I dreamed of being a trial lawyer, a character from the courtroom dramas I devoured as a boy in San Francisco. I attended trials, persuading my father to take me to the city’s superior courthouse, known grandly as the Hall of Justice. As an adult, however, my love of the legal system—a child’s dream of truth and fairness—grew more complicated, gnarled by the understanding that justice isn’t meted out equally after all, especially if you’re an investment banker.
My first inkling of this came as a doctoral student at MIT in the 1980s. I learned that large corporations outspend the government by as much as 100 to one in their efforts to shake charges, and many of my professors made millions as expert witnesses for the defense. Later, as a software entrepreneur, I watched as dozens of dotcoms went public, their stock prices inflated by the investment banks that helped them get there. Investors lost everything in the ensuing crash. But the big Wall Street firms escaped criminal prosecution, and the fines they paid were a tiny fraction of their profits.
This pattern—fines, but not prosecutions—has become the norm for offenses that would land ordinary people in jail. For example, earlier this year an Iranian-born U.S. citizen was convicted of operating an illegal money-transfer process, violating trade sanctions by sending $3 million to people and firms in his home country without proper documentation. He got a two-and-a-half-year sentence. Also this year, however, Barclays settled charges that it had processed transactions between banks in Iran, among other sanctioned countries, and U.S. entities. The bank signed a “deferred prosecution agreement,” meaning it “acknowledges responsibility for its conduct,” but the charges will be dismissed after a period of good behavior. It merely paid fines. Since January 2009, two other banks have settled similar criminal charges through fines. Nobody has been arrested.
During the last two decades, major U.S. and European banks have paid fines to settle charges of, among other things, accounting fraud (Fannie Mae, Freddie Mac), assisting Enron’s fraud (Citigroup, J.P. Morgan), assisting people in tax evasion (UBS), using bribery to sell financial products (J.P. Morgan), money laundering (Citicorp), and fraudulently recommending stocks in exchange for business (10 investment banks in the dotcom era). In paying the fines, none of these banks acknowledged wrongdoing.
Now we’re witnessing another round of this shameful routine. President Obama and Attorney General Eric Holder Jr. have said they would hold Wall Street accountable for the crash, warning “unscrupulous executives,” in Holder’s words, that “we will investigate you, we will prosecute you, and we will incarcerate you.” But despite fraud on a scale possibly unmatched in history, the Justice Department has not charged a single executive or firm. The Securities and Exchange Commission, meanwhile, has extracted only fines from a handful of big banks. Three of the federal judges who oversaw these cases—none of which included an acknowledgment of guilt—protested from the bench, saying the fines are “not enough to deter anyone from doing anything,” the justice is “half baked at best,” and the banks are getting “a free ride.” (Holder has defended his financial-fraud task force, stressing “the totality” of its efforts, including cases against mortgage fraud and insider trading; SEC chairwoman Mary Schapiro has noted that the bulk of its investigations are “not necessarily” done.)
It’s often argued that proving criminal-fraud cases in finance is difficult. That’s true, but when the government gets serious, it finds a way to get the information it needs. Prosecutors could also go after bankers’ personal foibles, forcing lower-level personnel to chose between testimony or jail time. That’s how investigators have crippled organized crime. Unfortunately, no one has yet shown the same enthusiasm for policing the Street.
Ferguson is an Oscar-nominated filmmaker whose latest work, Inside Job, is an exposé of the meltdown.