BOYNTON BEACH, Fla. — What would the Democratic Party look like today if the administration of President Barack Obama had prosecuted the senior executives of the nation’s largest financial firms that caused the 2008 recession?
In October 2008, President George W. Bush signed a $700 million bailout known as TARP (Troubled Asset Relief Plan), for the very institutions responsible for the economic debacle. It was due, in large part, to Bush’s emphasis on deregulation and lack of federal oversight on banks and financial institutions.
Would such prosecutions have prevented the election of Donald Trump?
Would those prosecutions have underscored that justice is blind to criminals, regardless of their wealth?
While the Democratic Party is rebuilding its energy level and reconnect with former constituents, these questions are vital to democracy and the rule of law.
The events leading up to the global financial meltdown made the 2008 recession the most covered financial event in history.
It was also the costliest.
Losses from the 2008 fraud-led recession vary, but it is widely considered the worst financial collapse since the Great Depression. One estimate found that American households collectively lost $19.2 trillion in their net worth and investment losses. A CBS report said the losses amounted to about $8 trillion in household stock market wealth and $6 trillion in home values. The St. Louis Federal Reserve believes up to 10 million Americans may have lost their homes.
These financial losses to citizens and institutions were unprecedented and entirely preventable.
Average Americans watched stock-market gains from 2000 to 2007 erased in 2008. At least six of the nation’s long-established financial institutions (Bear Stearns, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, and Lehman Brothers) failed for six months due to the crash — then merged or required federal bailouts.
After the mortgage-market collapse, lawmakers created the Financial Crisis Inquiry Commission. It interviewed more than 700 witnesses during 19 days of public hearings.
The “too big too fail” crisis happened under Bush, who pushed for deregulation during his presidency, which meant federal oversight agencies eased off on banks and mortgage brokers. Bush failed to condemn or suggest prosecution of those responsible during his tenure. And the man that orchestrated the $700 million bailout — with few restrictions — made his fortune on Wall Street: Bush’s Treasury Secretary Henry Paulson.
However, once President Obama took office, in late January 2009, he had the resources to take action. He had the U.S. Justice Department, led by then-Attorney General Eric Holder, and the appropriate financial regulatory agencies, including the SEC, FBI, federal bank regulators and the U.S. Treasury.
If Obama had utilized those resources, he could have captured the political attention of the nation. He would also have sent a clear message: There was one standard of justice for white-collar executives and average Americans.
The failure to prosecute meant well-compensated financial executives who engineered the mortgage frauds were held accountable for causing the worst recession in U.S. history. Instead, Obama, Holder and others, like Bush before them, collectively moved to the sidelines. For them, the regulatory and justice battle was over.
The fraud and resulting bank bailouts cost an estimated $498 billion, which amounted to 3.5 percent of the gross domestic product in 2009, according to Professor Deborah J. Lucas of the MIT Sloan School of Management.
The systemic failure of banks required an unprecedented bailout of the largest U.S. financial institutions by the Federal Reserve. Due to its size and dollar amount, this economic car wreck involved Washington’s most potent political forces. Unraveling it and prosecuting those responsible required an extensive interdepartmental federal investigation.
Yet deciding who to prosecute was radioactive to federal regulators and politicians.
The 2008 Recession Showed Why Washington Won’t Investigate Itself
As the economic fallout hit, Americans looked to the U.S. Justice Department, administered by Attorney General Eric Holder and other regulators, to prosecute.
Instead, Holder and other regulators headed for the exits.
“People didn’t get prosecuted during the financial crisis or high-level executives simply because of a lack of commitment, competence and courage by the political leaders in the Department of Justice. That’s what I observed. That’s what I saw. That’s what I felt. And that’s why I left the Department of Justice,” said Paul Pellatier, the former senior prosecutor in the U.S Justice Department Criminal Division’s Fraud Section,
Pellatier was not alone decrying the Justice Department’s dereliction of duty.
Writing in the New York Review of Books (Jan. 9, 2014), Judge Jed S. Rakoff, United States district judge for the Southern District of New York, provided a historical perspective on previous financial debacle prosecutions and on Holder’s failure to prosecute. Rakoff wrote:
“The Great Recession (of 2008) was in material part the product of intentional fraud; the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal-justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years in bringing to justice even the highest-level figures who orchestrated mammoth frauds,” according to Rakoff.
“Thus, in the 1970s, in the aftermath of the ‘junk-bond’ bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken,” Rakoff wrote.
He also noted that during the savings-and-loan crisis in the 1980s, federal prosecutors and regulators led successful criminal prosecutions of more than 800 individuals, right up to Charles Keating, a lawyer and banker. Similarly, the widespread accounting frauds of the 1990s, vividly represented by Enron and WorldCom, led directly to the successful prosecutions of CEOs such as Jeffrey Skilling and Bernie Ebbers.
Rakoff said the final report of the Financial Crisis Inquiry Commission, used “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, 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 mortgage fraud’s ‘pervasive problem,’ driven by the voracious demand for mortgage-backed securities.”
Rakoff’s critique was shared by Neil Barofsky, the former special inspector general in charge of oversight of TARP. Barofsky found that regulators “made almost no effort to hold accountable the financial institutions they were bailing out, to wonder whether the government, having helped create the conditions that led to the seeming widespread fraud in the mortgage-backed securities market, was all too ready to forgive its alleged perpetrators.”
This fraud was vividly described by William K. Black, a professor of law at the University of Missouri, Kansas City. In testimony before a Senate Judiciary Committee in 2012, Black said the banks and investment firms committing “elite financial frauds are treating the United States of America’s criminal-justice system and financial markets with utter contempt.”
Black told the committee “they believe they can become wealthy – with impunity – through frauds… Not a single elite fraudster who was instrumental in making the millions of fraudulent loans that drove the [2008] crisis has even been indicted — over seven years after the FBI’s September 2004 warnings that there was an — epidemic of mortgage fraud that would cause a financial — crisis if it were not stopped.”
More Federal Agencies Blamed for the 2008 Recession
But the 2008 housing fraud was ignored by other agencies. The SEC also looked the other way.
Donations play a huge role in Washington’s lobbying. The financial-services industry (banks, insurance companies, securities-investment firms, private equity, hedge, real estate) has historically been the most significant political donor to both parties in Washington. When the SEC decides to investigate a case with the intent of prosecuting it, the agency looks at how it will impact the political-donation stream, according to one Washington insider.
Data from Open Secrets showed that securities and investment firms were the top donors of any other industry, sending $43.7 million to Congress.
Another study by Americans for Financial Reform found that financial-services firms, trade associations and their employees spent a record $2.9 billion on campaign donations and lobbying in the 2019-20 election cycle.
Corporate Lawyers Never Prosecute Future Clients
Holder, previously a corporate lawyer with Covington and Burling in Washington, D.C., faced a difficult decision about whether to prosecute. So he conferred with Valerie Jarrett, a top Obama advisor.
Jarrett, Obama’s senior advisor, image protector and link to large donors, knew that if regulators undertook prosecutions, many of these donors would desert the Democrats.
People who followed her career with Obama said Jarret routinely advised him not to make crucial decisions until public polling showed the dominant trends. Obama, who had a difficult time making decisions on such matters, deferred to Jarrett. Obama also had a very close relationship with Holder. They decided, per one D.C. researcher, to walk away from any prosecutions to preserve future fundraising.
This decision also sustained Holder’s position as a white-collar defense lawyer and partner in the Covington and Burling law firm. The firm’s website boasts of having “one of the largest white-collar practices in the world,” with “a deep bench of other highly experienced white-collar lawyers who zealously defend clients in any type of white-collar case.”
Today, Jarrett administers the Obama Foundation in Chicago, while Holder returned to Washington as a white-collar defense lawyer.
As for those millions of average Americans who lost jobs, houses and retirement savings due to the 2008 recession and its aftermath, statistics showed it took about a decade to recover their losses and regain their previous net worth.
