports, but not airlines.

So as you look around at, say, the US, it's not really characterized by socialism. It is, to some degree in some sectors, but the whole economy is not characterized by the government owning the means of production.

[Edit: This means that economies are not binary: socialist/not socialist. They are often a mix of some socialism (government ownership) and some not. We call an economy socialist when the government fraction of production (not purchasing) becomes significant, though there is no bright line (above X% it's definitely socialist).]

Id never assume that usa is socialistic. Neigther is switzerland where the goverment might own 3% of the industry, which is where im from. Id assume only kuba might be considered a socialistic country if you look at these values.

My original point was, that rescuing the banks by the goverment was a socialistic act. Thats where the discussion started and i still need to see an explanation why this is not the case. But i think you might even agree to this.

For all other points i fully agree with you. The goverment does only parts of these functions (healthcare insurance, etc.) . Which doesnt make the country socialistic, but these functions the goverment provides are. (In my point of view)

My key takeaway from this discussion is that in europe socialism is defined broader then in the usa. At least for an average of the people. The part of „govermentally controlled production“ has never really a been part of what i assume to be socialism. I think of it much more in the way as our second largest party the sozialdemokraten do (sp schweiz). But describing that would blow this topic completely.

Thanks for the discussion.

Below are some of the key tenets of socialism:

1. Public or collective ownership of the means of production

2. Central planning of the economy

3. Emphasis on equality and economic security

4. Goal of reducing class distinctions

( from: https://www.investopedia.com/articles/investing/082014/what-... )

And what happened?

1. The goverment decided to bail the banks, the goverment is _the_ public institution.

2. It was central planning "preventing the world economy from crashing" that lead to this decision.

3. not really equality, but economic security was one of the reasons.

4. ... no thats doesnt apply to the banks bailout.

That's not much of a problem, it just shows how capitalism is not a sustainable system on its own. It shows that capitalism is fine and dandy in some contexts, in others, it doesn't work well. So the conclusion is that a mixture of systems need to be in place: for example, strong social programs could take care of people while they are growing up or begin to fall out of the system, and capitalism can always step in on top of that, or as an alternative even.

> "...we found that the answer has several components, including power shifts at the Department of Justice, a high-profile trial loss, civil lawsuits and punishments that did not include jail time."

Too long; didn't read (listen) - America is an oligarchy.

https://www.cambridge.org/core/journals/perspectives-on-poli...

Unfortunately doing bad things to get rich isn't always illegal, and a lot of the times the parts that are illegal are hard to prove against institutions who have professionally been getting away with it for a while.

Payday loans come to mind - they definitely aren't illegal, have tons of predatory practices built in, but are universally (at least in my experience) seen as a scam.

I've been told by several people that used to work at large payday loans company: "Under no circumstance should you or anyone you care about get a payday loan. Go beg for money, steal food, whatever you need to do to survive, but never get a payday loan".

I used payday loans a few times back in the day - not for anything large, just for like $300 or so at a time. Getting those payday loans really helped me and I never experienced any negative consequences from taking them. I never thought of them as being a scam. I knew what sort of interest rates I was getting into and I took the loans fully knowingly. Personally I did not experience any predatory practices unless you count the interest rates themselves as predatory. That said, I always paid the loans back pretty quickly so I do not know how the companies behave if people are slow in paying.

I worked at a payday loan place, and sure, if you make decent income and just find yourself short a few hundred bucks for a few days before a payday you can get out okay, but folks who are at the edge, making ends meet just barely...well those folks get trapped in a very difficult cycle of paying back $795 every two weeks and immediately taking out a $700 loan, rinse repeat 7 cycles of that before the payday company will allow for a different repayment plan (still a hard hole to dig out of, but a little less shitty than the standard pay us 795 right now thing you have to do for 7 cycles before the option for escape is even available to you)

It's a gross business, exploitation of human misery.

It does seem gross and I do not think I would feel good about the idea of working in the industry. That said, I wonder - is it worse than the loans not being available at all?

It can be both things at the same time. Maybe you go into a casino once, on your birthday, have some fun with $500, and never again. That doesn't mean that casinos don't fuel addiction for profit.

What's important here I think is that while saying that payday loans are bad, I don't mean to take away your positive experience with it. Just that looking at the bigger picture, they do more harm than good. That they exploit the desperation in the people, and that's immoral and should be regulated more.

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