Too Big to Fail and Too Much Trouble to Jail

Given the scale of the economic damage caused by financial improprieties leading up to the Great Recession, one has to wonder about the lack of penalties imposed on those bearing responsibility for the disaster. Fines are beginning to be imposed on specific corporations, but few, if any, punishments for individuals. Companies don’t commit crimes, people do. Jed S. Rakoff discusses this outcome in an article in the New York Review of Books: The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?


Rakoff is extraordinarily cautious in actually claiming malfeasance on the part of any specific individual, or by any class of financial operators, but allows that anyone who does so believe would view this lack of prosecution as a great moral failure on the part of our legal system. He then points out that in previous instances of financial chicanery prosecutions of responsible individuals were the norm.

"….in the 1970s, in the aftermath of the "junk bond" bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken."

"Again, in the 1980s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than eight hundred individuals, right up to Charles Keating. And again, the widespread accounting frauds of the 1990s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected CEOs as Jeffrey Skilling and Bernie Ebbers."

Rakoff disposes of the argument that what recently transpired was no more than an excursion from financial stability and not a matter of individual guilt.

"….the Financial Crisis Inquiry Commission, in its final report, uses variants of the word "fraud" no fewer than 157 times in describing what led to the crisis, concluding that there was a ‘systemic breakdown,’ not just in accountability, but also in ethical behavior."

"As the commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising twenty-fold between 1996 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker was publicly warning of the "pervasive problem" of mortgage fraud, driven by the voracious demand for mortgage-backed securities."

One of the reasons often provided to explain a lack of zeal on the part of law-enforcement agencies is the fear that the large financial organizations involved would be impaired by any attempt to punish them for crimes and the health of the economy would suffer. This "too big to fail" argument makes little sense if one is concerned with the actions of individuals.

"But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high-level executives were prosecuted, as opposed to the institution itself."

Rakoff discusses a number of issues related to why law-enforcement agencies might have been slow or reluctant to address the guilt of individuals. One, perhaps the most disturbing, involves a long-developing trend towards prosecuting companies rather than the individuals in those companies who are guilty of crimes. The logic behind punishing a company and leaving the agents of that company untouched is patently absurd.

"Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most US jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?"

It has become increasingly common to rely on "deferred prosecution agreements" in which the agents of the corporation promise that they will stop committing crimes and will behave better in the future. A relatively harmless fine is usually imposed as part of the agreement.

"In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single person. This shift has often been rationalized as part of an attempt to transform "corporate cultures," so as to prevent future such crimes; and as a result, government policy has taken the form of ‘deferred prosecution agreements’ or even "nonprosecution agreements," in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. Such agreements have become, in the words of Lanny Breuer, the former head of the Department of Justice’s Criminal Division, ‘a mainstay of white-collar criminal law enforcement,’ with the department entering into 233 such agreements over the last decade."

Given that an agency would not approach a company with a threat of prosecution unless it had proof that some individual or individuals were guilty of wrong doing, why not prosecute the individuals themselves? The answer Rakoff suggests is rather troubling: executives of large companies are immune from prosecution because it is too much trouble to go after them.

"If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by "flipping" some lower- or mid-level participant in the fraud who you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate, and maybe even 'wear a wire'—i.e., secretly record his colleagues—in order to reduce his sentence. With his help, and aided by the substantial prison penalties now available in white-collar cases, you go up the ladder."

Months and years of hard work—who would want to do that? Besides, with budgets of law-enforcement and regulatory agencies being cut, who would do the hard work? And why invest years of effort when the political winds change every few years and redefine the importance of addressing corporate crime? It is much easier to threaten a company, allow it to go away and develop with a face-saving proposal incorporating a promise to "do better," and assess it with a fine that provides the appearance of punishment. Both sides get to declare victory, and the guilty are free to plan their next transgression.

"So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue."

Time is on the side of the guilty.

"….not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears likely that none will be."

Given the ease and rapidity with which those who do not possess this bubble of corporate immunity can be arrested and sent to prison for minor crimes, it is difficult to not choke on uttering the phrase "equal justice for all."