How They Got Away With It

White Collar Criminals and the Financial Meltdown

Susan Will, Stephen Handelman, David C. Brotherton

• Publisher: Columbia University Press
• Year: 2012
• ISBN:
  9780231527668
• Topic: Law
• Subtopic: Ethics & Professional Responsibility in Law
• Index: Law

A team of scholars with backgrounds in criminology, sociology, economics, business, government regulation, and law examine the historical, social, and cultural causes of the 2008 economic crisis. Essays probe the workings of the toxic subprime loan industry, the role of external auditors, the consequences of Wall Street deregulation, the manipulations of alpha hedge fund managers, and the "Ponzi-like" culture of contemporary capitalism. They unravel modern finance's complex schematics and highlight their susceptibility to corruption, fraud, and outright racketeering. They examine the involvement of enablers, including accountants, lawyers, credit rating agencies, and regulatory workers, who failed to protect the public interest and enforce existing checks and balances. While the United States was "ground zero" of the meltdown, the financial crimes of other countries intensified the disaster. Internationally-focused essays consider bad practices in China and the European property markets and draw attention to the far-reaching consequences of transnational money laundering and tax evasion schemes. By approaching the 2008 crisis from the perspective of white collar criminology, contributors build a more general understanding of the collapse and crystallize the multiple human and institutional factors preventing capture of even the worst offenders.

[ PART I ]

ROOTS OF THE CRISIS

While the vulnerabilities that created the potential for crisis were years in the making, it was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008…. When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. This happened not just in the United States but around the world.

—(Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Official Government Edition 2011, xvi).

[ 1 ]

WALL STREET

Crime Never Sleeps

DAVID O. FRIEDRICHS

The global economic and financial crisis that began in 2007, and reached an especially intense apex in the fall of 2008, has been widely described as the worst such crisis since the Great Depression of the 1930s. If the financial meltdown has multiple dimensions and involves a variety of causes, fraudulent misrepresentations in many different forms and on many different levels were clearly at the center of this catastrophe.

Analysis of, and commentary on, the global economic crisis has poured forth from a wide range of sources; and in the academic realm, in particular, from historians, economists, political scientists, law professors, and many others. Overall, to date, criminology and criminal justice have not had a high profile in the avalanche of analysis and commentary. It is a core premise of this chapter that criminologists should be well qualified to make useful and unique contributions to understanding the financial crisis and should be able to frame the ongoing dialogue on the optimal response to the crisis in a form that constructively complements the dominant voices in this dialogue. It is obviously difficult to overstate what is at stake in arriving at the most comprehensive understanding of the causes of the crisis and the importance of the perspectives, policies, and practices that might impose fundamental constraints on a similar crisis in the future.

The objectives of this chapter are as follows. First, to address the financial crisis as crime in conceptual terms: If crime—and, more specifically, white collar crime—played a central role in this crisis, in what sense of the term crime was this the case, and what form of white collar crime was involved? Second, to address the financial crisis as crime in contextual terms: How should the consequences of crime on Wall Street be understood in relation to the consequences of crime on Main Street? And third, to address the financial crisis as crime in critical terms: What kinds of transformative perspective and policy initiatives are needed if we are to minimize the chances of a catastrophic financial crisis in the future?

In the wake of the financial crisis, many excellent books, along with countless articles and columns, on how and why this crisis occurred have been produced (e.g., Cassidy 2010; Johnson and Kwak 2010; Lowenstein 2010; Prins 2009; Roubini and Mihm 2010; Stiglitz 2010). Those who have written these books have included highly respected economists and financial journalists. Although some of the key dimensions of these analyses must be included here, the overriding objective is to complement rather than to duplicate these efforts. Accordingly, the goal is to apply a specifically criminological framework—one rooted in the traditions of white collar crime and critical criminological scholarship—to the financial crisis. But both of these traditions within criminology have always drawn upon an especially broad range of sources. Similarly, the interdisciplinary character of this anthology recognizes that the financial crisis and the wrongdoing associated with it can be understood in a sophisticated way only by drawing upon many different academic and professional perspectives.

Muckraking journalists and investigative reporters have made and continue to make important contributions to our understanding of crime in high places, in part because of both the resources and the special access available to them to investigate this world. The segment of the media that covers the financial industry did not always collectively and skeptically question the claims made by spokespersons for this industry. But white collar and critical criminologists need not be apologetic about drawing upon the work of those journalists who have been at the forefront of exposing fraud in the financial industry, as well as the contributions of those from a range of academic disciplines. The complexity of sophisticated crimes perpetrated by powerful institutions and individuals requires an interdisciplinary approach.

Criminology, throughout its history and into the present, has focused disproportionately on conventional forms of crime and delinquency and on their control. The belief that conventional crime and delinquency result in significant social harm, and accordingly should be addressed, is a core raison d’être for the field of criminology. But criminologists who focus upon white collar crime have long believed that by many standard measures the harms caused by such crime outweigh those caused by conventional forms of crime and delinquency. Accordingly, criminologists who specialize in white collar crime have been disturbed and puzzled by the lack of proportionality in the field: That is, a great deal of criminological attention and research focuses upon less consequential forms of crime, and far less attention and research are focused upon the most consequential forms of crime. Elsewhere, I have referred to this situation in terms of an “inverse hypothesis,” where the proportion of criminological attention to a form of crime varies inversely with the objectively identifiable level of harm caused by such crime (Friedrichs 2007, 5). Of course this “hypothesis” may be regarded as somewhat hyperbolic by some, but I believe there is a strong mea sure of truth to it.

The Causes of the Financial Crisis—and Attributing Responsibility

Who or what is to blame for this economic and financial crisis? The list is very long and includes Wall Street, Washington, and Main Street (Kowitt 2008; Morris 2008; Ritholtz 2009). In the simplest and most colloquial terms, Wall Street is blamed for unsound, highly risky practices; Washington is blamed for regulatory failure and bad policies; and Main Street is blamed for living beyond its means. The specific list of blameworthy parties and institutions in relation to the financial crisis can be expanded almost indefinitely (Gibbs 2009). It includes, but is not necessarily limited to, recent presidents; cabinet secretaries; high-level legislators; regulatory agency chairs and staff; government-sponsored entities (e.g., Fannie Mae and Freddie Mac) and their directors and staff; financial industry lobbyists; investment bankers; credit rating agencies; insurance division chiefs; major home builders; and mortgage lenders. Corporate boards played a role, as they are ridden with conflicts of interest, have awarded unwarranted and exorbitant compensation packages, and have failed to effectively oversee excessively risky practices (Ritholtz 2009). “Risk officers” who had the specific responsibility of overseeing and evaluating the risks in banking investments obviously did a very poor job (Story and Dash 2009). Lawyers—as legislators, as regulators, as judges, and as counselors—played a key role in drafting legislation, disregarding dangerous initiatives, blocking shareholder lawsuits, and sanctioning highly questionable deals as legally sound (Carter 2009).

Other entities and parties can also be blamed, ranging from high-level economists, hedge fund managers, and media-show promoters to traders and leaders of countries such as China and Iceland who adopted or promoted practices that contributed to the economic crisis and financial meltdown. In the view of some prominent behavioral economists, the classic economic model of a “rational man” is wrong. The financial crisis must be understood as reflecting, among other things, the “animal spirits” of human beings and their strong tendency to act in irrational ways, independent of economic motivations (Akerlof and Shiller 2009). The much-invoked fundamental human concept of “greed,” as well as “delusional optimism,” was clearly involved (Ehrenreich 2008). The recent era embraced with abandon a “fundamentalist” belief in the unlimited potential of free markets and their capacity to be self-regulatory. Broad dimensions of human nature, psychology, and ideology contributed to speculative bubbles, the acceptance of excessive risk, and inevitable catastrophic financial failures and meltdowns.

Given the extraordinary breadth of assigning blame for the financial crisis, how can “crime” and “criminality” be disentangled from all of this? Which, if any, of the parties invoked in the preceding paragraphs are criminals who belong behind bars? Should all the financial institutions and entities involved be criminally prosecuted? Of course, the reality is that few (if any) of those identified earlier intended to cause a financial catastrophe; and few (if any) will be criminally prosecuted for their actions. What is really involved is a complex, broad spectrum or continuum of actions with varying degrees of intent, liability, and wrongfulness.

But the central thesis here is that the structure of the present financial system, its culture, and its collective practices and policies are fundamentally criminal and criminogenic. The harms emanating from this financial system are exponentially greater than those emanating from the disadvantaged environments that generate a disproportionate percentage of conventional crime. Accordingly, on various levels, there is much at stake in more fully and directly recognizing and identifying many core policies and practices of the financial system for what they are: crimes on a very large scale.

Analysis of the financial crisis should adopt as a starting point this recognition, and work through both the moral and the practical implications of this premise. Let us begin by considering the populist or rhetorical (as opposed to analytical) use of the terms crime and criminal in relation to the financial crisis, before moving on to a conceptual analysis of these terms in relation to white collar crime.

The Financial Crisis as Crime, as White Collar Crime, and as Finance Crime

The term crime has been widely applied to the activities of individuals and institutions regarded as having played a central role in causing the financial crisis. Those who have invoked this term include political officials, public commentators, cartoonists, and ordinary citizens. Michael Moore’s 2009 documentary Capitalism: A Love Story opens with shots of conventional bank robberies but then turns to the “robberies” committed by investment banks, with Moore’s proclamation outside the Goldman Sachs building that “crimes have been committed in this building,” and his attempt to enter and carry out a citizen’s arrest of the perpetrators. He marks off investment banking office buildings with yellow police tape announcing “Crime Scene: Do Not Cross.” Danny Schechter’s 2010 documentary Plunder: The Crime of Our Time invokes the term crime not only in its subtitle but throughout. A protester calls for a “Jailout, Not Bailout”; Wall Street is described as a “crime scene” and as being engaged in a Ponzi scheme that has produced the biggest financial crime in history, stealing far more than has the Mafia. In the course of a one-hour documentary, the terms crime, fraud, white collar crime, and financial crime are all invoked in relation to the financial meltdown. The very title of Charles Ferguson’s 2010 documentary Inside Job is also associated with crime, with the clear claim that the financial meltdown of 2008 is best understood as a fraud on a massive scale (or “bank heist”) committed by those operating inside the financial (and political) system.

The Nobel laureate economist and New York Times columnist Paul Krugman (2010b) characterizes the activities on Wall Street as “looting” and “a racket.” Former Senator Ted Kaufman has specifically demanded that we root out the “fraud and potential criminal conduct” that “were at the heart of the financial crisis” (Rich 2010). One could cite many other such examples. It seems worthwhile to sort through some of the key terms.

Despite its ubiquity in popular culture, crime is, in fact, applied in a broad range of different ways (Kauzlarich and Friedrichs 2005). A violation of the criminal law is arguably the most widely accepted meaning of the term. In relation to the financial crisis, two key points arise. First (as noted by Plunder and uniformly by students of white collar crime), corporate and financial elite interests have always exercised formidable influence over which activities do and do not get defined as crime by substantive criminal law and have historically been largely successful in shielding many of their blatantly exploitative practices from being prohibited by law or criminalized. Only in 2010, for example, do we very belatedly have federal legislation prohibiting the imposition of overdraft protection and associated fees, in fine print, on debit card customers without their specific consent. Banks had earned some $27 billion annually from overdraft fees, overwhelmingly from their least affluent and least sophisticated customers (Johnson and Kwak 2010, 196). And second, even when financial elites are charged with violations of the substantive criminal law in relation to their activities, it is generally far more challenging to adjudicate such cases and arrive at a formal finding that a crime has in fact occurred than in the case of conventional crime offenders. Two hedge fund managers for Bear Stearns, the first high-level Wall Street executives criminally indicted in the wake of the financial meltdown, were acquitted in the fall of 2009 because their well-funded defense team was able to persuade a jury that their actions took the form of poor investment decisions and not intentional criminal fraud (Kouwe and Slater 2009). Such outcomes have the potential to discourage prosecutors from initiating criminal prosecutions against financial elites.

Although mainstream criminology has for the most part adopted the legalistic conception of crime for purposes of studying crime and criminological phenomena, criminology has a long tradition of suggesting alternative conceptions of crime. The founding father of white collar crime scholarship, Edwin Sutherland (1945), famously incorporated violations of civil and administrative laws in his definition of white collar crime, and engaged in a celebrated debate with Paul Tappan (1947) on the legitimacy of extending the definition of crime beyond violations of the criminal law. Herman Schwendinger and Julia Schwendinger (1972) set forth a humanistic conception of crime in relation to demonstrably harmful activities, arguing that one should not cede to the capitalist state a monopoly over the definition of crime. More recently still, some British criminologists have argued that we should abandon our focus on the notion of crime itself and should shift our focus to the more appropriate category of “social harm” (Hillyard et al. 2004).

In relation to the financial meltdown, it is worth noting, then, that the invocation of the term crime ranges from references to apparent violations of existing criminal law and violations of some other body of law to activities that are demonstrably harmful and should be classified as crimes even if they are not specified as such by existing law. One could take this further by acknowledging that the term has a populist dimension when it is simply used in popular discourse in reference to practices and policies the speaker regards as abhorrent.

If the perception exists tha...