Some “officers of the court”—prosecutors and judges—are pushing back against the Obama administration’s go-easy passivity toward bankers accused of gross financial fraud. The feds, instead of investigating and prosecuting, are urging the fifty state attorneys general to settle for a sweetheart deal with the biggest banks. The bankers would put up cash—maybe $25 billion—and the state prosecutors would promise not to send any of them to jail.

But to the public, as the foreclosure crisis deepens, such forgiving transactions are taking on a bad odor. We’re happy to note that a stubborn minority of authorities don’t like the smell either. They’re insisting on more rigorous legal procedure: enforce the law before trading away anything with the culprits. New York Attorney General Eric Schneiderman pioneered this resistance; he’s been joined by Delaware AG Beau Biden.

The scandal is systemic and has three layers: the corrupt practices common among the leading banks; the colossal failure of the SEC and other regulatory agencies; and the politicians who tolerate and defend this degradation of law.

Massachusetts Attorney General Martha Coakley has filed a lawsuit against five of the largest banks (Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and GMAC), accusing them of using fraudulent documents to seize homes illegally. In Nevada, ground zero for foreclosures, Attorney General Catherine Cortez Masto has filed criminal fraud charges against five supervisors at a major mortgage-servicing firm. This is a first in the nation, according to Matt Stoller of the Roosevelt Institute. And it could have a salutary effect: people facing jail time may be more likely to testify against their superiors—the executives who authorized the lawbreaking.

The most spectacular rebuke to lax law enforcement came from federal Judge Jed Rakoff, who rejected an SEC settlement with Citigroup, dismissing it as “neither reasonable, nor fair, nor adequate, nor in the public interest.” Citigroup had engineered one of those deals in which it sold a derivative to investors but did not tell them Citi was itself betting the financial instrument would fail. It did, investors lost
$700 million and the bank made
$160 million in profit. The SEC fined Citi a trivial $95 million and made it surrender the profit, with interest. But the bank was allowed to neither admit nor deny the charges, only to promise never to do it again. Ridiculous! Rakoff exploded, as he has before.

Here’s the real scandal: Citigroup has done this many times, getting caught by the SEC, promising to be good and getting caught committing the same offense. It would pay a nominal fine and be free to break the law again. This is not law; it is a toll gate for criminal activity. Over the past fifteen years Citi has been a repeat offender on interstate commerce fraud, as well as on securities fraud, for a total of eight offenses. In fact, the biggest banks are a rogues’ gallery of recidivists: JPMorgan Chase, six offenses; Bank of America, eight; Morgan Stanley, five; Goldman Sachs, three; Wachovia (now Wells Fargo), three, according to the diligent work of New York Times reporter Edward Wyatt. It seems the smart money knew the game was rigged. Evidently so did the American people.

Shame on the banks, and shame on the regulators and corrupt politicians. And hats off to Schneiderman, Coakley, Rakoff and the other stewards of financial decency. Keep in mind who stood up for the law and who didn’t the next time you hear a politician whining about the public’s lack of trust in Washington.