Obama's bank regulation: Doomed to fail?

Administration lax on cleaning up AIG, Bear Stearns, and Lehman Brothers

Under the "Holder Memo," which he wrote in 1999 as deputy AG in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.

After leaving government, Holder followed the mandates of his own memo and made a lucrative living conducting internal probes for companies and negotiating outstanding results for white-collar clients. He was public about it: Holder's 2002 op-ed "Don't Indict WorldCom" in The Wall Street Journal argued on behalf of the corporate perpetrator of one of the sleaziest frauds of the past decade.

When asked if he plans to prosecute the financial mayhem that erupted under Bush, Holder has said he isn't inclined to engage in what he calls "witch hunts."

Chris Whetzel

Last spring, Holder tabbed Lanny Breuer, his former partner at the major D.C. law firm Covington & Burling, to head the DOJ's Criminal Division. Breuer couldn't be further from the right person to root out white-collar crime.

As chief of Covington's white-collar department, Breuer was known for his "rogues gallery" of corporations and individuals under investigation or indictment. His clients included Halliburton, the Federal Home Loan Mortgage Corporation (Freddie Mac), Exxon Mobil, and big pharmaceutical companies.

Breuer's former work with Freddie Mac is especially troubling. One of the executives at the heart of the global meltdown was Franklin Raines, the CEO of Freddie's older sister, the Federal National Mortgage Association (Fannie Mae). Freddie and Fannie bought and securitized mortgages from other banks at a breakneck pace that fueled the bubble and led to their federal bailouts and takeovers in September 2008. An investigation of Fannie and Raines's practices could spread to Freddie, which is not something Breuer or any other lawyer would want for a former client.

Obama played the populism card during the campaign, making fodder of Countrywide, then the nation's largest mortgage company and a dominant player in the subprime scandal: "These are the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis—two million people may end up losing their homes." We are, in fact, north of three million, and the widely expected criminal prosecution of Angelo Mozilo, Countrywide's chief during the heyday of predatory home loans, hasn't materialized. Mozilo's case was merely channeled to the SEC for civil sanctions.

The SEC accused Mozilo and two top aides of selling $140 million in stock based on inside knowledge of the riskiness of credit that Countrywide extended while it told investors that the loans were secure. A Mozilo email called one subprime loan "the most dangerous product in existence.... There can be nothing more toxic," and another "poison." It would seem as if a criminal securities fraud case could be made against Mozilo and his crew. The Justice Department wouldn't confirm or deny pending indictments, but Mozilo is probably safe. Usually, when there's going to be a prosecution, the SEC refers the case to the DOJ and doesn't press it alone.

You would think that AIG's Joseph Cassano would also be prosecuted for securities fraud. As boss of AIG Financial Products, Cassano made ungodly amounts of money by selling credit default swaps (CDSs), which were side bets on collateralized debt obligations (CDOs) swelled to the gills with subprime-mortgage toxins. In fact, the AIG arm sold so many credit default swaps that it lost track of the number, but they totaled more than the value of AIG itself, which was one of the world's biggest companies. The ensuing collateral calls to satisfy the deals choked AIG nearly to death, triggered the financial crisis of September 2008, and led to the biggest bailout of all: $182.5 billion to keep AIG afloat as an 80 percent government-owned company.

A grand jury was reportedly convened to look at Cassano. The DOJ won't confirm or deny the existence of a probe, but given the remarks of Cassano's lawyer, F. Joseph Warin, in September, the grand jury probably exists. Warin said that his client was cooperating and that AIG had known about all of Cassano's deeds. Will the Justice Department seek to indict AIG's leadership? No comment.

In fact, there seems to be little going on in the justice process. Elite white-collar defense attorneys report no clamor for their counsel from major financial managers. Regulators talk of no demand for their services and for evidence from prosecutors. As they say in the trade, there's no "buzz."

SO FAR, THEN, THE COMMON PERSON HAS reaped little relief. Well, maybe clearer credit card statements, plain vanilla mortgages with slightly less fine print, and probably some "green" infrastructure jobs. But these have been slow to happen. About a billion dollars have been dedicated to putting and keeping "cops on the street." Remember the poignant vignette during the State of the Union address in which Obama talked about saving 57 police jobs in Minneapolis? But keeping the public safe from financial criminals is another story: The administration and Congress have failed to bulk up white-collar fraud enforcement with either new FBI agents or new forensic specialists.

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