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The Financial Crisis on Trial: What Went Wrong

Published online by Cambridge University Press:  22 December 2021

John H. Sturc Open the ORCID record for John H. Sturc [Opens in a new window]
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Abstract

Americans demanded retribution from the mortgage lenders whose subprime loans defaulted and from investment bankers whose mortgage-backed securities sharply declined in value in 2007, leading to financial panic and the Great Recession. From 2008 to 2019, the federal government extracted hundreds of billions in fines from dozens of corporations, but few individual business executives were held accountable, and no senior banker was convicted of a crime. I use the trial court record of five government enforcement cases against individuals to explain this apparently anomalous result. I conclude that, in addition to a lack of funding, the prosecution effort was hindered by the government’s erroneous selection of cases to pursue. Further, the diffused nature of decision making in the mortgage finance market made it difficult to prove that any one senior-level participant had the criminal intent necessary for a conviction or a Securities and Exchange Commission civil fine or injunction. The trial results also support the argument that the growth and consolidation of investment banks from 1990 to 2008 created incentives for misconduct within the firms.

Keywords

Financial Crisisgovernment enforcementfinancial regulationbusiness crime
Type
Article
Information
Enterprise & Society , Volume 24 , Issue 1 , March 2023 , pp. 222 - 252
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Business History Conference. All rights reserved

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References

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Buell, Samuel W. Capital Offenses: Business Crime and Punishment in America’s Corporate Age. New York: W. W. Norton & Co, 2016. Kindle edition.Google Scholar
Coffee, John C. Jr. Corporate Crime and Punishment: The Crisis of Underenforcement. New York: Berritt-Koehler, 2020. Kindle edition.Google Scholar
Cohan, William D. House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. New York: Random House, 2009.Google Scholar
Connaughton, Jeff. The Payoff: Why Wall Street Always Wins. Westport, CT: Prospecta Press, 2012.Google Scholar
Eisinger, Jesse. The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. New York: Simon & Schuster, 2017.Google Scholar
Farrell, Greg. Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near Collapse of Bank of America. New York: Crown Publishing, 2010.Google Scholar
Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report. New York: Cosimo, 2011.Google Scholar
Gasparino, Charles. The Sellout. New York: HarperCollins, 2009.Google Scholar
Kaufman, Henry. On Money and Markets. New York: McGraw-Hill, 2000.Google Scholar
Kindleberger, Charles P., and Aliber, Robert Z.. Manias, Panics and Crashes: A History of Financial Crises, 6th ed. New York: Palgrave Macmillan, 2011.Google Scholar
Lewis, Michael. Liar’s Poker. New York: W. W. Norton & Co., 1989.Google Scholar
McLean, Bethany, and Elkind, Peter. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio Penguin, 2013. Kindle edition.Google Scholar
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Morgenson, Gretchen, and Rosner, Joshua. Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. New York: Henry Holt & Co, 2011.Google Scholar
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Ramirez, Steven A. Lawless Capitalism: The Subprime Crisis and the Case for an Economic Rule of Law. New York: New York University Press, 2013.Google Scholar
Rosoff, Robert, Pontell, Henry, & Tillman, Robert. Profit Without Honor: White Collar Crime and the Looting of America. Boston: Pearson Publishing, 2009.Google Scholar
Shiller, Robert J. The Subprime Solution. Princeton, NJ: Princeton University Press, 2008.Google Scholar
Taub, Jennifer, Big Dirty Money: The Shocking Injustice and Unseen Cost of White Collar Crime. New York: Viking Press, 2020.Google Scholar
Black, William K. “The Department of Justice Chases Mice While Lions Roam the Campsite: Why the Department Has Failed to Prosecute the Elite Frauds that Drove the Financial Crisis.” Missouri-Kansas City Law Review 80, no. 4 (2012): 987–1019.Google Scholar
Breslow, Jason M. “Lanny Breuer: Financial Fraud has Not Gone Unpunished.” Frontline, January 22, 2013. https://www.pbs.org/wgbh/frontline/article/lanny-breuer-financial-fraud-has-not-gone-unpunished/Google Scholar
Fligstein, Neil, and Roehrkasse, Alexander F.. “The Causes of Fraud in the Financial Crisis of 2007 to 2009: Evidence from the Mortgage-Backed Securities Industry.” American Sociological Review 81, no. 4 (August 2016): 617–643.CrossRefGoogle Scholar
Garrett, Brandon L. “The Rise of Bank Prosecutions.” Yale Law Journal Forum 126, no. 33 (May 2016): 33–56.Google Scholar
Griffin, John M. “Ten Years of Evidence: Was Fraud a Force in the Financial Crisis?” February 18, 2019, ssrn.com/abstract=3320979.CrossRefGoogle Scholar
Pollack, Alex J., Hamandi, Hashim, and Leung, Ruth. “Banking Credit System, 1960–2020.” Washington, DC: Office of Financial Research, 2021. https://www.financialresearch.gov/from-the-management-team/2021/01/06/banking-credit-system-1970-2020/Google Scholar
Rakoff, Jed S. “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” New York Review of Books, January 9, 2014, www.nybooks.com/articles/2014/Jan09/financial-crisis-why-no-executive-prosecutions/Google Scholar
Schwarcz, Steven L. “Excessive Corporate Risk-Taking and the Decline of Personal Blame.” Emory Law Journal 65, no. 534 (2015): 533–580.Google Scholar
Skinner, Christina Parajon, “Misconduct Risk.” Fordham Law Review 84, no. 4 (2016): 1559–1610.Google Scholar
U.S. Department of Justice, Office of the Inspector General. Audit of the Department of Justice’s Efforts to Address Mortgage Fraud, Audit Report No. 14-12, March 2014. https://oig.justice.gov/reports/2014/a1412.pdfGoogle Scholar
US Department of Justice, Special Counsel for Financial Institution Fraud. Special Report. Washington, DC: Department of Justice, 1995.Google Scholar
Weidman, Leon (Lee). “Civil Remedies for Mortgage Fraud.” United States Attorneys’ Bulletin 58, no. 3 (May 2010): 22–28.Google Scholar
The Atlantic Google Scholar
The New York Times Google Scholar
The New York Review of Books Google Scholar
Reuters Google Scholar
The Wall Street Journal Google Scholar
Flannery v. Securities & Exchange Commission, 810 F.3d 1 (1st Cir., 2015).CrossRefGoogle Scholar
In the Matter of Credit Suisse Alternative Capital, LLC, Credit Suisse Asset Management, LLC, and Samir H. Blatt , Admin. Proceeding File No. 3-1495, Oct. 19, 2011, avail. at www.sec.gov/litigation/admin/2011/33-90628.html.Google Scholar
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In the Matter of Harding Advisory LLC and Wing F. Chau , Administrative Proceeding File No. 3-14474 (Jan. 6, 2017).Google Scholar
In the Matter of John H. Gutfreund , et al., 51 S.E.C. 93 (1992).Google Scholar
Securities and Exchange Commission v. Angelo Mozilo , et al. CV-09-03994 (JFW) (C.D.Cal. 2009).Google Scholar
Securities & Exchange Commission v. Brian H. Stoker . Civil Action No. 11 Civ 7388 (JSR) (S.D.N.Y. 2011).Google Scholar
Securities & Exchange Commission v. Citigroup Capital Markets, Inc ., 752 F.3d 285 (2d Cir., 2012).Google Scholar
Securities & Exchange Commission v. Citigroup Global Markets, Inc ., 827 F. Supp. 2d 328, 333 (S.D.N.Y. 2011)Google Scholar
Securities & Exchange Commission v. Edward S. Steffelin , Civil Action No. 1:11-cv-04204 MGC (S.D.N.Y. 2011).Google Scholar
Securities & Exchange Commission v. Fabrice Tourre , Civil Action No. 1:10-cv-3229 (KBF) (S.D.N.Y. 2010).Google Scholar
Securities and Exchange Commission v. Larry A. Goldstone , et al., Civil Action No. 1:12-cv-00257 (D. N.M. 2012).Google Scholar
Securities & Exchange Commission v. Larry A. Goldstone , et al., 253 F. Supp. 3d 1169 (D.N.M. 2017).Google Scholar
Securities & Exchange Commission v. Reserve Management Company, Inc ., et al., Civil Action No. 09 Civ. 4346 (PGG) (S.D.N.Y. 2013).Google Scholar
United States ex rel. Edward O’Donnell v. Countrywide Financial Corporation , et al. Case No. 1:12 CV 01422 (JSR) (S.D.N.Y 2012).Google Scholar
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United States ex rel. O’Donnell v. Countrywide Financial Corp ., et al. 83 F. Supp. 3d 528, 535 (S.D.N.Y. 2015).Google Scholar
United States ex. Rel . O’Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650 (2d Cir. 2016).Google Scholar
United States v. Barclay’s Capital, Inc ., et al, Civil Action 1:16-cv-7057 (E.D.N.Y. 2016).Google Scholar
United States v. Ebbers , 458 F.3d 110 (2d Cir., 2006).Google Scholar
United States v. Michael R. Milken, Criminal Action 89 cr 41 (S.D.N.Y. 1990).Google Scholar
United States v. Paul Mangione , Civil Action 1:17-5305 (E.D.N.Y, Sept.11, 2017).Google Scholar
United States v. Ralph Cioffi and Matthew Tannin , 1:08 CR 00415 (2008).Google Scholar
United States v. Skilling , 554 F.3d 529 (5th Cir. 2009).Google Scholar