Wall Street: not guilty

Illustration by Justin Metz; Fuld, Blankfein: Bloomberg; O'Neal: Tim Sloan/AFP/Getty Images

By Roger Lowenstein

"Forgive me," began Charles Ferguson, Director of Inside Job, while his 2011 Oscar for best documentary. "I must begin by pointing out that three years after a horrible financial crisis caused by mass fraud, not a single financial executive has gone to jail, and that is wrong." The audience erupted in applause.

Ferguson is not the first to outrage about the lack of criminal matters until the spring from the financial crisis, and his speech also triggered a wave of prosecutorial feelings. Since that February night, financial journalists, bloggers and who knows how many dinner party guests have debated the trillion question: when will a Wall Street executive will be sent to prison?

There are people who have implied that prosecutors are too cozy with Wall Street or incapable of cases to the Court. So, in a measured piece that the debt of various financial managers assessed, New York Times columnist Joe Nocera complained that "Wall Street bigwigs whose companies took unreasonable risks ... not even on justice radar screen." A news story in the Times about a mortgage Executive who was convicted of criminal fraud observed, "the Justice Dept has yet to charges against an Executive who ran a large Wall Street firm prior to the disaster." In the same dispassionate tone, National Public Radio's all things considered chimed in, "some of the most publicly reviled figures in the mortgage mess will not be any public accounting face." New York magazine saw fit to print the Windows opinion of Bernie Madoff, who noted that the scarcity of criminal convictions is "incredible." Rolling Stone, who already has won this drum the longest and with the heaviest hand, reductionist asked, "why isn't Wall Street in prison?"

Taken from the top, imply these feelings that the financial crisis was caused by the fraud; that people who take big risks subject to a criminal investigation should be; that managers of large financial corporations criminal defendants after a crash should be; that public aversion probably blame; that it is inconceivable (for Madoff, anyway) that people could make as much money losses absent a conspiracy; and that bears Wall Street collective guilt for which a large part of it should be locked up.

These assumptions do violence to our system of Justice and our understanding of the crisis. The assertion that the "was caused by financial fraud" is debatable, but the weight of the evidence is strongly against it. The financial crisis has been accompanied by fraud, mortgage applicants, as well as banks. It was more nearly, caused by a speculative bubble in mortgages, in which bankers, applicants, investors and regulators were all blind to risks. More generally, the crash was the result of a trend in our financial culture, especially after a period of buoyancy, push leverage and risk taking to the extreme.

Mortgage fraud compounded the bubble-as well as, among other factors, lax monetary policy, not by Congress and successive administrations-rein in Fannie Mae (FNMA) and Freddie Mac (Fmcc) and weak financial regulation, itself a product of the discredited but entrenched theorem that the markets are efficient and self steer. Among the banks, overconfidence in "risk management" methods (which are usually worthless) and ill-considered compensation practices were serious reasons to contribute.

As this list suggests, was the meltdown much. This explanation will be unsatisfactory armchair prosecutors, but it has the merit of answering the complex nature of the bubble. Is right and proper, and a necessary aspect of deterrence to prosecute white-collar crime. But tests are meant to deter crime — not to scare off home foreclosures or economic downturn. And to search for crime as the alleged source of the crisis are origin badly wrong.