January 27th, 2013, Kareem Serageldin, a then 41 year old making 7 million dollars annually as a managing director at Credit Suisse, was sentenced to jail for 30 months. Not surprising one might say, given that he was charged and found guilty of manipulating the financial system in such a way that caused the great recession of 2008. Surprisingly enough, though it isn’t the material aspect of his case that gave it such popularity in the past decade after the subprime mortgage crisis, but rather the lacking prosecution of his conspirators. Up to this date, there have been zero successful convictions concerning the 2008 crisis, how is this possible? The large wall street investment banks seem to not only be too big to fail, yet also seem to be too big to prosecute, granting them a position superior to that of any legislative organ in the United States, or in the world for that matter.
Previous to the credit crunch in 2008, there were other major financial scandals in the United States, namely the Enron scandal of 2001, as well as the savings and loans collapse in the 90s. To combat growing inflation, Fed Chair Paul Volcker decided to raise the federal funds to 20 percent in 1981, which would be considered astronomical by today’s standards, given that our current rate is a mere 2.5 percent. Following this event, President Ronald Reagan signed an act removing caps and enabling savings and loans associations to make risky loans using deposits, insured by the Federal Savings and Loans Insurance Corporation (FSLIC). This caused the S&L associations to move into riskier branches of finance, like commercial and residential real estate lending and junk bonds, as well as the development of this real estate with the deposited cash left over after loans, giving them close to no liquidity. By the end of the 80s insolvency of the savings and loans industry rose by a whopping 150 billion US-dollars, rendering the 6 billion dollar FSLIC insurance fund worthless in covering the issue, demanding interference and heavy investment from the government as a whole, in other words the people had to cover those costs. In contrast to our most recent financial scandal, dozens of savings and loans executives were prosecuted and sentenced to jail in the aftermath of the crisis, evening the balance of justice.
After the Enron scandal, a former energy conglomerate that went bankrupt in 2001, virtually every executive was indicted and most of those resulted in prison sentences for the white collar criminals. The company became so synonymous with corporate fraud that adding the word scandal seems redundant now. Most of the financial manipulation involved putting their debt in SPVs to book it as assets, and falsifying their profits through partnerships that were left off the books. They also lent heavily to get into more frontier and risky industries, investing in broadband, commodities and trading complex derivatives.
So what changed in those measly 5 years between the last conviction of Enron executives and the start of the global financial crisis? After all, Enron was quite a significant part of the US economy as well, that should have given it some too big to fail privileges. What seems to be the difference between a single conglomerate like Enron and a collective of system banks like the big four of Wall Street, is, as the name latter’s name suggests, the sheer influence it has on the economy. While Enron lost all trust, the Wall Street investment banks seem to have surpassed a certain threshold defying such economic principles. Equal to interstellar objects surpassing a certain threshold in vastness, thus creating their own orbit, the big four of the United States have created their own economic principles as well, where matters as trust and economic moralism don’t seem to matter as much. For creating one of the single largest economic disasters in history, standing next to the great depression and John Law’s first economic bubble, the banks merely got a slap on the wrist and had to pay a mere 65 billion dollars in fines, not even close to 1% of the AUM.
Moreover, these expenses were paid with the same money that had to bail the out, the Federal governments, or rather the people’s money. The fact that the bank as an entity is now free of any risk concerning bankruptcy is one thing, but it seems that executives have also gotten away with their crimes scot-free. Mostly due to the enormous economic tumult in the aftermath of the 2008 financial crisis did the government and the district attorney of New York decide not to prosecute, to salvage any trust that still remained. Apparently they thought that hiding the crimes committed that caused the crisis from the public in the heat of the moment was a good idea, which in a sense was true, sentiment did balance out quite quickly after the recession hit its low. Irregardless, neither the government nor the prosecution took this as a sign to start indicting the conspirators, rather as a sign to back off from any further interfering in the matter. Who knows what uproar might be caused by a belated stream of convicted executives, that might cause another economic dip.
Concluding, while previous crises caused by financial crimes resulted in the prosecution and sentencing of executives, nowadays the employees of Wall Street banks, as well as the banks themselves, are rendered untouchable, backed by the government if anything might go wrong. Whether the innocence of the government and prosecution bestowed upon them, by assuming their actions were in the interest of the people, is unfounded. We are talking about the Bush administration after all, so a fat paycheck might be more plausible than a moral incentive towards the people.