In a recent interview with USA Today, former Federal Reserve chairman Ben Bernanke stated that he thinks the DOJ should have prosecuted individuals, and not just financial firms, for misdeeds connected to the global financial crisis. Bernanke is right – the Obama/Holder DOJ failed to target individuals and therefore probably failed to deter future financial fraud, because the real wrongdoers have been sent a message that they can get away with it.
Republican candidates for President should get on top of this issue. There’s a real opportunity here. The Democratic Party, which claims to represent the little guy, has arguably gotten caught up in cronyism, settling with big banks and not prosecuting any actual bankers. Conservatives, who actually believe in capitalism, are more likely to defend it than liberals who think the whole game is rigged anyway.
The JPMorgan Chase mortgage-securities case serves as an excellent example of the Democratic Party’s approach to enforcement. In that case, an employee at JPMorgan discovered that the bank was packaging bad loans into securities and not properly disclosing the risks to investors. When she reported up the chain, her supervisors basically told her to shut up and go away, and soon thereafter she was dismissed as part of a round of layoffs.
After being alerted to this fraud, the DOJ negotiated a settlement with JPMorgan. JPMorgan paid $13 billion to settle the case, which at first glance seems like a harsh punishment. Yet no individuals were sent to prison or even fined; in fact apparently some of the managers that tried to conceal the scheme still work at JPMorgan, while the whistleblower who alerted authorities to the fraud lost her job and ended up leaving New York and the financial industry. This is justice upside down. It makes no sense. Holder is supposed to look good for making JPMorgan “pay” but really the actual wrongdoers go unpunished. Meanwhile, the government collects the settlement money and gloats. How is this any different from saying, “OK, we’ll forgive the fraud, just cut us a slice of the pie”?
Simply obtaining settlements from banks such as JPMorgan is not enough because the real wrongdoers, the actual people that committed crimes, go unpunished. Fining the bank only punishes the bank’s shareholders, who will see the value of their investment in the bank decrease. Shareholders could be anybody – you, me, anyone that has shares of JPMorgan in their 401(k). When the bank pays the fine, the value of its equity decreases, a net loss to shareholders but a loss that can be spun as a prudent settlement by the bigshots that run the bank, who can survive and keep their jobs.
With anger against Wall Street running high, the electorate may naturally turn to liberal firebrands such as Senator Elizabeth Warren. However, conservative thinkers also want to hold Wall Street accountable. Those who believe in capitalism can be its best defenders. After the financial crisis, it seems the Democrats who were actually in power wanted to squeeze some money out of the banks, declare victory, and move on. That approach has failed. Republicans should offer an alternative – old fashioned law and order. Conservative presidential candidates should promise to appoint an attorney general who is tough as nails and not impressed with investment bankers, and will go to bat for the American people.