Following the savings and loan crisis of the late 1980s, more than a thousand bank officials faced prosecution, with 800 of them winding up in jail for their financial misdeeds that ruined institutions and robbed Americans of their retirement.

 

Today, the 2008 financial crisis—considered the worst disaster on Wall Street since the 1929 crash—has yet to yield any bank executives going to prison.

 

A variety of reasons have been cited for why America’s financial titans have avoided criminal court…so far. The FBI scaled back a plan to assign more field agents to investigate mortgage fraud, while the Department of Justice rejected calls to create a task force devoted to mortgage-related investigations. Also, federal regulators, such as those at the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, failed to compile information that could have helped build criminal cases against banking leaders.

 

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” William Black, a professor of law at University of Missouri, Kansas City, who worked on the savings and loan prosecutions, told The New York Times. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

 

It is not out of the question that someone on Wall Street will have to answer for their decision-making in front of a jury. A new, bipartisan report from the U.S. Senate Subcommittee on Investigation blasts the work of Goldman Sachs, accusing the powerful firm of “engaging in massive conflicts of interest, contaminating the U.S. financial system with toxic mortgages and undermining public trust in U.S. markets in the months leading up to the financial crisis.”

 

The report, the culmination of a two-year investigation, concluded that “the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” It zeroes in on four levels of failure and malfeasance: 1) mortgage lenders, 2) regulatory agencies, 3) credit rating agencies and 4) investment banks.

 

Using Washington Mutual Bank (WaMu) as a case study, the report harshly criticizes banks and thrifts for turning to high risk loans so that they could bundle them into securities that they sold on Wall Street.

 

The report accuses Washington Mutual and its subprime lender, Long Beach Mortgage Corporation, of engaging in “in a host of shoddy lending practices that produced billions of dollars in high risk, poor quality mortgages and mortgage-backed securities. Those practices included qualifying high risk borrowers for larger loans than they could afford; steering borrowers from conventional mortgages to higher risk loan products; accepting loan applications without verifying the borrower’s income; using loans with low, short term “teaser” rates that could lead to payment shock when higher interest rates took effect later on…” They also “rewarded loan personnel for issuing a large volume of higher risk loans, valuing speed and volume over loan quality.” And “On at least one occasion, senior managers knowingly sold delinquency-prone loans to investors.”

 

Turning to the government, the report focuses on the failure of the regulatory agencies by presenting the case study of the Office of Thrift Supervision (OTS), which was supposed to be watching over Washington Mutual Bank. Despite identifying more than 500 deficiencies at Washington Mutual between 2004 and 2008, OTS, under the leadership of James Gilleran (2001-2005) and John Reich (2005-2009), failed to take any enforcement action whatsoever against the bank. Instead, OTS repeatedly rated WaMu as financially sound and “displayed an unusual amount of deference to WaMu’s management, choosing to rely on the bank to police itself in its use of safe and sound practices.”

 

The nation’s two largest credit rating agencies, Moody’s and Standard & Poor’s, misled investors by incorrectly giving safe AAA ratings to tens of thousands of mortgage-backed securities and collateralized debt obligations (CDOs). They did this because they were being paid by the Wall Street firms that asked for the ratings and profited by the sale of the financial bundles that were being rated. The report accuses the ratings agencies of “a failure to provide adequate staffing to perform rating and surveillance services, despite record revenues.”

 

The Senate report saves its most serious accusations of blame for the heads of the investment banks who knowingly sold bad financial products to investors while making billions by secretly betting on their failure. To take a “short position” is to borrow an asset (such as a security, commodity or currency), sell it, hoping that it will lose value, and then buy it back before returning it to the lender.

 

Goldman Sachs, for example, sold securities to their clients without letting the clients know that Goldman itself was taking short positions on the very same securities. Deutsche Bank, the world’s largest trader in CDOs, engaged in the same practices. Its leading CDO trader, Greg Lippmann, referred to CDO marketing as a “ponzi scheme” and some of the securities as “crap” or “pigs.”

 

Both Goldman Sachs and Deutsche Bank continued to sell bad CDOs even though the U.S. mortgage market was disintegrating because to stop “would have meant less income for structured finance units [and] smaller executive bonuses.”

 

The Senate report concludes that “The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis.”

 

The chairman and CEO of Goldman Sachs from 1998-2006 was Henry Paulson, who left to serve as Secretary of the Treasury under President George W. Bush. His place was taken by Lloyd Blankfein, who, in January 2010, admitted to the Financial Crisis Inquiry Commission that Goldman Sachs had engaged in “improper” behavior when it bet against the mortgage-based securities it was selling to investors.

-David Wallechinsky, Noel Brinkerhoff

 

In Financial Crisis, No Prosecutions of Top Figures (by Gretchen Morgenson and Louise Story, New York Times)

Criminal Charges Loom for Goldman Sachs After Scathing Senate Report (by Halah Touryalai, Forbes)

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Senate Subcommittee on Investigations) (pdf)

Goldman Sachs CEO Admits “Improper” Hedges (by Noel Brinkerhoff, AllGov)

Is Geithner Covering Up Massive Bank Fraud? (by Noel Brinkerhoff and David Wallechinsky, AllGov)