No Justice

Despite Obama's promises of change, corporate crooks are still going unpunished for their roles in the financial collapse.

An administration whose claws are far from sharpened shouldn't really surprise us: Obama was Wall Street's preferred candidate in terms of campaign contributions. His SEC chairwoman, Mary Schapiro, ran the Financial Industry Regulatory Authority, the Street's self-policing private agency. Gary Gensler, chairman of the Commodity Futures Trading Commission, actually worked a decade ago to exempt credit default swaps and other derivatives from regulation.

More importantly, the nation's new top prosecutor, Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.

Under the "Holder Memo," which he wrote in 1999 as deputy attorney general in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.

Financial criminologist William “Bill” Black warns that the “zombie” megabanks aren’t done feeding.
Financial criminologist William “Bill” Black warns that the “zombie” megabanks aren’t done feeding.
Obama’s point man: Attorney General Eric Holder (right).
Chip Somodevilla/POOL-CNP-PHOTOlink
Obama’s point man: Attorney General Eric Holder (right).

After leaving government, Holder followed the mandates of his own memo and made a lucrative living by conducting internal probes for companies and negotiating outstanding results for white-collar clients. He was public about it: His 2002 Wall Street Journal op-ed, "Don't Indict WorldCom," argued on behalf of the corporate perpetrator of one of the sleaziest frauds of the past decade.

Holder takes a hard line on social issues, but not on financial ones: He favors rededicating the DOJ to civil rights, and he has vowed to investigate George W. Bush–era torture. But when asked whether he plans to prosecute the financial mayhem that erupted under Bush, Holder has said that he is disinclined to engage in what he calls "witch hunts."

The previous chief of the DOJ's Criminal Division, Rita Glavin, seemed motivated: She testified to Congress last spring, before she was replaced, about the need to hire more FBI agents to fight white-collar crime. After 9/11, hundreds of agents had been shifted from financial fraud to counterterrorism, so the agency was perilously thin when the tidal wave of financial fraud inundated the system.

Glavin's successor couldn't be further from the right person to root out white-collar crime. Last spring, Holder tapped Lanny Breuer, his former partner at the major D.C. firm Covington & Burling, to head the division. In 2006, Breuer represented Mario Gabelli, a billionaire broker and money manager who, in some recent years, has been the highest-paid person on Wall Street, with compensation in former Merrill Lynch CEO John Thain's class. When Gabelli was caught setting up shell companies to bid at federal auctions of coveted cellphone licenses, Breuer savaged the person who blew the whistle on the scheme and kept his client out of criminal court. "Super Mario" eventually paid a $130 million settlement under the federal False Claims Act, but he made more than $200 million from the scam.

As chief of Covington's white-collar department, Breuer was known for his "rogues' gallery" of corporations and individuals under investigation or indictment. His clients included Halliburton, the Federal Home Loan Mortgage Corporation (Freddie Mac), ExxonMobil, and big pharmaceutical companies. Breuer represented so many companies that had problems with the federal government that the Department of Justice promised to erect "Chinese walls" around him to keep him from traipsing into his former clients' matters. Nevertheless, a napping Senate confirmed him 88-0.

Breuer's connection to Freddie Mac is especially troubling. One of the executives at the heart of the global meltdown was Franklin Raines, the CEO of Freddie's older sister, the Federal National Mortgage Association (Fannie Mae). Freddie and Fannie bought and securitized mortgages from other banks at a breakneck pace that fueled the bubble and led to their federal bailouts and takeovers in September 2008. Politically wired — he was Bill Clinton's director of the Office of Management and Budget — Raines aided and abetted the process by orchestrating massive accounting and compensation fraud at Fannie Mae. He paid a small civil settlement to the Securities and Exchange Commission and has never been criminally charged. Will the DOJ indict him? That would be a problem for the Obama administration: Although Freddie was set up to compete with Fannie, the two often operated similarly, so an investigation of Fannie and Raines' practices could spread to Freddie, which is not something Breuer or any lawyer would want for a former client. The Justice Department refused requests to interview Breuer and Holder. Asked whether Raines will be indicted, a senior spokesperson would neither confirm nor deny it.

Obama played the populism card during the campaign, making fodder of Countrywide, then the nation's largest mortgage company and a dominant player in the subprime scandal: "These are the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis — two million people may end up losing their homes." We are, in fact, north of three million, and the widely expected criminal prosecution of Angelo Mozilo, Countrywide's chief during the heyday of predatory home loans, hasn't materialized. His case was merely channeled to the SEC for civil sanctions.

The SEC accused Mozilo and two top aides of selling $140 million in stock based on inside knowledge of the riskiness of credit that Countrywide extended while it told investors that the loans were secure. A Mozilo e-mail called one subprime loan "the most dangerous product in existence. ... There can be nothing more toxic," and another "poison." It would seem that a criminal securities fraud case could be made against Mozilo and his crew. The Justice Department wouldn't confirm or deny pending indictments, but Mozilo is probably safe. Usually, when there's going to be a prosecution, the SEC refers the case to the DOJ and doesn't press it alone.

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