In September 2009, as chief of staff to Senator Ted Kaufman, I sat in on a meeting with the then-senator and Lanny Breuer, who led the criminal division of the Justice Department at the time. Why, Senator Kaufman wanted to know, had the Justice Department not prosecuted financial institutions and the individuals who run them for criminal behavior? Breuer said he was “dependent on the pipeline” to bring forward cases, and added that bank regulators so far had provided no criminal referrals related to the financial crisis.
A year later, Breuer told us he still “need[ed] people with deep substantive knowledge” to bring forward cases, and in recent U.S. Senate hearings, it was clear that little has changed. Bank regulators, having failed to accumulate evidence of wrongdoing in the financial industry, punted questions about criminal behavior to the Justice Department. At the same time, Justice Department leaders, when explaining why they didn’t indict large banks, hid behind bank regulators’ concerns about “collateral consequences” to the financial industry and economy.
One thing has changed, however, and it’s encouraging. What’s different now is that, unlike 2009, when Senator Kaufman, who served on the Judiciary Committee and could warn only about the Justice Department’s failure to investigate Wall Street, the Senate Banking Committee is finally overseeing and not overlooking the abysmal record of bank regulators. Even better, newcomer Elizabeth Warren is leading the charge.
At Warren’s first Banking Committee hearing in February, she asked a panel of bank regulators: “When was the last time you took a Wall Street bank to trial?”
"We do not have to bring people to trial," Thomas Curry, head of the primary bank regulator, the Office of the Comptroller of the Currency (OCC), assured Warren, declaring that his agency had secured a large number of "consent orders," or settlements.
"I appreciate that you say you don't have to bring them to trial. My question is, when did you bring them to trial?" she responded.
"We have not had to do it as a practical matter to achieve our supervisory goals," offered Curry, who has said elsewhere it’s not “our role to avenge or to punish per se.” (A study by Syracuse University showed that, in 1995, the OCC and other bank regulators provided 1,837 criminal referrals, while in 2006, that number had fallen to 76.)
In Warren’s second hearing, she pushed OCC, Treasury and Federal Reserve officials on the repeated and egregious money laundering violations at HSBC.
“What does it take, how many billions of dollars do you have to launder from drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution?” Warren asked. These officials punted, saying criminal prosecutions are up to the Justice Department, not them. All three regulators insisted they had only civil authorities, and a Fed governor stated that a bank’s charter would be pulled only after a criminal conviction.
Warren has had help from several of her colleagues. A report on repeated HSBC violations from Senator Carl Levin and the Permanent Subcommittee on Investigations (PSI) found “The bank’s federal bank regulator, the OCC, tolerated HSBC’s weak [compliance] system for years.” Senator Chuck Grassley, the Republican from Iowa, compelled Attorney General Eric Holder to confess, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them.”
This year, Levin’s PSI investigated trading losses by the J.P. Morgan London “Whale.” In the hearing, Levin forced OCC to admit that, for almost a year, the OCC had never said publicly that J.P. Morgan assurances (made on an April 13, 2012 quarterly earnings call) about contemporaneous regulatory involvement were patently false. In addition, Levin’s report documented a raft of OCC failures, tolerance of regulatory violations, and acceptance of blanket assurances by the bank.
Last Thursday, Democratic Senator Sherrod Brown, who chairs the panel’s subcommittee on Financial Institutions and Consumer Protection, held a hearing on the role of independent consultants in the mortgage foreclosure debacle. Warren—for the third time since joining the U.S. Senate—publicly pantsed two senior bank regulators, this time unleashing a withering cross-examination that even fans of Perry Mason would admire.
Brown and Warren had good reason to be outraged. In 2009 or 2010, four million Americans lost their homes through bank foreclosure proceedings that were often unlawful, leading bank regulators to permit outside independent consultants to conduct an ill-designed foreclosure review that ran up fees of more than $2 billion. In January, OCC abandoned the case-by-case review of foreclosure fraud in favor of a $9.3 billion settlement (only $3.3 billion of which will go to wronged borrowers). Under the deal, regulators had initially claimed banks broke the law or made errors in 6.5 percent of the approximately 100,000 cases actually reviewed, and most of the homeowners who were foreclosed on received less than $1,000 each. The OCC’s Curry said the settlement “isn’t perfect” but that it was necessary to end a long, flawed review process that had grown expensive.
"If you had believed that the banks had broken the law in 90 percent of cases, would you have settled for more money?" Warren asked Daniel Ashton, a top lawyer at the Federal Reserve. "Doesn't it matter how many homeowners were victims of illegal activities by their bank?"
"Our priority was to get cash to borrowers," Ashton responded.
Warren also discovered that the banks had decided which mortgage foreclosures were illegal, without any independent review. Used to overreliance on Suspicious Activity Reports (filed by banks), the OCC preposterously outsourced the question of whether laws had been broken to the banks themselves.
Can a handful of determined senators like Warren, Levin, Brown, and Grassley shame the OCC and DoJ into doing their jobs, when none of the Obama Administration’s top appointees believes justice or punishment is their “thing,” as Timothy Geithner once suggested? One can only hope (or simply watch with gleeful pleasure as Warren continues to humiliate hapless regulators). When Lanny Breuer told Ted Kaufman and me almost four years ago that he was “dependent on the pipeline” to bring forward cases, we knew it was a pipeline to nowhere. It still is.
Jeff Connaughton, a former investment banker, lobbyist, aide to Senator Joe Biden, and Clinton White House lawyer, worked with former Senator Ted Kaufman on financial reform in legislation in 2009 and 2010. He is the author of The Payoff: Why Wall Street Always Wins.