Not a single high-level executive has been prosecuted by the U.S. Department of Justice or the U.S. Securities Exchange Commission for fraud that precipitated a world-wide financial collapse, from which many are still suffering. At the heart of the collapse was the bundling and sale of bad mortgages into “securities” that were backed by nothing more substantial than a wish and a prayer.
The government’s “failure to prosecute” the financial executives who set this fraud in motion and profited obscenely from it gives rise to a profoundly depressing notion that American democracy is just a front for predatory capitalists who ignore the law while reaping 99 percent of the nation’s wealth. Once that belief is credible, it is easier to think that other institutions, including our judicial system, look the other way.
Jed S. Rakoff, a federal judge for the Southern District of New York, has written an important article in The New York Review that offers real insight into and debunks the reasons proffered by the government for its failure to prosecute. But most importantly, Judge Rakoff took off his black robe for a moment to challenge the very idea that it is ever acceptable for our government to be willfully blind to corporate executives who engage in financial fraud.
U.S. Attorney General Eric Holder told Congress that it is difficult to prosecute when “we are hit with indications that if you do prosecute—if you do bring a criminal charge—it will have a negative impact on the national economy, perhaps even the world economy.”
Judge Rakoff’s response: “To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse—sometimes labeled the “too big to jail” excuse—is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law.”
Judge Rakoff notes the Financial Crisis Inquiry Commission, in its final report, used variants of the word “fraud” 157 times to describe what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. The commission found the number of reports of suspected mortgage fraud rose twenty-fold between 1996 and 2005 and then doubled again in the next four years.
The judge notes that the statute of limitations is expiring on fraud related to the financial collapse.
He said the U.S. Department of Justice’s position, until at least recently, was that “going after suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.”