Bill Black: Why Did Preet Bharara Refuse to Drain the Wall Street Swamp?

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and c–founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives

The New York Times’ editorial board published an editorial on March 12, 2017, praising Preet Bharara as the “Prosecutor Who Knew How to Drain a Swamp.” I agree with the title. At all times when he was the U.S. Attorney for the Southern District of New York (which includes Wall Street) Bharara knew how to drain the swamp. Further, he had the authority, the jurisdiction, the resources, and the testimony from whistleblowers like Richard Bowen (a co-founder of Bank Whistleblowers United (BWU)) to drain the Wall Street swamp. Bowen personally contacted Bharara in 2015.

You were quoted in The Nation magazine as saying that if a whistleblower comes forward with evidence of wrongdoing, then you would be the first to prosecute [elite bankers].

I am writing this email to inform you that there is a body of evidence concerning wrongdoing, which the Department of Justice has refused to act on in order to determine whether criminal charges should be pursued.

Bowen explained that he was a whistleblower about Citigroup’s senior managers and that he was (again) coming forward to aid Bharara to prosecute. Bowen tried repeatedly to interest Bharara in draining the Citigroup swamp. Bharara refused to respond to Bowen’s blowing of the whistle on the massive frauds led by Citigroup’s senior officers.

Bharara knew how to drain the Wall Street swamp and was positioned to do so because he had federal prosecutorial jurisdiction over Wall Street crimes. Whistleblowers like Bowen, who lacked any meaningful power, sacrificed their careers and repeatedly demonstrated courage to ensure that Bharara would have the testimony and documents essential to prosecute successfully some of Wall Street’s most elite felons. Bharara never mustered the courage to prosecute those elites. Indeed, Bharara never mustered the courtesy to respond to Bowen’s offers to aid his office.

The editorial lauds Bharara for his actions against public corruption in New York.

New Yorkers, who have had a front-row seat to his work over the last seven years, know him for his efforts to drain one of the swampiest states in the country of its rampant public corruption.

We are all for rooting out public corruption. The editorial ignores three key facts. First, New York politics are less corrupt than many other states, but Wall Street’s leaders created the “swampiest” region in American business. Further, the Northern District of New York has jurisdiction over Albany, so the swampiest part of New York State politics did not lie in Bharara’s jurisdiction. Second, Wall Street CEOs created, and infest, the swampiest of regions over which Bharara had jurisdiction. They led the epidemics of “control fraud” that hyper-inflated the housing bubble, drove the financial crisis, and caused the Great Recession. Third, Bharara did not prosecute any of them even when whistleblowers brought him the cases on platinum platters. Indeed, Bharara did not prosecute even low-level bank officers who were minor leaders in implementing those fraud epidemics.

I will summarize briefly Bowen’s story as it intersects Bharara. Bowen held a senior position with Citigroup supervising a staff of several hundred professionals that conducted risk assessments on roughly $100 billion in annual mortgage purchases – a majority of which Citigroup resold to Fannie and Freddie or mortgage securitizers. Citigroup was exposed to enormous losses on these mortgages because the sellers had strong incentives to provide false “reps and warranties” to Citigroup and sell them fraudulently originated loans that were particularly likely to default and suffer larger losses upon default. Citigroup could only sell these fraudulently originated mortgages to others through making essentially the same fraudulent reps and warranties that it received from the original sellers. Bowen’s staff found originally that 60% of the loans it was buying had false reps and warranties. He warned his superiors about the problem, but they responded by weakening Citigroup’s already inadequate underwriting by buying pervasively fraudulent “liar’s” loans. Bowen put Citigroup’s senior management, including Robert Rubin, on written notice of the growing crisis and called for immediate intervention to stem the crisis. Citigroup’s senior management responded by removing Bowen’s staff and responsibilities. The incidence of fraud grew to 80 percent.

Bowen was blowing the whistle internally at Citigroup and acting exactly as he was supposed to do – as Citigroup articulated what an officer should do in such circumstances. He was not looking for money or a lawsuit. He was the opposite of a disgruntled employee. He had never gone public.

Citigroup’s top leaders forced Bowen out – for doing exactly the right think according to Citigroup’s own policies. Bowen did eventually blow the whistle to the public about the Citigroup’s top leadership and the banks hundreds of billions of dollars in sales of mortgages through false reps and warranties. Those sales, because of the losses they caused to Fannie and Freddie, were substantial contributors to Fannie and Freddie’s failures and the public bailout of both firms. Bowen met with the SEC staff and Assistant U.S. Attorneys (AUSAs) in several districts to provide them with the critical facts and documents. Bowen also testified before the Financial Crisis Inquiry Commission (FCIC), which made multiple criminal referrals against Citigroup, including a referral based on Bowen’s testimony. Bowen was the perfect witness for a criminal prosecution of Citigroup’s senior managers and for an SEC enforcement action against Citigroup for securities fraud.

Assistant U.S. Attorneys (AUSAs) in Denver, the Eastern District of New York (where Loretta Lynch was then the U.S. Attorney), and Bharara’s office told Bowen that the Department of Justice (DOJ) had never sent the criminal referrals that FCIC made about Citigroup to them. Bowen met with the AUSAs to assist them in what he had expected to be a series of prosecutions in 2016. Phil Angelides, FCIC’s Chairman, made public in 2016 the fact that the FCIC had made a criminal referral about Citigroup based on Bowen’s testimony before the inquiry. Bowen was by 2016 one of the best-known and most respected whistleblowers in America. FCIC’s chair found his testimony about Citigroup’s leaders highly credible, leading him to make the criminal referral, but DOJ’s leadership not only refused to prosecute, but also buried the criminal referrals to discourage any U.S. Attorney from prosecuting Citigroup’s fraudulent leaders.

AUSA Jonathon Schmidt (San Francisco) called Bowen on July 10, 2010. Bowen gave him everything. Schmidt was excited and said that they were going to pursue the claims that Bowen had laid out, particularly Citigroup’s fraudulent reps and warranties. Bowen challenged Schmidt, telling him that I believed that once he talked to DC DOJ that Bowen would never hear from him again. Schmidt promised he would be back to Bowen within a week.  Bowen never heard from him again.

Alayne Fleischmann, also one of the most famous whistleblowers to emerge from the crisis, provided vital information and documents to DOJ prosecutors about frauds led by JPMorgan’s senior managers. Fleischmann continued to seek to aid a DOJ prosecution after the Attorney General transferred responsibility for the case to Bharara’s office. No prosecution has occurred.

Bharara is like every other federal prosecutor and the SEC’s top leaders. Bowen met with the SEC staff and five Assistant U.S. Attorneys (AUSAs) in four different districts (including Bharara’s) to provide them with the critical facts and documents. Each failed to prosecute the elite Wall Street officials who drove the three epidemics of fraud that drove the financial crisis. What is different is that because his office had jurisdiction over the elite frauds and the staff to conduct sophisticated investigations and prosecutions he could have drained the Wall Street swamp. Bharara simply had to take advantage of the courage and competence of whistleblowers like Bowen and Fleischman who brought him cases against the top managers of two of the world’s largest banks on a platinum platter. Bharara also could have taken advantage of the expertise and experience of regulators and prosecutors who worked together to produce over 1,000 felony convictions in “major” cases against financial executives and their co-conspirators in the savings and loan debacle. Bharara (and Lynch and their counterparts) failed to take either approach.

Bharara knew how to drain the Wall Street swamp. He had the facts, the staff, and the jurisdiction to drain the Wall Street swamp. Bharara refused to do so.

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41 comments

  1. skippy

    Sorry Bill…. but the Flexians are lined up deeper than the ramparts to the south Korea…

    disheveled…. per MMT to much money and people is a bad mix…. sigh…

      1. skippy

        Money as a vote, where those with the most votes, maximize their utility over the control of the aforementioned.

        disheveled… ultimate self licking ice cream cone….

  2. ambrit

    Sorry to say it but the situation as it stands now makes mob actions against the financial elites a rational choice.
    I know that such ideas are an essential part of the Libertarian Dream State, but, what else is left to do then either submit or fight?
    As is the case in our politics now, reform is no longer an option.

  3. Larry

    Of course the NYT defines the liberal version of draining the swamp. Government actors are already considered bad eggs. But the upper echelons of elite Wall St firms sit on the boards of America’s cultural and educational institutions and are culturally liberal, so whatever they may have done was done with no ill intent nor malice. Black exposes this as completely bogus in a short editorial but the leading pundits will be pounding on Russia, Hillbillies, and Russia some more.

    1. steelhead23

      Dang, NC needs those up arrows so I could show my approval. The philanthropy fig-leaf of America’s elite hides a plentitude of warts. Too many people are duped by these ‘pillars of community.’

    2. chicken_or_egg

      But the upper echelons of elite Wall St firms sit on the boards of America’s cultural and educational institutions and are culturally liberal

      Huh? If they weren’t they wouldn’t be a part of those institutions. Right?

  4. allan

    Prof. Black loses some credibility when he writes,

    … First, New York politics are less corrupt than many other states …

    Evidence? Links to studies? Anything?

    Given the national trends of the last few decades (many of them originating from Wall Street or Wall Street-owned politicians in D.C.), the NYS economy would have been fighting some very strong headwinds in any case. But the cesspool in Albany helped convince a lot of businesses and individuals to make their futures elsewhere.

    Parents in NYS know that their children’s adult lives will (if they’re lucky) be spent somewhere else.

    Yes, Preen is a fraud, but Albany was and remains a very corrupt place and the state suffers because of it.

    1. Arizona Slim

      And this has been going on for a long time. My mom and dad were born and raised New Yorkers​ who got out as soon as they could.

    2. DorothyT

      Recall Bill Black’s work during the S & L crisis across the country. I’m one who was involved with the economic class of Americans who were likely to have their savings in CDs in the fraudulent institutions in the swamp that Black was instrumental in draining. And, pertinent to this piece about Citi, I recently met a group of former Citi mid-level execs who were laid off during the mortgage mess: they rec’d golden parachutes, stock options, and never had to work again.

      Bill Black has my respect and gratitude.

    3. Julie

      I couldn’t paste the link successfully but this is from the Center for Public Integrity: New York GRADE:D-(61)RANK:31ST

      So 19 states are worse than New York. More than a few in other words, and only 3 states scored higher than a D+. At any rate, the swamp in Albany was not under Bhahara’s jurisdiction anyway, as Black points out.

      Seems unfair to attack his credibility over this.

      1. allan

        I have great respect for the work that Prof. Black did in the past and the work he continues to do.

        But public corruption can be incredibly damaging to government functions
        in the short and medium run, and corrosive to trust in government in the long run.
        To suggest that NYS doesn’t have a serious problem is not helpful.
        I would much rather have the USA for SDNY devoting limited resources to going after that,
        even if it might be publicity-seeking bigfooting of the USA in Albany,
        rather than crusading against insider trading.

        Even though I agree that Bharara, Breuer and Holder (and the czar they all worked for)
        were a disaster for the rule of law in this country.

        1. Michael Fiorillo

          He didn’t say New York didn’t have a serious corruption problem, and he didn’t say corruption wasn’t important; he said NY was less corrupt than many other states. They’re not the same thing, and I imagine we could have a lively state corruption sweepstakes among the NC commentariat, as to who’s Most Corrupt.

          Also, the insider trading prosecutions were all misdirection by Bharara, making him appear like a tough guy, while ignoring the systemic and management-sanctioned corruption described in Black’s article. That in many ways was a waste of limited resources. As rich as the hedgies Bharara convicted on insider trading may have been, their grift was chump change compared to the structural corruption at the root of the crisis, and which he had an obligation to pursue.

          Bharara had the knowledge and the resources to create real deterrents to future fraudulent banking, namely, by jailing fraudulent bankers. He made a conscious decision not to do so.

          And here’s another facet of the story, structural corruption-wise: Bharara is Schumer’s guy. It was always a bit deluded to think he’d ever go after any of the big guys.

    4. Left in Wisconsin

      Further, the Northern District of New York has jurisdiction over Albany, so the swampiest part of New York State politics did not lie in Bharara’s jurisdiction.

      Not good enough?

    5. Stephen Gardner

      Bill Black has all the credibility he needs. This is a classic propaganda technique to focus on unimportant minor points to impeach an otherwise very import essay. People here know better than to listen to that.

    6. Yves Smith Post author

      You’ve never seen how government works in Alabama or Texas. People get convicted in Texas with the prosecutor presenting no evidence.

      New York rates as one of the less corrupt states on every survey of corruption, as high as #2 (rated from clean to corrupt, although on that survey CA got a C- and everyone was below that) and as low as #11 or so, which still puts it way above average.

  5. KYrocky

    The Obama Administration prevented any investigations, let alone prosecutions, of Wall Street and large scale mortgage fraud. Obama’s 50 State Solution was sold as consolidation of multiple state efforts, which were making good progress, into a single, streamlined and comprehensive federal effort that would take the burden off the states. It was a lie.

    Preet Bharara was fired by Trump and has gotten a lot of sympathetic press over his firing. And he has certainly done many good things. But when it came to the biggest financial crimes in the history of the world he followed his orders, failed to do his job, and kept his mouth shut as the criminals reaped hundreds of billions of dollars and millions of American families suffered. And he is still keeping his mouth shut. But other than that….

    1. robnume

      +1,000,000! Obama was a rapacious doer for the .001%. That smirky dubya-esque smile on his face while on Sir Richard Branson’s private island off of the coast of Madagascar says it all. “Fuck all of y’all, I got out and away with screwing the rest of the nation, not once, but twice!”
      There’s not one politician who doesn’t deserve pitchforks and lamposts. Tar and feather these folk!
      Good essay by a man I highly respect, but I, too, noted long ago that New York State politics are real down and dirty. It’s the home of Wall Street, so how could it be otherwise?

    2. Luis

      While an important essay it needs to be realized that the courts are part of the swamp. Without the actions of Obama or Bharara it would have been worse which is where we are now with the swamp taking over the highest levels of government. This would be more balanced if the current unwinding of ANY regulation was noted which was the problem with prosecuting Wall St in the first place.

  6. johnnygl

    It’s been a long time since the crisis and it’s clear that the elites would like to pretend there was very little of interest here.

    Incidents like this are helpful to remember just how much criminality took place and just how bad the obama administration was on corporate crime.

    1. Gman

      Obama will hopefully be remembered by most as the president who missed a unique opportunity and in doing so grabbed a golden one for himself at the very same time.

  7. linda amick

    It is all theater. We read Wikileaks exposures. There are crimes or at least valid reasons for investigations.
    We get teasers that investigations will happen.
    They never do.
    The political and corporate leadership class is immune from prosecution except for passing fine monies back and forth.
    These people are completely corrupt and have greatly participated in corrupting our society and its cultures.

  8. Robert NYC

    I have always found the Richard Bowen story particularly fascinating and infuriating. His memo to Rob Rubin is unbelievable. Frontline also did a piece on the failure to prosecute the banks. The Financial Crisis Inquiry Commission took testimony from Bowen but then locked it up under seal for five years. Do we have any rational explanation for this other than that the system is that corrupt. I am a cynic but this still shocks me to the point where I can’t fathom that it is really this bad.

    1. gepay

      we all know what happened to Eliot Spitzer who likely might have acted. Were there any US attorneys or state attorneys who actually did their jobs?

  9. jhallc

    “Bharara knew how to drain the Wall Street swamp. He had the facts, the staff, and the jurisdiction to drain the Wall Street swamp. Bharara refused to do so.”

    If my memory serves me, perhaps, like Neil Barofsky (SIGTARP), he had lunch with Larry Summers where it was explained to him that if he wanted to have a $$$career after leaving government it would be wise to let things slide ( i.e. see Lanny Breuer).

  10. RUKidding

    Bahara did what he was told by Obama. That’s the end of it.

    Anyone who wants to deify Obama – and I know far too many people who do – are completely ignoring Obama’s and Bahara’s criminal neglect to hold the banks and Wall St truly accountable.

    Recall Jamie “Presidential Cufflinks” Dimon basically thumbing his snooty nose at the hoi poloi. What? Me, worry? Sucks to be you, great to be me.

    These crooks will never do a perp walk, and Bahara made sure that they didn’t. All the whining about Bahara being “fired” by Trump is ignoring these inconvenient truths.

    1. UserFriendly

      I’m no Obama apologist, but if Bahara indited someone on Wall Street just how was Obama going to explain firing him? If either had an ounce of integrity the right people would be in jail.

      1. Ian

        Some manufactured scandal or leak regarding improper or compromising behaviour, well before the ball trully got rolling on prosecuting our criminal elite forcing Obama to step in and either move him down, sideways or outright let go to ensure the integrity of the office.

  11. sd

    Citigroup (previously Citibank, etc) has always been corrupt. They were caught money laundering for drug cartels in the 1980s and terrorism back in the 1990s and should have been shut down forever both times. They weren’t.

    The only conclusion I can come to is that Citigroup is a heavily exposed to CIA activity. It sounds like a loony conspiracy theory until you look at the history of Riggs Bank, BCCI, etc and realize that historically its in the realm of possibility. So yes, its entirely possible.

    1. Susan the other

      It doesn’t sound at all loony to me, sd. I think the current mess goes all the way back to the 50s. In defiance of financial prudence, in 1954, the rich guys went to DC, like some super mercenary army (pun intended) and threw what was called “The Bankruptcy Ball” which everyone who was anyone attended, all decked out in tuxedos and gowns. Catherine Graham’s autobiography. And I think it marks a point in time when our government became blood brothers with the banks. A relationship that saw us through the Cold War – which had already bankrupted us – and the Vietnam War which was an awful and senseless debacle; and on through till the USSR finally said “enough” – at which point our government and the banks were one. One big mess. We should have had the integrity at that point, 1990, to fix things. But we couldn’t because our capitalist economy, upon which most of the world had become addicted, would have failed without the crazy growth that the banksters provided… so, god. Talk about a mess. But that’s just my opinion.

      1. Susan the other

        So, clearly we did learn one thing: we can supply the money to accomplish our goal, whatever it is. The important thing is to have a good goal.

      1. Michael Fiorillo

        Their corruption goes way back, long before the ’20’s, the Depression and the infamous Charles Mitchell. The bank in all its various incarnations has long been a private financial conduit for state actions, public and covert. It’s also got a long history as a conduit for capital flight from the developing world, especially Latin America.

    2. robnume

      Ah, yes, the ol’ “Bank of Crooks and Criminals, Intl.” I remember them and good old Clark Clifford. Boy, that guy died just in time, huh? Good times! / sarc

  12. Sluggeaux

    Well said, Professor Black. The Southern District of New York was the biggest crime scene in the U.S. during Bharara’s tenure as United States Attorney, and he was the man in charge of the Holder doctrine, printing “Get Out of Jail Free” cards for the donor class. Of course, Bharara is ambitious enough not to take a multi-million dollar desk at Covington like Holder and Breuer did. Bad optics. He’s going to academia, as a Distinguished Scholar in Residence at NYU School of Law. How noble!

    NOT. Naked Capitalism readers recognize NYU as what Pam Martens called “a tyrannical slush fund for privileged interests” where Obot Flexian grifters roost in luxury:

    http://www.nakedcapitalism.com/2015/05/the-art-of-the-gouge-nyu-as-a-model-for-predatory-higher-education.html

    1. Michael Fiorillo

      NYU a “tyrannical slush fund for privileged interests?”

      And here I thought it was just a real estate development company with a higher education subsidiary.

  13. blert

    Draining Wall Street is more challenging than cleaning out the Augean stables.

    Your first steps take you down the rabbit hole.

    White collar paper crime is brutally difficult to prosecute. It corn fuses the juries.

    (* per my Uncle… in his career he prosecuted 10,000 cases… ultimately as District Attorney with 700+ attorneys in his office.)

    Yes, it’s very slow going. It just is.

  14. Dr Duh

    Not for nothing, but Preet came out of Schumer’s office who has parlayed being Wall Street’s senator into dejure leadership of the Senate Dems and defacto control of the Democratic party.

    Picking off egregious individuals like Madoff, who can be described as “bad apples” while ignoring systemic fraud is the playbook.

    1. Isacc J. Witham

      Here’s a Set of VIDEOS that will explain They used Russian Vodka to WIPE THE SERVERS CLEAN …… This one is for the County Attorney and the DA ……. The BOIZ from HAZARD will love it …….. https://vimeo.com/160954023

  15. Isacc J. Witham

    Dear Bill,

    The reality is very simple ….. The MASSIVE CORRUPTION is Run Away. What Mr. Bowen has observed is the TIP of a GARGANTUAN Iceberg. What may surprise many is In New York as a Kid I grew up in the Home of a Real Estate Developer and Broker. Dad was a WW II Carrier Pilot and when He and Mother began on Lake George at Harris Bay was a way to try and put the War years behind Them. As many know …… Judson Witham ( Son of Swamp Fox ) beginning in the early 1980s ….. exposed what was later to be named The Savings and Loan Scandal. The SCANDAL was the Banks were far far far DIRTIER. The Bowen claims are a DROP IN THE BUCKET as it relates to the Looted Trillions. Preet Bharara simply did NOT have the BALLS nor the Integrity to DRAIN THE SWAMP. In closing it should be noted that My Father THE SWAMP FOX ….. well His Marina was on THE SWAMP …… so at 61 Years of age I am an EXPERT SWAMP DRAINER. Richard Bowen’s Story is hardly the Pinnacle of the Corruption ……. There has been a VAST Multi Trillion FRN ( Reserve Notes ) Bank Job and simply stated JUDSON WITHAM has been exposing that DEBACLE for nearly 35 Years. The Corruption runs back DECADES not just to the 2006 era. Judson Witham http://www.bing.com/search?q=Toxic+Zombie+Subdivisions+Bank+Looting&qs=n&form=QBLH&sp=-1&pq=toxic+zombie+subdivisions+ban&sc=0-29&sk=&cvid=FBDBCEDFF55847CB92E17EA1091D32EF

  16. Isacc J. Witham

    Here’s a Set of VIDEOS that will explain They used Russian Vodka to WIPE THE SERVERS CLEAN …… This one is for the County Attorney and the DA ……. The BOIZ from HAZARD will love it …….. https://vimeo.com/160954023

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