In a widely quoted interview with USA Today, Bernanke said that ‘It would have been my preference to have more investigations of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm.’ He makes it clear that he thought some Wall Street executives should have gone to jail. However, ‘ the Fed is not a law enforcement agency. The Department of Justice are responsible for that, and a lot of their efforts have been to indict or threaten to indict financial firms. Now a financial firm is of course a legal fiction; it’s not a person. You can’t put a financial firm in jail.’
Going after firms is precisely what the Department of Justice has been doing in the aftermath of the financial crisis. It was nothing new. For some decades, prosecutors have preferred to go after companies rather than individuals, partly because of the alleged difficulties in prosecuting individuals, but also on the grounds that this was an attempt to change the ‘corporate culture’ so as to prevent future crimes, The result has been ‘deferred prosecution agreements’ and even ‘non-prosecution agreements’ in which companies agree to undertake various reforms to prevent future wrong doing. Such agreements became the mainstay of white-collar criminal law enforcement. There is little evidence that such an approach, including the imposition of heavy fines, does actually change the behaviour of companies. It did, however, bring in billions of dollars ($220 bn by March 2015) and kept government housing policy, which required Fannie Mae and Freddie Mac to buy ever-increasing proportions of subprime loans from the lenders, out of the picture in any cases brought against the lenders.
In the aftermath of the financial crisis, the Department of Justice brought many high profile case against leading banks, but these were settled out of court, as they resulted in the kind of negotiations which were roundly condemned by Judge Jed Rakoff. He described just going after the company is ‘both technically and morally suspect’, since the prosecutors can only threaten to prosecute the company if there is sufficient evidence to prove beyond reasonable doubt that fraud has been committed, and, if that can be established then the managers concerned should be indicted.
Such condemnation from a judge and from the politicians and media led to a radical change of direction announced by the deputy Attorney General in her Memorandum on September 9th.. Sally Quillian Yates announced that in the future, the Department of Justice will turn its attention to individual a
since it is one of the ‘most effective ways to combat corporate misconduct is
by seeking a ccountability from the
individuals who perpetrated the wrongdoing’. She argued that this ‘deters future illegal
activity; it incentivizes changes in corporate behaviour, it ensures that the proper parties are held
responsible for their actions, and it promotes the public’s confidence in our
justice system’. Ben Bernanke’s remarks are certainly in line with the changing
views about law enforcement.
However, that is not the fundamental issue concerning the past. It would, of course, have been possible to bring criminal charges against senior executives if they could be shown to have been guilty of fraud as individuals, but the charges were always against the company. The real question is: if senior executives are to be held a
ccountable, then the
laws and regulations should be clear and of course in force at the time to
ensure that administrative actions or
prosecutions could take place. For
Bernanke to say that some senior executives
should be in prison implies that
he considers that it was possible to do under the regulations or the laws in
existence at the time, but that the regulatory authorities did not refer any
case to the Department of Justice nor take the administrative actions open to
them at the time or in the aftermath of the financial crisis.
Bernanke was in a position to ensure that regulations were in place so that senior executives could be called to a
ccount., but his speeches and the full minutes of
the Federal Open Markets Committee indicate that he did not see the risks in
the growth of the subprime market and weak regulation. Indeed, Bernanke seemed unaware of the extent
of subprime lending and its impact on the economy or even on the banking
sector. Even as late as May 2007, he stated, we do not expect significant
spillovers from the subprime market to the rest of the economy or the financial
system’. In June 2007, he announced a
review of the rules governing lending
practices and supervision. It was too
little, too late. Looking back later,
Bernanke admitted that ‘stronger regulation and supervision aimed at the problems
with underwriting practices and risk management would have been more effective
in containing the housing bubble. The
Big Five investment banks voluntarily agreed to be supervised by the SEC under
a special, undemanding regulatory regime. Inadequate regulatory frameworks and
an unwillingness to take action against individuals meant that senior executives would not, and
often could not be taken to task for their alleged misdeeds.
Dr Oonagh McDonald is author of Lehman Brothers: A Crisis of Value (978-1-7849-9340-5)