This Is Why Bankers Keep Getting Away With Fraud

Breaking The Power Of The Banks: This is the first of two articles on the use of the office for personal gain

Jamie Dimon, Chairman and CEO of JPMorgan Chase, discusses his Annual Letter to Shareholders on Tuesday, April 4, 2017 at the Chamber of Commerce of the United States of America in Washington, DC. (Paul Morigi/AP Images for JPMorgan Chase)

When former FBI director James Comey was appointed AG for the Southern District of New York, the office that has jurisdiction over Wall Street, he called a meeting with his prosecutors. He asked for a show of hands for those who had never lost a case. He called those who raised their hands “chickenshit” for lacking the courage to take on tough cases and for too readily offering soft deals to avoid a trial.

Financial journalist Jesse Eisenger seized that colorful portrayal/description for the title of his new book: The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives.

There are many good reviews of this excellent book. I’m not going to do another here, but add a different perspective to the questions raised and the ones that are relative to the financial system.

It’s commonplace to grumble that instead of jail, bankers got away with big bonuses while the middle class took the brunt of their greedy foolishness. Why weren’t these guys in Gucci behind bars?

An Invisible Door Revolves

There is a door that directly joins Wall Street and the federal government. We cannot use it, but its floor is well-worn and its hinges well greased.

In 2009, when the public was just waking up to the enormity of banker responsibility for the financial crisis, Eric Holder left the Washington power broker firm of Covington and Burling to become the Attorney General of the United States of America. Covington is the quintessential revolving door firm and like many before Holder, it has had at least a dozen partners walk through to and from high-level government positions.

Eric Holder has become something of a legendary figure in politics. As the first African American to become the nation’s top law enforcement official, he pursued an ambitious agenda that transformed the face of America’s justice system. By refusing to defend the Defense of Marriage Act, fighting voter discrimination, and lobbying for reduced sentences for minor drug offenses, Eric Holder achieved significant advancements in civil rights and social justice during his six-year tenure.

Holder is also known for the doctrine of “too big to fail,” but the idea didn’t actually originate with him. The concept that the damaging of business could hurt the economy, especially in terms of job loss, was introduced in 1980 by a US Sentencing Commission, and adopted in 1991 by the SEC. It was revisited in 1994 by Sheila Nieman, working under Mary Jo White, then head of the Southern District AG’s office, who wrote a memo adopting that position for criminal prosecutions. In January 1999, when Deputy AG under Janet Reno, Holder wrote his version of that memo.

If banks are convicted criminally, Holder said, they would lose their license to operate as a bank and have to close down. It would place an already damaged economy in a perilous situation.

As it turned out, Holder was right. In the 2008 financial crisis, a huge number of banks were involved. Eventually, 18 major investment banks admitted to fraud in civil actions. If charged criminally as they deserved, America would have been left with practically no major federal-wide banks in one fell swoop of the law.

While this concern was valid, it doesn’t necessarily apply to individual bankers. No banker is so important to the system that it would collapse on his conviction — although some bankers believe it would.

Why then was only one obscure banker, Kareem Serageldin, an Egyptian national, convicted of fraud in the 2008 crisis?

A Laundry List Of Excuses

Here are some of the reasons Jesse Eisenger, author of The Chickenshit Club, identifies for the failure to prosecute bank fraud, followed by my comments on the inadequacy of such flimsy excuses.

1: Financial crimes are complicated and beyond a jury’s understanding.

True in some, but not all cases.

In 2008, the major type of fraud consisted of mobile brokers or staff in private mortgage companies submitting applications so that a person who earned $20,000 per year was reported as earning $200,000 with a tick in a box saying that the lender (the ‘originator’) had verified the income when it had not.

While a jury might have difficulty understanding some complex financial transactions, no jury would have a problem with that one.

2: It’s hard to get convictions in financial criminal trials.

It is also true that white collar criminal convictions can be difficult. From the earliest time of the common law, judges developed protections for the indigent accused against the power of the state. The rules of criminal evidence, as an example, were not devised to primarily get at the truth, but to control police abuse of power. (We all saw the recent video of the cop arresting a nurse who was obeying hospital policy — nothing new to judges.)

As a result, there are many purely technical defenses that Wall Street lawyers can use to defend Wall Street bankers.

This problem was already faced and solved. In every regulatory system, there is a parallel civil action. Like a civil action, there are none of the criminal protections. Thus, success is much easier; the only drawback is the remedy is limited to a fine but no jail time.

Headlines have blared about huge fines on banks from this civil process. For example:

JPMorgan agrees $13 billion settlement with U.S. over bad mortgages

However, making a bank pay a fine is a penalty that does not punish. That fine is passed on to us the customers one way or another. Let’s look at the example of JP Morgan, who has paid the largest fine related to bank fraud to date.

JP Morgan’s Blunder

JP Morgan had made a tragic mistake in 2006. It had hired an honest employee with guts as part of its quality control efforts to vet mortgages assembled from private lenders. Their mistake was Alayne Fleischmann, a young lawyer who would eventually turn whistleblower.

JP Morgan was certifying to its clients that these packages of mortgages contained prime mortgages. Fleischmann’s group job was to ensure that was true. Fleischmann had quickly identified mortgages, particularly from one source, Green Point, that could not pass the smell test. For example, a manicurist reported income of $120,000 a year.

Additionally, the group was only given the original application files from lender Green Point. Fleischmann noticed that some of these mortgages were very old. The new business model for lenders is called “originate and sell.” It requires them to sell the mortgages immediately to get the cash back and make more loans. If the mortgage was old, something was wrong.

She tried complaining to her immediate boss to no avail. She wrote what would become the smoking gun evidence against J.P. Morgan.

She sent a letter over her boss’ head to an executive outlining what she saw. As a lawyer, Fleischmann knew that single document alone would be enough to convict J.P. Morgan of a criminal fraud charge. In her naivety, she believed that would stop the fraud. What she did not know was the power of the modern bank in American politics.

Of course, as you have already guessed, JP Morgan ignored the warning and fired Fleischmann. Blacklisted on Wall Street, she had to return to her native Canada where she now practices law.

Fleischmann had signed a confidentiality clause in her employment contract. She knew that if she disclosed what J.P. Morgan had done, even though she believed it to be criminal, the bank would persecute her with lawsuit tactics to ruin her financially. She would have the burden of proving the fraud in lawsuit. She kept quiet until something happened that prevented her from sleeping. It began this way.

In response to the Occupy Wall Street protest, Obama had assembled a Justice League-like SWAT team of the best and most aggressive investigators and prosecutors from all the U.S. government departments. This team of super prosecutors would surely get to the bottom of what happened.

A young district attorney in California, Richard Ellis, while reading through documents obtained from J.P. Morgan, came across the smoking gun memo. He contacted Fleischmann and got all the gory details. Fleischmann was impressed with Ellis’ understanding and waited for the bombshell announcement of criminal charges — which never happened.

One morning, while strolling through a mall, a newspaper headline caught her eye. It announced a potential civil lawsuit by the U.S. government against JPMorgan, based on an internal letter sent by a former female employee. She was startled because she had heard nothing about this for so long. How could they start a lawsuit in Washington without speaking to her, their prime witness?

But reading on she knew little would happen. Fleischmann, the prime witness, was never contacted again. The next she heard was of the deceptively huge $13 billion settlement.

How Crime Pays In Banking

While the mainstream media totally bought the press release about how this fine was a punishing blow to the bank, the shareholders of J.P. Morgan knew better.

JP Morgan’s shares rose 0.7%; Jamie Dimon, the CEO of JPMorgan Chase, got a 74% raise.

What great deed had Dimon done?

When he heard of the press conference to announce a public civil lawsuit alleging fraud against JP Morgan, Dimon called the associate AG, Tony West. He got an immediate meeting and a made in Hollywood settlement which made it appear that JP Morgan was being punished, but was, in fact, the ultimate in damage control by Dimon. Here’s the reality of the deal:

Later, David Dayan, writing in The Nation, told that J.P. Morgan had already sold a large number of mortgages in default to 23 other companies. However, J.P. Morgan sent out forgiveness letters for these mortgages — that it no longer owned — and claimed credit against the settlement.

The Statement of Facts was so convoluted that JP Morgan’s CFO Marianne Lake could say without fear of contradiction, “The firm has not admitted to violations of the law.”

Simultaneously, the AG’s office issued a press release that the fine only settled the bank’s civil liability but did not release any individual banker, nor did it release either banks or bankers from criminal proceedings. The AG’s office would continue to pursue these remaining matters diligently.

As evidence of the level of President Trump’s understanding of the financial system, he called Dimon the worst banker in the United States for making that $13 billion deal with the AG.

Fleischmann waited again for the announcement of criminal proceedings. She waited, and waited, and she waited. Then came the triggering events.

She saw a news clip of Eric Holder saying “I am resolved to seeing the investigations through.” Doing so, he added, would “reaffirm” his principles. Then in September, at a speech at NYU, Holder defended the lack of prosecutions of top executives personally on the grounds that, in the corporate context, sometimes bad things just happen without actual people being responsible.

“Responsibility remains so diffuse, and top executives so insulated that any misconduct could again be considered more a symptom of the institution’s culture than a result of the willful actions of any single individual.” — Eric Holder

That’s when Fleischmann decided to break her silence. She knew that there weren’t going to be any civil lawsuits against bankers individually and there weren’t going to be any criminal prosecutions. “I tried to go on with the things I was doing, but I just stopped sleeping and couldn’t eat,” she says. “It felt like I was trying to keep this secret and my body was literally rejecting it.”

She had to go to the media. Fleischmann told Matt Taibbi of Rolling Stone,

“I could be sued into bankruptcy. I could lose my license to practice law. I could lose everything. But if we don’t start speaking up, then this really is all we’re going to get: the biggest financial cover-up in history.”

And indeed it has been.

You have probably heard of the supposedly magnificent fines like the $13 billion one noted above levied against the banks. Have you heard of the Fleischman revelations?

Apart from a couple of TV interviews, the mainstream media completely ignored Fleischman. They continue to give prominence to the bankers’ spin that the cause of the crisis was poor people trying to live above their means by buying houses they couldn’t afford and the bleeding heart government that had forced the banks to lend to those undeserving poor.

JP Morgan Chase whistle-blower Alayne Fleischmann risked it all. Photo Credit: <a href=

It is true that if banks were charged criminally, they would lose their license. But fining banks has proved to be a penalty that does not punish or deter bad behavior. It’s also true that getting convictions against white-collar criminals is difficult, but there is another obvious solution.

Civil actions have been very successful. Why give bankers a free license to commit fraud for life? Just sue them civilly, as lawyer Neil Barofsky recommends, down to their last cuff-link.

Both Republican and Democratic administrations have bought into the myth that the best people to regulate Wall Street are from Wall Street. After all, who knows the Street better, they reason. The Holder experience is evidence that this is not so. The best people to regulate Wall Street are those who have no ties to it.

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