All this time, we had it wrong.
While the country gnashes its teeth over giant financial institutions being TBTF — Too Big to Fail — we should really focus on those that are TBTP.
Too Big to Prosecute.
It's a frequent question I get from readers: Why haven't more people gone to jail for causing the crisis on Wall Street?
Sure, U.S. prosecutors are putting some scamsters in jail. It's just that those who get prosecuted successfully are small fries. Like the four fellows who sold Tampa Bay investors on investing in bogus deals concocted by Ponzi schemer and Orlando boy-band producer Lou Pearlman. He's in jail. And now his four salesmen, all from Tampa Bay, are heading there. Finally.
But the Big Boys? The ones who instigated the Wall Street mess and related mortgage and housing market fiasco? Few, if any, are behind bars.
The sad truth is our federal government's law enforcement folks are too pressed and inexperienced. They see a poor career return on spending lots of tax dollars to pursue complex litigation against rich Wall Streeters.
Long ago, federal regulators made a mistake in how they reprimand Wall Street firms and corporations. They fined firms for things they should not have done but allowed them to go on their merry way "without admitting wrongdoing." The idea was to punish a company financially without assigning any real legal responsibility that could spur other litigation from investors or customers.
The Securities and Exchange Commission especially liked this tool. It made the SEC look like a good watchdog of capitalism without rocking the Wall Street boat too much. The problem is the Wall Street firms grew bigger and bolder while SEC fines — without any admission of wrongdoing — became merely minor costs of doing business.
In one recent and remarkable moment, U.S. District Court Judge Jed S. Rakoff in Manhattan took exception to this bad SEC habit after the agency reached a $285 million settlement with Citigroup. The bank had offered a CDO or "collateralized debt obligation" that lost investors $700 million but delivered $160 million in profits to the bank. Per the SEC formula, Citigroup neither admitted nor denied the agency's findings.
That, Rakoff said, is not good enough for a repeat offender like Citigroup that's facing a "pocket change" fine.
But one judge's opinion won't change the system.
Wayne State University Law School professor Peter J. Henning, writing in his White Collar Watch column for the New York Times, argues the lack of criminal prosecutions from the financial crisis shows that the real difficulty lies in gathering evidence to prove a crime took place.
In other words, budget-pinched prosecutors routinely are outclassed, outgunned and outspent by Wall Street's A-team lawyers.
President Barack Obama recently called for strengthened oversight and accountability of financial firms. He wants to toughen the punishments that can be imposed for criminal violations. The SEC wants to raise the civil penalties for violating securities laws.
To quote Internet slang, this is LOL. Until we put a stop to TBTP on Wall Street — until wrongdoing is prosecuted — there will be no moral reckoning for this financial crisis.
Contact Robert Trigaux at email@example.com.