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

by Matt Taibbi

  Take the HSBC case. In the rest of America, stiff money-laundering punishments are handed out to all sorts of people in the newspapers pretty much on a weekly basis. Very shortly after the HSBC fiasco, for instance, the federal government sentenced a Texas racetrack owner named Jose Trevino Morales, who had been busted for conspiracy to commit money laundering after he reportedly bought millions of dollars of racehorses from Mexican drug lords.

  Tried alongside four others, Trevino was held up by federal prosecutors as a menace to decent American society. “The government was able to show how the corrupting influence of drug cartels has extended into the United States, with cartel bosses using an otherwise legitimate domestic industry to launder proceeds from drug trafficking and other crimes,” said local U.S. attorney Robert Pittman. “They hang themselves by their actions,” added federal prosecutor Douglas Gardner in his closing.

  The total amount of money reportedly laundered in his case was somewhere in the area of $16 million. HSBC admitted to laundering more than $800 million. Trevino laundered for the Zetas; HSBC, for their rivals, the Sinaloa cartel. Trevino could get twenty years. At HSBC, again, nobody got even one day.

  These are enormous discrepancies. There’s a huge difference between twenty years and nothing—that is, a banker slapped with fines he doesn’t even personally pay. So what justifies the difference? Is there any conceivable reasonable explanation?

  I’ve heard the counterargument firsthand, for instance from the federal prosecutors who put together the settlements with companies like HSBC and UBS. In the course of the years I spent working on this book, I had numerous discussions with people from that side of the bar, usually on background. The people whose job it is to take on these big companies bristle at the notion that they’re not working hard to lock up the bad guys.

  They moreover violently reject the idea that the fact that local cops all over the country are breaking heads and tossing people into jails and prisons for smoking joints and stealing socks and road flares—while their own white-collar targets get off with negotiated settlements—has anything to do with them. These are two completely different things, they say. They take it all very personally and make what at first blush sounds like very compelling arguments in their own defense.

  The arguments go something like this:

  We want to lock up bad guys. If we could, we would. The problem is, it’s very hard to gather evidence against single individuals in these massive corporate cases. “What you don’t understand,” I was told pointedly by one prosecutor, “is that you can’t just throw these guys in jail just because you know they did it. You need witnesses. You need evidence.”

  And getting such evidence is definitely not easy in these huge commercial schemes, where oftentimes it’s not even clear where the offense took place, who had guilty knowledge and who was just following orders, who thought their activities were sanctified by legal opinion and who didn’t, and so on.

  As a corollary, these people often ask about the public utility of throwing a few midlevel peons from a bank like HSBC in jail versus collecting 1.9 billion actual dollars. What’s better, they ask, for the state? What’s better for the people? With some regulatory agencies like the SEC, the settlements they collect go directly to victims. Within the walls of those agencies, the calculus starts to feel exactly like the math employed by any private civil law firm, where you’re weighing the possibility of getting nothing at all versus the chance, today, at $100 million or $200 million.

  So given these factors, prosecutors will tell you that these massive financial settlements, and the binding deferred prosecution agreements that theoretically give the government enormous leverage over these offender firms, are not only good deals, they’re great deals.

  This sounds like a good argument, it really does. Trapped in a room with a federal prosecutor who argues for a living, you would find yourself buying it.

  But it’s bullshit. It’s belied by the entire history of these settlements.

  Since the mid-2000s, and especially since 2008, we’ve seen one settlement after another with the same characteristics: very high fines, limited (or no) admission of responsibility, and no criminal charges against individuals.

  It’s an incredibly long list. Take just one company, Bank of America, which paid out some $29 billion in settlements between 2009 and September 2012.

  There was the $150 million settlement it paid to the SEC for lying to shareholders about the Merrill Lynch acquisition. There was the $600 million settlement for concealing a lack of underwriting standards in the loans put in pools mostly sold, as usual, to the defenseless elderly. There was a $3 billion settlement for defrauding Fannie and Freddie. Then there was $410 million paid for charging phony overdraft fees, $20 million paid to the DOJ for illegally foreclosing on actively serving members of the military, $11.8 billion paid out in a foreclosure settlement, $1.6 billion paid to Assured Guaranty for coaxing the insurer to wrap toxic bonds … the list goes on and on.

  You could make up similarly long lists for Chase, Goldman, Wells Fargo, HSBC, UBS, Deutsche Bank, Barclays, and many others. All those firms have paid upward of a billion dollars in settlements, if not more, since 2008. (Again, for Chase, the number is more than $16 billion, or 12 percent of its net revenue from 2009 to 2012, and an even greater percentage of its net went to cover a $13 billion settlement in 2013.) And in all but a very few of these cases, the narrative is exactly the same. There is somehow just enough evidence to extract hundreds of millions or even billions of dollars in penalties, but somehow not quite enough evidence to force any individual to do so much as a day in jail. Every single time, the state lands itself right in that oddly enormous sweet spot between spectacular leverage (to extract fines) and no leverage at all (to hand down criminal penalties).

  This makes the “not enough evidence” defense either a total lie or the most unbelievable coincidence in history. In one case, maybe. But across all these diverse settlements, in so many different types of cases, there’s not one case against an individual?

  Then there’s the damning question of resources. How many bodies has the state even assigned to gather evidence for these difficult cases? How much money has it been willing to spend for that kind of justice? It never put together a task force to concentrate on this corruption, never had a coordinated strategy. In fact, it barely even studied the problem.

  Fun fact: When the economy crashed in 2008, the federal government formed an investigatory group to look into the causes. That Financial Crisis Inquiry Committee was given a budget of $9.8 million. Committee chairman Phil Angelides acidly noted that this was “roughly one-seventh of the budget of Oliver Stone’s Wall Street: Money Never Sleeps.”

  Meanwhile, that same year the federal drug enforcement budget leaped from $13.275 billion to $15.278 billion. That meant that just the increase in the national drug enforcement budget for the year of the biggest financial crisis since the Depression was roughly two hundred times the size of the budget for the sole executive branch effort at formally investigating the causes of financial corruption.

  This is an important distinction, that in this period of extreme crisis, we not only didn’t allocate funds to investigate the crash, we actively did increase the budget to tackle street crime, incidentally at a time of declining street violence.

  If you press prosecutors, sooner or later they’ll forget about the evidence and resources questions and come back to the social utility argument. What is better for society, they ask, sending a few HSBC bankers to jail, or snagging $1.9 billion in fines from the bank? Why go after intangible rewards like political optics when you can have, bird-in-hand-style, $2 billion right now, without even risking the possibility of losing?

  That’s an argument one can have. It might even have, who knows, some merit. But to even have that argument, one has to admit what it concedes. And what it concedes is that there’s a concrete difference between how we treat an individual who commits fraud within the structure of a giant mul
tinational company with a lot of settlement money lying around, and how we treat, say, an ordinary broke person who commits welfare or unemployment fraud.

  If you choose to take the money over and over again from the Wall Street crowd while the welfare moms keep getting jail and community service, now suddenly you’ve institutionalized the imbalance. From there, it’s not long before the tail starts wagging the dog. A massive, unconscious tendency toward reverse profiling occurs. Because, thanks to all these various factors, executives from giant multinationals simply don’t end up in the prison population, law enforcement soon starts to operate on the reverse principle, that those huge companies are not the places where jailable crimes take place. So even white-collar investigators start to look for targets elsewhere, like at smaller businesses.

  A commissioner for the SEC, Daniel Gallagher, even talked about this out loud, in April 2012, when he gave a speech in Denver, Colorado. This was right in the middle of the Chase “London Whale” story and just before the LIBOR story, the HSBC story, and a half-dozen other financial scandals of various degrees of horribleness blew up. Despite all this, Gallagher came out with an interesting take on where to look for white-collar crime.

  “It is critically important that our enforcement program be extremely efficient,” Gallagher said. “Recognizing that it is unrealistic to imagine we will ever achieve a one-to-one correspondence between incidents of misfeasance and SEC Enforcement staff, we’d better plan to do everything we can to increase our hit-rate per investigation opened, and should commit our staff resources carefully, which is to say, consciously.”

  This passage would have required translation into human English, except that Gallagher went on to spell out exactly what he meant:

  Experience teaches us, for example, that fraud tends to proliferate in smaller entities that may lack highly developed compliance programs. It also means thinking carefully about what we might, borrowing again from the world of sports, call “shot selection.” It can be tempting to tangle with prominent institutions. But chasing headlines and solving problems are two different things. The question is what will do most good—where our focus should be. And the record seems to suggest that we can do most to protect smaller, unsophisticated investors by focusing more attention on smaller entities.

  In other words, we’ve got a limited budget, and there’s a bigger degree of difficulty in going after big banks with powerful lawyers. Therefore the SEC shouldn’t give in to the “temptation” of tangling with big banks because, rhetorically speaking, those shots are harder to make. Better to go for uncontested dunks and lay-ins than heave deep threes at the buzzer.

  This is coward’s language. No true cop would ever think like this. Real police will go after the bad guy no matter who he is or how well protected he might be. In fact, the best of them will take on a villain even when winning is a long shot. There’s value even in trying and losing sometimes. It’s not as tangible as a billion dollars, but it’s real enough.

  Sometimes you can even see it. In one great example, the Commodity Futures Trading Commission and the Justice Department joined forces in the mid-2000s to go after four traders for BP, who were gaming the market for a fuel called TET propane. Vaguely similar to the Goldman-aluminum-storage scandal that broke in the summer of 2013, the case involved traders buying up huge stores of propane in the Mont Belvieu storage fields in Texas, then hoarding it until the end of a given month, when businesses would be short of propane and in greater need. The BP swindlers would then jack up the price of the product and clean up. Classic market cornering. The traders were so dead to rights, they were even caught on tape talking about wanting to “control the market at will.”

  The government indicted four traders, even though there was an obvious problem with the case. The Commodity Futures Modernization Act of 2000, a crazy law deregulating much of the derivatives market that had been pushed through Congress in the waning days of the Clinton presidency thanks to the advocacy of Phil Gramm and a host of financial and energy industry lobbyists, contained a little-known exemption to laws against market manipulation. Cornering markets was okay, it turned out, so long as traders did their crooked deals with other sophisticated participants, outside regulated trading platforms.

  This little loophole to the Commodity Exchange Act of 1936, known as the “2(g) exception,” is one of many exemptions that have been written into law, thanks to industry lobbyists in the last twenty or thirty years, that say things like “Insider trading is against the law unless you’re hopping on one leg and air-guitaring ‘Smells Like Teen Spirit’ at the time of the trade.” The BP traders had clearly manipulated the price of TET propane, but they had done so hopping on one leg and humming the right song. As a result, in 2009 a federal judge named Gray Miller thought he had no choice but to throw out all four indictments. Not that he was happy about it. The decision, he said, “should not be taken as condoning the defendants’ alleged actions in this case.”

  The BP lawyers clucked loudly after Miller’s ruling, saying among other things, “We always knew it was a foolish indictment.” But the case was such a fiasco that it got the attention of Congress. Less than two years later the 2(g) exemption was summarily removed during the Dodd-Frank negotiations. Congress would never have acted had the DOJ not brought the BP case forward in the mid-2000s, and had members of Congress not been forced to watch obviously guilty financial criminals end-zone-dancing in the newspapers over a silly technicality.

  So prosecutors lost, but they won in the end.

  “I’d rather do that case and lose, than not do it at all,” says one former federal prosecutor.

  As this book goes to press, the Justice Department is sending signals that it’s beginning to realize its mistakes. Eric Holder is reportedly thinking of nominating a tough prosecutor, Leslie Caldwell, to permanently fill Lanny Breuer’s vacated post. Holder also talked about raising the statute of limitations on Wall Street cases, to give themselves another shot at all the crimes they ignored in the last five years, warning that those who committed crimes are “not out of the woods yet.” Hedge fund villain Stevie Cohen is being put out of business. As this book goes to press, criminal cases are reportedly coming against the megabank Chase for the “London Whale” episode and perhaps other misdeeds, including some related to its status as Bernie Madoff’s banker.

  At the very least, on the federal level, officials seem to recognize the political necessity of saying these things out loud, and this has to be in very large part due to the public outrage over the lack of Wall Street prosecutions. Decisions like the HSBC settlement were blunt bureaucratic calculations, where the risk of losing and/or disrupting the economy was weighed against the benefit of receiving $1.9 billion in settlement money. But these new moves by Holder & Co. show that public outrage sometimes can change the calculus.

  At the same time that Eric Holder was experimenting with a public change of mind, a federal judge named Shira Scheindlin handed down a ruling against New York’s stop-and-frisk policies. This was late in the summer of 2013. Scheindlin, among other things, cited a popular new book, The New Jim Crow, in her ruling and noted that since 2004 more blacks and Latinos have been accosted by police than actually live in the city. The ruling came at the end of a long and well-coordinated campaign by groups like the Center for Constitutional Rights and the NAACP.

  Of course, a federal judge striking down stop-and-frisk as unconstitutional doesn’t mean the practice will end anytime soon. “You’re not going to see any change in tactics overnight,” promised Mayor Mike Bloomberg. But the fact that Bloomberg was put in the position of having to fight back—and that his successor, Bill de Blasio, won in part by running against those tactics—shows that public pressure can work. Just trying to do the right thing legitimizes the entire system. We don’t do it often enough.

  * * *

  *1 The SEC has been hilariously consistent in its numbers of enforcement actions. It gets there through a classic stat-padding technique that Congress f
or some inexplicable reason swallows year after year, without calling BS.

  Every year hundreds or thousands of publicly traded companies either go out of business or come close to it, and many of those companies stop bothering with their regular SEC filings. You had an idea for a new kind of synthetic rubber tire, you got some investors together, you went public, your tires turned out to be no good, the business died, you went broke. And before closing up shop formally, you stopped bothering to file your quarterly disclosure forms.

  This is called a 12(j) disclosure violation. And at the end of every year, when the SEC starts getting more and more desperate to show that it actually did work the previous year, it starts looking for dead companies with lapsed paperwork and files “enforcement actions” against these zombie firms.

  At the end of 2011, the SEC bragged to Congress that it had completed 735 enforcement actions. It didn’t mention that fully one-sixth—131 of them—were 12(j) deals, shooting the corpses of companies like Longtop Financial or American Capital Partners or Austral Pacific Energy. It issues fancy press releases for a lot of these actions, often tossing in something sexy in the headline if there’s a Congress-friendly angle—“SEC Charges China-Based Longtop Financial Technologies for Deficient Filings” is an example.

  If you search for these releases, you’ll find that a surprisingly high number of these enforcement actions come in October and November—that is, just before the agency has to go to Congress with its hat in hand. One former SEC official compared it to how a meter maid on a quota operates. At the beginning of the shift, she’s only giving tickets to cars that are two or three hours expired. “By the end of the shift, she’s giving tickets for being five minutes over,” he went on. “If you’ve got a quota, you’ve got a quota.”

  Again, the numbers are hilariously, ridiculously consistent. In 2011 the agency announced 735 enforcement actions. In 2012, it magically came out with almost exactly the same number—734, to be exact. Only this time, it had a slightly harder time making real cases. If 131 of the agency’s 735 “actions” in 2011 were shooting unarmed companies, in 2012 the number was 134 out of 734.