The global economic and financial crisis that began in 2007, and reached an especially intense apex in the fall of 2008, has been widely described as the worst such crisis since the Great Depression of the 1930s. If the financial meltdown has multiple dimensions and involves a variety of causes, fraudulent misrepresentations in many different forms and on many different levels were clearly at the center of this catastrophe.
Analysis of, and commentary on, the global economic crisis has poured forth from a wide range of sources; and in the academic realm, in particular, from historians, economists, political scientists, law professors, and many others. Overall, to date, criminology and criminal justice have not had a high profile in the avalanche of analysis and commentary. It is a core premise of this chapter that criminologists should be well qualified to make useful and unique contributions to understanding the financial crisis and should be able to frame the ongoing dialogue on the optimal response to the crisis in a form that constructively complements the dominant voices in this dialogue. It is obviously difficult to overstate what is at stake in arriving at the most comprehensive understanding of the causes of the crisis and the importance of the perspectives, policies, and practices that might impose fundamental constraints on a similar crisis in the future.
The objectives of this chapter are as follows. First, to address the financial crisis as crime in conceptual terms: If crime—and, more specifically, white collar crime—played a central role in this crisis, in what sense of the term crime was this the case, and what form of white collar crime was involved? Second, to address the financial crisis as crime in contextual terms: How should the consequences of crime on Wall Street be understood in relation to the consequences of crime on Main Street? And third, to address the financial crisis as crime in critical terms: What kinds of transformative perspective and policy initiatives are needed if we are to minimize the chances of a catastrophic financial crisis in the future?
In the wake of the financial crisis, many excellent books, along with countless articles and columns, on how and why this crisis occurred have been produced (e.g., Cassidy 2010; Johnson and Kwak 2010; Lowenstein 2010; Prins 2009; Roubini and Mihm 2010; Stiglitz 2010). Those who have written these books have included highly respected economists and financial journalists. Although some of the key dimensions of these analyses must be included here, the overriding objective is to complement rather than to duplicate these efforts. Accordingly, the goal is to apply a specifically criminological framework—one rooted in the traditions of white collar crime and critical criminological scholarship—to the financial crisis. But both of these traditions within criminology have always drawn upon an especially broad range of sources. Similarly, the interdisciplinary character of this anthology recognizes that the financial crisis and the wrongdoing associated with it can be understood in a sophisticated way only by drawing upon many different academic and professional perspectives.
Muckraking journalists and investigative reporters have made and continue to make important contributions to our understanding of crime in high places, in part because of both the resources and the special access available to them to investigate this world. The segment of the media that covers the financial industry did not always collectively and skeptically question the claims made by spokespersons for this industry. But white collar and critical criminologists need not be apologetic about drawing upon the work of those journalists who have been at the forefront of exposing fraud in the financial industry, as well as the contributions of those from a range of academic disciplines. The complexity of sophisticated crimes perpetrated by powerful institutions and individuals requires an interdisciplinary approach.
Criminology, throughout its history and into the present, has focused disproportionately on conventional forms of crime and delinquency and on their control. The belief that conventional crime and delinquency result in significant social harm, and accordingly should be addressed, is a core raison d’être for the field of criminology. But criminologists who focus upon white collar crime have long believed that by many standard measures the harms caused by such crime outweigh those caused by conventional forms of crime and delinquency. Accordingly, criminologists who specialize in white collar crime have been disturbed and puzzled by the lack of proportionality in the field: That is, a great deal of criminological attention and research focuses upon less consequential forms of crime, and far less attention and research are focused upon the most consequential forms of crime. Elsewhere, I have referred to this situation in terms of an “inverse hypothesis,” where the proportion of criminological attention to a form of crime varies inversely with the objectively identifiable level of harm caused by such crime (Friedrichs 2007, 5). Of course this “hypothesis” may be regarded as somewhat hyperbolic by some, but I believe there is a strong mea sure of truth to it.
The Causes of the Financial Crisis—and Attributing Responsibility
Who or what is to blame for this economic and financial crisis? The list is very long and includes Wall Street, Washington, and Main Street (Kowitt 2008; Morris 2008; Ritholtz 2009). In the simplest and most colloquial terms, Wall Street is blamed for unsound, highly risky practices; Washington is blamed for regulatory failure and bad policies; and Main Street is blamed for living beyond its means. The specific list of blameworthy parties and institutions in relation to the financial crisis can be expanded almost indefinitely (Gibbs 2009). It includes, but is not necessarily limited to, recent presidents; cabinet secretaries; high-level legislators; regulatory agency chairs and staff; government-sponsored entities (e.g., Fannie Mae and Freddie Mac) and their directors and staff; financial industry lobbyists; investment bankers; credit rating agencies; insurance division chiefs; major home builders; and mortgage lenders. Corporate boards played a role, as they are ridden with conflicts of interest, have awarded unwarranted and exorbitant compensation packages, and have failed to effectively oversee excessively risky practices (Ritholtz 2009). “Risk officers” who had the specific responsibility of overseeing and evaluating the risks in banking investments obviously did a very poor job (Story and Dash 2009). Lawyers—as legislators, as regulators, as judges, and as counselors—played a key role in drafting legislation, disregarding dangerous initiatives, blocking shareholder lawsuits, and sanctioning highly questionable deals as legally sound (Carter 2009).
Other entities and parties can also be blamed, ranging from high-level economists, hedge fund managers, and media-show promoters to traders and leaders of countries such as China and Iceland who adopted or promoted practices that contributed to the economic crisis and financial meltdown. In the view of some prominent behavioral economists, the classic economic model of a “rational man” is wrong. The financial crisis must be understood as reflecting, among other things, the “animal spirits” of human beings and their strong tendency to act in irrational ways, independent of economic motivations (Akerlof and Shiller 2009). The much-invoked fundamental human concept of “greed,” as well as “delusional optimism,” was clearly involved (Ehrenreich 2008). The recent era embraced with abandon a “fundamentalist” belief in the unlimited potential of free markets and their capacity to be self-regulatory. Broad dimensions of human nature, psychology, and ideology contributed to speculative bubbles, the acceptance of excessive risk, and inevitable catastrophic financial failures and meltdowns.
Given the extraordinary breadth of assigning blame for the financial crisis, how can “crime” and “criminality” be disentangled from all of this? Which, if any, of the parties invoked in the preceding paragraphs are criminals who belong behind bars? Should all the financial institutions and entities involved be criminally prosecuted? Of course, the reality is that few (if any) of those identified earlier intended to cause a financial catastrophe; and few (if any) will be criminally prosecuted for their actions. What is really involved is a complex, broad spectrum or continuum of actions with varying degrees of intent, liability, and wrongfulness.
But the central thesis here is that the structure of the present financial system, its culture, and its collective practices and policies are fundamentally criminal and criminogenic. The harms emanating from this financial system are exponentially greater than those emanating from the disadvantaged environments that generate a disproportionate percentage of conventional crime. Accordingly, on various levels, there is much at stake in more fully and directly recognizing and identifying many core policies and practices of the financial system for what they are: crimes on a very large scale.
Analysis of the financial crisis should adopt as a starting point this recognition, and work through both the moral and the practical implications of this premise. Let us begin by considering the populist or rhetorical (as opposed to analytical) use of the terms crime and criminal in relation to the financial crisis, before moving on to a conceptual analysis of these terms in relation to white collar crime.
The Financial Crisis as Crime, as White Collar Crime, and as Finance Crime
The term crime has been widely applied to the activities of individuals and institutions regarded as having played a central role in causing the financial crisis. Those who have invoked this term include political officials, public commentators, cartoonists, and ordinary citizens. Michael Moore’s 2009 documentary Capitalism: A Love Story opens with shots of conventional bank robberies but then turns to the “robberies” committed by investment banks, with Moore’s proclamation outside the Goldman Sachs building that “crimes have been committed in this building,” and his attempt to enter and carry out a citizen’s arrest of the perpetrators. He marks off investment banking office buildings with yellow police tape announcing “Crime Scene: Do Not Cross.” Danny Schechter’s 2010 documentary Plunder: The Crime of Our Time invokes the term crime not only in its subtitle but throughout. A protester calls for a “Jailout, Not Bailout”; Wall Street is described as a “crime scene” and as being engaged in a Ponzi scheme that has produced the biggest financial crime in history, stealing far more than has the Mafia. In the course of a one-hour documentary, the terms crime, fraud, white collar crime, and financial crime are all invoked in relation to the financial meltdown. The very title of Charles Ferguson’s 2010 documentary Inside Job is also associated with crime, with the clear claim that the financial meltdown of 2008 is best understood as a fraud on a massive scale (or “bank heist”) committed by those operating inside the financial (and political) system.
The Nobel laureate economist and New York Times columnist Paul Krugman (2010b) characterizes the activities on Wall Street as “looting” and “a racket.” Former Senator Ted Kaufman has specifically demanded that we root out the “fraud and potential criminal conduct” that “were at the heart of the financial crisis” (Rich 2010). One could cite many other such examples. It seems worthwhile to sort through some of the key terms.
Despite its ubiquity in popular culture, crime is, in fact, applied in a broad range of different ways (Kauzlarich and Friedrichs 2005). A violation of the criminal law is arguably the most widely accepted meaning of the term. In relation to the financial crisis, two key points arise. First (as noted by Plunder and uniformly by students of white collar crime), corporate and financial elite interests have always exercised formidable influence over which activities do and do not get defined as crime by substantive criminal law and have historically been largely successful in shielding many of their blatantly exploitative practices from being prohibited by law or criminalized. Only in 2010, for example, do we very belatedly have federal legislation prohibiting the imposition of overdraft protection and associated fees, in fine print, on debit card customers without their specific consent. Banks had earned some $27 billion annually from overdraft fees, overwhelmingly from their least affluent and least sophisticated customers (Johnson and Kwak 2010, 196). And second, even when financial elites are charged with violations of the substantive criminal law in relation to their activities, it is generally far more challenging to adjudicate such cases and arrive at a formal finding that a crime has in fact occurred than in the case of conventional crime offenders. Two hedge fund managers for Bear Stearns, the first high-level Wall Street executives criminally indicted in the wake of the financial meltdown, were acquitted in the fall of 2009 because their well-funded defense team was able to persuade a jury that their actions took the form of poor investment decisions and not intentional criminal fraud (Kouwe and Slater 2009). Such outcomes have the potential to discourage prosecutors from initiating criminal prosecutions against financial elites.
Although mainstream criminology has for the most part adopted the legalistic conception of crime for purposes of studying crime and criminological phenomena, criminology has a long tradition of suggesting alternative conceptions of crime. The founding father of white collar crime scholarship, Edwin Sutherland (1945), famously incorporated violations of civil and administrative laws in his definition of white collar crime, and engaged in a celebrated debate with Paul Tappan (1947) on the legitimacy of extending the definition of crime beyond violations of the criminal law. Herman Schwendinger and Julia Schwendinger (1972) set forth a humanistic conception of crime in relation to demonstrably harmful activities, arguing that one should not cede to the capitalist state a monopoly over the definition of crime. More recently still, some British criminologists have argued that we should abandon our focus on the notion of crime itself and should shift our focus to the more appropriate category of “social harm” (Hillyard et al. 2004).
In relation to the financial meltdown, it is worth noting, then, that the invocation of the term crime ranges from references to apparent violations of existing criminal law and violations of some other body of law to activities that are demonstrably harmful and should be classified as crimes even if they are not specified as such by existing law. One could take this further by acknowledging that the term has a populist dimension when it is simply used in popular discourse in reference to practices and policies the speaker regards as abhorrent.
If the perception exists that crime was involved in the financial meltdown, clearly it was not conventional or street crime (although a significant slice of it occurred on a “street”—Wall Street!). So it is widely understood, by members of the public as well as by professional commentators, that white collar crime is involved. But if this is true, what does this mean, and what form or forms of white collar crime were involved? As was suggested earlier, the proper definition of the term white collar crime has a long and contentious history (e.g., Friedrichs 2010b; Geis 2007; Helmkamp, Ball, and Townsend 1996). But since the 1970s, in particular, two core types of white collar crime have been widely recognized: corporate crime and occupational crime. Corporate crime is defined most concisely as illegal and harmful financially driven acts committed by officers and employees of corporations primarily to benefit corporate interests. Occupational crime is most concisely defined as illegal or harmful financially driven acts committed within the context of a legitimate, respectable occupation primarily to benefit those who commit the acts. Both types played at least some role in bringing about the financial crisis. When I produced the first edition of my text Trusted Criminals: White Collar Crime in Contemporary Society, written in the early 1990s and published in 1996, it seemed necessary to recognize that beyond these core types, significant cognate, hybrid, and marginal forms of white collar crime that did not fit neatly into these categories also had to be identified and delineated. At least some of these cognate, hybrid, and marginal forms of white collar crime were central to the financial meltdown.
The term finance crime in the original edition of my text referred to “large-scale illegality that occurs in the world of finance and financial institutions” (Friedrichs 1996, 156). More specifically, I noted that such crime stands apart from corporate and occupational crime insofar as “vastly larger financial stakes are involved … [it is intertwined with] financial networks … [and it] threatens the integrity of the economic system itself” (Friedrichs 1996, 156). The stakes, as we have learned, are in the hundreds of billions of dollars—or in the trillions by some measures—far more money than is typically involved in corporate crime and occupational crime, certainly relative to the number of organizations and individuals involved. Although the worst corporate crimes can have a substantial impact on the economy, they do not have the diffuse, devastating impact of finance crimes. The proportion of harmful, unproductive activity—in the sense of no measurable benefit for society—relative to beneficial, productive activity, is significantly greater for finance crime than for corporate and occupational crime. This type of crime has an especially broad network of parties, both horizontal and vertical. If some of the most significant finance crimes are committed on behalf of financial institutions, such as major investment banks, then the top executives of these institutions benefit disproportionately, arguably exponentially, more than the top executives in corporate crime. One can argue that the finance crimes at the center of the financial crisis are the single most complex form of white collar crime. Their complexity contributes to the paradoxical fact that, relative to the harm done, finance crime has been the most difficult form of white collar crime to define by law, to regulate and contain, and to prosecute or adjudicate successfully.
If it is clear that white collar crime was one of the core forces at the center of the financial crisis, it is surely important to understand what white collar crime in the financial world has in common with, and how it differs from, white collar crime in other contexts. In simply referring to this activity as “white collar crime” or “fraud,” it becomes conflated with a broad range of illegal or unethical activities, for the most part of far narrower scope. The unique dimensions and extraordinary consequences of finance crime come into sharper relief when it is separated clearly from the broad range of activities characterized as white collar crime or fraud.
Other students of white collar crime have recognized that white collar crime in the financial industry is distinctive. William Black (2005), for example, has adopted the term control fraud, where the corporation becomes a weapon used to commit fraud. Stephen Rosoff, Henry Pontell, and Robert Tillman (2010) have invoked the terms securities fraud (e.g., insider trading and stock manipulation) and fiduciary fraud (i.e., crime in the banking, insurance, and pension fund industries).
The task for students of white collar crime is to refine and explore systematically and empirically the relative utility of competing formulations in this realm. A coherent and sophisticated understanding of the forms of white collar crime that occurred within the financial crisis requires a typological approach that delineates as fully as possible the attributes of these forms of crime that are both common to and distinctive from other forms of white collar crime. We should never lose sight of the fact that a typological approach can gloss over complexities and ambiguities in the most significant manifestations of white collar crime (Haines 2007). The premise here is that typologies provide a necessary point of departure for any meaningful discussion of white collar crime, despite the inevitably arbitrary and limited dimensions of any typological scheme.
“Bank Robbery”: From Without and from Within
Famously, during the savings and loan crisis of the 1980s, California banking regulator Bill Crawford commented that the “best way to rob a bank is to own one” (Calavita and Pontell 1990, 321). The looting of the savings and loans by their owners generated losses vastly greater than those from conventional bank robberies. In the case of the recent financial meltdown, with the investment banks (not thrifts) playing such a central role, it may be more accurate to suggest that the best way to commit bank robbery is to control such a bank. This form of bank robbery is “robbery” of many different parties—including clients and customers, investors, and ordinary taxpayers—by the banks, not robbery of the banks. The top executives of the major investment banks, from Lehman Brothers to Goldman Sachs, were not best described as owning these banks, although they often held a significant number of their shares. But they certainly ran and controlled them. Here again the claim is made that the losses caused by these investment banking executives vastly exceeded—by at least some measures on a level exponentially greater than the losses involved in the savings and loan catastrophe—the losses involved in conventional bank robberies.
Bank robbery is a quintessential form of crime in the public imagination. Those who rob banks range from polished professional bank robbers to opportunistic or desperate amateurs (McCluskey 2009). But they are more often than not hapless individuals, possibly unemployed, afflicted with a substance abuse or gambling problem, committing a crime where the take often ranges from a few hundred to a few thousand dollars and more often than not results in arrest and subsequent long prison sentences, to be served in maximum-security prisons. Conventional bank robbers who commit multiple bank robberies are almost certain to be caught sooner or later. Most such bank robberies involve lone, unarmed individuals making an oral demand or passing a note. Violence is rare (less than 5 percent of bank robberies involve violence), and deaths are very rare (Weisel 2007). The total annual take from all bank robberies in the United States over the past few years has been in the range of $25 million to $60 million (Weisel 2007). Although this is not an insignificant sum, it is a very small fraction of the losses incurred by the reckless (and often fraudulent) conduct of major financial institutions, including investment banks.
The intent here is not to dismiss the various forms of harm involved in conventional bank robberies, which are surely traumatic for many of the victims, but rather to place such robbery within the broader context of other forms of “bank robbery,” and to call for more appropriate proportionality in the popular, legal, and justice system responses to these different forms of crime.
Finance Crime on a Grand Scale and the Case of Goldman Sachs
In the two most recent editions of my text Trusted Criminals, I have included a box entitled “Investment Banks: Wealth Producers or Large-Scale Fraudsters?” Investment banks are prestigious and powerful financial institutions, with high-level executives who are richly compensated. They present themselves as central players in the creation of wealth in capitalist societies who put the interests of their clients first. In The Greed Merchants, former investment banker Philip Augar (2005) challenged this characterization and sought to demonstrate that the investment banks are riddled with conflicts of interest and, all too often, put their own interests and profits ahead of everything else. Specifically, the wages for the investment banking industry for the period from 1980 to 2000 amounted to a staggering $500 billion, with shareholders and customers subsidizing a vast proportion of this payout (Augar 2005, 62). Since 2000, payouts increased even more dramatically (Johnson and Kwak 2010; Morris 2008; Prins 2009).
By simultaneously advising both buyers and sellers in merger transactions, investment banking institutions are obviously involved in a conflict of interest. Indeed, they aggressively promote mergers—even when such mergers impose great costs or losses on investors, employees, and consumers—because they generate huge fees for investment banks. They allocate hot initial public offering (IPO) shares to top executives of corporations, expecting that in return these executives will steer lucrative corporate business to the investment banking houses.
Major investment banks were deeply implicated in the corporate scandals involving Enron, WorldCom, and other corporations that vastly misrepresented their finances (Augar 2005; Sale 2004). They were accused of either inadequately overseeing huge loans to such corporations or being directly complicit in fraudulent applications of these loans. Among other things, they had helped structure controversial and sometimes illegal off-balance-sheet partnerships. High-level employees of these banks were accused of having misled investors in relation to the prospects of telecommunications companies, and the banks themselves were charged with having failed to supervise some trading accounts that lost large sums of money.
Investment banks were very much in the midst of the current financial crisis (Johnson and Kwak 2010; Prins 2009; Ritholtz 2009). I restrict myself here to focusing on just one of these investment banks. Goldman Sachs has been widely recognized as an iconic American investment bank, perhaps the iconic investment bank. It has been phenomenally successful over a long period of time and has generated enormous wealth for its partners and employees. Its senior officers have also been a pervasive presence, especially in the recent era, in the highest ranks of the United States government. Two recent Treasury secretaries came from the firm. In the spring of 2010, Goldman Sachs received a great deal of unwanted attention following the civil fraud filing against it by the Securities and Exchange Commission (SEC), reports of an ongoing criminal fraud investigation by the Department of Justice, and a high-profile Senate hearing (Story 2010; Story and Morgenson 2010; Taibbi 2010). Among other forms of wrongdoing, Goldman Sachs was accused of selling to investors “synthetic collateralized debt obligations [CDOs]” that were designed to fail and then betting against these opaque investments (Gandel 2010a). In July 2010, Goldman Sachs agreed to pay $550 million to settle the SEC complaint (Chan and Story 2010). In that same month, an arbitration panel ordered Goldman Sachs to pay more than $20 million to investors defrauded by the Bayou Group, a hedge fund from which Goldman earned millions of dollars of fees for clearing trades (Craig 2010). The arbitration panel accepted the claim that Goldman had serious concerns about Bayou but failed to alert investors. During this period the meltdown of the Greek economy and the resulting impact on the European Union was also a big story. Goldman Sachs was shown to have collected hundreds of millions of dollars in fees over a period of years for helping Greece conceal its mounting debt and then to have made more money betting on the failure of the Greek economy (Schwartz and Dash 2010). In the United States, Goldman Sachs created CDOs that ultimately were repackaged as structured investment vehicles (SIVs)—all highly complex financial instruments—and sold to many American municipalities and counties, leading to huge losses when the housing market collapsed (Gandel 2010b). As a consequence, vital services had to be cut and fees imposed on residents of these municipalities and counties. Journalist Matt Taibbi (2009) demonstrated that Goldman Sachs played a central role, over much of the course of the past century, in major manipulations of the financial markets, profiting very richly while complicit in the “high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts,” and other immense costs to the American citizenry.
According to this analysis, Goldman Sachs was involved in a vast “investment pyramid” or “pump-and-dump” scheme, persuading ordinary investors to purchase investments that the bank knew to be defective and that would decline greatly in future value. Traditional guidelines for underwriting companies were abandoned, and stocks in new companies with extremely doubtful prospects were increasingly sold to investors. Goldman engaged in “laddering,” the practice of manipulating share prices in new offerings; and “spinning,” the practice of offering executives in new public companies shares at exceptionally low prices, in return for promised future business. Practices such as these contributed to the creation of a huge internet bubble, which wiped out some $5 trillion of wealth on the NASDAQ alone. Penalties imposed on firms such as Goldman Sachs for wrongful practices were so small relative to the profits that they could not be said to act as any deterrent.
According to Taibbi (2009), Goldman Sachs also played a central role in the manipulation of the oil market, which led to a dramatic rise in the cost of gas at the pump, not traceable to a shortage of supply or an increase in demand. Starting in 1991, Goldman Sachs invested heavily in the food commodities market, in effect profiting greatly by “gaming” this market, with the ultimate consequence of an estimated one billion more people worldwide left hungry or even starving (Kaufman 2010). The worldwide price of food rose some 80 percent between 2005 and 2008, with millions of American households bearing a heavy burden from this rise. Goldman Sachs has continued to pay billions of dollars of compensation in the midst of the devastating financial meltdown to which it contributed, and it has continued to benefit hugely from “bailout” initiatives due to its contacts at the highest levels of the government. Moreover, it has positioned itself to profit immensely from a proposed, emerging carbon credits market. Throughout most of its history, Goldman Sachs has epitomized ultrarespectability and has enjoyed a high level of trust. If the preceding critique is accurate, however, it should more properly be regarded as a form of organized crime. And if some of its key activities over the years were fraudulent, then they need to be legislatively defined as such and therefore classified as criminal.
Criminogenic Conditions Contributing to the Global Financial Crisis
If we are to diminish the chances of a repeat of the 2008 financial meltdown, and more broadly the global financial crisis linked to this meltdown, we must identify the conditions that were central to this crisis and the policies needed to address them effectively. Within the context of a specifically criminological framework, it is necessary to identify criminogenic conditions. Broadly defined, the concept of “criminogenic conditions” refers to conditions that promote criminal activities and actions. Thus, the notion of crime is extended beyond the strictly legalistic notion of violation of the criminal law to encompass demonstrably harmful activities and actions that often are not specifically encompassed in the criminal codes, as a reflection of the influence of powerful and privileged segments of society.
Many of the proposed or selectively implemented financial reforms implicitly, if not explicitly, acknowledge criminogenic dimensions of a wide range of policies, practices, and conditions in the financial industry, and do so without specifically invoking this concept. The criminogenic conditions complicit in the financial meltdown include financial organizations that are either “too big to fail” or too interconnected to challenge without harming financial structures. They also include exorbitant executive compensation and bonuses; excessive leveraging in relation to investments; “innovative,” complex, and excessively risky financial products or instruments; and pervasive conflicts of interest involving entities that supposedly provide some form of oversight of the activities of financial institutions, including boards of directors, auditing firms, and credit-rating agencies.
The fact that the government has felt obliged to bail out financial institutions and corporations deemed too big to fail and has, furthermore, imposed no significant negative consequences in relation to the other criminogenic conditions just mentioned has created a situation of “moral hazard.” That is to say, incentives exist for financial institutions and executives to continue taking huge risks and paying huge bonuses, with potentially catastrophic consequences for the economy, because the upside vastly outweighs the downside, with the costs of failure shifted to third parties. Other criminogenic conditions contributing to the financial meltdown include a weak or ineffective regulatory system; an inherently corrupt political system where wealthy financial institutions and corporations have far too much influence; and, more broadly, “free market” fundamentalism. Proponents of such fundamentalism advocate a largely, if not wholly, unregulated market as the most efficient and productive model for the economy. The argument here is that we must collectively focus on how these conditions very specifically promote criminal practices. The second task is to address which practices might be specifically criminalized and what the benefits and the drawbacks would be of such criminalization.
Transformative Public Policies and the Full Acknowledgment of Financial Industry Practices as Crimes
It is widely agreed that the financial crisis requires an effective response and the adoption of appropriate policies. But what sort of policies? One division exists between those who favor incremental and targeted reform policies and those who call for transformative and systemic policies. Just prior to the 2008 presidential election, Robert Kuttner (2008) argued persuasively that President Barack Obama’s administration needed to adopt transformative policies in the midst of extraordinary and exceptionally challenging historical circumstances. In this regard, transformative public policies are indeed called for in response to the financial crisis, and the specific criminalization of practices at the center of the financial meltdown should be one dimension of this transformative policy shift.
The history of the development of criminal law incorporates disproportionate attention to some minor or inconsequential forms of harm, while either disregarding or legitimizing and supporting large-scale forms of demonstrable harm. William J. Chambliss (1976), in a frequently cited analysis, traced the origins of vagrancy laws to the Black Death in the fourteenth century, when the elite landowning classes feared that the devastating loss of life among the laboring classes would make it difficult to keep their enterprises going. Vagrancy laws were thus intended to ensure that cheap labor would continue to be available, as those unwilling to work would be subject to penal sanctions. Although prosecutions for vagrancy in the contemporary era are rare, homeless people continue to be prosecuted for such “offenses” as panhandling and loitering. Many other recent examples could be cited, such as the criminalization of marijuana use.
The history of penal policies is, in a parallel vein, one of harsh punishments imposed on individuals for minor offenses, while the rich and the powerful committed large-scale crimes (e.g., in relation to the slave trade and colonialism) with impunity. Many desperately poor people convicted of relatively minor property crimes such as shoplifting, picking pockets, and stealing incidental items of food or clothing were transported to penal colonies from the United Kingdom to Australia to serve long sentences, with some of the off enders as young as 9 years of age (Hilton and Hood 1999). Although over a long period of time the specific policies associated with transportation were abandoned, it remains the case that early in the twenty-first century in the United States well over two million people are incarcerated, with a not insignificant proportion of these imprisoned for relatively minor offenses involving property or drugs.
In the late nineteenth century, a growing number of politicians and social commentators recognized that the large monopolistic trusts exemplified by John D. Rockefeller’s Standard Oil were harmful to American consumers, farmers, small businessmen, and, more broadly, the U.S. economy. This recognition led to the adoption of the Sherman Antitrust Act, which prohibited (and criminalized) anticompetitive practices. It is not necessary to revisit the long (and uneven) history of the implementation of this act to acknowledge its significance in creating a more level playing field for American businesses. Nevertheless, oligopolies, conglomerates, and multinationals have, in at least some important respects, counterbalanced the formal purpose of the Sherman Antitrust Act to produce a “fairer” marketplace by giving large and powerful entities immense competitive advantages. That said, we would be far worse off without this act.
If in an earlier era it was recognized that monopolies were too harmful to be allowed to exist, and accordingly had to be outlawed, then it follows that in the contemporary era we must recognize that the criminogenic conditions that have had such demonstrably harmful consequences in bringing about a massive financial meltdown should be outlawed to the extent possible. In relatively recent times, we have criminalized environmental pollution, the creation of unsafe working places, and the distribution of harmful products, although still in a fairly limited way (Friedrichs 2010b). A truly effective response to the current financial crisis would have to be quite direct and uncompromising in acknowledging the inherently criminal character of the financial industry as presently organized, and the criminogenic conditions promoted by many of its core policies and practices.
All financial reform initiatives generate concerns about unintended or negative consequences. This is especially true for any criminalization initiatives. When public policy initiatives are promoted in response to the whole range of conventional forms of crime, there tends to be little concern with potential unintended or negative consequences of such policies. Tough new legislation in response to street crime, to drug dealing, to sexual predation (especially directed at children) is politically popular and generates little effective opposition. But such policies have led recently to the vast expansion of the prison population and those under the supervision of the criminal justice system. Some criminologists have explored the negative consequences of these policies. As just one example, in Imprisoning Communities: How Mass Incarceration Makes Disadvantaged Neighborhoods Worse (2007), Todd Clear documents the claim made in the subtitle to his book. But a broad popular or political concern with such consequences is relatively absent.
Concern about negative and unintended consequences of initiatives directed at the harmful practices and policies of major corporations and financial institutions is immense. It is fueled particularly by the vast economic resources and political influence of these organizations. There can be no question that proposed transformative policies directed at the financial industry, if implemented, will carry huge costs, starting with greatly diminished profits for major financial institutions. All sophisticated proponents of transformative policies recognize such direct costs as well as many potential residual costs and unanticipated consequences. But the fundamental premise of such proponents is quite simple: The costs of failing to adopt and implement such policies, to society as a whole and to a broad swath of taxpayers, workers, homeowners, investors, and savers, are certain to be far greater than any negative and unintended consequences.
Paul Krugman, in one of his New York Times columns (2010a), has put the matter concisely: “We’ve devoted far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes—schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?”
The financial reform measures passed in 2010 by the U.S. Congress are incremental, technical, and limited. Certainly some elements of the reform measures are needed and may have some beneficial effects. But the history of such reforms is that over time they will be gamed, watered down, and selectively enforced. New regulatory agencies and initiatives are always subject to the enduring problem of “agency capture.” That is, they are “captured” and virtually controlled by the industry they are supposed to regulate. Only transformative policies are likely to have an enduring effect (Friedrichs 2010a). Such policies implemented by the Roosevelt administration in the 1930s—including the passage of the Glass-Steagall Act of 1933 and the establishment of the SEC—did make a difference over a period of many de cades. Ultimately the Reagan conservative “counterrevolution”—including the passage of the Garn-St. Germain Act of 1982 and the enfeebling of the SEC—led to a systemic erosion of the controls rooted in the New Deal policies (Hagan 2010). Subsequent administrations, including those of Bill Clinton and George W. Bush, adopted further deregulatory initiatives.
Concluding Observations
In a world of growing interdependence and diminishing resources, the current architecture of high finance is not sustainable. Going forward, the harmful effects of this architecture will be progressively amplified, with broad and catastrophic consequences. The specific, direct harms that can be linked to the financial system activities are well understood: millions of lost homes, jobs, and savings, along with broad and devastating effects on the physical and mental well-being of millions of people. It is impossible to explore larger issues here that can be linked to all this, such as the dramatic increase in the unequal distribution of wealth and income, the case that high income is not earned, for the most part, in terms of merit and effort, and the multiple harmful effects on society and its citizens of intensifying socioeconomic inequality. More narrowly, it has been a core argument of this chapter that unless the inherently criminal and criminogenic nature of the present architecture of the system of high finance in our society is fully recognized and addressed, we are destined to endure ongoing cycles of financial crises, with often devastating losses imposed on a wide range of people—but with those at the top of the financial system coming out ahead.
This analysis does not suffer from the illusion that formally characterizing policies and practices at the heart of the financial industry as crime is a realizable objective in the near term. Rather, the case being set forth here is that broadly diffused recognition of this activity as criminal is a crucial starting point for transformative public policies that will ultimately prove essential to minimizing the chances of future catastrophic financial meltdowns. A transformative collective consciousness about the nature of crime in relation to harm is part of this. We must transform our understanding of crime and adopt an understanding that accords appropriate societal attention to the whole range of criminal activities proportional to their identifiable harm. It remains the case that activities with relatively mild harmful consequences for society are accorded much attention and treated harshly, whereas activities with demonstrably major harmful consequences for society are accorded little attention and only very selectively addressed.
Admittedly, a call for a radical reordering of our consciousness of crime and our response to it is an ambitious project. Many might insist it is wholly unrealizable. But whether or not it can be realized, it should be at the center of our dialogue about the financial system and the harm emanating from it.
A Postscript: How They Got Away with It
At this writing not a single high-level private- or public-sector executive or official has been convicted of criminal charges in relation to a financial meltdown that has been described as having obliterated trillions of dollars of value. How is this possible, in an era when our prisons are filled with a record number of offenders, many of whom have been convicted of relatively inconsequential crimes? A concise (and contextual) answer to the core question posed in the title of this book—“How they got away with it”—can readily be produced by any serious student of white collar crime. First, because the illegitimate and harmful activities in the financial sector were intertwined with legitimate and beneficial activities, it is on some level challenging to disentangle one from the other. There is nothing legitimate, beneficial, or productive about an inner-city mugging, but this is not necessarily the case with the securitization of mortgage loans by Wall Street investment banking houses.
Second, the media (and the popular culture itself) has a long history of highlighting conventional crime—especially sensational, violent crime—over white collar crime, which tends to direct the public to demand political responses. Third, the Wall Street “crooks”—despite being widely castigated as such—continue to enjoy a relative degree of immunity from formal identification and processing as criminals, significantly protected by their ultrarespectable status. Bernard Madoff avoided serious scrutiny of his suspect investment fund, over a period of many years, due in part to his highly respected status (as a former chair of NASDAQ, among other things). Fourth, the ties between the high-level financial sector and the high-level political sector—greased by large campaign donations and multimillion-dollar lobbying—provide a further mea sure of relative immunity from criminal investigations and prosecutions.
Fifth, the complex and diffuse nature of Wall Street wrongdoing (relative to most conventional crime) confronts potential investigators and criminal prosecutors with formidable challenges. And sixth, following up on this point, much greater resources must be devoted to investigating and prosecuting Wall Street cases relative to conventional criminal cases. It is clear that, otherwise, any hope of success in such investigations will be compromised by the vast resources available to stifle investigations and defeat prosecutorial initiatives.
A Brief Update on Wall Street Crime: February, 2012
In his State of the Union address in January 2012, President Barack Obama announced the establishment of a new prosecutorial entity to address financial sector crimes that contributed to the financial meltdown. Phil Angelides (2012), chairperson of the Financial Crisis Inquiry Commission, asserted that if Wall Street is to face justice, a real commitment of substantial resources to this entity will be necessary. And if we hope to deter future malfeasance, criminal prosecutions must be vigorously pursued. As of early 2012, no Wall Street executives or their firms have been successfully prosecuted for practices they engaged in leading up to the meltdown that had occurred. Some high-profile insider trading cases were pursued—most prominently the conviction and imprisonment of hedge fund billionaire Raj Rajaratnam—but individuals from various quarters have criticized the privileging of these prosecutions over the prosecutions of fraudulent investment banking practices. Federal Judge Jed Rakoff refused to sign off on an SEC civil settlement with Citigroup that allowed the bank to fork over hundreds of millions of dollars without admitting any wrongdoing. Such settlements have been quite common. And key figures in the subprime mortgage collapse, such as Angelo Mozillo of Countrywide, have been allowed to make civil settlements that were largely paid by other parties and did not in any way put a significant dent into the huge fortunes acquired during the subprime mortgage mania.
Substantial lobbying efforts from Wall Street to rescind provisions of the Dodd-Frank Act, which places restrictions on excessively risky (but often highly profitable) investment bank activities, are under way. The bankruptcy of MF Global (headed by former New Jersey governor and Goldman Sachs CEO Jon Corzine), with over $1 billion of customers’ funds missing, is an ominous warning that little has changed since the financial meltdown. In March 2012, a Goldman Sachs executive director, Greg Smith (2012), inspired a firestorm of commentary with his New York Times op-ed “Why I Am Leaving Goldman Sachs.” He alleged that the “morally bankrupt” culture of Goldman Sachs continued to promote aggressively “ripping off” the investment bank’s own clients in the interest of making the most possible money from them. In April 2012 the manager of a major institutional investment firm, Sequoia Fund, criticized Goldman Sachs’ renomination of James Johnson, former CEO of Fannie Mae, to its board, since Johnson was at the center of several major corporate governance debacles (Sorkin 2012). And the outbreak of Occupy Wall Street protests—with the failure to prosecute Wall Street crime as one theme of these protests—was just one sign of widespread and justifiable public anger toward both Wall Street and Washington. It is crystal clear that an effective response to the criminogenic nature of Wall Street is far from being realized. Altogether, in Spring 2012, crime on Wall Street was still wide awake and had hardly been put to sleep.
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