The Crime Nobody Named

What the Law Already Said About the 2008 Financial Crisis

Campaign Briefing: An Afternoon Post

2028 Presidential Campaign of Martin A. Ginsburg, RN

The most consequential financial fraud in American history since the Great Depression was also among the most documentable. The emails existed. The internal due diligence reports existed. The data existed — showing loan defect rates of thirty to forty percent in the mortgage packages being sold as investment-grade products. The question was never whether the evidence was there. The question was whether anyone in a position of authority was willing to use it.

Nobody was. And the country is still paying for that decision.

What Actually Happened

The institutions at the center of the 2008 crisis did not simply make bad bets. They purchased and packaged mortgage assets their own internal reviews had flagged as defective. They did not disclose those defect rates to the investors who bought the resulting securities. When the assets deteriorated beyond concealment, they sold them to other institutions rather than absorb the loss — knowing what they were selling, and knowing what they were not saying about it.

This is not aggressive capitalism. It is not poor risk management. It is not the kind of institutional failure that calls for a bailout and a stern regulatory conversation. Knowingly selling assets while concealing material defects from buyers is securities fraud. Doing it repeatedly, across coordinated units, using interstate wire communications — email, phone, transaction systems — meets the pattern and enterprise elements of the Racketeer Influenced and Corrupt Organizations Act.

The emails from inside these institutions used words like 'crap,' 'shitty deals,' and 'toxic' to describe what they were selling as investment-grade. Those words were written by people who knew.

The Delivery Mechanism

The banks created the product. Someone had to sell it. The American real estate industry — operating on a commission model that pays identically whether the underlying transaction is sustainable or not — supplied the delivery system. And it delivered with considerable effectiveness to a population that had not been equipped to evaluate what it was being sold.

A family purchasing a home at a half-percent introductory rate was not being told, in plain language, what their payment would look like when prime moved two points and their mortgage rate moved four. An increase of two points in prime translates, in many ARM structures, to an increase of four points in the mortgage rate. On a $200,000 mortgage, that is the difference between a payment of roughly $1,000 a month and a payment of roughly $1,470 a month — $5,600 more per year. The families who took those mortgages were not going to receive raises at that rate. Anyone who ran the arithmetic going in knew the transaction was not sustainable for a large portion of the people being sold into it.

The people running the arithmetic were the people making the commission. The people signing the papers were not given the arithmetic.

The Tools That Existed and Were Not Used

The legal arsenal available to prosecutors in 2008 was substantial and well-established. Securities fraud was the most direct charge. Wire and mail fraud applied to every communication used to facilitate those sales. RICO, applied to the specific securitization groups that structured and sold these products, could establish the pattern and enterprise the statute requires.

These were not exotic theories. The savings and loan crisis of the 1980s used the same legal tools against the same basic fact pattern — executives who knew assets were bad and sold them anyway. That crisis produced more than a thousand criminal convictions, including major executives. At its peak, a thousand FBI agents were working those cases.

When the 2008 crisis arrived — two hundred times larger in scope by some estimates — the regulatory agency that had made thousands of criminal referrals during the S&L crisis made zero. Not fewer. Zero.

The Failure Was Not Partisan

The regulatory architecture that made the securitization machine possible was built on two pieces of legislation passed by a Republican-majority Congress and signed by a Democratic president. The Gramm-Leach-Bliley Act of 1999 repealed the Glass-Steagall separation of commercial and investment banking. The final House vote was 362 to 57. The Senate vote was 90 to 8. The Commodity Futures Modernization Act of 2000 exempted derivatives from regulatory oversight. Both passed with overwhelming bipartisan margins.

President Bush had the clearest window for early intervention — the period between Bear Stearns in March 2008 and the general collapse in September. He did not act. President Obama's Department of Justice inherited the evidence, the criminal referrals, and former prosecutors inside the building who were trying to build cases. It made a documented policy decision to treat this as a regulatory matter. The statute of limitations ran out on hundreds of fraudulent transactions while settlement negotiations produced agreements that fined shareholders and released the people who had made the decisions.

Three presidents. Two parties. The same outcome. The people whose decisions produced the crisis were not named, not charged, and not convicted.

The Cost of the Path Taken Instead

The recession that followed destroyed an estimated twenty-three to thirty-four trillion dollars in wealth globally. Eight point eight million Americans lost their jobs. Millions of families lost their homes in a foreclosure wave that a structured modification program could have substantially reduced.

The families at the center of this were not left holding anything. They were left buried in the rubble of it, stripped of everything they had brought to the transaction, by institutions that had been bailed out with public money and returned to profitability while the families were still sorting through what remained. The people who lost their down payments in the foreclosure wave of 2008 through 2012 skewed toward working families in their thirties and forties who had done what they were told — saved, qualified, committed to a thirty-year obligation in good faith.

Re-saving took years. During those years, home prices recovered and then surpassed the levels at which those families had been foreclosed. The window that closed on them never fully reopened. Several major banks that created the conditions for those foreclosures then acquired the properties at auction prices and rented them back to comparable families at market rates. The same institutions. The same neighborhoods. Different transaction structure. Same address.

Why This Campaign Addresses It

The pattern this represents is not partisan. It is structural. And it is the pattern this campaign proposes to break — not by relitigating 2008, but by building the regulatory architecture and the prosecutorial culture that would make the next version of this story end differently.

The tools already exist. The Glass-Steagall analysis, the RICO framework, the securities fraud statutes — none of them had to be invented in 2008. They had to be used. This campaign's financial regulation platform is built on a simple principle: the law applies to institutions the same way it applies to individuals. The scale of the enterprise does not determine whether the law applies. It determines how many FBI agents you assign to the case.

Sources:

Clayton Holdings due diligence data: Financial Crisis Inquiry Commission Final Report (2011). Government Printing Office. https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

Gramm-Leach-Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (1999); Commodity Futures Modernization Act of 2000, Pub. L. 106-554.

S&L criminal referrals comparison: Black, William K. The Best Way to Rob a Bank Is to Own One (2005). University of Texas Press.

DOJ deferred prosecution policy: U.S. Department of Justice. "Principles of Federal Prosecution of Business Organizations." Justice Manual § 9-28.000. https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations

Wealth destruction estimates: Federal Reserve Bank of Dallas. "Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath." Working Paper 1102 (2011). https://www.dallasfed.org/research/papers/2011/wp1102.aspx

Job losses: Bureau of Labor Statistics. "The Recession of 2007–2009." BLS Spotlight on Statistics (February 2012). https://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf

Martin A. Ginsburg, RN

2028 Presidential Campaign of Martin A. Ginsburg, RN