Obama Administration, Wall Street Crackdown, and Deregulatory Hurdles

One of the biggest complaints you hear from the left ideologue critics of President Obama is that he has willfully refused to prosecute people on Wall Street in the wake of the financial meltdown that's grappled the country in 2008 and the effects of which America is still badly suffering from. The gripe is of course largely an unfounded one, especially in light of enforcement activities that have taken place and the context of 30 years of systematic dismantling of legal and regulatory framework prior to President Obama's taking office.

The most recent and most famous of the administration's aggressive prosecutions is probably the conviction on 14 counts of securities fraud and conspiracy of Galleon founder Raj Rajaratnam, a billionaire hedge fund manager in the largest insider trading case in a generation. Rajaratnam was convicted of fraud and conspiracy to commit fraud with stocks of mostly high-tech companies, ranging from Intel to ATI, but also including Goldman Sachs. Rajaratnam is currently under surveillance but free on $100 million bail till his sentencing hearing in July, in which he faces up to 25 years in prison. Mr. Rajaratnam's attorney seemed particularly mad at CNBC, for some reason, after the verdict was announced. Watch this:



Not a happy camper, I see. And he shouldn't be. The US Attorney who prosecuted Mr. Rajaratnam, Preet Bharara, is pretty adamant about locking up Wall Street criminals.
Preet Bharara, the United States attorney for Manhattan, whose prosecutors brought the case against Mr. Rajaratnam, said, “The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”

Mr. Bharara noted that over the last 18 months, his office had charged 47 people with insider trading; Mr. Rajaratnam is the 35th to be convicted.
You could say this guy eats inside traders for lunch. And Mr. Rajaratnam is by far the biggest fish - not just now, but one of the biggest ever. Mr. Bharara's New York Times profile credits him with a widespread crackdown on insider trading on Wall Street, and when he worked for the Senate Judiciary Committee, his investigations into the Bush administration's US Attorney scandal lead to the resignation of Alberto Gonzalez. No wonder the Rajaratnam's attorney is not happy.

The criminal prosecution of hedge fund managers on insider trading has accompanied a myriad of other law enforcement actions, including civil suits brought by the SEC in parallel with some of the criminal cases. Disgraced former Countrywide CEO, Angelo Mozilo, for example, settled his SEC case for $67.5 million, the largest financial penalty ever against a senior executive of a public company. In the same case, two other Countrywide executives will also pay civil penalties and profits, bringing the total amount of this settlement to over $72 million.

In March, FBI Director Robert Mueller pointed to massive investigative efforts by the FBI into the financial crisis:
The agency has more than 3,000 open investigations into mortgage fraud alone, with 94 task forces and some 340 agents assigned, Mueller told the House of Representatives' Judiciary Committee.[...]

He said there are 667 ongoing probes into corporate fraud by some 110 FBI agents. More than 55 are related to the subprime mortgage industry and "most of these cases are on Wall Street," Mueller said.

As for securities fraud, there are about 1,700 open cases with 233 agents, he said.
As we discuss the untold story of Wall Street prosecutions under Obama, though, one thing is important to understand. The political Right has been at their campaign to deregulate everything for over 30 years. That is significant in terms of what can and cannot be prosecuted. Deregulation of the financial sector - legally capped with the repeal of Glass-Steagall by the Graham-Leach-Bliley Act in late 1999, and regulatorily capped with the fox-guarding-the-henhouse regulatory regime the Bush administration that followed.

Why am I telling you all this? Because most of the outrageous behavior by Wall Street tycoons during the financial crisis were, sadly, legal and permitted under the regulatory regime at the time. Subprime mortgages without verifying incomes? Legal. Shady "derivatives" products traded far away from the pubic eye? Legal. Selling off bad mortgage securities with good ratings based on ratings companies receiving bad information (that's what they claim anyway)? Also legal. While fraud remained illegal in name, the lack of legal and regulatorily required transparency made it extraordinarily difficult to prove against people adept at covering their tracks. Legalized malpractices of Wall Street, along with a deep lack of transparency created the perfect storm for a financial meltdown, and at the same time, it made prosecutions much harder. Essentially, the legal and regulatory framework enabled people to get away with murder. It's a miracle we're able to prosecute at all. Civil and criminal wrongdoings on Wall Street were as difficult to commit as election law violations in Texas.

These are all problems in the law and regulatory structures addressed by the Wall Street reform bill that Preident Obama signed into law last year. Given the Constitutional ban on ex post facto laws, however, even President Obama could not make Wall Street reform apply back in time. What his administration is able to do is not to perp-walk people for the sake of perp-walking people, but enforce the laws, investigate as thoroughly as possible and come down hard on those who actually violated the law. It's not a matter of screaming and pouting, but of doing the hard work holding people accountable. And it's about ensuring that never again can these practices happen under the protection of a legal cloak, and protecting shareholders and consumers.