The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  “The casualness of it was what got me,” he says now. “Everybody was acting the same way, like it was no big deal.”

  When Patrick was being photographed, he saw that the original charges were possession of a controlled substance, possession of marijuana, and resisting. By the time he was arraigned, the marijuana charge had been dropped, replaced by a tampering-with-evidence charge.

  A few weeks later Patrick went back to court, and the judge immediately gave him an ACD, meaning the whole thing would go away, provided he didn’t get “in trouble” again in the next six months. Under the circumstances even an ACD was monstrous, but it was the best possible outcome in a system that’s designed to arrest and detain first, then sort out the crime later.

  Patrick was never the same after that incident.

  Almost immediately after it happened, he started having nightmares. He’d wake up in the middle of the night, ready to defend himself against attack. He’d leap out of bed, physically jumping up.

  Or he’d have panic attacks, long periods of near-total paralysis, heart racing, anxiety through the roof. And even when he was fine, the panic attacks would sometimes take so much out of him, he’d be too drained to be fully functional.

  “A good friend would be telling me something really important to him,” he says, “and I would just be like, ‘Uh-huh.’ I couldn’t be the way I wanted to be with people. I stopped going out, which doesn’t sound like much, but for a musician, networking is kind of important.

  “I started going to therapy. And I found out that what I was experiencing was post-traumatic stress disorder.”

  Patrick in person seems strong, pleasant, and put together, a mature, responsible young man about to get married, his life still going on.

  But he’s had something taken from him. He seems like the kind of person who wants to be a peaceful, positive presence in everyone’s life, but he can’t be that to everyone anymore, not always anyway, and it obviously troubles him. “The weird thing is, it’s not like I’m angry at the cops,” he says. “It’ll come out in an argument with my girlfriend, or at the guy who cut in line in front of me a little while ago.”

  He shakes his head. “It changed my life forever.”

  A collateral consequence, but this is the kind we’ve decided we can live with.

  Of course this reads like a shocker story only because Patrick Jewell is a white, college-educated musician. Imagine the same story a few hundred thousand times over, and you’re starting to plug into the ordinary urban nonwhite experience. And that, too, is a collateral consequence we’ve decided we can live with.

  Patrick Jewell most likely was some plainclothes policeman’s fleeting visual error—a rolled cigarette mistaken from a distance as a joint. But instead of simply walking up to him and asking him what he was smoking, law enforcement’s first move was to assault him, then frame him, toss him in jail, and run him all the way through the system without apology, rather than admit the mistake.

  Patrick’s arrest was the essence of stop-and-frisk, which itself was the perfect symbol of the new stats-based approach to city policing. You throw a big net over a whole city region, bounce some heads off sidewalks, then throw back the little fish. Almost as important (and this aspect of it is little discussed), you gather intelligence with each catch.

  The thing is, this particular ocean, to push the metaphor a bit further, is getting overfished. So they’re trawling more remote waters, the nets being cast are wider. Which is a fancy way of saying that it’s not just blacks from Bed-Stuy or Hispanic workers in rural Georgia or Mexican single moms living out of vans who are getting the treatment.

  Being white and middle class never meant your kids breezed into Yale with a C average. That kind of privilege was always reserved for a special kind of wealth. But it did once mean that police would think twice before bouncing your head off a sidewalk. Not anymore.

  And it’s not just the streets. Financial regulators, too, are expanding their range of targets. Once HSBC and Barclays and UBS and Chase and Goldman and the rest of the Collateral Consequences All-Stars secured their status as unprosecutable, too-big-to-jail institutions, the margin of regulatory error suddenly became that much smaller for the giant subset of All Other Businesses. The SEC tells Congress it makes about 735 enforcement cases a year,*1 and it needs to hit or surpass that number every year to expect its budget to keep flowing. But if the SEC has a powerful disinclination to make those cases against the Lloyd Blankfeins and Jamie Dimons of the world, it’s going to start looking at everyone else’s books far more closely. It’s going after smaller businesses more aggressively than before.

  It’s profiling, except it’s expanding the profile. And on the flip side, it’s doing the same thing, only in reverse.

  “I can tell you, just from forty thousand feet, that some of the most damaging behavior on Wall Street, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

  BARACK OBAMA, DECEMBER 11, 2011, 60 Minutes

  Like most things spoken out loud by lawyers of Barack Obama’s caliber, the president’s now-infamous 60 Minutes statement was parsed to mean nothing at all, if you examined it closely.

  Some of the least ethical behavior wasn’t illegal? Okay, that’s probably true. But did that mean some of it was illegal? Or alternatively, did it mean all of it wasn’t illegal? He didn’t say either way. From a factual standpoint, the statement was meaningless.

  But psychologically, it was meaningful. It showed us how they think up there, in the upper reaches of this giant cultural bureaucracy.

  Obama was echoing the main mantra that continued to emanate from Wall Street after the crash, in which high-level executives involved in this or that scandal repeatedly insisted that what they had done was not actually against the law. The thing that’s interesting about this claim isn’t that it’s factually wrong, which incidentally it almost always is, often to a humorously enormous degree. What’s interesting is that the people who make this claim usually believe it to be true. Even Barack Obama, despite the fact that he’s almost universally understood to be an outstanding lawyer and should know better, probably believes it to be true.

  This weird psychological kink is where the Divide lives. Increasingly, the people who make decisions about justice and punishment in this country see a meaningful difference between crime and merely breaking the law. There’s a community of maybe ten or twenty thousand lawyers and businesspeople, living mostly in New York and Washington, who are being asked to evaluate the behavior of their peers. And out of sheer, dumb sympathy and shared perspective, they just can’t see certain behavior as criminal, in the sense that the rest of America thinks of crime.

  Bizarrely, they don’t understand the material. People like Eric Holder and Lanny Breuer in particular had the unique problem of having worked in a top corporate defense firm where they probably saw many capers in larval form, through the prism of their clients’ long-term goals. These companies wanted to beef up their bottom lines, make more money. So maybe they cut a few corners along the way. The lawyers in retrospect must have thought: That’s a very different thing from beating up prostitutes or robbing liquor stores. People like that, they’re criminals. We send those people to jail.

  This other thing, cutting corners on paper—they actually have a word for that: aggressive. That’s the lawyers’ euphemism for pushing the limits of the law. It’s considered a good quality in a certain kind of lawyer, the ability to be “aggressive” and get away with it. Eric Holder, back in the Clinton days, was actually being “aggressive” when he came up with the enforcement idea that he later hated, forcing companies to waive privilege.

  It’s the grad-school version of reaching into a cookie jar: Can I get away with this? Can I get this by my professors? Let’s see just how ballsy I can be.

  The clarification letter cooked up by the Lehman/Barclays lawyers was the ultimate example of “aggressive,” a high-stakes intellectua
l gambit that required a quadruple backflip and a perfect, reverse-spinning dismount to cover up a humongous theft with a fig leaf of argued legality that held firm for a fleeting second or two. To dream it up was ingenious; to not alert the judge to its contents was hubris and the ultimate example of “aggressive.”

  Lawyers admire the right kind of “aggressive” for the same reason we love heist movies: we sympathize with anyone clever enough to penetrate the impenetrable. But those same attorneys sometimes have a hard time seeing past the daring all the way to the consequences on the other end, which might very well be something like seventy thousand creditors losing thousands of dollars apiece, or a whole company’s shareholders losing a total of $600 million. So when somebody gets caught doing it, the immediate thought is, Sure, there are obviously sanctions, penalties, for being a little aggressive with your paperwork. Maybe a hearing of the Bar Association.

  But jail? Are you kidding? People get stabbed in jails! Those places are dangerous!

  There are thousands of other things at work here, but the last straw in every great social tragedy is always something absurd like this, like the nation’s top law enforcement officials unable to spot the greatest crime wave of a generation, because they can’t see the victims from their offices.

  The problem is, if the law is applied unequally enough over a long enough period of time, at some point, law enforcement becomes politically illegitimate. Whole classes of arrests become (circle one) illegal, improper, morally unenforceable.

  We have to be really close to that point now. Too many of the same damning themes keep jumping out.

  The first and most obvious is that two people caught committing the same crime rarely suffer the same punishments, if they aren’t the same kinds of people. There are enough examples in this book. Abacus versus every other bank in the world, or Tory Marone in jail for a joint while HSBC executives walk for washing hundreds of millions for drug dealers. Some guy in backwoods Arkansas gets arrested for forging a check for $450 to bail his girlfriend out of jail, but nobody gets arrested for systematically forging thousands of signatures in foreclosure affidavits.

  One of the most amazing examples of arrest/no-arrest lunacy in recent times was witnessed by former SEC investigator and famed whistle-blower Gary Aguirre.

  Aguirre joined the SEC in 2004, less than a year before the Arthur Andersen case would be overturned. Upon joining the agency as an attorney/investigator, he famously was assigned to look into a series of suspicious trades involving a company called Heller Financial, which had been acquired by General Electric in 2001.

  In a story that has since been extensively documented by Senate investigators, Aguirre found that the star trader of a hedge fund called Pequot Capital, Art Samberg, had made a series of suspiciously prescient trades ahead of the Heller merger, pocketing about $18 million in a period of weeks by buying up Heller shares before the merger, among other things.

  But Samberg had never had a meeting about Heller and appeared never to have spent even a minute researching the stock. “It was as if Samberg woke up one morning and God told him to start buying Heller shares,” Aguirre says. Aguirre did some digging and found that just before making those trades, Samberg had been in contact with his old friend John Mack. Mack had recently stepped down as president of Morgan Stanley and had just flown to Switzerland, where he’d interviewed for a top job at Credit Suisse First Boston, the company that happened to be the investment banker for … Heller Financial.

  Now, Mack had been on Samberg’s case to cut him in on a deal involving a spinoff of Lucent. “Mack is busting my chops” to let him in on the Lucent deal, Samberg told a coworker. So when Mack returned from Switzerland, he called Samberg. Samberg suddenly decided to buy every Heller share in sight. Then he cut Mack into the Lucent deal, a favor that was worth $10 million to Mack. Dot connects to dot: a seemingly open-and-shut case.

  The SEC refused to investigate this highly suspicious-looking series of events, denying Aguirre the right even to talk to Mack about these trades. Again, this is well known and became the central focus of widely covered Senate hearings later in the decade. Aguirre was eventually ruled to have been wrongfully terminated and won a $755,000 settlement from the SEC.

  What is less well known about the Aguirre case is that the SEC did actually pursue an insider trading case involving Heller Financial. It just wasn’t against a powerful, well-defended figure like John Mack (who was represented at the time by former U.S. Attorney and future SEC chief Mary Jo White),*2 but instead against, well, a pair of schmucks.

  The two hard-luck cases were a mid-level GE executive and, wait for it, his kung-fu instructor. The two had conspired to make a $157,000 trade ahead of the merger. You can look it up: United States v. Anthony Chrysikos and Michael Martello, filed in 2002.

  These two idiots realized a total profit of $157,259.09. Chrysikos, the GE exec, ended up getting fifteen months in jail for the crime. Samberg, meanwhile, made $18 million on his Heller trade, and Mack made about $10 million through the seemingly linked Lucent deal. But Mack got off scot free and was not even interviewed until right after the statute of limitations expired.

  Aguirre remembers being astonished to learn that the SEC had chased such small fry when such a big target was sitting right there in front of them. “Two cases, the same stock, but they went after the small guy,” he says.

  Then there are the myriad approaches to the same crime, fraud. Viewed through the eyes of law enforcement, fraud comes in two types. When it’s committed by some single mom in the projects on her welfare application, it has the stink of theft and desperation, and the response is by the book. When it’s committed systematically, it’s just some lawyers somewhere being “aggressive,” and the government response is more idiosyncratic.

  Here’s a crazy example. About a decade ago, Washington Mutual gave a second mortgage to O. J. Simpson—yes, that O. J. Simpson—a loan that ended up being securitized and sold to investors all around the world. The bank at the time was pursuing a new policy of giving loans to anything that breathed. Loan officers were discouraged from gathering too much material on their borrowers. “A skinny file is a good file” is how a loan consultant named Nancy Erken later explained it. Erken was admonished for collecting too much paperwork on a WaMu loan applicant. “Nancy, why do you have all this stuff in here? We’re just going to take this stuff and throw it out,” she was told.

  And in one such skinny file was the data for a second home loan to O.J. This was long after both the criminal and civil trials following the murder of Nicole Simpson had run their courses. So when WaMu’s chief legal officer, Fay Chapman, saw the loan, she flipped out, knowing Simpson had a $33.5 million judgment against him and couldn’t possibly afford to buy property. “When I asked how we could possibly foreclose on [the loan], they said there was a letter in the file from O. J. Simpson,” she said. The letter read:

  the judgment is no good, because I didn’t do it

  Now, someone at WaMu sold this preposterous loan into a pool of mortgages that was bought by investors all around the world. Among the buyers of such loans was Stichting Pensioenfonds ABP, a Dutch state pension fund, which ultimately sued JPMorgan Chase, which by then had acquired WaMu in a state-aided shotgun wedding. The Dutch plaintiffs described the Simpson loan in their suit. That same year the fund was forced to cut pensions for some three million workers by 0.5 percent.

  Selling that loan into a securitized pool that would be marketed everywhere wasn’t just fraud, it was as bad as grinding horsemeat into hot dogs and sending them by the truckload to supermarkets around the world. There were tens of thousands of cases just as insidious as the Simpson case, and each one of them was a truly despicable criminal fraud. But no individuals were ever prosecuted for this kind of crime.

  Meanwhile you can open up the newspaper virtually any day of the week—not just in Riverside County, California, but just about anywhere—and read about someone who’s been criminally sentenced for welfare fraud
. As I write this, the case of the day involves an immigrant named Graciela Antonio in Green Bay, Wisconsin, who in April 2013 was busted after she “illegally received $25,416 in taxpayer-funded public assistance for food and medical bills over three years.”

  The twenty-nine-year-old mother of three’s crime was concealing the fact that while receiving benefits, she was working under another name, at American Foods, for $12.65 an hour. “Really the victims are the community at large,” Kate Zuidmulder, assistant district attorney for Brown County, Wisconsin, righteously told a local TV station. Antonio got two years of probation and 180 hours of community service.

  Nobody is saying people like this aren’t guilty, or that there shouldn’t be a punishment for deceiving the government and for making taxpayers pay the medical bills for her and her husband’s three kids.

  But if her crime gets punished, someone else committing the same crime has to receive the same punishment. This stuff isn’t brain surgery. But there just aren’t cases of bankers or mortgage lenders doing jail time or lengthy community service stints for dumping bad loans into mortgage pools. Nobody from a bank or a ratings agency is losing his or her kids or housing because he or she sold or helped sell bad loans to, say, King County, Washington, or the Iowa Student Loan Liquidity Corporation. It just doesn’t happen. The method for dealing with that kind of offender increasingly involves fines and noncriminal sanctions. Responsibility for the fraud redounds to the institution, which takes the punishment.

  The only thing that changes is that as the economy stagnates more and more, and the wealth divide gets bigger, it becomes less and less possible for law enforcement to imagine the jail-or-garbage option for the Collateral Consequences crowd, and more and more possible to imagine it for an ever-expanding population of Everyone Else. The significance of the new Holder-era cases was only that they formalized an already-evolving system of legal schizophrenia, a weird Two Faces of Eve approach to sentencing.