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Yves Smith: NYT’s Joe Nocera Defends Failure to Bring Wall Street Execs to Justice

YS:

NYT’s Joe Nocera Defends Failure to Bring Wall Street Execs to Justice « naked capitalism: Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.” Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes.... Nocera recounts some of the unsavory acts of Countrywide’s Angelo Mozilo.... Then he points to the decisions not to pursue criminal prosecutions of Mozilo and Cassano, and recites oft-repeated arguments. First, it’s too costly.... Second, it’s too hard.... Third, the top brass has successfully insulated itself from the really bad actions at their firms....

[Nocera's] statement, “fraudulent actions at Countrywide took place at the bottom of the food chain” suggests that it was low level employees operating on their own. Huh?... [I]nstitutionalized patterns of deception, involving senior managers, not low level employees out of control.... Nocera suggests investors knew Countrywide’s loans were drecky. That too is misleading. The bank made specific representations about the quality of the loans they were making, and now a number of court cases allege the bank violated those promises by putting far worse loans into its deals. So the idea that the investors knew what they were buying is a canard....

Let’s work back to Nocera’s second argument, that these cases are hard to win and the failed Bear hedgie case proves it. Yes, financial fraud litigation is hard to win. But a single data point proves very little.... [A] separate issue: the weakened state of the various offices that ought to be chasing banking industry crooks. But using current bad performance to say it’s inevitable is also lame.... And he also has the wrong implicit standard. The goal is not to win every case, or even most cases. It’s to win enough to be a threat and not to lose them in the embarrassing fashion of the Bear case. And prosecutions that fail can still be powerful deterrents. They put information in the public domain that private litigants can use to mount civil cases....

Let’s finally turn to Nocera’s first reason: it’s too costly, and the successful effort during the S&L crisis depended on the FBI throwing a lot of horsepower at the problem.... But the S&L crisis is not the right model. These cases are much more like Enron, where a number of executives were in cahoots in both creating questionable products and presenting a misleading picture to the outside world. And the Enron case did not start at the top. It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity. For financial crimes, that also vastly lowers the cost of prosecution. The cooperating insiders provide the road map and enable the prosecutors to do much more focused discovery, as well as potentially serving as witnesses.

But why could prosecutors take that approach with Enron? Because it had already failed. We are back to fundamental mess the officialdom has created by leaving the management and boards of bailed-out companies in place.... The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error. It has embedded and emboldened a deeply corrupt plutocracy...

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