Here’s something you don’t expect to hear from a man who made his reputation by jailing bankers and becoming the “scourge of Wall Street”: ask him if fraud existed during the mortgage crisis and his answer is “the evidence is not there.”
The words come from Preet Bharara, the US attorney for the southern district of New York, who prosecuted more Wall Streeters for insider trading than anyone who came before him. Worth magazine this week named Bharara at the top of its “100 Most Powerful People in Finance”. Bharara seems to like his high profile, and appears to be gunning for an even bigger one: he suggested that the new US attorney general of the United States should share all of the priorities of Bharara’s own office.
In boasting about his record of putting white-collar criminals in jail, Bharara repeated a common – but outdated – Obama Administration line, that the mortgage crisis was not fuelled by fraud.
“This is by reputation and track record the most aggressive office in white-collar crime in the country ever,” Bharara modestly told Worth, “and if we’re not bringing a certain kind of case, it’s because the evidence is not there. Pure and simple”.
He added that critics pointing out his selective Wall Street targets merely “want to behead the heads of all these financial institutions”, without understanding how cases against them would not stand up in court.
This statement is, to say the least, a stretch.
For Bharara’s goals, however, it make sense. If he wants to start building a case that he should be attorney general in this administration, there’s no better way than to advertise himself as someone who doesn’t have too much prosecutorial ambition. This is an administration that, with Eric Holder at the helm of the Justice Department, hasn’t prosecuted these crimes in the last six years. Bharara would benefit from the idea that he would not rock the boat too greatly. It certainly would soothe some of the decision-makers in the White House, and their deep-pocketed friends on Wall Street.
The government understands law enforcement 101: just as in organized crime, prosecutors try to flip white collar crime’s lower-level grunts to try to get to the bosses above. They’ve belatedly started to do it with traders in the foreign exchange market-rigging scandal. But they never tried with the core mortgage frauds that drove the crisis; officials swiftly moved past investigations and right into settlement negotiations.
Then there are more creative options. The Sarbanes-Oxley law, put in place after the Enron/WorldCom/Tyco accounting scandals of 2001-02 – for which many executives went to jail, by the way – included a requirement for CEO certifications.
Every financial statement a corporation files with the Securities and Exchange Commission must come with a signed statement from the CEO, attesting that he or she has maintained and tested controls to ensure the company hasn’t taken large risks without disclosing them to investors.
These certifications get made annually, and knowing or wilful falsehoods on them can carry prison terms of up to 20 years. You could describe the entire financial crisis by saying that big banks took large risks without disclosing them to investors. Those multibillion-dollar write-downs didn’t come out of nowhere. Every bank CEO could therefore be legally responsible for failing to disclose improper risk management and a lack of control at their companies. Financial writer Yves Smith has explained this in detail before.
Instead, Bharara makes excuses.
Bharara justifies the inability to prosecute these cases because the CEO may have done “a really good job of getting a law firm to give them a legal opinion that blesses [their actions]”.