Why So Few Ended Up in Jail After the Financial Crisis

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While accepting the Oscar for best documentary earlier this year, Inside Job director Charles Ferguson came out with a bang.

"Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that's wrong," he said.

At least one now has. Lee Farkas, former chairman of mortgage lender Taylor Bean, was convicted last week on 14 counts of conspiracy and fraud. He could spend the rest of his life in prison.

So there's one.

But why no others? After a financial crisis that doubled the unemployment rate and slaughtered wealth around the globe, nobody thinks one executive -- and one few have ever heard of -- was solely to blame. Nor is it how these things usually work out. After the savings and loan crisis of the early '90s, 800 financial executives went to prison. Not only have most bank execs avoided prosecution this time around, but many are still gainfully employed by the banks that ran the economy into the ground.

Why is a difficult question. I think it can be broken down into three parts.

1. The ground troops have been charged 
The most disgusting, outright-fraudulent parts of the bubble years didn't take place on Wall Street. It took place on the ground in areas like Orange County and Las Vegas, where mortgage brokers, Realtors, and borrowers lied through their teeth, forged loan documents, and actively pursued screwing over anyone within reach. The industry of selling mortgages was a magnet for some of society's sketchiest characters. As the Financial Crisis Inquiry Commission noted in January, "at least 10,500 people with criminal records entered the [mortgage-broker] field in Florida, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion."

Thousands of mortgage brokers and scam borrowers have indeed been charged, and in many cases jailed. In June 2008, before the financial crisis unraveled, the FBI busted 400 brokers in a single sting. A sting last summer brought down another 500. Browsing the FBI's website details a few cases. One borrower was found guilty of defrauding Bank of America (NYSE: BAC  ) by "recruiting 'straw buyers' to apply for a mortgage loan for a home that he himself intended to occupy, and inflated the value of that home in order to increase the amount of the loan." These guys did the same with loans from JPMorgan Chase (NYSE: JPM  ) . These folks forged loan documents submitted to Regions Financial (NYSE: RF  ) . All were caught. All were charged. The public hasn't heard their stories because they don't involve the executive suite.

2. Coddling regulators, strapped detectives 
That few execs have been charged doesn't mean they're all innocent, of course.

High-level fraud cases are typically referred to the Justice Department by industry regulators. The Department of Health and Human Services, for example, works in tandem with the Justice Department to reel in medical fraud. Same for the Department of Agriculture. And the National Association of Insurance Commissioners.

Bank regulators are different. Since 2000, the Office of Thrift Supervision has not referred a single case of fraud to the Justice Department, according to The New York Times. The Office of the Comptroller of the Currency has referred just three cases.

There could be many reasons for this. The two regulators, though, have a long history of coddling the banks they oversee. They have every incentive to do so: Regulators' existence depend on banks -- or "clients," as the OCC refers to them as -- since fees paid by banks fund their operations. In some cases, banks can shop around for the regulator with the lightest touch.

That's what Countrywide did in 2007. Then-CEO Angelo Mozilo was frustrated with the demands of the OCC. Regulators were getting in his hair. Easy solution: Countrywide changed charters to fall under the purview of a gentler regulator, the OTS. As Connie Bruck of The New Yorker pointed out, the OTS actually lobbied Countrywide to make the switch.

Not that the OCC was a regulatory pit bull itself. When West Virginia tried to sue Capital One  (NYSE: COF  ) for credit card abuse in 2005, the company applied for a national charter with the OCC. By doing so, Capital One escaped West Virginia's jurisdiction, and the state lost authority to pursue its case. This wasn't an isolated incident. The OCC stopped Georgia when it attempted to enforce predatory lending laws. New York regulators were intervened while pursuing discriminatory lending investigations. The head of the Financial Crisis Inquiry Commission told former OCC head John Dugan, "You tied the hands of the states and then sat on your hands."

If regulators didn't make it hard enough, the FBI has seen a radical cut in the number of agents available to investigate financial crime. Law enforcement's focus began shifting to health care fraud in the '90s, and to terrorism after 9/11. During the savings and loan crisis, 1,000 FBI agents worked the financial-crimes scene. Today, just 240 do.

3. Stupid isn't illegal 
Crime deserves jail time. Idiocy is another issue.

This explains most of why so few major financial executives are behind bars. Blowing up your company isn't necessarily a crime. Leveraging 30-to-1 isn't unlawful. Neither is buying securities backed by homeowners unable to repay. Nor is ignoring caution signs. Or disregarding history. Much of what brought the financial system to its knees was unbelievably stupid and unethical, yet perfectly legal.

Investors were shocked, for example, after discovering Lehman Brothers used an accounting trick called repo 105 to mask the health of its balance sheet. Yet as The Wall Street Journal notes, "SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal."

Not only was this stuff legal, but lucrative. Many executives walked away rich. Filthy rich. This was heads they win, tails you lose, and in either case, jail remains elusive. You can almost hear them laughing now.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns Bank of America preferred. Follow him on Twitter @TMFHousel. The Fool owns shares of Bank of America and JPMorgan Chase. Through a separate Rising Star portfolio, the Fool is short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (21) | Recommend This Article (62)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2011, at 4:13 PM, gmichieli wrote:

    In feudal China losing money was a capital offense for the directors of banks. They tended to lose their heads if they weren't careful. Maybe not such a bad idea...

  • Report this Comment On April 26, 2011, at 5:49 PM, sgl1004 wrote:

    This fraud is an enormous elephant and people continue to suffer and will for a long time to come. i am one of those people that was illegally foreclosed on in the middle of a modification and this involved MERS and Wells Fargo. Well, imagine that.... I guess they thought that everyone was just completely stupid and clueless as to launch their own investigations to solidify suspicions. Well, I found the forged docs on line! In the meantime, I don't know how long it will take for them to investigate all foreclosures. Makes no difference anyway, no one going to jail and this thing has gotten very quiet hasn't it? They continue on as usual, sell what they have illegally taken possession of and its just another day to them. Even getting our lower level of government, the courts, to allow this to happen. How sad this world has become. No wonder our forefathers felt the imperative need to prepare and enforce a Constitution, they knew what was up even then!

  • Report this Comment On April 26, 2011, at 5:51 PM, smartmuffin wrote:

    #3 is probably the main one. Running a company poorly is not a crime, nor is taking TARP money (particularly when the government insists you take it).

    Those who are demanding bank executives go to jail should probably ask themselves if THEY'D like to get a prison sentence for making an unwise judgement (that doesn't violate any actual law) throughout the course of their employment.

  • Report this Comment On April 26, 2011, at 6:02 PM, dgmennie wrote:

    Should we not have a SIMPLE solution to the mortgage 'problem' rather than endless excuses based on the accepted wisdom that 'stupid' is not a crime? Sure 'stupid' is a crime, especially when the end result is middle class families forced from their homes while an army of loan originators, pockets stuffed with commission money, continue 'business as usual.'

    Why not require that the banks loaning the money KEEP the paper on their books for the life of the mortgage? No repackaging this stuff and selling it as investment-grade anything. When/if something goes sour, the banks will (of necessity) be REQUIRED to deal with their borrowers in the flesh and work things out with forcloseure being the last (not automatic first) option?

    Lots of Wall Street confidence men (and women) will then have to find themselves real jobs that pay ordinary salaries. But what's wrong with that?

  • Report this Comment On April 26, 2011, at 6:59 PM, DefensorDiablo wrote:

    Personally if these Executives had any sort of a consience at all they would resign, like Japaneese executives did back in 2009. Unfortunately honor and integrety are qualities rarely found in the US business realm, we prefer cuthroats and underhanded tactics.

    They should also give thier personal fortune made by these horribly unethical (albeit legal) practices and be sentanced to work community service at Homless Shelters and Unemployment offices so they can see what they have done.

    Granted top level businessmen are likely psychopathic (not every psychopath is a murderer - it merely means they make decisions without emotion) so they would likely not care.

  • Report this Comment On April 26, 2011, at 7:09 PM, OneLegged wrote:

    I would argue that making loans that require ZERO documentation and marketing the most exotic mortgage products to the least sophisticated borrowers is in fact, FRAUD. Fraud is a crime here in the U.S. Ben Bernanke telling Congress under oath that he is not monetizing the nation's debt is a crime. Selling securitized loans that one knows are "crap" as AAA products is a felony. Robo-signing is illegal. When local officials in one southern U.S. city are convicted of accepting bribes and sentenced for their crimes and the bankers who offered the bribes walk, that too is a crime. Congress and the Fed continue to collude to create a culture of invincibility for these leaches. I totally disagree with point number 1 above. The banks in many cases offered rather large incentives for the real estate agents and mortgage brokers to push these "Liars' Loans"

    These bankster leaches need to attached by lengths of boiled rope to the nearest light pole. The biggest fraud in the history of mankind and totally unprosecuted. DISGUSTING!

  • Report this Comment On April 26, 2011, at 7:48 PM, xetn wrote:

    Without the Fed and the FDIC, there would not have been the moral hazard of excess risk-taking because the "banksters" would have taken real risks of failure, no bailouts. Those toxic assets, resulting in toxic banks would have all gone bankrupt.

    Obviously, we live in a fascist country where, although there is private ownership, the government is stands ready to do what ever is necessary. This is especially true when the politicians receive large portions of their "contributions" from the big banks, corporations and lobbyists. We have the best bought politicians money can buy.

  • Report this Comment On April 26, 2011, at 10:12 PM, TMFKopp wrote:

    "Obviously, we live in a fascist country ..."

    Yes, obviously.

  • Report this Comment On April 27, 2011, at 1:09 AM, ET69 wrote:

    I remember the good ole days of the Soviet Union. They had a simple answer for a couple of co op managers who sold large amounts of surplus cotton and watches secretly to capitalist companies in the West....they executed them! I love it. Capital punishment for crimes of Capitalism. Just imagine the impact on Wall Street if Ken Lay had been executed! If Lee Farkas had been shot! Oh joy! Now that would make the big boys think twice!

  • Report this Comment On April 27, 2011, at 1:40 AM, ershler wrote:


    Maybe I don't understand fascism, but if the US was a fascist nation wouldn't all the banks be nationalized or at least proxies for national government? The financial crisis would have been a perfect time to do this but the US government did everything except give out handies (maybe they did) to keep banks private.

  • Report this Comment On April 27, 2011, at 5:36 AM, dbtheonly wrote:


    Not quite. Under a traditional socialist govt. the banks & other major services would be nationalized. Think the UK in the late 40s. Under National Socialism the ownership of the companies remains private but are at the service of the govt. it's more a Plutocracy or Oligarchy than Socialism.

    Where xetn errs is in missing that the Nazi govt. did not permit currency exchange with foreign countries & thus was able to insulate its' economy. I don't know enough about the Italian economy of the 20s & 30s to speak of that form of Facism. Some other Fool may be able to help us out.

    xetn also ignores the potential disastrous consequences of having several (many? most?) major banks collapse. It was quite a topic of conversation back in 2008 when the Bush Administration decided to bail out the banks.

  • Report this Comment On April 27, 2011, at 12:22 PM, mtf00l wrote:

    What I haven't seen here is when the "banks" did do something illegal the law makers moved quickly to change the law so as to make it legal or at least defendable.

    So of course the only people responsible are those at the bottom of hte plumbing, or, as we like to say in America, "buyer beware".

  • Report this Comment On April 27, 2011, at 1:46 PM, Duke5343 wrote:


    The reason the meltdown occured was USG intervention in housing with the 1999 Fair Housing act and Barney Frank DESTROYED the banking regulations installed by ROn Reagan - HE is Patient ZERO in this meltdown

    NOW we must also look at ourselves- US Citizen GREED caused it as well- Filp this house and people in trailers buying McMansions they could NOT possibly afford the utility bills let alone the taxes-

    IF it sounds TOO GOOD to be TRUE it usually is & Most people caught in a scam WERE greedy

    Also the USG & Liberal media have been Blaming the banks in a form of deflection so they are NOT blamed for this meltdown

    WHEN has USG ever run a successful business??? NEVER

  • Report this Comment On April 27, 2011, at 4:23 PM, 02421 wrote:

    Idiocy? Please, all these guys knew EXACTLY what was going on. But it didn't matter because everyone was making so much money, and they all thought they could get out just before the party ends.

  • Report this Comment On April 28, 2011, at 3:48 PM, wasmick wrote:


    Have you gotten your house back? I would assume that given your fact set, this would be a windfall of a case for an energetic attorney.

  • Report this Comment On April 29, 2011, at 2:39 PM, ibuildthings wrote:

    Politicians get elected by taking fat donations, keeping the donors happy, and telling stories to the voters. The so-called party of the working class hides behind slogans and is no better than the other party, and less honest on the way.

    When candidate Obama was blaming the financial crash on the previous administration (and McCain by proxy) I checked OpenSecrets donors list. The largest contributions from Fannie Mae and Freddie Mac were to Chris Dodd (D, CT) Barney Frank (D, MA) and Barack Obama (D, IL).

    This is a link to a NY Times story dated September 11, 2003. It quotes Bush asking for an oversight agency for Fannie Mae and Freddie Mac. He outright accused them of cooking their books (later proven). Bush wanted MORE oversight over the largest pseudo government-sponsored lender, and got blamed later for their crimes.

    The story is even slanted to give Barney Frank and another democrat the last word, where they defend Fannie's financial soundness and integrity.


    ''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

    Representative Melvin L. Watt, Democrat of North Carolina, agreed.

    ''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.


    I am not shilling for the republicans here. I am only pointing out that the so-called party of the people is not any better, and actually worse because they pretend to be pro-people, but are pro-donor, just like anyone else.

    Fannie and Freddie have so far soaked the Treasury for $165 Billion. The legal fees of the party luminaries like Franklin Raines who ran it into the ground are being paid by the corportation (taxpayers) while the pretend-investigation continues.

  • Report this Comment On April 29, 2011, at 7:14 PM, Excusemesir wrote:

    One of the BIGGEST differences between the S&L crisis and the more recent one is that in the S&L crisis, all the senior management teams at institutions that failed or received bailouts were REPLACED. In the latest one, none of them were, at least for the too-big-to-fail ones.

    When the senior management is replaced, their replacements are in a great position to uncover all the dirt. When they remain in place, job number one is to make sure that all the dirt stays covered up, and it mostly has.

    Bernanke, Poulsen, and Geithner defended keeping the management teams in place, saying that there was no way that they could find other people qualified to run those institutions. As if they really were qualified. Makes me wonder what dirt the senior management of our NATION didn't want uncovered!

  • Report this Comment On April 30, 2011, at 11:53 AM, savysally wrote:

    Those three defended keeping the management teams in place because, as the most senior management of the largest failed institutions of all, they would have had to step down, too.

    We should have demanded resignations from them all, including Dodd and Frank.

    With no accountability, there is moral hazard. A lack of moral compass is the greatest threat to our United States.

  • Report this Comment On May 01, 2011, at 1:22 AM, ershler wrote:

    Another difference between the S&L bailout and TARP is the S&L bailout was the largest bailout in US history and TARP wasn't.

  • Report this Comment On May 02, 2011, at 1:21 PM, aamcadams wrote:

    "Banks" have been in bed with the Fed since the '30's, it's only the last 20 years [w/drug dealers & Nat. Security for excuses to show their "papers" ala Patriot act].

    Eisenhower & Jefferson warned us. How sad both the "Parties" shun the middle, I know I was too conservative for the dems & far too liberal for the Republicans after the coup d'etat. It's gonna be a very strange election, with no one wanting the "Blue Dogs" & "the Rinos"

  • Report this Comment On May 03, 2011, at 11:56 AM, IBJAMMIN wrote:

    I disagree with the author , Morgan House. These banksters were not stupid, they were not making mistakes, they were maximizing their profits, commissions, and bonuses. They had no concern for the consequences of their actions. BTW, in what country is fraud not a crime?

    Many of us here in FL have been aware of these crimes since 2006. Almost no one we talk to can believe the extent of it. There are massive RICO violations to investigate and prove, then prosecute. The SEC should also be involved because every MBS had to be registered under them and thousands of them were fraudulent. Even mail fraud is involved since MILLIONS of fraudulent and outright forged documents were sent through the mail.

    More information is available on a site I found at . I personally will be satisfied when the b#&*^%$ that thought these schemes up and executed them are themselves executed, hanging from the light poles on Wall St. if that sounds extreme, remember their crimes crashed the entire world’s economy. Sadly, we'll be lucky if they go to jail at all, let alone forfeit the huge bonuses and commissions they collected for 5 or 6 years during the boom.

    On the other end of the financial spectrum, millions of ordinary Americans will never recover financially from the disaster the banksters created. If you are an early Baby boomer like me, you are too old to recover before retirement years arrive. For most, their investments and home equity (if they are still in their home) have dropped in value so much that retirement is out the question.

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