Remember when the economy collapsed because some people were criminally negligent and nobody went to prison?
The headquarters of the Security and Exchange Commission in Washington, DC. Photo via Flickr user US_SEC
If there's anything more maddening than the sheer scale of the financial fraud that sent America and the rest the planet spiralling into the economic abyss in 2008, it's the fact that no Wall Street bankers have gone to jail for causing the mess. As in zero, zilch, none at all.
So at his farewell party last month to celebrate a lengthy career at the Securities and Exchange Commission (SEC) – the US regulatory agency that supposedly keeps Wall Street in check – James Kidney, a trial attorney who had been hamstrung for years by indifferent bosses, broke his silence and went off on an awesome rant about how no one in the financial sector fears the body supposedly policing their behaviour. The SEC, in essence, is a joke.
Describing it as "an agency that polices the broken windows on the street level and rarely goes to the penthouse floors," Kidney told an audience of fellow employees that they had dropped the ball because of a revolving door of corruption between the SEC and Wall Street megabanks. "I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket. They mouthed serious regard for the mission of the Commission, but their actions were tentative and fearful in many instances," he said.
So corruption does not exist solely in the hallowed halls of Congress, where lawmakers spend much of their time on the phone begging for money from plutocrats, but also in the very institution intended to protect the little guy, whether that means investors with small portfolios or families relying on pension funds to survive after their breadwinners' retirements. The only reason Kidney can speak his mind, of course, is that he has no intention of going into private practice, as many former SECers do, which would compel him to keep his mouth shut in hopes of winning banks' business. After all, no one is more useful to Wall Street firms than an ex-regulator who can help them avoid getting punished for coming up with new "innovative financial products" that wind up screwing over the poor and middle classes.
"As people climb the ladder at the agency, they become more timid and it becomes more political," Kidney told me. "If you employ somebody whose goal is to return to Wall Street, you're going to get a different kind of enforcement than from somebody who's willing to make a career out of tough regulations."
Specifically, Kidney is upset with how the SEC whiffed on its signature post-crash case against Goldman Sachs in 2010, when the Vampire Squid whose employees often go on to work in government was charged with fraud for its marketing of subprime mortgage products that helped trigger the housing meltdown. A deal was made in a matter of weeks and the SEC settled the case in exchange for $550 million, an eye-popping fine that made for good tabloid fodder at the time but is really just a drop in the bucket given Goldman's massive ($913 billion at the end of last year) assets.
"I had the feeling that the idea was to push the whole case out the door to show that the SEC was going after Wall Street bad guys even if they were low-level guys," Kidney told me. The SEC only pursued one individual in that case, a 28-year-old vice president named Fabrice Tourre, and when Kidney demanded they go higher up the foodchain and take out Tourre's boss, managing director Jonathan Egol, he got shut down.
And this isn't an exception, but rather just one of many cases that end in obscene settlements where the firms admit no wrongdoing and simply pay fines – which doesn't exactly provide an incentive not to break the rules again, so long as the profits gleaned by the bad behavior are enormous enough to make it worthwhile. Instead of taking down the fat cats, the SEC tends to ruin the lives of minor offenders by pursuing insider trading schemes that barely scratch the surface of all the shady shit going on.
"The last successfully litigated complex financial fraud case was in 2005," said one congressional aide who is active on financial issues. "At this point the entire white collar legal profession and much of the court system is rotten. They are too corrupt to even know what corruption is."
While he was reluctant to go after President Obama too aggressively because the SEC is, technically speaking, an independent agency (and it's the Department of Justice that has the power to file criminal cases that might actually put a banker behind bars, even if the SEC can make criminal referrals to DOJ), Kidney reminded me that the White House does choose the agency's chairman, as well as the attorney general.
"If he wanted more aggressive enforcement, there would be more aggressive enforcement," Kidney said of Obama, who along with the Democratic Party's various committees raked in $28.82 million from Wall Street banks for his first presidential campaign in 2008 and plenty more since.
Having successfully made some noise and drawn renewed scrutiny to our middling-at-best regulatory and enforcement system, Kidney is content to settle into retirement, and plans to become a docent at the American History Museum in DC and provide part-time legal aid at the Community Council for the Homeless. But those still struggling to rein in financial titans in the US capital take little solace in one man's courage, breath of fresh air though it may be.
"If this keeps up there will be a revolution," said the congressional aide. "That is Obama's legacy, a thoroughly corrupted legal system."
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