Thursday, Sept. 15, 2016 marked the eight-year anniversary of Lehman Brothers declaring bankruptcy, sending shockwaves through the economy and sending the U.S. into a recession.
Sen. Elizabeth Warren, D-Mass., used the anniversary of the “failure of the fourth-largest U.S. investment bank” to loudly question again why individuals were not held responsible for the conduct that led to the financial crisis, and this time she did it armed with some disconcerting new information.
The government’s failure to hold individuals responsible for their conduct during the crisis is a familiar talking point for Warren, who rose to prominence during the financial crisis and helped create the Consumer Financial Protection Bureau before being elected to the Senate in 2012.
In May 2014, Warren spoke at length about the government’s post-crisis actions, telling NPR’s Diane Rehm that the government should have done more to target Wall Street executives.
“I just kept expecting any day that there would be indictments, that people will go out in handcuffs, and it never happened,” Warren told Rehm in 2014. “This was always about saving the biggest financial institutions. They treated the crisis like a hurricane, not anything that anyone did wrong.”
And Thursday, Warren reiterated her views on the matter and went a step further, calling for a government investigation into the Department of Justice’s “abysmal failure” to prosecute individuals for the financial crisis.
In a lengthy letter sent Thursday to the Department of Justice Officer of the Inspector General, Warren called on the OIG to conduct an investigation into the “inability” of the DOJ to prosecute executives for the financial crisis.
Specifically, Warren references recently released documents from the Financial Crisis Inquiry Commission, which show that the FCIC referred nine individuals and 14 corporations to the DOJ in 2010 based on “serious indications of violations” of federal securities or other laws.
According to Warren, none of these individuals or corporations were criminally prosecuted.
“The outcome of the referrals by the FCIC to the DOJ represents an abysmal failure,” Warren wrote in her letter. “It means that key companies and individuals that were responsible for the financial crisis and were the cause of substantial hardship for millions of Americans faced no criminal charges. This failure is outrageous and baffling, and it requires an explanation.”
Warren notes that simply because the FCIC referred an individual or a company for DOJ prosecution, that does not mean that the individual or company is indeed guilty of a crime (or crimes), but stated that the DOJ’s failure to criminally prosecute any of the individuals or corporations named in the FCIC referrals suggests that the DOJ “failed to hold the individuals and companies most responsible for the financial crisis and the Great Recession accountable.”
One of the executives mentioned in the FCIC report, and specifically called out by Warren, is Daniel Mudd, the former CEO of Fannie Mae, who recently settled with the U.S. Securities and Exchange Commission for $100,000 over his role in the run-up to the financial crisis.
Mudd did not admit to wrongdoing as part of settlement, which echoes the settlements of the five government-sponsored enterprise executives who settled before him.
Warren’s letter calls out the “potential accounting fraud and false certifications” allegedly made by Fannie Mae, Mudd, and Fannie Mae’s former chief financial officer, Stephen Swad.
“The FCIC memo describes a series of reports indicating that in the run-up to the financial crisis, ‘Fannie Mae may have overstated assets, earnings and capital through various accounting improprieties ... [and] a failure to disclose accurate information about the state of risk management at Fannie Mae,’” Warren states in her letter.
Warren’s letter also calls out the “potential fraud and false certifications” supposedly made by Citigroup, former Citigroup CEO Chuck Prince, former Citigroup Board of Directors Executive Committee Chair Robert Rubin, and former Citigroup CFO Gary Crittenden.
“The FCIC memo describes a 2010 SEC civil settlement with Citigroup, its former CFO and the head of investor relations arising from the company's ‘statements to the market in 2007 that the company had only $13 billion in subprime exposure when, in fact the company ultimately disclosed $55 billion in subprime exposure,’” Warren’s letter states.
Warren’s letter also states the FCIC report stated: “It is clear that CEO Chuck Prince, and Robert Rubin, chair of the Executive Committee of the Board of Directors, knew this information ... no later than September 9, 2007,” and subsequently made false representations about the company’s subprime exposure in October 2007.
All in all, Warren’s letter states that the FCIC referred the cases Mudd, Swad, Prince, Rubin, Crittenden, former AIG CEO Martin Sullivan, former AIG CFO Stephen Bensinger, former Merrill Lynch CEO Stanley O'Neal, and former Merrill Lynch CFO Jeffrey Edwards to the DOJ for potential violations of securities or other laws.
“An FCIC referral alone does not indicate guilt. And not every DOJ investigation results in a criminal conviction,” Warren writes.
“Nonetheless, the DOJ record of action on these individuals, nearly six years after DOJ received the referrals, is abysmal. The DOJ has not criminally charged or taken any of these nine individuals to trial. None have been convicted or sent to prison. Not one paid a fine commensurate with their alleged actions,” Warren continues.
“In fact, only one of these nine individuals - Mr. Crittenden- paid any penalty at all: a meager $100,000 civil fine as part of Citigroup's 2010 civil settlement with SEC over securities fraud, while a second, Mr. Mudd, recently agreed to a settlement in which he admitted no wrongdoing and paid no personal fine,” Warren adds. “The other seven individuals paid no personal fines, served no prison time, and appear to have gotten off scot-free despite the role they played in the financial crisis.”
Warren’s letter also states that the FCIC referred 14 corporate entities to the DOJ for potential prosecution as well: AIG, Citigroup, Credit Suisse, Fannie Mae, Freddie Mac, Goldman Sachs, JP Morgan, Lehman, Merrill Lynch, Moody's, Price WaterhouseCoopers, Societe Generale, UBS, and Washington Mutual.
According to Warren, the DOJ pursued charges against only five of those entities, reaching settlements with four of them: the $13 billion settlement in 2013 with JP Morgan to settle federal and state civil claims related to the company's alleged false and misleading representation of loan quality; a $7 billion settlement with Citigroup for similar federal and state civil claims in 2014; a $17 billion settlement with Bank of America/Merrill Lynch in 2014; and a $5 billion settlement with Goldman Sachs earlier this year.
Warren says that there are “mitigating circumstances” surrounding the investigations and their lack of results, including the “limitless funds” that big banks and their executives have to fight back against the government.
But despite those circumstances, the government’s failure to hold executives accountable is “outrageous and baffling” and “requires an explanation.”
To that end, Warren is called for the OIG to investigate the DOJ’s failures and notes that “it is not too late” to hold those individuals responsible.
In a separate but related letter, Warren calls on the Federal Bureau of Investigation to release the records of its investigations into the financial crisis, echoing a recent request made of the FBI by Representative Bill Pascrell, D-NJ.
As Pascrell did, Warren notes the FBI’s willingness to release much of its investigative materials to respond a Congressional inquiry relating to Hillary Clinton’s use of a private email server during her time as secretary of state.
“Your recent actions with regard to the investigation of former Secretary of State Hillary Clinton provide a clear precedent for releasing additional information about the investigations into the parties responsible for the financial crisis,” Warren writes in her letter to the FBI Director James Comey.
Warren goes on to note that the FBI deviated from its normal course of actions when it released the results of its investigation, along with a “2300-word statement” explain the FBI’s decision, and Comey further explaining the FBI’s decision when testifying before Congress.
“You explained these actions by noting your view that ‘the American people deserve those details in a case of intense public interest,’” Warren tells Comey.
“The FBI does not typically release internal documents from its investigations, but you did so anyway, ‘making these materials available to the public in the interest of transparency,’” Warren continues.
“These new standards present a compelling case for public transparency around the fate of the FCIC referrals,” Warren adds. “If Secretary Clinton’s email server was of sufficient ‘interest’ to establish a new FBI standard of transparency, then surely the criminal prosecution of those responsible for the 2008 financial crisis should be subject to the same level of transparency.”
Warren goes on to ask Comey to “agree to a public hearing” so Congress can ask about the decisions to not prosecute the individuals and companies in the FCIC report.
“The American people deserve to understand why individuals were held appropriately accountable in these cases,” Warren states.
“Your release of these documents and your willingness to testify will enhance transparency and serve the public interest,” Warren concludes. “I therefore ask that you make these documents relating to the financial crisis public as expeditiously as possible so that Congress and the public may begin to understand the FBI’s decision not to prosecute the people who, in the eyes of the FCIC, may have been criminally responsible in the crash of 2008.”