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"Forgive me," began Charles Ferguson, the director of Inside Job, while accepting his 2011 Oscar for Best Documentary. "I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that's wrong." The audience erupted in applause.
Ferguson is not the first to express outrage over the lack of criminal cases to spring from the financial crisis, and his speech triggered a wave of similarly prosecutorial sentiments. Since that February night, financial journalists, bloggers, and who knows how many dinner party guests have debated the trillion-dollar question: When will a Wall Street executive be sent to jail?
There are those who have implied that prosecutors are either too cozy with Wall Street or too incompetent to bring cases to court. Thus, in a measured piece that assessed the guilt of various financial executives, New York Times columnist Joe Nocera lamented that "Wall Street bigwigs whose firms took unconscionable risks … aren't even on Justice's radar screen." A news story in the Times about a mortgage executive who was convicted of criminal fraud observed, "The Justice Dept. has yet to bring charges against an executive who ran a major Wall Street firm leading up to the disaster." In the same dispassionate tone, National Public Radio's All Things Considered chimed in, "Some of the most publicly reviled figures in the mortgage mess won't face any public accounting." New York magazine saw fit to print the estimable opinion of Bernie Madoff, who observed that the dearth of criminal convictions is "unbelievable." Rolling Stone, which has been beating this drum the longest and with the heaviest hand, reductively asked, "Why isn't Wall Street in jail?"
Taken from the top, these sentiments imply that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.
These assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was "caused by financial fraud" is debatable, but the weight of the evidence is strongly against it. The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.
Mortgage fraud exacerbated the bubble—as did, among other factors, lax monetary policy, failure by Congress and successive administrations to rein in Fannie Mae (FNMA) and Freddie Mac (FMCC), and weak financial regulation, itself a product of the discredited but entrenched thesis that markets are efficient and self-policing. At the banks, overconfidence in "risk management" methods (which were mostly worthless) and ill-considered compensation practices were serious contributing causes.
As this list suggests, the meltdown was multi-causal. That explanation will be unsatisfying to armchair prosecutors, but it has the virtue of answering to the complex nature of the bubble. To prosecute white-collar crime is right and proper, and a necessary aspect of deterrence. But trials are meant to deter crime—not to deter home foreclosures or economic downturns. And to look for criminality as the supposed source of the crisis is to misread its origins badly.
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