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<DIV class=timestamp>May 6, 2011</DIV>
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<H1><NYT_HEADLINE type=" " version="1.0">You Call That
Tough?</NYT_HEADLINE></H1><NYT_BYLINE>
<H6 class=byline>By <A class=meta-per title="More Articles by Joe Nocera"
href="http://topics.nytimes.com/top/news/business/columns/josephnocera/?inline=nyt-per"
rel=author>JOE NOCERA</A></H6></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody><NYT_CORRECTION_TOP></NYT_CORRECTION_TOP>
<P>The only thing missing from Preet Bharara’s press conference was the blaring
of trumpets. </P>
<P>It was Tuesday, and the U.S. attorney in Manhattan was proudly <A
title="NYT article"
href="http://www.nytimes.com/2011/05/04/business/04mortgage.html">unveiling a
lawsuit</A> against Deutsche Bank that his office had filed that morning. As he
took reporters through the legal complaint, Bharara spoke sternly about how the
bank had defrauded the Federal Housing Administration, which had insured
hundreds of millions of dollars’ worth of bad loans that the bank then sold to
investors, reaping handsome fees. </P>
<P>Listening to Bharara, one could easily think that prosecutors were finally —
finally! — getting tough on the bad behavior that helped bring about the
financial crisis. Alas, it was mainly an illusion. </P>
<P>Upon closer inspection, it turns out that the main target of Bharara’s wrath
was MortgageIT, a smallish division that Deutsche Bank bought in 2007 — eight
years into an alleged fraud that ended in 2009. In <A
title="A pdf of the full complaint"
href="http://graphics8.nytimes.com/packages/pdf/business/20110504mortgage/04mortgage-complaint.pdf">the
complaint itself</A>, not one MortgageIT executive was singled out as a
wrongdoer; it was as if this faceless corporation had somehow defrauded the
government without human help. </P>
<P>Most stunningly, despite concluding that MortgageIT executives had
“knowingly, wantonly and recklessly” lied to federal officials, Bharara’s office
had decided that none of them deserved jail time. It had brought a civil, not a
criminal, case, meaning the only punishment prosecutors could seek was money —
more than $1 billion in this instance. That sounds like a lot until you realize
that Deutsche Bank’s 2010 revenues were more than $42 billion. In other words, a
tap on the wrist. </P>
<P>“Every lie is not a crime,” said Bharara, when he was asked why no criminal
charges had been brought. But two-plus years after the financial crisis, that’s
not the right question anymore. The right question is: Are there any lies that
amount to crimes? When it comes to financial executives, it sure doesn’t look
that way. </P>
<P>To give him his due, Bharara has brought serious insider-trading charges
against Raj Rajaratnam, the hedge fund manager, using evidence that included
wiretaps of brazen phone calls between Rajaratnam and the insiders who were
feeding him illegal information. If Rajaratnam is convicted — inexplicably, the
jury remains out after several weeks — he would go to prison for a long time.
</P>
<P>But that case doesn’t have anything to do with the events that led to the
financial crisis; indeed, one can argue that the immense resources devoted to
cracking the insider-trading case meant that Bharara lacked manpower to go after
those culpable for bringing us to the brink of financial disaster. </P>
<P>He also put Bernie Madoff in prison, though that didn’t exactly require
heaving lifting. Later, Bharara would take credit for forcing large settlements
from two of Madoff’s presumed enablers, Carl Shapiro and the late Jeffry
Picower. But, here again, Bharara was searching for applause he doesn’t deserve.
Bharara parachuted into settlement talks that were well under way between Irving
Picard, the trustee handling the Madoff bankruptcy, and lawyers for Shapiro and
Picower. It was Picard’s inquiry that made those settlements possible. </P>
<P>As for the big fish, they’re all walking away unscathed. The Securities and
Exchange Commission got <A title="The S.E.C. press release"
href="http://www.sec.gov/news/press/2010/2010-197.htm">a $67.5 million
settlement</A> out of Angelo Mozilo, the former chief executive of Countrywide.
(Mozilo paid only $22.5 million; the rest was picked up by Countrywide’s owner,
Bank of America.) But prosecutors on the West Coast dropped their criminal
investigation. </P>
<P>The Justice Department spent several years trying to build a case against Joe
Cassano, the former head of A.I.G.’s Financial Products division. It gave up.
Richard Fuld, the former chief executive of Lehman Brothers, approved a
bookkeeping scam that hid billions of dollars of Lehman’s debt from investors.
Recent reports suggest that not only will he not be charged with a crime, he
isn’t even likely to face civil charges. </P>
<P>The MortgageIT executives are hardly in the same rank as Fuld or Mozilo, but
the facts laid out in Bharara’s complaint are truly shocking. Given special
status by the F.H.A. to make loans to low-income Americans, which the government
would then insure, the company flagrantly lied about the underwriting it had
done. Loans would often default in a matter of months. Independent auditors who
reported problems saw reports stashed in a closet, unread. To make a criminal
case, prosecutors need to show that executives knowingly intended to deceive. If
10 years of this behavior doesn’t qualify as intentional deception, it is hard
to know what would. </P>
<P>I know that these are difficult cases to win. The one time prosecutors
brought a criminal case involving the financial crisis — against two Bear
Stearns hedge fund managers whose fund collapsed in the summer of 2007 — <A
title="NYT article on the acquittal of the fund managers"
href="http://www.nytimes.com/2009/11/11/business/11bear.html">they lost</A>. But
so long as prosecutors resist bringing criminal cases against financial
executives, they are sending a message. </P>
<P>Crime pays. </P><NYT_CORRECTION_BOTTOM>
<DIV
class=articleCorrection></DIV></NYT_CORRECTION_BOTTOM><NYT_UPDATE_BOTTOM></NYT_UPDATE_BOTTOM></DIV></NYT_TEXT></FONT></DIV>
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<DIV><FONT size=2>_________________________________________</FONT></DIV><FONT
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