Three of the best-known “Cassandras” credited with shouting to head off the 2008 financial meltdown lambasted the Justice and Treasury departments on Wednesday for failing to prosecute perpetrators on Wall Street and for allegedly going easy on regulating the financial services industry.
The statement to Congress by Attorney General Eric Holder in March saying that bringing criminal charges against large banks will negatively impact the national economy means the “administration of justice is significantly undermined,” said Brooksley Born, the chairman of the Commodity Futures Trading Commission in the late 1990s who also served on the statutory commission that reviewed causes of the 2008 crisis. “The philosophy of the Obama administration has been letting the banks earn their way out, and that banks had to be protected from the rule of law to preserve the financial system,” Born said.
“They are putting their heads in the sand,” she added, stating that Justice has never released results of the referrals for prosecution that the Financial Crisis Inquiry Commission sent the department.
Born spoke at a panel convened by the liberal-leaning Public Citizen group to mark release of a book, “Reality Check: The Forgotten Lessons of Deregulation and Unsung Successes of Sensible Safeguards,” by Taylor Lincoln. The discussion centered on how the powerful financial services industry shifted the regulatory agenda from a consensus on a need for a crackdown soon after the meltdown to a view currently popular in Congress that the main effect of regulations is to kill jobs.
Born’s views were echoed by Neil Barofsky, former special inspector general of the TARP program, who said the 2010 Dodd-Frank Financial Reform law should have been enacted sooner, “when we had our boot on their throats,” before the big banks “re-found their mojo.”
The prosecution strategy of “too big to jail was not just a priority,” he said, adding the Treasury Department pursued a Timothy “Geithner Doctrine of fear that if they let any large bank go under, it will take down the whole system.” Avoiding indicting banks may have made sense in 2009, Barofsky said, but in 2013 the attorney general should be going after the individuals. “This can’t just end with a shrug from the Justice Department,” he said. “We need regulators and Justice to show spine and courage of their convictions.”
Both veteran regulators criticized federal agencies and some lawmakers for being too influenced by the industry’s “captive economists, lawyers and accountants,” in Born’s phrase. Because of lobbying by the highly resourced large banks, she said, lawmakers and regulators analyzing Dodd-Frank now “are not looking back at the lost jobs and the foreclosures but at the fact that it might cost J.P. Morgan 15 cents more for transactions.”
Born complimented the current CFTC for working slowly but steadily to implement Dodd-Frank regulations even as “industry takes every step to delay or overturn the law” while “marketing the view that regulations hurt, not help.”
Barofsky, who published a book on his Troubled Asset Relief Program years titled “Bailout,” said, “The first apparent sign that the industry arguments had become the government arguments” was when Treasury in the first months of the Obama administration named former Goldman Sachs lobbyist Mark Patterson as chief of staff. “The industry owns this town,” he said, “and now a number of the individuals have left Treasury and gone back to Wall Street.” He recalls agency leaders dismissing his ideas, saying, “You’ve never spent a day on the trading desk of a bank.”
Inside Treasury, Barofsky was also told his “harsh tone” would harm his career. “The incentive structure doesn’t encourage aggressive regulation,” he said, noting that the recently open Treasury secretary position was not offered to CTFC chief Gary Gensler or former Federal Deposit Insurance Corporation Chairman Shelia Bair, both of whom favor tougher regulation of financial services giants. He called for higher pay for regulators and tying of bonuses to aggressiveness rather than to automatic steps.
A legislative view was offered by former Rep. Brad Miller, D-N.C., who worked over the past decade to tighten oversight of banks’ subprime lending and laid groundwork for what became the Consumer Financial Protection Bureau.
“The complexity makes this difficult to deal with as a political issue,” he said. Financial services industry people “consider themselves the smartest guys in the room, or any room, so they dismiss regulators as people who mean well.” After the financial crisis, Miller said, he was “stung at how quickly the industry regained its footing” and blocked major reforms,“They were embarrassed for about 15 minutes,” he said.
Though he expressed some optimism that small components of the financial industry are seeing their interests diverge from those of the big banks, “we are losing the rule-making process,” Miller said. Republicans in Congress “want to toughen up cost-benefit analysis to make sure that a rule is the most cost-effective of all the options. But that’s an impossible standard under which no agency could issue any rules,” he said. “We have to give regulators flexibility to apply the law in new circumstances.”