Perhaps no recent occurrence stirred leftist-populist angst as much as the lack of any criminal prosecutions in the aftermath of the 2008 financial crisis. Many analysts believe that a few sacrificial lambs would have pacified angry Americans and helped to stave off public discontent. It’s a plausible-sounding thesis, and Jesse Eisinger’s new book seeks to explain where the blame lies for the lack of what he and many others believe would have been worthy prosecutions.
The phrase “chickensh** club” comes from a sort of inaugural speech that James Comey (yes, that James Comey) gave in 2002 upon his arrival as U.S. attorney for the Southern District of New York. Comey was calling out prosecutors who have never lost a trial as a “chickensh** club” of those who are unwilling to take on risky cases; the implication was that a gutsy prosecutor will lose a couple along the way.
Eisinger then recounts the Enron case and celebrates not only the prosecutorial successes that that debacle generated, but the prosecutors’ tactics and their holistic approach to the fraudulent Enron ecosystem. The Enron prosecutors had a perfect conviction record and took down the whole chain of actors involved in that rather clear case of direct fraud. But it was the Enron case that Eisinger believes started to send things astray, through the government-forced shutdown of the famed accounting firm Arthur Andersen.
Eisinger’s thesis is that Arthur Andersen’s winning of the PR war in that case, even as the government succeeded in destroying it, led to new burdens on prosecutors of white-collar crime. A company of 28,000 law-abiding and extremely gifted tax and finance professionals was forced to close because of the deviant actions of perhaps half a dozen people; in 15 years of studying the Arthur Andersen prosecution (eventually thrown out by the Supreme Court, but not until it was too late to save the company), I do not believe I have ever read a single analysis that defends that abusive overreach . . . until now. Eisinger thinks society was wrong to condemn the Arthur Andersen shutdown and identifies it as a turning point in our expectations of prosecutors.
If my patience for Eisinger’s worldview was wearing thin during his treatment of the Arthur Andersen case, he permanently lost me by the time he got to the infamous KPMG prosecutions. In the KPMG case, the court system lambasted prosecutors in the strongest way possible for their perverse threats: They had warned the company that it would be treated more harshly if it paid the legal bills for its key executives and officers who were then under investigation. The courts, quite reasonably, ruled that this was an egregious violation of due process and constitutional rights, and the entire case was thrown out as a result. To Eisinger, this was yet another indication that the deck was being stacked against prosecutors who were trying to take down white-collar criminals.
Eisinger dedicates a grand total of one paragraph to what is perhaps the most significant factor in the lack of criminal prosecutions in the financial crisis. The U.S. government did indeed try to prosecute two high-profile actors: the two famed hedge-fund managers at Bear Stearns whose failure preceded the crisis. The jury trial resulted in acquittal, and for good reason: It is not illegal to be bad at investing. Prosecutors did not become “chickensh**” after that failed attempt; rather, they were provoked into a sober reflection that public anger would not give them a pass for a lack of evidence that a crime had been committed at all, let alone committed by particular people. The acquittal of the Bear Stearns defendants was the turning point in this story, but it merits barely a footnote in Eisinger’s book.
Surely a 400-page book dedicated to telling us what went wrong in the pursuit of justice after the financial crisis would provide a smoking gun — a clear and obvious case of a crime that was not sufficiently prosecuted? Sadly, no. After 200 pages of throat-clearing, we get to the first case in which Eisinger believes the people responsible for the crisis were inadequately prosecuted. But there’s a problem: The case had nothing whatsoever to do with causing the crisis.
The case involved the process in which Bank of America swept up a beaten-down Merrill Lynch. The prosecutors alleged that, in the closing of that transaction, there was a troubling effort by leaders at both Bank of America and Merrill Lynch to downplay, in a deceptive manner, the bonuses that would be paid out at Merrill and the nature of the losses Merrill had incurred. But that transaction was the result of the financial crisis, not its cause. For years, hype has been built up to the effect that criminal actors committed illegal acts of fraud and corruption that caused our society to enter a great housing meltdown, recession, and financial crisis. That the lead “case in point” in Eisinger’s book is nothing of the sort, but an anecdotal story that took place months after the crisis, out of a transaction that took place only because of that crisis, is extremely telling.
If Eisinger and I agree on anything, it is that using “deferred-prosecution agreements” to shake down corporations for financial settlements, instead of pursuing actual individual lawbreakers, represents a deeply regrettable shift in the philosophy of American justice. It forces us to address a foundational question, one that has as yet not been adequately answered: Do companies break the law, or do people? Because a person has a face, and enjoys constitutional rights, including such arcane ones as “innocent until proven guilty,” prosecuting individuals is not easy. But it is not easy because it is not supposed to be. Our legal tradition demands a high burden in prosecuting the accused, and this entire cultural context is exactly why. Innocent or potentially innocent people should not be the sacrificial lambs when a thirst for “Old Testament justice” (Treasury secretary Tim Geithner’s famous phrase) overcomes the desire for genuine justice. To give in to the political temptation to take down real people in order to make a purely symbolic statement is wholly unbecoming of our republic.
It is also, of course, unbecoming for guilty people to walk away scot-free. And to the extent that a real individual commits a real crime and there is real evidence that requires his prosecution, no reader would disagree with Eisinger’s plea that prosecutors be equipped with the tools necessary for an aggressive effort to secure such justice. The problem is that Eisinger’s book started as a conclusion in search of support, and that the support he provides is based entirely in emotional assertion. The financial crisis was so severe that there just had to be someone to put in jail for it. Eisinger’s inquiry was never focused on ascertaining who committed criminal infractions or what criminal infractions he might have committed. It began with a presupposition that some guilty bastards were walking free and a case needed to be made against the “chickensh**” prosecutors who allowed it.
The pain of the financial crisis will be with American society for a long time to come, and for good reason. From Main Street to Wall Street to K Street, there were a plethora of bad actors and an entire set of policies that did extraordinary harm to the American economy. It is an irreversible fact of human nature that, after such a large and traumatic event, we want someone to suffer. But populist rage shouldn’t drive legal decision-making in a society ruled by law. Only a simplistic and inadequate account of the financial crisis would assert that what we have missed is a legal prosecution of its worst culprits. And perhaps that will be the real achievement of Eisinger’s book: After reading this first thorough work making the case for such crisis criminalization, readers are left realizing how naked that emperor really is.
– Mr. Bahnsen is the managing partner of the Bahnsen Group, a wealth-management firm, and the author of the forthcoming book Crisis of Responsibility.