November 15, 2009
When Is the Criminal Part of the Government's Response to the Financial Crisis Going to Get Going?
Posted by David Zaring

People go to jail after financial crises, but they have not had to do so in the wake of our most recent one.  In the S&L crisis of the 1980s - which was much less costly than this one - the number of convicted bankers was sobering. The FHLBB – today’s OTS - referred 11,000 cases to the DOJ in 1987 and 1988.  By 1992, there had been 1000 convictions, and a reported conviction rate of 91%.  The GAO concluded that, of the 26 largest thrift failures, 60% had been marred by “serious criminal activity.”  And the Resolution Trust Corporation, which cleaned up the bankrupt thrifts, said criminal fraud was a significant contributor to the failure of 33% of its institutions. 

That’s Main Street, and Wall Street is a bit more politically juiced.  But nothing like that has happened during this financial crisis, and it strikes me as curious.  Two BSC fund managers heavily invested in subprime were recently acquitted.  Three federal grand juries are still investigating what went wrong at Lehman Brothers in 2007.  There are investigations under way at Fannie and Freddie.  But that's it.  And let's not forget the convictions during previous financial crises turned on fraud (especially during the S&L crisis) and insider trading - two causes of action with strong common law, I know it when I see it, elements that give prosecutors plenty of flexibility in defining criminal conduct.

Plus, there appears to be a vigorous US Attorney in charge of the SDNY.  In that sort of a climate, for Wall Street to be setting up big bonus payments again seems to me to be quite risky, at least of you subscribe to criminal prosecutions in a gestalt way, rather than looking at the merits of any single indictment.  But, look, there haven't been any convictions yet, and there aren't yet the number of grand juries you expect to see in the aftermath of a financial collapse.  Perhaps this will be one of those rare, no-conviction crises (like 1987's market break, perhaps).

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