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Comment by bawolff | Hacker News Reader

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>.

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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

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.

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...

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.

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 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...

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 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?

People really need to watch Margin Call.

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.

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