On sending Wall Street to jail

by Robert Teitelman  |  Published March 21, 2011 at 8:24 AM
PrisonBars125X100.jpgThe Wall Street Journal has reported that the Securities and Exchange Commission is unlikely to seek indictments against Lehman Brothers executives over the now-famous Repo 105. (Instead, the paper said charges might be filed against Lehman's auditor, Ernst & Young.) The news is bound to stir up further cries that a vast cover-up is taking place with the complicity of the White House, regulators and the Justice Department. This accusation that fraud has been systematically brushed under the carpet has been made for some time, most famously by Charles Ferguson when he accepted an Academy Award for his documentary "Inside Job," most sweepingly by Matt Taibbi, in his most recent jeremiad against Wall Street in the March Rolling Stone.

I have commented before on this question, most often about what is blindingly obvious: These white-collar financial fraud cases are extremely difficult to investigate and prove, and many of them lose in court, such as the first cases brought against the two Bear Stearns Cos. hedge fund managers. Financial errors and mistakes do not necessarily suggest fraud, particularly in the case of of a systemic bubble. It may well be that Wall Street was better lawyered this time around and avoided the kind of legal missteps, particularly involving public statements or e-mails during a meltdown, that brought others down. And it is very possible that some cases of fraud have been missed, particularly by regulators that were undermanned and ideologically or bureaucratically averse to looking too deeply; then were swept up in the rescue efforts of the crisis and reform efforts that followed; then were whipsawed by congressional attempts to cut their budgets and suggest that nearly everything they do is inappropriate.
But, of course, to true believers like Taibbi or Ferguson, all of this is simply pedantry and excuse making. As economist Joseph Stiglitz said in an interview several months back, if no one violated the law, well, then the law should be changed. Taibbi, as he has in the past with the likes of Goldman, Sachs & Co., constructs the outlines of a vast conspiracy that began long before the financial crisis. It's an outline because he's essentially assembled a mélange of cases -- insider trading, disclosure failures, accounting fraud -- that have gone nowhere and suggest to him a pattern. But he offers little more than a Manichean interpretation, driven by a crude political critique that suggests that this is really an orchestrated campaign of rich versus poor (or middle class). He even finds a place for Bernie Madoff, who did go to jail: Madoff, Taibbi explains, finally got caught and convicted because he was a bilking other rich people.
The notion that trillions of dollars can be lost and no one is sent to jail runs through all of this. The idea resists the reality reflected in any economic history going back for centuries: Errors may be made, but markets (and banks) tend to overheat and crash with startling regularity. And while there may be fraud, it probably would not have made a difference in the scope of the disaster. Crashes tend not to be conspiracies.
But what of this notion that we as a society can only move beyond the crisis by sending paddy wagons of Wall Street to Sing-Sing? That a financial disaster demands punishment? Driving this idea is a primitive, if very real, emotion that's particularly prevalent in democracies, which have a tendency to believe that the system is good, but that somewhere, someplace, someone is engaging in a plot to aggrandize itself or its class. And let's face it: This sentiment has been stirred up by the ideological and social complicity of regulators and politicians in the growth of the bubble, and the existence of bailouts (it doesn't matter if they were necessary or effective: They were bailouts, end of story) and by income inequality. This sets up a tension. Those are our regulators, policymakers and politicians. We elected them. We can say that we were fooled by them, or didn't vote for them, but the free-market and deregulatory environment that many believe caused the bubble and breakdown was, for decades, generally applauded, beginning with Ronald Reagan, and cut across party lines. To say that we didn't or couldn't know what was going on is a self-indictment, though it's one that's mightily resisted by the body politic. The only escape is to suggest that these "crimes" took place in darkest secrecy, behind closed doors, by shadowy and immensely figures: that we were taken.
The fact is, the argument that what we need now is to jail as many Wall Streeters as possible may be satisfying psychologically - even if it's a travesty of the law that exists - but it may be the worst thing to do in terms of prevention. (If you think you can get rid of every Wall Streeter involved somehow, then you might as well shutter the place, which is unrealistic. If you think that jailing is somehow a deterrent, then you completely misunderstand bubbles.) In fact, the belief in jailing as a remedy is an escape from any sense of collective responsibility, any sense that the electorate needs a better form of oversight and a more effective cadre of overseers; that greater attention must be paid. Ironically, given the political persuasion of the toss-them-in-jail crowd, sending Wall Streeters to the clink only reinforces the notion that markets and the very nature of the system are fine; that we just need to replace some bad eggs. There's no such thing as a collective mistake, or a widespread error. We needn't explore too far. There's no need to think hard, to be more vigilant, to sacrifice  to achieve prudence, to resist economic euphoria. There is only the clash of rich and not so rich, victim and victimizer; only guilt and innocence. That's an escape from reality just as much as Charlie Sheen's short tenure in rehab. - Robert Teitelman