Why No Prosecutions

The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it.  

The NYT editorial incorrectly states that the relevant statute of limitations have expired.  The usual statutes of limitations have or will shortly expire, but not those under FIRREA (for frauds that affect federally insured banks), which are 10-years long. So there is still theoretically the possibility of prosecutions (and remember that Mozilo's deal, for example, was with the SEC, not with the states...). But don't count on it happening.

My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis. These two failures are intimately tied, of course. Both are explained by the "Obama administration’s emphasis on protecting the banks from any perceived threat to their post-bailout recovery." 

The logic here is that financial stability and economic recovery are more important than rule of law. There's an argument to be made that law has to give way to basic economic needs.  I, however, would reject the choice as false. Instead, the best way to restore confidence in markets is to show that there is rule of law.  The best route to economic recovery was through rule of law, not away from it. (Yes, I realize there are those who would argue that the GM/Chrysler bankruptcies and cramdown aren't rule of law, but rule of law can include flexible systems like bankruptcy, rather than just rigid rules.)

The Administration, however, determined that it wasn't going to rock the boat via prosecutions, even though there is no person in the banking system who is so indispensible to economic stability as to merit immunity from prosecution, and as the experience of 2008-2009 shows, recapitalizing institutions isn't rocket science. In any case, the Administration's policy has produced the worst of all worlds, where we have neither justice nor economic recovery. This is our new stagflation. Call it injusticession.