GAI on Financial Fraud Prosecutions

by Reihan Salam

Peter Schweizer’s new Government Accountability Institute has a report arguing that the Justice Department’s failure to prosecute top financial executives for malfeasance reflects the fact that its leadership “came from and returned to law practices where they defend the financial institutions the DOJ is tasked with prosecuting.” The report also notes that financial fraud persecutions have declined by 39 percent since 2003 and that they’ve declined even more dramatically since the Clinton era, when the DOJ aggressively pursued S&L executives. While health care fraud prosecutions and prosecutions of civil rights abuses have increased dramatically, GAI maintains that financial fraud exceptions represent a striking exception to the larger trend. 

Would a Romney administration represent a significant improvement in this regard? While financial sector professionals favored Barack Obama over John McCain in 2008, there is good reason to believe that they now favor Mitt Romney, or rather that the balance of campaign contributions drawn from the financial sector now favors the Republican presidential nominee. If GAI is right and campaign contributions constitute a corrupting influence, this is not encouraging for those who both support Romney and who believe that the DOJ should be more active in prosecuting financial fraud. 

Contributions aside, GAI makes the case that the key issue is a kind of subtle collusion that flows from the revolving door, in which senior DOJ officials work for financial firms both before and after serving in government. And this problem seems to be deep and directional. That is, it is easy to imagine that a high human capital person who is a plausible candidate for an executive branch job is more likely to come from the financial sector in 2013 than in 1993 or 2003. Part of the reason is social: to the extent that high human capital people are status conscious, the opportunity cost involved in taking an executive branch job might be quite high, and so one is more likely to take such a job if one has savings to draw on, etc. Wage gains in the financial sector have outstripped wage gains for lawyers in the civil service.

So this leads us to an interesting conclusion: perhaps we need to raise the compensation of the officials tasked with prosecuting financial fraud. It’s not obvious that this strategy would work, as the job would be difficult under any circumstances and the knowledge garnered in the process would presumably be very valuable — so valuable that financial firms would presumably bid up the price of these workers. Alternately, we could find some way to increase the prestige afforded such officials, though it is hard to see how we’d go about doing that.  

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.