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Wrecking an Economy Means Never Having to Say You're Sorry

Why Wall Street should be thrilled with the government's billion-dollar settlements

The megabanks are finally feeling the hurt for the depredations of the mortgage era. That’s what the government, and some in the financial press, too, would have us believe. Bank of America on Thursday announced a whopping $16.65 billion settlement with the Justice Department, topping the previous record of $13 billion paid to the government by J.P. Morgan. Citigroup has handed over $7 billion, and Wells Fargo and others are likely to strike settlement deals next. Says The New York Times: “Prosecutors are getting creative in holding the nation’s big banks accountable.” They are indeed—and that’s the problem.

It bears saying one more time: It’s a disgrace that the Justice Department has failed to bring a single criminal charge against any Wall Street or mortgage executive of consequence for their roles in wrecking the economy, despite having managed to make arrests in the comparatively piddling schemes of Enron and the Savings & Loan flimflam. (The latter resulted in more than 800 convictions, including those of many top executives.) These settlements are wan consolation. The sums being surrendered, for starters, are large only until compared with the $13 trillion or so the public lost in the financial crash—or, for that matter, with the banks’ own coffers. (Citi’s pure profit in the two years before the wipeout was more than triple its penalty.) Not to mention that the money won’t be paid by any parties actually responsible, but by the banks’ current shareholders, who pretty much had nothing to do with the misdeeds in question. And the bulk of the settlements will be tax deductible. For destroying trillions in wealth and thousands of jobs, banks will get a write-off.

There’s a much deeper problem here, however, and one that has received far less attention: Not only has the Department of Jus­tice (DOJ) failed to build any criminal cases for financial-crisis misdeeds, but it’s also now settling with these banks without even filing civil complaints. A complaint is the cornerstone of civil litigation, the foundation for even routine lawsuits. One of its primary benefits—and of adversarial legal proceedings generally—is that a complaint can bring huge amounts of previously undisclosed information into the public record. In these mortgage securities cases, the Justice Department had not only an obligation but an opportunity: to show the country what it found, to deter future misconduct, to complete the story of the financial crisis in humanizing, clarifying, searing detail. And to do all that, the department didn’t need to do anything special. Just what lawyers normally do. Instead, by imposing a fine without documenting the underlying abuses, the Justice Department has permitted the banks, for a price, to bury their sins.

One way to appreciate the DOJ’s negligence is to compare these settlements with the civil action that New York’s Department of Financial Services brought against the French banking giant BNP Paribas a few weeks before the Citi deal was announced. The state accused BNP of concealing more than $190 billion in transactions that allowed warlords, mullahs, and other miscreants to evade U.S. sanctions and spirit money in and out of Sudan, Iran, and Cuba. We know which executive did what bad thing when, because it’s all laid out in a consent order, complete with the de rigueur damning e-mails. In one of them, the head of ethics and compliance for the bank’s North American unit expressed his glee at another bank’s bust for sanctions evasion: “The dirty little secret isn’t so secret any more, oui?” he wrote to a colleague. Now BNP’s own dirty little secrets have been exposed as well. In a press release accompanying the filing, the regulator gives the name of that compliance officer, Stephen Strombelline, along with those of four other executives fired as a result of the investigation, including the bank’s chief operating officer, Georges Chodron de Courcel.

In announcing the BNP penalty, New York’s superintendent of financial services, Benjamin M. Lawsky, made the following observation: “In order to deter future offenses, it is important to remember that banks do not commit misconduct—bankers do.” Many of his predecessors in white-collar law enforcement also understood the corrective power of publicity. Ivan Boesky and Michael Milken became household names in the 1980s because of the riveting civil complaints brought by the Securities and Exchange Commission (SEC), an agency that evoked a fear on Wall Street that is hard to imagine today. Robert M. Morgenthau, the legendary Manhattan district attorney, is legendary partly for actually sending bankers to prison, but he also pursued devastating civil suits against wayward financiers. The sweeping white-collar civil complaints that Eliot Spitzer filed as New York’s attorney general read like detective novels; his blockbuster settlement with American International Group was preceded by a lawsuit that explicitly targeted the titan Maurice R. “Hank” Greenberg, to Greenberg’s everlasting fury.

Detailed airing of past wrongdoing doesn’t just put would-be malefactors on notice. It does more than bolster public confidence in the legal system. It can also force structural change. In 1933, the Pecora hearings hauled banking chieftains (including those who ran the predecessors of J.P. Morgan and Citi) before the Senate banking committee to scrutinize their actions before the 1929 crash. These hearings led to the Glass-Steagall reforms and the Securities Exchange acts, the foundations of U.S. financial stability for half a century. Later in the century, the Savings & Loan prosecutions led to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 that, among other things, effectively disposed of failed thrifts. The Enron debacle was followed by the Sarbanes-Oxley accounting and governance reforms of 2002. Spitzer’s suit against Wall Street banks produced a global pact to reform bogus stock research, and so on. But in the current cases, in which institutions are accused of systematic wrongdoing with historic consequences, the government is letting banks discreetly settle out of court, as if the facts at issue were some kind of fender bender.

In an e-mail to me defending its gentlemanly arrangements with Citi and J. P. Morgan, Justice Department spokesperson Ellen Canale argued that cases were “routinely” settled outside court without a complaint being filed. “What is not routine,” she added, “is the department’s demand for the companies at issue to agree to a statement of facts which acknowledges many of the core facts underlying the government’s allegations.”

The statements of facts she refers to—the department’s substitute for civil complaints—are documents of eleven pages in the case of J. P. Morgan, and nine in the case of Citi. That’s about one page to cover each billion dollars of damage. They do not contain a single proper name, do not specify a single discrete act of wrongdoing by an individual, and, incredibly, only mention the actual word “fraud” in the context of outside brokers and borrowers. The Justice Department here rests two major settlements—Petronas Towers of settlements—on the enforcement equivalent of Styrofoam peanuts.

In February, in a delicious twist, Better Markets Inc., a reform group led by former Skadden Arps partner-turned-watchdog Dennis Kelleher, sued the Justice Department in an effort to block the J.P. Morgan settlement, which Better Markets called a “mere contract” with the bank. The department’s response was unintentionally revealing. It submitted a motion to have the lawsuit thrown out, contending that it would require an “invasive inquiry into DOJ’s decision-making process.” In the department’s estimation, the aspects of its settlement process that should remain unknowable include:

“The nature, scope, and thoroughness of DOJ’s investigation, including its duration and the number of documents reviewed and witnesses interviewed ...;

“JPMorgan’s conduct, including the number, type, and content of its misrepresentations and when they occurred ...;

“A calculation of the monetary harm that JPMorgan’s conduct imposed on mortgagors, investors, the markets, and the economy as a whole, as well as a calculation of any monetary gains that accrued to JPMorgan ...”

And so forth. The biggest settlement of its kind in U.S. history, but we don’t get to know how many rocks DOJ looked under. Nor just what misdeeds it discovered at the bank. Nor how it came up with the number for the settlement amount.

A final consequence of the way these settlements were conducted—one suspects it is not coincidental—is that no judge will ever review them, for the simple reason that a judge can’t review a case that has never been filed. If you’re the putative prosecutor, this removes a pesky form of oversight. Before the SEC settled with Citigroup over its sale of a toxic mortgage derivative, in 2011, the agency brought a lawsuit against the bank—which meant that the deal could be evaluated by the presiding judge, Jed S. Rakoff of the U.S. District Court in Manhattan, who famously rejected the settlement as short on both remuneration and disclosure. “The S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges,” Rakoff wrote, “and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

Rakoff was later overturned, but at least he had the opportunity to take the Justice Department to task. With its latest settlements, the department has insulated itself from that possibility. We know the banks are eager to put the scandal of the financial crisis behind them. What’s disturbing is that, in the name of deference, convenience, or something darker, the Justice Department is letting them do just that.

This post has been updated to reflect the Justice Department's deal with Bank of America, which was announced Thursday morning.