Home > #OWS, finance, news > Judge Rakoff explains why no banker is in jail #OWS

Judge Rakoff explains why no banker is in jail #OWS

January 7, 2014

United States District Judge Jed S. Rakoff is already kind of a hero to me, given that he’s the guy who rejected a “do not admit wrongdoing” settlement between Citigroup and the SEC over mortgage-backed securities fraud because, according to Rakoff, the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

More recently Rakoff has written a fine essay in the New York Review of Books entitled The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? which I will summarize below but is well worth your time to read.

Rakoff’s essay

First Rakoff made the point that if there was no intentional fraud we should not scapegoat people and put them to jail. But on the other hand, if there was intentional fraud, then it’s a reflection on a dysfunctional justice system that nobody has gone to jail.

Then he examined that first possibility and found it unlikely, given that “… 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…” In fact, fraud permeated at every level.

The Department of Justice (DOJ) has focused on explaining why nobody has gone to jail in spite of the existence of fraud. They have three reasons.

First, the DOJ claims it’s hard to prove intent for high-level management. But Rakoff demurs on this point, explaining that in cases of accounting fraud, “willful blindness” or “conscious disregard” is a well-established basis on which federal prosecutors have asked juries to infer intent.

Second, since many counterparties were “sophisticated,” it’s difficult to prove “reliance“. Again Rakoff demurs, pointing out that “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.”

Third, because of the “Too Big To Jail” problem, namely that prosecuting fraud would kill the economy. To this, Rakoff points out what that means in terms of class: that poor people can be prosecuted but the rich are protected.

Next, Rakoff says what he thinks is actually happening. First he discounts the revolving door: he thinks lawyers are thoroughly incentivized to make a name for themselves. Then what? He’s got three reasons.

Well, first, people were distracted. The FBI was distracted by terrorists, and the SEC was focused on Ponzi schemes and insider trading. The DOJ was inexperienced and the Southern District US Attorney’s Office was also focused on insider trading. And given the complexity and incentives, it’s hard for a given lawyer to decide to go with an MBS case instead of insider trading.

Second, the government had direct conflict in the fraud, given that the Fed and the regulators had deregulated everything in sight and then kept interest rates low to keep the mortgage machine going. They also meddled a lot during the crisis, deciding which failing bank should be taken over by whom. It made it hard for them to admit shit went wrong.

Finally, it’s because it’s now in vogue to prosecute corporations instead of people, but that really doesn’t work. Here’s Rakoff on this prosecutorial method:

Although it is supposedly justified because it prevents future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

And then his final conclusion:

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.


First, I am super grateful for Judge Rakoff’s essay, because as an experienced lawyer he has way more ammunition than I do to explain this stuff from the perspective of what is actually done in law. The “willful blindness” issue is particularly ridiculous. I’m glad to hear that courts have a way to deal with that problem, even if they aren’t using their tools against Jamie Dimon.

I am also grateful to hear him make the point that widespread fraud, unprosecuted, is not simply a theoretical issue. It exposes the dysfunctionality of our justice system and it exposes basic unfairness in society, where depending on how rich you are and how complicated your crime is, you can avoid going to jail. Personally, in the past few months I’ve gone from being angry at the bankers to being angry at the prosecutors.

Finally, I disagree with Rakoff on one point. Namely, his argument against the negative effect of the revolving door. His argument, I stipulate, only works for lawyers in a US Attorney’s office. I don’t think the average SEC lawyer or economist, or for that matter an employee at any captured regulator, has that much incentive to take on a big MBS case and be hard-assed. I think we would have seen more cases if that were true.

Categories: #OWS, finance, news
  1. January 7, 2014 at 8:45 am

    Thanks for pointing out this article.

    Equally surprising to me are the promotions for folks that were involved. No one seemed to mind at all when Geithner moved from the NY Fed to the Treasury – how he did his job supervising banks leading up to the crisis didn’t matter, I guess.

    Hardly an eyebrow was raised when Summers returned to Washington in 2009. His role in writing the laws that banned derivative regulation didn’t really seem to bother, well, anyone.

    Even now, Yellen’s performance as head of the San Francisco Fed hardly came up at all. It didn’t seem to matter to anyone that part the SF Fed’s job was supervising the area where some of the worst lending abuses took place.

    From the lack of prosecution, to promotions like these, it has all be quite astonishing to watch.


  2. January 7, 2014 at 12:18 pm

    I’ve studied financial crises for some graduate work in sociology. The moving train seems stationary when you are on it. The revolving door is part of a larger “system” of Wall Street, government, and corporate elites which drafts the regulations, approves the accounting standards, writes and passes the legislation, holds the hearings when things go south but takes no meaningful action, makes sure that enough loopholes are in the reforms to accelerate beyond the watchdogs, and prosecutes the accused for display while avoiding the messy hangings in the public square. It doesn’t take long for even a populist President to succumb to the system (as Obama did when he made his first appointments) What the bankers (and government officials with home mortgages did may be unethical, immoral, even fraudulent, but not illegal. Judges like Rakoff are part of this system of elites. When you are part of the system, it’s really hard to alter the surroundings.I don’t buy for a minute that “people were distracted.” The entire world was focused on this especially because the crisis occurred simultaneously with a major political changing of the guard (Bush to Obama). On point number two, absolutely, the government was congruently complicit in the crisis. Finally, if it is “in vogue” to prosecute corporations rather than individuals, that’s because the system (including the judiciary) always, throughout history, protects the elite and the expense of everyone else, the exception being when the elite fight among themselves and throw a few of their own to the masses. Even then, in America, they return as media stars, talking heads, and other second acts.


  3. Andrew Hamilton
    January 7, 2014 at 1:50 pm

    In several cases, attempts were made to prosecute but charges were dropped when the cases simply became to complicated, and several dependencies on unnacceptable circumstantial evidence turned up – such proscecutions were dropped as they simply wouldn’t stand up in court.
    1)Charged http://news.bbc.co.uk/1/hi/business/7463713.stm
    2)Cleared: http://news.bbc.co.uk/1/hi/business/8353763.stm
    Andrew Hamilton – Twitter @andyham10


  4. Old Hickory
    January 8, 2014 at 8:15 am

    Thanks for the summary. I don’t think Rakoff’s three explanations, except maybe the second, cover something like letting JPM off the hook for overlooking the Madoff fraud. That I really don’t understand except if it’s sheer, naked cronyism.


  5. Jim Bender
    January 8, 2014 at 1:01 pm

    My concern is that the Wall Street bankers feed money to Democrats and buy protection. First, if they have political sympathies, it is with the Democrats. President Obama reportedly parties with the Goldman Sachs crowd. If they are buying protection, so far it has worked. The Democratic Party, those who will lie cheat, and steal to help the President and the Party succeed, are a different crowd from principled progresses like you and Ted Rall (if you forgive me for mentioning him here). There is definitely a need for the Alt Banking people, although I don’t understand what their relationship is with OWS. OWS came across originally just as a Obama/Democrat support group.


  6. FogOfWar
    January 8, 2014 at 4:02 pm

    Rakoff’s piece is incredible! Thanks for bringing it to the fore.



  7. David Laxer
  8. January 23, 2014 at 10:36 am

    Finally, I disagree with Rakoff on one point. Namely, his argument against the negative effect of the revolving door. His argument, I stipulate, only works for lawyers in a US Attorney’s office. I don’t think the average SEC lawyer or economist, or for that matter an employee at any captured regulator, has that much incentive to take on a big MBS case and be hard-assed. I think we would have seen more cases if that were true.

    Cathy, you’re a mathbabe and a data scientist. Surely you should be able to run some numbers on this! I’m sure you have some technical ideas on risk-weighting utility functions … couldn’t you look at the size of various payouts and do a risk-weighted NPV comparison?


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