The Obama administration collected some crowd-pleasing headlines with its announcement that the Justice Department is suing Standard & Poor’s, the rating agency that notoriously fueled the financial crisis and crash by duping investors into buying billions in rotten securities. The government is said to be seeking a cash penalty of more than $1 billion.
That sounds good, but President Obama and his administration are stalked by a question of scandal that will not go away: Why isn’t anyone going to jail? The lawsuit’s accusation against S&P sounds like a crime. The firm, it charges, “knowingly and with intent to defraud, devised, participated in, and executed a scheme to defraud investors.” Yet federal investigators seem unable to identify any Wall Street executives to prosecute as criminals.
Why not? The popular explanation, widely shared among citizens, is that leaders of the largest banks and financial firms are given a pass because they are “too big to jail.” The public’s cynicism sounds right. It has become a momentous black mark on the Obama presidency, like a blood stain that cannot be washed away. Does the government operate two systems of justice—one for mom-and-pop criminals and another for influential titans who run the “too big to fail” banks?
These are hard cases to make, as Justice lawyers argue. But when the feds go after the mafia, they usually start at the bottom of the criminal syndicate, put the squeeze on the little thugs and turn them to testify against the big guys who called the shots. That is what financial crimes may require, too.
I have a hunch this scandal is not going away and it will gnaw at Obama during his second term. The outrage will expand as more bits of evidence keep surfacing in various lawsuits. It reminds me a little of the Watergate scandal in the 1970s that unfolded gradually, drip by drip, long after Richard Nixon had won his reelection landslide. As evidence accumulated of criminality in the White House, Nixon was stalked by a single question: What did the president know and when did he know it?
Obama is haunted by a roughly similar question: Who decided that Wall Street mega-banks and their executives must not be prosecuted as criminals for fear this might bring down the entire economy?
Potential examples of the contradiction keep piling up. The Justice Department settles lawsuits with handsome fines, but no indictments. After years of suspicion, HSBC, Europe’s largest bank, was finally nabbed for aiding drug peddlers. Its US affiliate laundered at least $880 million in dollars for Mexican and Colombian drug cartels (often driving the cash over the US border in their own armored cars). HSBC paid a fine and was given what the Justice lawyers call a “deferred prosecution.”