Jesse Eisenger of the Times write again (the Times bangs this drum pretty regularly) with amazement that more people aren't going to jail in the wake of the financial crisis.  This time, he's blaming the SEC, and thinks the agency should be forced to sue Citigroup.

...the reason for putting Citigroup in the dock goes beyond the bank itself. The S.E.C. is not getting big enough settlements out of the largest banks. It’s not bringing enough financial cases. It isn’t going after the big banks’ top executives. It’s being way too cautious in its interpretation of its role as defender of the fairness and sanctity of the markets. The frustration, shared by Judge Rakoff and the rest of humanity, is all the greater because the agency rarely, if ever, gets anyone to admit guilt when they settle.

I have a sociological and a normative view about this stuff and they aren't that consistent.  Here's the sociological one.  In the wake of financial crises, usually people go to jail.  It happened with Enron, it happened with the S&Ls, it happened when the junk bond market went south.  I would go so far as to say it happens every time ... except this one.  After a financial crisis, you get reform legislation and some white collar convictions.  I almost thought it was a rule.  The SEC, Justice, the NY AG, and everyone else is, in effect, declining to give people politically popular prosecutions, and that is strange - and infuriating to the "we bailed them out and they're still rich" crowd like Eisenger.

My normative view, shared by a bunch of law professors, is that it is easy to overcriminalize business conduct and overpolice "fraud" that is really simply a market decline, and that it makes little sense to do so.  There are good arguments out there that Michael Milken and even Ken Lay were not criminals, and were not engaged in even the sort of fraud that the SEC polices.

Where does this leave us with the SEC and Citigroup?  I don't understand why agencies shouldn't settle cases, as Eisenger and Judge Rakoff appear to suggest - that's what they do.  Occasionally you try the most heinous actor - see Rajnaratnam - but you do a deal with everyone else.  And usually, civil settlements don't include admissions of guilt.  I'm not sure what the affection for truth commission style "what really happened" stipulations is rooted in, and why it should be the answer now.  I also wouldn't want to try the case against Citigroup, given that the bank has a completely plausible and easy to understand defense ("we sold to big boys products that by their nature had a short side, as those buyers knew; we have done that for years, as has every other Wall Street bank, and the SEC never complained").  Citi probably has to settle - Goldman did.  But I suspect that if the case was presented to a jury, Citi would win, just like Tanin and Cioffi did.

It is still worth relfecting on how strange and seemingly ineffective it has been for the SEC of late.  Its big, market-reforming rules are faring badly in the D.C. Circuit, albeit unfairly.  So regulation isn't getting anywhere.  And enforcement appears to be obsessed with hedge funds, instead of with the financial crisis.  When it has done financial crisis work, it has been random forays against Goldman Sachs and Citi, and little else.  Strange times for an agency that might not be guilty of overpolicing, but that appears to be ignoring the "laws" of nature.

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