September 24, 2012 – Op-Ed by Phil Angelides featured in the Politico.
The Obama administration’s investigation of major international banks for manipulation of the “London interbank offered rate,” or Libor, has been in the headlines lately, and that’s good news. The banks’ actions have cost savers and investors dearly; shaken anew confidence in our financial markets; and revealed once again pervasive corruption within our banking system. On this critical issue, the administration has shown teeth — and the international community is hopefully moving swiftly to ensure accountability.
But the administration’s action on this scandal raises a key question: When will we see results from the investigation of Wall Street for the mortgage securities fraud that led to the devastating collapse of the housing, jobs and financial markets?
The president announced the investigation in this year’s State of the Union address, saying a new working group would be staffed by “highly trained investigators to crack down on large-scale fraud.” New York State Attorney General Eric Schneiderman, the co-chairman of that working group and a strong proponent of aggressive action, predicted results within six months.
But the jury is still out on whether the investigation will bring Wall Street CEOs to justice and deter future wrongdoing.
Attorney General Eric Holder acknowledged early this year why a thorough inquiry is so crucial.
“The roots of our recent economic collapse can – in many ways –be traced to instances of unethical and reckless misconduct,” Holder said, “that took place in major financial centers like Wall Street. These abuses have driven away many who were once willing to invest in our economy, and destroyed once-thriving communities. And some of the practices that have been uncovered have placed unprecedented — and unfair — challenges before cash-strapped governments, local police departments, small businesses and American workers and consumers.”
Wall Street executives themselves admit that high-level wrongdoing has become commonplace, threatening the financial system and the economy. Twenty-four percent of senior financial industry executives in the U.S. and Britain said they believe financial services professionals may need to engage in unethical or illegal conduct to be successful, according to a recent survey. Fully 30 percent reported that their compensation or bonus plans create pressure to compromise ethical standards or violate the law.
Only 30 percent of financial industry executives believe that government regulators — the Securities and Exchange Commission in the U.S. and the Serious Fraud Office in Britain — are effectively deterring, investigating and prosecuting misconduct, according to the same survey. So the vast majority of the respondents can see firsthand the inadequacy of efforts to bring financial wrongdoers to justice.
When a much smaller and less complex scandal infected the savings and loan industry in the 1980s, a Republican president and a Democratic Congress supported a wide-ranging investigation fueled by ample resources — including a $50 million appropriation in 1989 alone to hire 450 more personnel. More than 1,000 bank and thrift executives were convicted of felonies.
Yet more than seven months after this current working group was established, and years after the financial meltdown, staffing levels remain well under the levels of the S&L investigation. Reports indicate that approximately 200 personnel are involved in the task force’s investigation, and it’s unclear how many are full-time staff dedicated to this critical mission.
What should be done so that Americans can know, after another seven months, that they have gotten the full-scale investigation that they were promised and deserve?
First, the Justice Department must marshal resources on a dramatically larger scale, including staff from bank regulatory agencies, like the Federal Deposit Insurance Corp. and the Federal Reserve Bank of New York, who know the banking industry inside and out. Congress should approve President Barack Obama’s request for additional funding for the department to fight financial fraud.
Second, while intensifying the investigation, the Justice Department needs to focus on criminal wrongdoing and not just civil prosecutions. Deterring future crimes can’t be accomplished simply through fines or negotiated financial settlements — which many banks regard as the cost of doing business. Senior executives need to know that if they violate the law, there will be real consequences.
Holder noted, “millions of hardworking Americans have lost their jobs and their homes, as well as their hard-earned savings and financial security.” He added, “Just as tragically, many of our fellow citizens have lost faith.”
Restoring that faith will require bringing a renewed sense of urgency to the mortgage securities fraud investigation and applying the resources and commitment needed to do the job. Americans need to know that law breaking at the highest levels will not be countenanced or allowed to jeopardize our financial system and economy.
Phil Angelides, former state treasurer of California, was chairman of the Financial Crisis Inquiry Commission. He can be found on Twitter, @PhilAngelides.