US Senator Elizabeth Warren (D-Massachussets) wants President Barack Obama to explain — before he leaves office in a few months — why his administration declined to criminally prosecute the banksters behind the 2007-08 financial crisis and resulting Great Recession. On 15 September 2016, Warren sent a letter to Michael Horowitz (.pdf; 9.2MB), US Department of Justice (DOJ) inspector general, requesting a review of the DOJ’s failure to act on 11 criminal referrals it received from the Financial Crisis Inquiry Commission (FCIC). The 11 criminal referrals covered 9 individuals (two were covered twice each), were sent to the DOJ in October 2010, and have never been made publicly available.
That same day, Warren also sent a letter to James Comey (.pdf; 3.9MB), director of the US Federal Bureau of Investigation (FBI), requesting the release of all materials related to the FBI’s investigations into the FCIC criminal referrals.
While the FCIC criminal referrals have never been made public, Warren’s staffers were able to find references to them in the National Archive’s first data dump of FCIC records published on 11 March 2016. These records document multiple potential violations of securities laws — including overstated assets and earnings in financial disclosures, failure to disclose subprime exposure and credit downgrades, misrepresenting loan quality of mortgage-backed securities, and misleading credit rating agencies — by 15 financial institutions:
- American International Group (AIG)
- Bank of America (and its Merrill Lynch subsidiary)
- Citigroup
- Credit Suisse
- Federal Home Loan Mortgage Corp. (FHLMC; “Freddie Mac”)
- Federal National Mortgage Association (FNMA; “Fannie Mae”)
- Goldman Sachs
- JPMorgan Chase (and its Washington Mutual subsidiary)
- Lehman Brothers
- Moody’s
- PricewaterhouseCoopers
- Societe Generale
- UBS AG
None — not one — of these firms were put on trial or even indicted. Only five paid anything in civil settlements.
But it didn’t stop there. The nine individuals named in the FCIC criminal referrals were:
- Stephen Bensinger, AIG’s chief financial officer
- Gary Crittenden, Citigroup’s chief financial officer
- Jeffrey Edwards, Merrill Lynch’s chief financial officer
- Daniel Mudd, Fannie Mae’s chief executive officer
- Stan O’Neal, Merrill Lynch’s chief executive officer
- Chuck Prince, Citigroup’s chief executive officer
- Robert Rubin, Citigroup’s board of directors chair
- Martin Sullivan, AIG’s chief executive officer
- Stephen Swad, Fannie Mae’s chief financial officer
None — again, not a single one — of these individuals were faced criminal trial or even indictment. One individual, Citigroup’s Gary Crittendon, paid a US$100,000 civil settlement. Fannie Mae’s Daniel Mudd similarly reached an agreement to pay a US$100,000 civil settlement, but was allowed to pass it off to his employer.
Warren’s letter to the DOJ inspector general made her incredulity clear:
“Not every individual or company accused of a crime is guilty of that crime and not every DOJ referral results in a conviction. But the DOJ’s failure to obtain any criminal convictions of any of the individuals or corporations named in the FCIC referrals suggests that the department has failed to hold the individuals and companies most responsible for the financial crisis and Great Recession accountable. This failure requires an explanation.”
As Sheelah Kolhatkar writing for the New Yorker notes:
“According to one estimate ($$), banks have paid a hundred and ten billion dollars in fines to settle cases arising from the financial crisis. Most of those cases involved no admission of wrongdoing. No senior executives have gone to jail, and only one or two have been charged. Similarly, regulators are not in the habit of requiring senior Wall Street executives to return any portion of their compensation as a result of trades and investments that went bad. Higher-level workers are rarely fired. The result of such a system is that any connection between egregious behavior and negative consequences for that behavior in the financial world is strangely absent, even though the two should be closely linked.”
The Senate Banking Committee shoe drops
Five days later, on 20 September 2016, Warren grilled John Stumpf, chief executive and board of directors chair of Wells Fargo, in a US Senate Banking Committee hearing. At issue was the financial institution’s creation of as many as two million fraudulently forged banking accounts without customer knowledge or consent.
It quickly became apparent that Stumpf’s adherence to the timeworn, scripted code of contrition — offered by every beleaguered chief executive ever caught red-handed — would not be tolerated. Not this time. As Yves Smith writing for Naked Capitalism put it as the lede of his excellent analysis:
“It’s a safe bet that Wells Fargo [chief executive officer] CEO John Stumpf will be turfed out in the next 10 days. Not only did he break the cardinal rule of executive survival, namely, throw someone under the bus when the going gets rough, but he couldn’t even manage a credible show of contrition and groveling after a massive fraud took place on his watch.”
On 8 September 2016, Wells Fargo quietly agreed to a US$185 million civil settlement with the Consumer Financial Protection Bureau, the Comptroller of the Currency, and the Los Angeles city attorney.
Warren sucked the air out of the room of the Senate Banking Committee hearing when she told Stumpf flatly:
“You should resign. You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.”
Elizabeth Warren’s eloquent takedown of Stumpf was masterful:
US Senator Elizabeth Warren questions John Stumpf, Wells Fargo chief executive and board of directors chair, at Senate Banking Committee hearing — “An examination of Wells Fargo’s unauthorized accounts and the regulatory response” — 20 September 2016.
While more than 5,000 Wells Fargo employees were terminated over the issue, the highest level sackee was an area president, a non-senior executive. The creation of the forged accounts was exposed in 2013 by E. Scott Reckard writing for the Los Angeles Times. The practice of forging accounts continued for three more years and — according to Stumpf’s testimony — may have begun much earlier, in 2009.
Carrie Tolstedt, the Wells Fargo executive in charge of the firm’s community banking operations (the unit found to be forging the customer accounts), was allowed to retire two months ago with a compensation package of nearly US$100 million. Tolstedt will apparently not be receiving an approximate additional US$125 million in stock options and restricted stock. But, the Senate Banking Committee disclosed that she’s entitled to additional compensation for the current year.
Oh, and then there’s the binding arbitration bit. Wells Fargo requires its customers to abandon their right to bring a lawsuit against the financial institution and instead submit to binding arbitration when they open accounts. And, yes, that includes the forged customer accounts.
A smoking gun
Earlier today, Yves Smith writing for Naked Capitalism reported that CNN had found that “the bank terminated employees who made use of formal whistleblower procedures to object to account fakery and other abuses, like forging signatures.”
The CNN story has multiple named, on-record, sources and an unnamed former Wells Fargo human resources employee.
Smith notes that under the Sarbanes-Oxley Act, a corporation’s chief executive officer and chief financial officer must both personally “certify the accuracy of financial reports and the adequacy of internal controls.” Systematic punishment of whistleblowers is specifically illegal under Sarbanes-Oxley and “implicates a large number of executives, including the general counsel, the head of HR [human resources], and potentially outside counsel and board members, as well as Stumpf and Wells Fargo’s president and [chief operating officer] COO, Timothy Sloan.”
Surely, at least one Wells Fargo outlet’s public address system somewhere is playing Jimmie Rodgers’ “In the Jailhouse Now.”