Jesse Eisinger: Prosecutors Are Too Chicken to Rein In Wall Street

The bailouts should have come with accountability; and probably the government should have taken equity stakes and voting rights, wiped out the shareholders and given haircuts to bondholders. People saw the lack of consequences for individuals and also saw the lack of accountability on a criminal and civil enforcement level. That was incredibly corrosive to the system.

How does Wall Street’s compensation structure figure into all this?

There isn’t enough ability for regulators to claw back compensation. On Wall Street, it’s “I.B.G.-Y.B.G.”—“I’ll be gone; you’ll be gone.” They’re short-timers and don’t have loyalty to their institutions. They’re just trying to get what’s good for them. [People] blew up the global financial system; their firms got trillions of dollars in bailouts from the federal government — and yet no banker suffered significantly. They didn’t get wiped out; they didn’t lose their bonuses; they didn’t get clawed back. Nobody went to prison.

Nor did they incur much social cost.

Right. Even their reputations weren’t particularly damaged. Lloyd Blankfein [Goldman Sachs chairman-CEO] kept his job. Jamie Dimon [JPMorgan Chase chair-president-CEO] kept his job.

What’s the biggest implication of lack of punishment for such individuals?

Well, looking at that risk-reward scenario, why wouldn’t they do it again?

Seems like no matter what wrongs Goldman Sachs commits, it remains highly respected. Its nickname is “Government Sachs” because many former executives become regulators and presidential cabinet appointees. Gary Cohn segued right from being Goldman COO to chief economic advisor to Trump. Why weren’t top Goldman individuals punished for marketing CDOs in the mortgage deal that became known as the financial crisis’s “big short”?

The SEC was intimidated by Goldman. Fundamentally, they don’t think of Goldman executives as people who could commit securities fraud. When the SEC was about to bring charges [against the firm], a top regulator wrote in an email, “Remember, these people are good people who have made one mistake.”

How could they be sure of that?

This attitude permeates the regulatory structure: Democrats, Republicans, the DOJ, the SEC. Who’s to say the people are fundamentally “good” or that they’ve “made one mistake?” Maybe they knew what they were doing. Maybe they consciously were trying to rip people off. So what’s needed is a change in attitude.

You write about Warren Buffett’s being interviewed in the case in which Maurice Greenberg, ex-chair-CEO of American International Group, allegedly wanted to disguise a loan to look like an insurance product. You said that Buffett was given “Queen for a day” treatment.  Why was that?

They handled Warren Buffett with kid gloves. He’s sailed through his career getting kid gloves treatment. I don’t think there’s scandal with Buffett that should have been investigated; he seems like a pretty clean guy. But in this country, if you’re rich, you’re equated with being smart and often, sort of, honest. That shouldn’t be the default assumption.

This brings to mind Bernie Madoff. You say that JPMorgan Chase, his main banker for more than 20 years, was an enabler in his committing massive fraud even after spotting red flags in his account.

They said things about it internally to protect themselves financially, but they didn’t tell anybody else about it except halfheartedly warn the regulators. The DOJ investigated it quite substantially, and a subcommittee under Sen. Carl Levin found a lot that was troubling – that Madoff was doing something very, very bad that looked like a Ponzi scheme. But they couldn’t figure out how to bring individuals [of JPMorgan] to justice for it. [DOJ] came up with a fairly punitive settlement with the bank itself but didn’t name, shame or charge any individuals.

So JPMorgan saw what was happening but just let it go — and Madoff kept on doing it.

Yes. It was willful blindness. They looked the other way because they were making money [off him].

Two of Bear Stearns’ subprime mortgage funds that invested in CDOs failed during the financial crisis. There was a trial of two executives, but they were acquitted.  Because the DOJ lost that case, the department became more cautious, you write.

The Bear Stearns trial is an example of where they rushed to trail, didn’t fully investigate and got beaten. The effect is that they want to avoid complex trials in the white-collar arena. They’re afraid of juries because they’re unpredictable.

What’s the SEC’s attitude about trials?

The SEC is more afraid of trials than the DOJ, which is fairly afraid of them. There needs to be a reform effort to focus on individuals, hear evidence against them in court and get them to plead guilty. The sanctions have to be serious, like lifetime bans in the securities business.

What’s happened when those in the system have spoken out to try to change things, such as Judge Jed Rakoff, who served as senior judge of the Southern District of New York? After the financial crisis, he called the outcome of  proceedings against Merrill Lynch “half baked-justice…”

They’re heroes because they stood up to the bureaucracy, corporations and wrongdoers. But they’re really defeated. They win incremental battles, as did Judge Rakoff with the SEC. He changed a policy, but it was so minor and haphazard and enforced so infrequently, that it really was a minor victory.

Lawyer James Kidney, who was with the Securities and Exchange Commission, said in his retirement speech: “For the powerful, we are at most a toll booth in the bankster turnpike. We are a cost, not a serious expense.”

It’s really sad. Prosecutors need to figure out how to approach their jobs differently. They need to investigate things more aggressively, focus on individuals, take them to trial to serve as evidence of what these people did — and not be afraid of trials.

Any other solution to reform the Justice Department?

The DOJ is a stepping stone to a job as a partner with a big law firm defending corporations. It shouldn’t be a stepping stone. Prosecutors should recruit plaintiff lawyers, consumer advocates and academics. And they should recruit people from law schools all around the country, not just from the coastal elite schools.

Anything more along the lines of diversity?  

They should focus on age diversity by recruiting attorneys from big law firms who are, say, in their mid-50s and want to do some public service. They’d be very savvy, wise and experienced and might be really good prosecutors.

What you’ve written about Southern District of New York prosecutors reminded me of the TV series “Billions,” about a U.S. attorney in the District vs. a hedge fund king.  Seems as though some scripts borrow from reality.

They [do]. But TV is very exaggerated. As critical as I am of  prosecutors, I don’t think they act nearly as unethically as the prosecutors on [“Billions”], who cut corners to try to take down the powerful. So, in some ways, that show does a slight disservice to reality.  

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