January 27, 2011
The savings and loan crisis of the late 1980s sent Lincoln S&L’s Charles Keating to jail. Ken Lay’s criminal behavior at Enron will forever be associated with the accounting fraud that sent the energy and services company into bankruptcy and made it a symbol of corporate corruption.
But what will people remember when they look back on the financial crisis that led to the Great Recession? No single name or signature case has been linked to a financial collapse that destroyed $11 trillion of household wealth in 2008 and 2009 and helped put 10 million Americans out of work.
The Financial Crisis Inquiry Commission Thursday has released its final book-length analysis of the causes of the financial crisis. Stripped to its essence, the 576-page report blames widespread institutional failure at banks, rating agencies and regulatory agencies. Each ignored the unprecedented bubble in housing prices, the shady lending practices and the mounting risks of a largely deregulated financial system that fed a crisis that could have been avoided, the report concluded.
“This is a case where a whole industry deceived the entire public,” said Samuel Buell, a professor of law at Duke University who spent two years working on the Enron case as an assistant U.S. attorney.
The report’s signatories did not include a single Republican member of the commission, which was created by Congress in 2009. The Republicans offered two different dissents. One, signed by former Rep. Bill Thomas of California and former Congressional Budget Office chief Douglas Holtz-Eakin, blamed the crisis on the housing bubble, which they said was triggered by a surplus of Asian capital flowing into the U.S. housing market. The other, offered by Peter Wallison of the American Enterprise Institute, blamed the government for encouraging low-income home ownership through Fannie Mae and Freddie Mac.
Beyond analyzing the causes of the crisis, the commission was also charged with finding instances of wrongdoing, just as the Pecora Commission in the 1930s looked for any fraud that may have triggered the 1929 stock market crash that led to the Great Depression. The chairman of the current commission, Phil Angelides, a Democrat who was California state treasurer, on Thursday confirmed reports that the commission had referred a number of cases to federal prosecutors for possible criminal or civil wrongdoing, but he refused to disclose details.
A handful of cases related to the crisis have been brought so far, and it is not likely the FCIC played any role in bringing them to light. For instance, the Securities and Exchange Commission last year settled a civil complaint against Goldman Sachs for a record $550 million after the firm sold its clients a mortgage-backed security that another one of its clients had bet was going to fail. The out-of-court settlement suggests a criminal complaint is unlikely to follow.
In 2009, before the commission even got down to work, the Department of Justice indicted two former Bear Stearns managers who allegedly misled investors about the future prospects of their hedge funds, which had heavily invested in collateralized debt obligations. Though they produced email exchanges in which the two men trashed the investments, prosecutors were unable to convince a jury that individuals should be blamed for a crisis that few had predicted.
The Federal Deposit Insurance Corporation, which guarantees bank deposits, is reportedly investigating executives, directors and employees at more than 50 banks that have failed since the onset of the crisis — the greatest surge in bank collapses since the savings and loan fiasco of the early 1990s.
In what is probably the biggest case, the FDIC is seeking $300 million from four former officers at IndyMac Bancorp of Pasadena, Calif., which collapsed in 2008. It briefly made national news when worried depositors lined sidewalks in a made-for-television scene reminiscent of It’s a Wonderful Life. The FDIC is also pursuing 11 executives at a bank in Glenwood, Ill., for about $20 million.
But for the most part, federal prosecutors have left it to the individual investors to pursue cases of alleged wrongdoing. Earlier this week, a dozen plaintiffs led by New York Life Insurance Co. and TIAA-CREF, which invests on behalf of the nation’s university employees, sued Countrywide Financial, now owned by Bank of America, to recoup huge losses from mortgage-backed securities that had been portrayed as low-risk.
The lawsuit also named Angelo Mozilo, the former chief executive officer of Countrywide. Last October, Mozilo, without admitting wrongdoing, settled an SEC suit for $67.5 million to avoid trial on civil fraud and insider trading charges.
“The savings and loan scandals of the late 1980s resulted in a whole host of prominent and aggressive prosecutions by the Department of Justice,” said Tom Withers, a former federal prosecutor now at white-collar defense firm Gillen, Withers and Lake in Atlanta. “We really haven’t seen the same level of intensity and I don’t know why.”