Neil Barofsky met with several Occupy Wall Street working groups Sunday for nearly two hours. Barofsky is relaxed, thoughtful, and direct a Q&A format.
One of his major themes was that the unwillingness to mete out meaningful punishments to miscreant banks means that the authorities are providing incentives to engage in criminal activity. It’s now more profitable to break rules than abide by them. Barofsky stressed that the current form of corruption was worse than having officials take bribes; at least you could catch people like that and when you did, their behavior was recognized as outside the pale. By contrast, Barofsky stressed that the officialdom honestly believes things that most of us would regard as nonsensical, such as bank executives can be relied upon to behave responsibly, the SEC and Department of Justice have done a good job on the financial services front given their limited resources. Barofsky stressed didn’t see a way to break the dynamic. He believes a crisis is inevitable, given that we are now rewarding predatory, destructive behavior, and thinks that financial services industry critics and the public need to be ready to put forward a reform agenda when it occurs.
This, needless to say, is not the most cheery prognosis. Some participants pointed out that we just went through a global financial crisis and nothing much got fixed in its wake. Barofsky said that some important measures in fact almost got through, such as Brown-Kauffman, which would have imposed size limits on banks. It had the votes to pass both houses until Larry Summers and Timothy Geithner lobbied key Congressmen personally. He also said there is much wider recognition of the problem, as well as more people who have credibility on the side of reform.
Barofsky discussed the failure to prosecute HSBC for money laundering. He seemed a bit discouraged that there was not more outrage. He was willing to accept the proposition that indicting the bank would be too destabilizing, but did not see that as a justification for a cost-of-doing-business level fine. He laughed at the Department of Justice’s claim that a deferred prosecution agreement was a sword of Damocles hanging over the bank: “If they aren’t willing to indict them now, they aren’t willing to indict them in a few years.” He argued for having the bank be broken up as a condition of the deferred prosecution agreement, so it would be reduced to a size the various new entities could be prosecuted. Failing that, he felt the bank needed to pay a fine that was equal to several years of earnings, not a mere six weeks.
Barofsky also addressed why the various enforcement agencies were so bad at doing their jobs He attributed it to a loss of skills. In the early 2000s, there was still some expertise in prosecuting accounting fraud at the DoJ and the FBI. But FBI resources were diverted to terrorism and the SEC focused more on insider trading. When Barofsky worked at SIGTARP, he found the staffers at the DoJ didn’t know how to conduct the investigation; their reflex was to look at trading records, which is not where you go digging with accounting fraud. Barofsky enlisted the Post Office’s fraud unit, which was very capable but has since been taken out of the business of pursuing complex white collar frauds as a result of budget-cutting.
The former SIGTARP chief also pointed out that the various agencies have a resource allocation problem: do they allow some insider trading cases to go unpunished to invest the time and staff members to rebuild skills in prosecuting complex financial frauds? Nevertheless, they have also become demoralized. When he was at a prosecutor in the Southern District of New York, a new boss asked the various prosecutors who had won all their cases. Barofsky was one of the people who put their hand up. The boss called them chickenshit because anyone who is taking on tough cases is bound to lose some. With their new marching orders, the office’s acquittals indeed went up, but they never felt bad about losing these cases. By contrast, Barofsky said it was difficult to get the SEC and DoJ interested in pursuing a complex case prior to the Bear Stearns hedge fund case, which was an embarrassing loss, and he got a much chiller response afterwards.
And proscecutorial caution feeds on itself and produces negative outcomes due to the collateral damage done by the lack of confidence. Barofsky recounted how he was on a case where a famous defense lawyer came in and met with his team and gave them a speech about how there was evidence that exonerated his client and they’d suffer reputational damage if they went forward with the case. After the attorney left the room, Barofsky and his colleagues scoffed at the idea. But if they had doubts in their capabilities, they might spend another six months investigating and double checking before proceeding. This matters not simply because resources are wasted but more important, because speed works to the advantage of the prosecution. The faster it moves, the less time for the defense to get its ducks in a row and devise plausible-seeming rationales for bad conduct.
Barosky also said he was under no illusions about getting the nod to head the SEC, but that having his name thrown into the ring did serve to widen the spectrum of candidates that might be considered acceptable. He stressed the need to get in not only a strong head of the agency but also an effective enforcement chief. Given that some candidates to lead the SEC had been withdrawn due to pundit and popular opposition, he thought it was also worth putting similar focus on the Department of Justice, both a replacement for Eric Holder and more prosecution-minded assistant AGs.
It’s too bad that we can’t have Barofsky kicking ass and taking names, but at least he’s giving the officialdom a hard time for its abject failure to do the same.