Financial crisis case studies

Hi allI have Written Assignment ,so I need someone to help me.As we have read, in 2016 the DOJ and Goldman Sachs reached a settlement related to Goldman’s pre-financial crisis business practices. There are many other settlements and these links will take you to articles that summarize the settlements which involve huge fines and penalties: (Links to an external site.)Links to an external site. also see files for copy of the article (Links to an external site.)Links to an external site. (Links to an external site.)Links to an external site.A noteworthy aspect of the government actions since the financial crisis is that no individuals have gone to prison or even been charged with fraud. In his article included under the Files tab, Judge Rakoff, who presided over the Citigroup settlement, which he initially rejected, writes about these outcomes where no individuals have been charged with fraud:Two Questions for this final written assignment:1- What is your reaction to Judge Rakoff’s claims and, whether you agree or disagree, which of Rakoff’s arguments do you think is the strongest, and, 2- Based upon your reading of the settlement between the US Government and Goldman Sachs, your own research on additional settlements if you want (not required), your understanding the idea of “moral moral” hazard, and having read Rakoff’s article: Do you conclude that justice has been served by way of the financial crisis settlements and that the precedents and actions taken are sufficient to foster ethical business practices that protect the public interest in the future? (900 -1200 words)


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The Financial Crisis: Why Have No High­Level Executives Been
Jed S. Rakoff
Five years have passed since the onset of
what is sometimes called the Great
Recession. While the economy has slowly
improved, there are still millions of
Americans leading lives of quiet desperation:
without jobs, without resources, without
Who was to blame? Was it simply a result of
negligence, of the kind of inordinate risk­
taking commonly called a “bubble,” of an
imprudent but innocent failure to maintain
adequate reserves for a rainy day? Or was it
the result, at least in part, of fraudulent
practices, of dubious mortgages portrayed as
sound risks and packaged into ever more
esoteric financial instruments, the fundamental weaknesses of which were intentionally
If it was the former—if the recession was due, at worst, to a lack of caution—then the criminal
law has no role to play in the aftermath. For in all but a few circumstances (not here relevant),
the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct,
and nothing less. If the Great Recession was in no part the handiwork of intentionally
fraudulent practices by high­level executives, then to prosecute such executives criminally
would be “scapegoating” of the most shallow and despicable kind.
But if, by contrast, the Great Recession was in material part the product of intentional fraud,
the failure to prosecute those responsible must be judged one of the more egregious failures of
the criminal justice system in many years. Indeed, it would stand in striking contrast to the
increased success that federal prosecutors have had over the past fifty years or so in bringing to
justice even the highest­level figures who orchestrated mammoth frauds. Thus, in the 1970s, in
the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent
bubble in mortgage­backed securities, the progenitors of the fraud were all successfully
prosecuted, right up to Michael Milken.
Again, in the 1980s, the so­called savings­and­loan 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.
In striking contrast with these past prosecutions, not a single high­level executive has been
In striking contrast with these past prosecutions, not a single high­level 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 five­year statute of limitations, it
appears likely that none will be. It may not be too soon, therefore, to ask why.
One possibility, already mentioned, is that no fraud was committed. This possibility should not
be discounted. Every case is different, and I, for one, have no opinion about whether criminal
fraud was committed in any given instance.
But the stated opinion of those government entities asked to examine the financial crisis overall
is not that no fraud was committed. Quite the contrary. For example, 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 twenty­fold 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 mortgage­backed securities. Similar warnings, many from within the financial
community, were disregarded, not because they were viewed as inaccurate, but because, as one
high­level banker put it, “A decision was made that ‘We’re going to have to hold our nose and
start buying the stated product if we want to stay in business.’”
Without giving further examples, the point is that, in the aftermath of the financial crisis, the
prevailing view of many government officials (as well as others) was that the crisis was in
material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a
simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly
provided the chief collateral for highly leveraged securities that were marketed as AAA, i.e.,
securities of very low risk. How could this transformation of a sow’s ear into a silk purse be
accomplished unless someone dissembled along the way?
While officials of the Department of Justice have been more circumspect in describing the
roots of the financial crisis than have the various commissions of inquiry and other government
agencies, I have seen nothing to indicate their disagreement with the widespread conclusion
that fraud at every level permeated the bubble in mortgage­backed securities. Rather, their
position has been to excuse their failure to prosecute high­level individuals for fraud in
connection with the financial crisis on one or more of three grounds:
First, they have argued that proving fraudulent intent on the part of the high­level management
of the banks and companies involved has been difficult. It is undoubtedly true that the ranks of
top management were several levels removed from those who were putting together the
collateralized debt obligations and other securities offerings that were based on dubious
mortgages; and the people generating the mortgages themselves were often at other companies
and thus even further removed. And I want to stress again that I have no opinion whether any
given top executive had knowledge of the dubious nature of the underlying mortgages, let
alone fraudulent intent.
But what I do find surprising is that the Department of Justice should view the proving of intent
as so difficult in this case. Who, for example, was generating the so­called “suspicious activity
reports” of mortgage fraud that, as mentioned, increased so hugely in the years leading up to
the crisis? Why, the banks themselves. A top­level banker, one might argue, confronted with
growing evidence from his own and other banks that mortgage fraud was increasing, might
have inquired why his bank’s mortgage­based securities continued to receive AAA ratings.
And if, despite these and other reports of suspicious activity, the executive failed to make such
And if, despite these and other reports of suspicious activity, the executive failed to make such
inquiries, might it be because he did not want to know what such inquiries would reveal?
This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It
is a well­established basis on which federal prosecutors have asked juries to infer intent,
including in cases involving complexities, such as accounting rules, at least as esoteric as those
involved in the events leading up to the financial crisis. And while some federal courts have
occasionally expressed qualifications about the use of the willful blindness approach to prove
intent, the Supreme Court has consistently approved it. As that Court stated most recently in
Global­Tech Appliances, Inc. v. SEB S.A. (2011):
The doctrine of willful blindness is well established in criminal law. Many criminal statutes
require proof that a defendant acted knowingly or willfully, and courts applying the
doctrine of willful blindness hold that defendants cannot escape the reach of these statutes
by deliberately shielding themselves from clear evidence of critical facts that are strongly
suggested by the circumstances.
Thus, the department’s claim that proving intent in the financial crisis is particularly difficult
may strike some as doubtful.
Second, and even weaker, the Department of Justice has sometimes argued that, because the
institutions to whom mortgage­backed securities were sold were themselves sophisticated
investors, it might be difficult to prove reliance. Thus, in defending the failure to prosecute
high­level executives for frauds arising from the sale of mortgage­backed securities, Lanny
Breuer, the then head of the Department of Justice’s Criminal Division, told PBS:
In a criminal case…I have to prove not only that you made a false statement but that you
intended to commit a crime, and also that the other side of the transaction relied on what
you were saying. And frankly, in many of the securitizations and the kinds of transactions
we’re talking about, in reality you had very sophisticated counterparties on both sides. And
so even though one side may have said something was dark blue when really we can say it
was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying
at all on the description of the color.
Actually, given the fact that these securities were bought and sold at lightning speed, it is by no
means obvious that even a sophisticated counterparty would have detected the problems with
the arcane, convoluted mortgage­backed derivatives they were being asked to purchase. But
there is a more fundamental problem with the above­quoted statement from the former head of
the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud
case the government is never required to prove—ever—that one party to a transaction relied on
the word of another. The reason, of course, is that that would give a crooked seller a license to
lie whenever he was dealing with a sophisticated buyer. The law, however, says that society is
harmed when a seller purposely lies about a material fact, even if the immediate purchaser does
not rely on that particular fact, because such misrepresentations create problems for the market
as a whole. And surely there never was a situation in which the sale of dubious mortgage­
backed securities created more of a problem for the marketplace, and society as a whole, than
in the recent financial crisis.
The third reason the department has sometimes given for not bringing these prosecutions is that
to do so would itself harm the economy. Thus, Attorney General Eric Holder himself told
It does become difficult for us to prosecute them when we are hit with indications that if
you do prosecute—if you do bring a criminal charge—it will have a negative impact on the
national economy, perhaps even the world economy.
national economy, perhaps even the world economy.
To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse—
sometimes labeled the “too big to jail” excuse—is disturbing, frankly, in what it says about the
department’s apparent disregard for equality under the law.
In fairness, however, Holder (who later claimed his comment was misconstrued) was referring
to the prosecution of financial institutions, rather than their CEOs. Moreover, he might have
also been influenced, as his department unquestionably was, by the adverse reaction to the
Arthur Anderson case, where that accounting firm was forced out of business by a prosecution
that was ultimately reversed on appeal. 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 high­level executives were prosecuted,
as opposed to the institution itself.
Without multiplying examples further, my point is that the
Department of Justice has never taken the position that all the top
executives involved in the events leading up to the financial crisis
were innocent; rather it has offered one or another excuse for not
criminally prosecuting them—excuses that, on inspection, appear
unconvincing. So, you might ask, what’s really going on here? I
don’t claim to have any inside information about the real reasons
why no such prosecutions have been brought, but I take the liberty
of offering some speculations.
At the outset, however, let me say that I completely discount the
argument sometimes made that no such prosecutions have been
brought because the top prosecutors were often people who
previously represented the financial institutions in question and/or
were people who expected to be representing such institutions in
Eric Holder; drawing by John Springs
the future: the so­called “revolving door.” In my experience, most
federal prosecutors, at every level, are seeking to make a name for
themselves, and the best way to do that is by prosecuting some high­level person. While
companies that are indicted almost always settle, individual defendants whose careers are at
stake will often go to trial. And if the government wins such a trial, as it usually does, the
prosecutor’s reputation is made. My point is that whatever small influence the “revolving door”
may have in discouraging certain white­collar prosecutions is more than offset, at least in the
case of prosecuting high­level individuals, by the career­making benefits such prosecutions
confer on the successful prosecutor.
So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis?
I offer, by way of speculation, three influences that I think, along with others, have had the
effect of limiting such prosecutions.
First, the prosecutors had other priorities. Some of these were completely understandable. For
example, before 2001, the FBI had more than one thousand agents assigned to investigating
financial frauds, but after September 11 many of these agents were shifted to antiterrorism
work. Who can argue with that? Yet the result was that, by 2007 or so, there were only 120
agents reviewing the more than 50,000 reports of mortgage fraud filed by the banks. It is true
that after the collapse of Lehman Brothers in 2008, new agents were hired for some of the
vacated spots in offices concerned with fraud detection; but this is not a form of detection
easily learned, and recent budget limitations have only exacerbated the problem.
Of course, while the FBI has substantial responsibility for investigating mortgage fraud, the
Of course, while the FBI has substantial responsibility for investigating mortgage fraud, the
FBI is not the primary investigator of fraud in the sale of mortgage­backed securities; that
responsibility lies mostly with the SEC. But at the very time the financial crisis was breaking,
the SEC was trying to deflect criticism from its failure to detect the Madoff fraud, and this led
it to concentrate on other Ponzi­like schemes that emerged in the wake of the financial crisis,
along with cases involving misallocation of assets (such as stealing funds from a customer),
which are among the easiest cases to prove. Indeed, as Professor John Coffee of Columbia Law
School has repeatedly documented, Ponzi schemes and misallocation­of­asset cases have been
the primary focus of the SEC since 2009, while cases involving fraud in the sale of mortgage­
backed securities have been much less frequent. More recently, moreover, the SEC has been
hard hit by budget limitations, and this has not only made it more difficult to assign the kind of
manpower the kinds of frauds we are talking about require, but also has led the SEC
enforcement staff to focus on the smaller, easily resolved cases that will beef up their statistics
when they go to Congress begging for money.
As for the Department of Justice proper, a decision was made in 2009 to spread the
investigation of financial fraud cases among numerous US Attorney’s Offices, many of which
had little or no previous experience in investigating and prosecuting sophisticated financial
frauds. This was in connection with the president’s creation of a special task force to
investigate the crisis, from which remarkably little has been heard in the intervening four­plus
years. At the same time, the US Attorney’s Office with the greatest expertise in these kinds of
cases, the Southern District of New York, was just embarking on its prosecution of insider­
trading cases arising from the Raj Rajaratnam tapes, which soon proved a gold mine of
prosecutable cases that absorbed a huge amount of the attention of the securities fraud unit of
that office.
While I want to stress again that I have no inside information, as a former chief of that unit I
would venture to guess that the cases involving the financial crisis were parceled out to
assistant US attorneys who were also responsible for insider­trading cases. Which do you think
an assistant would devote most of her attention to: an insider­trading case that was already
nearly ready to go to indictment and that might lead to a high­visibility trial, or a financial
crisis case that was just getting started, would take years to complete, and had no guarantee of
even leading to an indictment? Of course, she would put her energy into the insider­trading
case, and if she was lucky, it would go to trial, she would win, and, in some cases, she would
then take a job with a large law firm. And in the process, the financial fraud case would get lost
in the shuffle.
In short, a focus on quite different priorities is, I submit, one of the reasons the financial fraud
cases have not been brought, especially cases against high­level individuals that would take
many years, many investigators, and a great deal of expertise to investigate. But a second, and
less salutary, reason for not bringing such cases is the government’s own involvement in the
underlying circumstances that led to the financial crisis.
On the one hand, the government, writ large, had a part in creating the conditions that
encouraged the approval of dubious mortgages. Even before the start of the housing boom, it
was the government, in the form of Congress, that repealed the Glass­Steagall Act, thus
allowing certain banks that had previously viewed mortgages as a source of interest income to
become instead deeply involved in securitizing pools of mortgages in order to obtain the much
greater profits available from trading. It was the government, in the form of both the executive
and the legislature, that encouraged deregulation, thus weakening the power and oversight not
only of the SEC but also of such diverse banking overseers as the Office of Thrift Supervision
and the Office of the Comptroller of the Currency, both in the Treasury Department. It was the
government, in the form of the Federal Reserve, that kept interest rates low, in part to
encourage mortgages. It was the government, in the form of the executive, that strongly
encourage mortgages. It was the government, in the form of the executive, that strongly
encouraged banks to make loans to individuals with low incomes who might have previously
been regarded as too risky to warrant a mortgage.
Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage
of low­income mortgages that the government­sponsored entities known as Fannie Mae and
Freddie Mac were required to purchase, helping to create the conditions that resulted in over
half of all mortgages being subprime at the time the housing market began to collapse in 2007.
It was the government, pretty much across the board, that acquiesced in the ever­greater
tendency not to require meaningful documentation as a condition of obtaining a mortgage,
often preempting in this regard state regulations designed to assure greater mortgage quality
and a borrower’s ability to repay. Indeed, in the …
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