Business Columns & Blogs

Larger bank crimes do not guarantee judicial punishment

Updated version of an old joke about another profession that has on occasion been held in disrepute:

Q: What do you call 10 bank executives in jail?

A: A good start.

Last week’s news of a 10-year sentence handed to a former executive of the failed Pierce Commercial Bank had some readers telling a version of that joke, except with little humor in their delivery and with some pointed questions about why so few responsible for the Great Housing Finance Meltdown will be keeping the incarcerated mortgage lender company.

In particular, they question why the occasional prosecution and conviction of bankers tends to focus on those from relatively small institutions. Pierce Commercial, after all, had only about $220 million in assets at the time regulators moved in and sold its remains in late 2010.

That amount sounds like a lot of money to thee and me, but it doesn’t constitute even a rounding error when compared with a certain Seattle-based mortgage lender that claimed more than $300 billion in assets at the time it was declared a failed institution in September 2008 – an institution, grumpy readers note, that has not had high-level executives sent off to the pokey.

Why is it, they ask, that there haven’t been more bank executives from the big-name institutions charged with criminal malfeasance? (For the record, a number of readers responding to a column in this space a few weeks ago indicated they’d like to spread the blame further to include executives of mortgage-finance agencies and politicians, with a few of them drawing “Go to Jail” cards too.)

Those questions are not asked without justification, beyond the sense of resentment among those who had no role in fueling the housing boom or triggering the bust but paid for it just the same in lost jobs and an income-crimping recession. It requires no great leap of assumption to conjure up tales of conspiracies and protection rackets for the rich and powerful. The answer of “it’s complicated,” to many, is no answer at all.

But it is. Complicated, that is, not that it will provide much solace or satisfaction.

First there’s the issue of plausible deniability. The higher you get in an organization, the easier it is for an executive to profess ignorance of and insulation from what his or her employees were doing. “But, I had no idea that our mortgage lenders were making loans with no documentation to people with no prayer of repaying them.” It is unlikely that such executives signed their names to memos laying out a strategy of making garbage or even fraudulent loans, then packaging and selling them to the first eager, uninquisitive sucker that came along – even if that was their intention all along.

And how do you prove it was, absent such documentation?

So what, the critics rejoin. Ignorance of the posted speed limit doesn’t get you out of the ticket the trooper is handing you. Why should ignorance of what was going on get these executives off the hook and keep them out of the slammer? Doesn’t such professed ignorance reflect a level of malfeasance that rises to the level of criminal conduct? (They might add that corporations and executives can and do face indictment and conviction in worker safety and pollution cases, witness what is happening with BP and the Deepwater Horizon oil platform fire or Massey Energy and the Upper Big Branch coal mine fatalities, so why should financial catastrophe be different.)

Indeed it might rise to that level, but lots of luck proving it. Financial-crime cases are not sure victories even with mounds of documents or wiretap transcripts. Prosecutors know this; they keep won-lost records just like sports teams, and they’re well aware what a hit to their prestige a well-publicized and expensive prosecution that ends in acquittal or the case being thrown out can be. Better to make noises about going after miscreants, quietly settling suits and regulatory actions and picking off the obvious cases of misbehavior.

What that leaves, though, is prosecution of those not quite clever enough to put sufficient distance between them and the scene of the crime. Those tend to be cases involving smaller institutions. That in turns further galls critics of the system who know those few executives at larger institutions, if they’re called upon to account at all for their conduct, usually get to settle civil suits with insurance-company dollars.

Saying “it’s complicated” is not the same thing as saying “it’s fair” or “it’s right.” But it is depressingly close to saying “it’s no deterrent” and “it’s going to happen again.”