I’ve been on deadline in the past week or so, so I haven't had a chance to weigh in on Eric Holder’s predictable decision to not pursue criminal charges against Goldman, Sachs for any of the activities in the report prepared by Senators Carl Levin and Tom Coburn two years ago.
Last year I spent a lot of time and energy jabbering and gesticulating in public about what seemed to me the most obviously prosecutable offenses detailed in the report – the seemingly blatant perjury before congress of Lloyd Blankfein and other Goldman executives, and the almost comically long list of frauds committed by the company in its desperate effort to unload its crappy “cats and dogs” mortgage-backed inventory.
In the notorious Hudson transaction, for instance, Goldman claimed, in writing, that it was fully "aligned" with the interests of its client, Morgan Stanley, because it owned a $6 million slice of the deal. What Goldman left out is that it had a $2 billion short position against the same deal.
If that isn’t fraud, Mr. Holder, just what exactly is fraud?
Still, it wasn’t surprising that Holder didn’t pursue criminal charges against Goldman. And that’s not just because Holder has repeatedly proven himself to be a spineless bureaucrat and obsequious political creature masquerading as a cop, and not just because rumors continue to circulate that the Obama administration – supposedly in the interests of staving off market panic – made a conscious decision sometime in early 2009 to give all of Wall Street a pass on pre-crisis offenses.
No, the real reason this wasn’t surprising is that Holder’s decision followed a general pattern that has been coming into focus for years in American law enforcement. Our prosecutors and regulators have basically admitted now that they only go after the most obvious and easily prosecutable cases.
If the offense committed doesn’t fit the exact description in the relevant section of the criminal code, they pass. The only white-collar cases they will bring are absolute slam-dunk situations where some arrogant rogue commits a blatant crime for individual profit in a manner thoroughly familiar to even the non-expert portion of the jury pool/citizenry.
In other words, they’ll take on somebody like Raj Rajaratnam, who stacked his illegal insider trades so brazenly and carelessly that his case almost reads like a finance version of Jeff Dahmer tripping over bodies in his Milwaukee apartment. Or they’ll pursue Bernie Madoff on the tenth or eleventh time he crosses their desk, after years of nonaction, and after he breaks down weeping and confessing. Basically, if someone backs a dump truck up to the DOJ and unloads the entire case, gift-wrapped, a contrite and confessing criminal included, a guy like Eric Holder might, after much agonizing deliberation, decide to prosecute.
But here’s the thing: most of the crimes Wall Street people commit involve highly specific, highly individualized transactions that won’t fit Eric Holder’s bag of cookie-cutter statutory definitions. That is not the same thing as saying they’re not crimes. They are: the crimes of the crisis period were and are very basic crimes like fraud, theft, perjury, and tax evasion, only they’re dressed up in millions of pages of camouflaging verbiage.
Or, even more often, the crimes have also been sanctified in advance by “reputable” law and accounting firms, who (for huge fees) offered their clients opinions that, if X and Y are signed in accordance with Z, and A and B are stipulated by the parties, and everyone’s sitting Indian-style and facing the moon when the deal is agreed to, then it’s not fucked up and illegal when Goldman Sachs tells you it’s a co-investor in your deal when it’s actually got $2 billion bet against you.
You know that look a dog gives you when you show it something confusing, like an electric razor or a lawn sprinkler? That’s the look federal prosecutors give when companies like Goldman wave their attorneys’ sanctifying opinions at them. They scratch their heads and say: “Oh, wow, well since this was signed in Australia by three millionaire lawyers wearing magic invisibility cloaks, it really isn’t fraud! They’re right!”
As one high-profile attorney currently working on a closely-watched case involving a Wall Street bank put it to me yesterday: “With these Justice guys, everything the Wall Street lawyers say makes perfect sense to them, no matter how dumb it is.”
You can almost feel the relief emanating from Washington when these prosecutors decide against matching wits with the wizened 60 year-old legal Sith Lords from Harvard and Yale who’ve seen everything, know every judge by his or her first name, and in a trial would be basically bringing absolutely everything a lawyer can bring to the table, except consciences of course.
It’s political, sure, these decisions not to go after the Goldmans of the world, but more than that what usually rules the day is just pure intellectual fear – appropriate in many cases, since any prosecutor who buys for a second any of the high-priced excuses being shoveled at them from corporate defense firms like Davis Polk or criminal defense mercenaries like Reid Weingarten (retained to defend Blankfein against possible criminal charges) probably really is no match, intellectually, for Wall Street’s lawyers.
They’re also no match morally. Wall Street firms pay their lawyers millions of dollars for their creativity, for their willingness to fight. They say to their lawyers, as Lehman Brothers said before it crashed: “We’d like to book $50 million in loans as sales. Find a way for us to call that legal.”
As it happens Lehman couldn’t find even one American law firm to go for that one, so they went to England and got a firm called Linklaters to find a way, which they did. The Linklaters opinion was just a duller version of the, “It’s legal if we’re all sitting Indian style and facing the moon” defense. Here’s the New York Times explanation:
Enter Linklaters, which grounded its legal brief in English, rather than American, law. The firm explicitly said: “This opinion is limited to English law as applied by the English courts and is given on the basis that it will be governed by and construed in accordance with English law.”
Otherwise, Linklaters provided Lehman with exactly what it wanted to hear. The law firm decreed in its briefs, at least as outlined in the 2006 iteration obtained by Mr. Valukas, that intent matters. If two parties intend to exchange assets for cash, and then later the party receiving the assets decides to hand back “equivalent assets (such as securities of the same series and nominal value) rather than the very assets that were originally delivered,” that amounts to a sale.
That’s how law works on Wall Street. The bank walks into the room with the sordid activity, and the law firm’s partners huddle up and whip their associates – for hundreds and hundreds of billable hours straight, if necessary – until a way is found to call stealing or tax evasion or accounting fraud or whatever legal.
That’s the way it should work on the prosecutorial side, too. You should start with a simple moral premise – this group of crooks ripped off X group of victims for fifty million dollars – and then you should bury yourself in law books until you find a way to put them all in jail. If Linklaters gets paid to be creative, well, Mr. Holder, we’re paying you to be creative, too.
Again, though, Holder didn’t need to be creative in the Goldman case. Levin gift-wrapped the whole thing for him. He could have had a dozen easy convictions just on the evidence in that report, and if he had been creative, if he had used his vast power to roll up the guilty and flip them into more revelations, then he’d have had enough cases to last the AG’s office the next decade.
But the Holders of the world do not want to be creative when the targets are politically influential rich people. Instead, they use their creativity against Roger Clemens, Barry Bonds, immigrant housekeepers, and guys who knock over liquor stores. They like to flex muscles against bank robbers, celebrity tax evaders (we can’t have Wesley Snipes on the loose!), truck hijackers, and drug dealers. As Gene Wilder would say, "You know – morons."
Holder’s non-decision on Goldman is more than unsurprising. It amounts to an official announcement that the government is no longer in the business or prosecuting smart criminals. It’s pathetic. The one thing you pay any lawyer to have is balls, and our nation’s top attorney has none.
Editor's note: As one lawyer close to the situation points out, I actually undersold the Lehman Brothers dilemma -- they were actually looking to mis-mark more like $50 billion per quarter toward the end, not $50 million.