Unintended Consequences (Gwen Moritz Editor's Note)

The question of why no big-name, big-shot bank CEOs went to prison after conspiring to blow up the global economy by creating and selling products so toxic that they were actively betting that they would fail is like the weather: Everyone talks about it, but it seems no one can do anything about it.

Watching PBS’ “Frontline” 2013 documentary on the issue — called, appropriately, “The Untouchables” — left me with the impression that Lanny Breuer, assistant attorney general for the U.S. Department of Justice’s Criminal Division, just didn’t have an appetite for prosecuting bad actors.

An article in Sunday’s New York Times Magazine (which was published online last week) provides ever so much more detail and insight into the DOJ’s paralysis, some of which may have been a lack of appetite but much of which was the unintended consequence of knee-jerk policy changes. (It also serves as a reminder that video is infinitely better than print for some kinds of storytelling, but not for this kind.)

Jesse Eisinger, a senior reporter for ProPublica, the Pulitzer Prize-winning nonprofit investigative organization, spent a year interviewing “Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors” in his quest “to understand why the largest man-made economic catastrophe since the Depression” had sent only one banker to federal prison.

And that was a guy most of us had never heard of: Kareem Serageldin, a Credit Suisse executive who admitted that he knowingly allowed some of the mortgage-backed securities held in the bank’s portfolio to be valued higher than their true market value. In other words, he didn’t “mark to market,” making Credit Suisse’s assets look better than they really were back in 2007, when he was in his mid-30s.

In the glacial way federal prosecutions proceed, he was indicted in February 2012 and pleaded guilty in April 2013. In November, he was sentenced to 30 months in prison, a punishment he began serving in January.

By way of comparison, that’s the exact sentence that Little Rock accountant and real estate developer Steve Clary drew back in October for misappropriating $1.6 million of a bank loan in 2008. (And Clary’s case has been almost as glacial, except he was indicted much faster — in 2010. He still hasn’t gone to prison, having been granted until May 12 to report.)

It’s hard to know whether Serageldin’s sentence was compassionately lenient, as it seems when compared with Clary’s, or unconscionably harsh when one considers how many other Wall Street bankers are continuing to draw obscene salaries when they were undoubtedly guilty of the same or much, much, much worse.

So what made Serageldin’s case special? Essentially this, Eisinger concluded: Serageldin was willing to admit his responsibility and “pay my debt to society.” A legion of others were not, and a patchwork of factors made it unlikely — almost impossible even — to prosecute and convict those crooks who weren’t as principled as the only one who is doing time.

Let that sink in. When it comes to white-collar crime on this systemic, firestorm level, the U.S. Department of Justice was so hamstrung that it had to hope that a Wall Street executive would 1) feel guilty and 2) feel so guilty that he was willing to work against his own interest. Because otherwise, these guys knew they were going to skate.

The factors at play include the fallout from earlier prosecutions like KPMG executives who were improperly pressured to sign away attorney-client privilege and Enron CEO Jeffrey Skilling, whose conviction on one charge, “honest services fraud,” was overturned when the U.S. Supreme Court ruled that it wasn’t even a crime.

The experience of prosecuting Arthur Andersen, formerly one of the biggest accounting firms in the country, also left a scar. After more than 10,000 people lost their jobs, the conviction against the corporation itself was overturned. Eisinger found that the fear of punishing the innocent along with the guilty was a factor in making some of the banks and their executives too big to prosecute.

And, sadly, he also found that there really was limited appetite for bringing criminal cases. “A former prosecutor at the Justice Department in Washington concurred that Bruer’s staff didn’t ‘want to pursue cases where they feel the person is 100 percent guilty but they are only 70 percent sure they can win at trial,” Eisinger wrote.

No one wants to see the overwhelming power but limited resources of the federal government unleashed willy-nilly, but what kind of deterrent to bad behavior do we have if the power and resources can’t be used even when they need to be?

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.