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The Rule of Law in the Financial System

posted by Adam Levitin

Felix Salmon has a depressing blog post about the Fab Tourre verdict and a criminal conviction in another Goldman Sachs-related case.  Felix concludes, "I’m increasingly coming to the conclusion that America’s system of jurisprudence simply isn’t up to the task of holding banks and bankers accountable for their actions." 

Felix's observation underscores that we cannot and will not see sufficient and durable financial regulatory reform without political reform. This core Brandeisian insight (e.g., Other People's Money) has been lost during the course of the 20th century and its turn to technocratic financial regulation. (Add two parts capital and one part co-cos, mix with risk retention requirements and garnish with macroprudential regulation...) Notice that the one piece of the Dodd-Frank Act that changed the politics of financial regulation--the CFPB--is also where the pushback has been the strongest.  We need to stop seeing financial regulation as a matter of technocracy and start seeing it as a matter of political importance of the first order.  At stake is nothing less than the rule of law. 


It is true that the financial system reflects political choices. Every nation has the financial system it wants. In most cases that is because the political class wants the electoral benefits that come from loose credit. Certainly the US political class has proven that on a bipartisan basis. And the left for decades has been very much a part of that ethos, pushing for increased lending to redlined areas, high ltv mortgages and adjustable rate mortgages. government backed loan programs, etc.

But neither the author nor Mr Salmon identifies any criminal action by any specific individual that has gone unpunished. They bemoan at such a high level of generality - "banks and bankers" being held accountable for "their actions" - that is very superficial and amounts to nothing more than guilt-by-occupation. If there is some action and some individual that you have evidence committed a crime, surely you know people to inform about it. The "rule of law" also means no arrests without probable cause and no conviction without guilt beyond a reasonable doubt. AFAICT, that has been respected fairly decently.

The system does and does not reflect political choices. Our political system is far from democratically responsive. We have lots of frictions deliberately built into the system and some (e.g., the Senate filibuster) that have emerged on their own.

With all due respect, the argument that because I cannot personally point to a criminal action means that there were none ranks among the most asinine arguments I've ever heard. My own interactions with law enforcement regarding the financial crisis are not public, but if you wish to see pretty clear public evidence of crimes, read through the Levin report on WaMu. There's more than enough on WaMu for a reasonably motivated prosecutor to string up some senior convictions. And let's not get started on Countrywide. If you truly believe that no crimes were committed, and that this is just a "tar the bankers" issue, there's no discussion to have--you're being willfully blind.

MT - to sum up the response to your rational post: "No, I don't have any examples to back up my statements. Moreover, you are an idiot."

To help explain MT's point, and I'll make it quick so you can get to part where you call me stupid, is that to make categorical claims that our judicial system has failed b/c certain types of people are not being punished as you see fit, it may help to have a specific example of a crime that has gone unpunished due to failings of our legal system. Lacking such an example, it's really no more than name calling (i.e., bankers are bad)

MT of course did not suggest that simply b/c you can't set forth example, that no crimes exist. Further, at no point did MT suggest that "no crimes were committed." Just more straw man type arguments.

MT seems to be addressing the outlandish claim that "America’s system of jurisprudence simply isn’t up to the task of holding banks and bankers accountable for their actions." We live in country where you can murder someone and be sentenced to less time in prison than Madoff's sentence. Personally, I'd rather someone take my money than kill me. But that's just me.


(1) It is a fair reading of mt's comment that absent evidence there aren't crimes. mt doesn't say that directly, but that's a quite fair reading.

(2) What was stupid was to suggest that either I or Felix Salmon have no basis for our argument because we do not have personal knowledge of a crime being committed. How on earth would I (or Felix) have such personal knowledge? If that's the standard, then I guess no one should have an opinion on whether OJ committed a crime unless they had personal knowledge.

(3) The WaMu example that I gave provides more than enough fodder. (I can point you to public documents in WaMu securities litigation that show that top WaMu execs knew that they were securitizing loans liar loans while claiming that they were full doc. That's a predicate for any number of crimes.

(4) Given how broad our federal criminal statutes are (wire fraud, mail fraud, etc.) it's not real hard to find a crime if you want to. Consider how many people went to jail with the S&Ls--the contrast is striking.

(5) Yes, no arrests without probable cause and no convictions without guilt proven beyond a reasonable doubt. But I think there's probable cause abounding for anyone who wants to see it. Whether there's enough to convict is not an issue that's even on the table, as we don't have any prosecutions of note beyond Farkas.

Could Levitin's timing be any better?


There's certainly enough here for plausible criminal charges...

I have no personal knowledge we're operating under any rule of law.

Witnessing court proceedings evidences a lack of rule of law, thus I have personal of same.

I read your response to my comment and am struck by the difference in tone comapred to mine, which I re-read as still seems to have been respectfully written.

Wadr, I don't agree it is enough to say "go read X report and you'll find the crimes" And that's not because I am lazy. I simply have no idea what actions you found in it that you think are crimes, or what laws they violate in your opinion, and I am not going to guess at your thinking. So if you want to say action X on page Y violated law Z, great, I'll have more respect for your thesis, but otherwise it's just McCarthyism to me.

WaMu is dead and no one could think that DOJ was constrained by TBTF in holding back a prosecution. Any US Attorney would love to throw a bank executive in jail, for advancement of his or her career. The motivation is huge. US Attorneys are not likely to have been bought off by campaign contributions. So there was clearly motivation and opportunity to prosecute and if they chose not to, In infer it is probably they did so based on an objective assessment. For the record, here is how extensive the investigation was:

Per the Seattle Times, Aug 5, 2011:

"Based upon its investigation, the Department of Justice has concluded that the evidence does not meet the exacting standards for criminal charges in connection with the bank's failure," Durkan said in the statement.

"Through a spokeswoman, Durkan declined to comment further on her decision to close the investigation, citing Justice Department policy.

"The probe, which began before WaMu was seized by federal banking regulators in September 2008 but was only made public a month afterward, involved "hundreds" of interviews and "millions" of documents, the statement said.

"At least seven federal agencies, as well as the state Department of Financial Institutions, participated in the investigation. Investigators also reviewed the results of several other inquiries into WaMu's failure, including reports by the Senate Permanent Subcommittee on Investigations, the Treasury Department's Office of Inspector General, and the Federal Deposit Insurance Corp."

August 2011 was of course 4 months after the Levin report you refer to.

The civil suit, brought by the FDIC, was settled for $64MM, of which 99% was covered by insurance.

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