Financial Crimes: One Reason There's No Justice at Justice

Three years after the financial crisis, not one of the big financial sleezemeisters that created the subprime mortgage machine has gone to jail. Plenty of people have lamented this basic fact. Sure, complicated financial crimes can be hard to prove, and weasel’s like this guy have money, but it’s hard to see that as much of an excuse. One major factor – one that doesn’t really get a lot of attention – is that the way prosecutors organized themselves to investigate the crimes set them up to fail.

Here’s how it worked: Despite the fact that the Southern District of New York (think Wall Street) had the most experience ferreting out accounting fraud, the Department of Justice basically handed out big cases as plums to different U.S. attorneys offices. Countrywide (the shady mortgage company now owned by Bank of America) went to Los Angeles; Washington Mutual went to Seattle, A.I.G. went mainly to Washington. Even Lehman Brothers was split like a pie with the Southern District getting just one slice. According to George Packer of the New Yorker:

Given the targets in question – huge banks, well-insulated executives, intricately structured financial products, tens of millions of knotty documents – it’s unlikely that a federal prosecutor’s office, staffed by generalists and operating under standard procedure, which is to wait for cases to come in, could have made serious headway.

What the Department of Justice needed to do was organize itself as a knowledge-based organization rather than merely an investigating organization. Knowledge-based organizations put a premium on building up knowledge in core areas that they know will be critical to their success, and then develop systems to share that knowledge. (This field is sometimes called knowledge management.)

The emphasis is on making sure expertise is available where it’s most needed and where it’s most needed. In 2008, it wouldn’t have taken a rocket scientist to figure out that the subprime mortgage food chain and related accounting machinations needed to become core knowledge areas for the DOJ. At the time, the main repository of knowledge on investigating complicated accounting crimes included a number of prosecutors in the Southern District of New York, a smattering of staff elsewhere in the country, as well as some folks at the FBI, SEC, the New York Attorney General’s Office, etc.

The DOJ would have had to create a structure that crossed the boundaries of its various districts and brought in experts from other agencies – Packer suggests a series of task forces, with each receiving an open mandate to focus on one of the big players in the subprime mess. Such a system would have been more likely to crack the first criminal case, and then use knowledge gained in one case to break the next.

As we know that’s not what happened. DOJ’s prosecutors paddled against the tide. They brought a desultory case or two to court, losing them. But mostly they either gave up or settled for civil fines levied by the SEC that allowed the worst culprits to avoid prison and the big institutions to avoid admitting wrong doing. I have one word to describe that: Feh!