Too Big To Jail? Executives Unscathed As
Regulators Let Banks Report Criminal Fraud
Huffington Post Investigative Fund
  |  David Heath

First Posted: 05- 3-10

Too Big To Jail

The financial crisis has spawned hundreds of criminal prosecutions
for alleged fraud. Yet so far, defendants have been mostly minor players
such as real-estate agents, mortgage brokers, borrowers and a few
low-level bank employees. No senior executives at large financial
institutions face criminal charges.

That’s in stark contrast to prosecutions during the savings and loan
scandal two decades ago, when the government’s strategy targeted and
snagged some of banking’s most powerful players. The approach back then
succeeded in sending scores of S&L executives to prison, as well as
junk-bond king Michael Milken and business tycoon Charles Keating Jr.

One explanation for the difference may be that key bank regulators —
who did the detective work during the S&L crisis and sent more than
1,000 criminal referrals to prosecutors — have this time left
reporting fraud up to the banks themselves.

Spokesmen for two chief regulators, the Comptroller of the Currency
and the Office of Thrift Supervision, say that they have not sent
prosecutors a single case for criminal prosecution.

An OTS spokesman said the agency, much like the banks themselves,
does not see much evidence of criminal fraud inside the financial
institutions. The spokesman, Bill Ruberry, citing the agency’s
enforcement director, said, "There may be some isolated cases, but
certainly there’s no widespread patterns."

That surprises William K. Black, a former OTS official who helped
coordinate criminal investigations during the S&L crisis.

Story continues

"Dear God," Black said when told bank regulators haven’t made any
criminal referrals. "Not a single one?"

Black sees many signs the the government is less aggressive than
during the S&L era — and could result in more bad behavior.

"This crisis was not bad luck," he said. "It was done to us. When you
bring those convictions, you hope that at least for a while to deter."

Banks have reported massive amounts of fraud to the Treasury
Department but have not held themselves — or their top executives —
responsible, instead pinning blame on borrowers, independent mortgage
brokers, and others.

That may account for the dearth of prosections against big fry. For
instance, in California, among states where the mortgage meltdown hit
hardest, the Huffington Post Investigative Fund identified 170 mortgage
fraud prosecutions in federal courts. Only two are against employees of a
regulated lender.

An Investigative Fund analysis shows that two-thirds of the 170
prosecutions are against mortgage brokers, real-estate professionals or
borrowers — the same groups blamed by the banks when they report
suspicious activities to regulators.

Besides the absence of criminal referrals, other plausible factors
for the lack of major prosecutions may include a skittishness among
prosecutors about filing cases they could have trouble winning, and a
severe decline in investigative resources. The FBI dramatically shifted
resources away from white-collar crime after the 2001 terrorist attacks.

To be sure, there are also notable differences between the S&L
and current financial crisis, in the behavior of lenders during both
periods, and between civil allegations of fraud and proving that someone
committed a crime — all of which could account for the lack of big

But interviews with several law enforcement authorities suggest
another explanation: A lack of active assistance to prosecutors by bank
regulators who played key roles during the S&L crackdown. Those
regulators sent detailed reports to prosecutors of known and suspicious
criminal activity.

"Only the regulators can make a lot of these cases," Black said. "The
FBI can make a few, but the regulators are the ones that understand the


Under intense political pressure in the late 1980s, the Justice
Department and thrift regulators developed a strategy to thoroughly
investigate failed S&Ls for evidence of fraud and to focus their
resources on the highest ranking executives.

In the early years, between 1987 and 1989, there were more than 300
prosecutions. Some bank executives were already behind bars. In 1989,
Woody Lemons, chairman of Vernon Savings and Loan in Texas, was
sentenced to 30 years.

In June 1990, then-OTS director Timothy Ryan told Congress that his
agency had established criminal-referral units in each of 12 district
offices. In addition, more than 30 OTS employees were assigned as
full-time agents of grand juries or assistant US attorneys to help
prosecutions. And the agency prioritized prosecutions to a Top 100 list,
targeting senior S&L executives and directors.

While data on criminal referrals during the S&L crisis is spotty,
the Government Accountability Office reported that in the first ten
months of 1992 alone — a random snapshot — financial regulators sent
the Justice Department more than 1,000 cases for criminal prosecution.

One study showed that 35 percent of criminal referrals in Texas —
ground zero for the S&L problems — were against officers and

This time, prosecutors are relying more heavily on banks to report
suspicious activity to the Treasury Department. Banks are required to
report known or suspected criminal violations, including fraud, on
Suspicious Activity Reports designed for the purpose. In effect, the
reports, which can be many pages in length, provide substantive leads
for criminal investigations.

Black scoffs at the strategy of leaving it to banks to ferret out all
the fraud. "Institutions will not make criminal referrals against the
people who control the institutions," said Black.

A white-collar criminologist and law professor at the University of
Missouri-Kansas City, he argues that there’s ample evidence of fraud.
Insiders working for lenders openly referred to loans they made without
proof of income as "liar loans." Many banks actively sought inflated
appraisals in their rush to make as many loans as possible. As
previously reported by the Investigative Fund, such lending practices
contributed to the demise of Washington Mutual.

Not everyone agrees that such a case can be successful. Benjamin
Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases
in Sacramento, Calif., points out that banks lose money when a loan
turns out to be fraudulent. An investor in loans who documents fraud can
force a bank to buy the loan back. But convincing a jury that
executives intended to make fraudulent loans, and thus should be held
criminally responsible, may be too difficult of a hurdle for

"It doesn’t make any sense to me that they would be deliberately
defrauding themselves," Wagner said.

So far, only sporadic news reports suggest that the Justice
Department has ongoing criminal investigations against major banks such
as Washington Mutual and Countrywide, as well as investment bank Goldman

Fewer Cops on the Beat

The Justice Department, in response to written questions from the
Investigative Fund, acknowledged the absence of criminal referrals from
financial regulators. Months into the financial crisis, a new Financial
Fraud Enforcement Task Force, formed by President Obama last fall, was
trying to work out communication problems between Justice and the
regulatory agencies, according to the head of the task force, Robb
Adkins. Adkins has said that criminal referrals from regulators have
been "too often the exception to the rule."

At a Congressional hearing in December, Assistant Attorney General
Lanny Breuer was asked why there have been no criminal cases brought yet
against CEOs. "Don’t for a moment think [these cases] aren’t being
investigated," Breuer replied. "They are complicated cases. It took a
long time in hatching them and developing them. But they will be

The system that tracks Suspicious Activity Reports, or SARs, detected
a dramatic increase in mortgage fraud starting in 2003, when reports of
mortgage fraud nearly doubled within a year from 5,400 to 9,500. By
2007, the number had exploded to 53,000. During those same years, many
mortgage lenders dramatically lowered their lending standards. Banks
often required no proof of income. Borrowers could even get loans
without be able to repay them.

Yet in their reports, banks overwhelmingly have blamed others for
fraud. Whenever a borrower’s income was wrong on a loan application, the
banks fingered borrowers 87 percent of the time and independent
mortgage brokers 64 percent of the time, according to a 2006 Treasury
analysis of the SARs. But the bank’s own employees were almost never
blamed — only about four times in every 1,000 reports.

That might explain why so few prosecutions have targeted bank

Another reason for fewer prosecutions against bank employees is that
the Federal Bureau of Investigation has far fewer agents working on the
current crisis. Deputy Director John Pistole testified before Congress
last year that the bureau had 1,000 people working on the S&L crisis
at its height. That compares to about 240 agents working on mortgage
fraud cases last year.

The FBI dramatically shifted its resources away from white-collar
crime and to terrorism after the Sept. 11 attacks.

"We just didn’t have the cops on the beat" during the recent crisis,
said Sen. Ted Kaufman, the Delaware Democrat who conducted a hearing on
the lack of criminal prosecutions. "I was around during the savings and
loan crisis [as a Congressional aide] and we had a lot more folks
working it when it went down."

Even with additional funding from Congress, which Kaufman helped push
through, the FBI is budgeted to have 377 people working mortgage fraud
cases this year, about a third as many as during the S&L

Charges Harder to Prove?

Charges in the recent banking crisis may be harder to prove, said
Robert H. Tillman, who teaches at St. John’s University and who analyzed
data about S&L prosecutions. Savings and loan executives who were
convicted often personally approved large commercial loans for projects
doomed to fail. Some would use federally insured deposits to pay
themselves excessive salaries or to lend money to their own real estate
projects. A few even took kickbacks.

This time, lending executives may have encouraged the making of bad
loans, but they generally did not personally approve the loans, Tillman
said. They didn’t send emails telling the troops to make fraudulent
loans but paid big commissions to loan offers who made risky loans. Then
the executives were able to reap huge bonuses for making the company
look so profitable.

So far, the biggest cases have been civil lawsuits brought by the
Securities and Exchange Commission, including most recently a highly
publicized securities fraud case against Goldman Sachs and one of its
vice presidents, Fabrice P. Tourre. News reports suggest that a referral
from the SEC’s enforcement division to the Justice Department has led
to a criminal inquiry.

Typically, federal authorities deal with massive financial scandals
by picking a few cases they are confident they can win, said Henry
Pontell, an expert on fraud at the University of California — Irvine.

This time, the administration may have been more focused on saving
failing banks — and an entire financial system — than in prosecuting
bank executives, Pontell said. Giving billions in bailout dollars to
executives who encouraged fraudulent practices not only could complicate
a case, it could prove embarrasing, he added.


2 thoughts on “TOO BIG TO JAIL (PART II)


  2. Here comes the story of the ‘Hurricane’

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