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Truthdigger of the Week: Judge Jed Rakoff

Posted on Dec 22, 2013
Composite image: Handout / Mary Altaffer, AP

Every week the Truthdig editorial staff selects a Truthdigger of the Week, a group or person worthy of recognition for speaking truth to power, breaking the story or blowing the whistle. It is not a lifetime achievement award. Rather, we’re looking for newsmakers whose actions in a given week are worth celebrating. Nominate our next Truthdigger here.

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Two years ago Jed Rakoff, senior judge for the Southern District of New York, embarrassed both the Securities and Exchange Commission and Citigroup by rejecting a deal to relieve the bank of guilt for cheating its customers out of more than $700 million by selling them bad mortgages. This month, in the pages of the Jan. 9 issue of The New York Review of Books, he stepped forward from the bench once again to criticize the mindset that both led to that deal and produced the financial crisis.

“Who was to blame” for the recession that forced “millions of Americans” into “lives of quiet desperation: without jobs, without resources, without hope”? he asked. “Was it simply a result of negligence. … Or was it the result, at least in part, of fraudulent practices?”

Without quite deciding what occurred, Rakoff asks why “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” One possibility is that no fraud was committed. Rakoff tells us he hasn’t performed the examinations necessary to rule on that matter. But others have. In their final report on the subject, investigators with the Financial Crisis Inquiry Commission used “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 of accountability, but also in ethical behavior,” he writes.

“[T]he signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising twenty-fold between 1996 and 2005 and then doubling again in the next four years,” Rakoff continues in The New York Review of Books. “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 mortgage-backed securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high-level 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.’ “


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Rakoff goes on to say that in the aftermath of the crisis, many government officials opted for the view that the collapse was in part due to intentional fraud relating to the sale of “mortgages of dubious creditworthiness. ... How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?”

Rakoff lists the Justice Department’s stated reasons for failing to pursue prosecutions for fraud. The claims are: 1) proving fraudulent intent is difficult, 2) because the buyers themselves were sophisticated investors, it cannot be said that their ignorance was taken advantage of, and 3) subjecting major banks to criminal inquiry would damage the economy.

The first objection implies that bank executives weren’t aware of possible fraud in their companies. That’s impossible, Rakoff says, because in the years leading up to the crisis, investigations performed by the banks themselves found evidence that fraud was occurring. The second claim is undone by two facts. First, convoluted trades occur in tremendous volume at lightning speeds, so even financial wizards might miss something. Second, “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 third claim, that prosecutions may harm the economy, is dealt with simply by referring to equality under the law. Even the spearing of a CEO wouldn’t destroy a bank.

Rakoff continues: “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?”

While reaffirming that he has no “inside information about the real reasons why no such prosecutions have been brought,” Rakoff offers some speculations. Again, we get three bullet points. The first, detailed at some length, is the possibility that regulatory bodies were already overwhelmed with other priorities. (Observers who are furious about the Justice Department’s inaction may find this excuse incredible because of its convenience to officials.)

The second possible explanation, also considered at length, is that an investigation would show how government policies enabled fraud. A lack of enthusiasm on the part of officials to unearth this fact in unprecedented detail is understandable. “One does not necessarily have to adopt the view of Neil Barofsky, former special inspector general in charge of oversight of TARP, that regulators made almost no effort to hold accountable the financial institutions they were bailing out, to wonder whether the government, having helped create the conditions that led to the seeming widespread fraud in the mortgage-backed securities market, was all too ready to forgive its alleged perpetrators,” Rakoff proposes.

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