Jan 22, 2018

Jessie Eisinger on the Financial Crisis and the Department of Justice

The Justice Department no longer prosecutes top executives and why regulators may be partially to blame.
David Beckworth Senior Research Fellow , Jesse Eisinger

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Jesse Eisinger is a senior reporter and editor at Pro Publica. Formerly, Jesse was a columnist for the New York Times and the Wall Street Journal. In 2011 Jesse won the Pulitzer Prize for national reporting on a series of stories on questionable Wall Street practices. Jesse has also won the Gerald Loeb Award for commentary in 2015 and has twice been a finalist for the Goldsmith Prize for investigative Reporting. 

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

David Beckworth: Today, Jesse joins us to discuss his new book "The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives." Jesse, welcome to the show.

Jesse Eisinger: Hi, thanks for having me, David.

Beckworth: It's a real treat to have you on. Now, as our listeners are probably wondering, what is the story behind that title to your book?

Eisinger: Sure. Well, it's not just because my children are big fans of it, although the nine and four-year-old are very big fans of it. In 2002, a guy named Jim Comey, that name may ring a bell for some people, becomes the U.S. attorney in the southern district of New York. Of course, he goes on to become FBI director and gets fired by Trump when he was in the news. Back in 2002, he rises to become U.S. attorney and he's replacing a legend, Mary Jo White, and he comes in. The people are a little suspicious of him. He's been a prosecutor in the southern district but they really liked Mary Jo White. He spends a few months listening and figuring out what the rhythms of the office are.

Eisinger: Then there's a monthly meeting. At the monthly meeting, usually they have the box score. The box score is something where they read off who handled trials in the last month and whether they won or lost. Comey says, "Well, I want to make a few remarks before we go through the box score." As everyone who's been watching him recently knows, he likes to hear himself talk and likes to give speeches, thinks he's pretty good at it. He starts off the talk and he says, "Well, how many of you have never lost a case?"

Eisinger: You have to understand who this audience is. It's criminal prosecutors in the southern district of New York. They have gone to the best middle schools to get into the best high schools to get into the best colleges to get to the best law schools to get the best clerkships to get to the southern district. They have performed the best at the highest level at the most elite institutions. They really consider themselves the best of the best of the best. They certainly have the arrogance to go along with that.

Eisinger: So, a bunch of these hands shoot up to this question of have you never lost a trial. They're very proud of their trial record. They think of themselves as great trial lawyers. Comey looks around the room at these go-getters with their hands up and he says, "Well, me and my buddies have a name for you guys. You're the Chickenshit Club." The hands go down, these guys slump in their chairs. It's probably the first time they were slumping in their chairs since maybe third grade. They're listening, well, what does he mean by that?

Eisinger: What he means is your job is not about winning. Your job is about doing justice. What that requires is not taking on the low-hanging fruit, not beating up on the weak or the people who you can ream against, but taking on the most ambitious cases, the most powerful wrong-doers in society. If you lose, that's okay sometimes because it means that you are being ambitious and you can still do justice, bring justice when you lose. You can't be afraid of losing, you can't make decisions based on a fear of losing.

Eisinger: My argument in the book, which we'll get to in a bit, of course, is that over those next 15 years after that speech in 2002, the Department of Justice writ large becomes the Chickenshit Club when it comes to top corporate executives. The Department of Justice has lost the will and ability to prosecute corporate executives at the highest echelons of the largest companies in America.

Beckworth: Yeah, that title is just not a clever title laced with profanity, actually it's an anchor for the rest of the book.

Eisinger: Yes. Yeah, I think that's why Simon & Schuster allowed this slightly crude title to go forward.

Beckworth: Right.

Eisinger: I think it's because it is organic. It is not something I invented or said, it's a concept that prosecutors have, certainly Comey had and he was fond of saying this over and over again and it really underscores the point. I elaborate on this and expand the argument. It's not just that they're afraid of losing. There are a lot of things that go into prosecuting corporate executives and why they've shifted away from it, but there is a fear of losing, a career-altering loss, that affects the way they approach these cases.

The Current State of Justice

Beckworth: Right. The title's not gratuitous, it actually makes a point. It's a very compelling point once you go through the book. You've kind of already summarized it but why don't you give us again kind of a 30,000-foot perspective. What are the key arguments you make in the book and what does it mean for the current state of justice?

Eisinger: Sure. I would say that the Justice Department no longer can, or wants to, or has the ability to prosecute top corporate executives, CEOs, chairmen, COOs, CFOs of Fortune 500 companies. This means instead what they do, with the way corporate law enforcement works in America now is that we settle with corporations for money. I have some statistics about that. Do you want me to go through the statistics now?

Beckworth: Yes, please do, yes.

Eisinger: Sure. The Department of Justice doesn't really keep very good statistics on white collar prosecution and they're kind of misleading but I'll give you the numbers that we have, which is that in the early 1990s when the DOJ started tracking white collar crime, about 20 percent of their cases were white collar. Today, it's less than 10 percent, so it's halved. The number of individual white collar prosecutions, prosecutions of individuals, is at a 20-year low, down 40 percent from its peak. They prosecute many fewer people.

Eisinger: Corporate prosecutions are also down about 30 percent from the last decade. Instead of prosecuting corporations, what they do is they settle with them, they write a check, and they call it Deferred Prosecution Agreement or Non-Prosecution Agreement sometimes, as corporations plead guilty. This was something that didn't really exist until the mid-1990s. In the 1990s, it was invested by Mary Jo White, who I referred to earlier, when she was the U.S. attorney in the southern district. It's not a very popular thing and not something that they really reach for the first decade or so. They have about 18 of these settlements until 2002. Since 2002 to today, they've had over 420 of them. This is the core, this is the way we prosecute corporate crime in America, we do settlements.

Eisinger: My argument is that this is emblematic of the two-tiered justice system in America, that we have one justice system that is overly punitive, that incarcerates people on a mass level, that puts people in prison for, often, non-violent crimes, they are disproportionately poor, disproportionately people of color, and then this is the flip side of that. That's been well-covered. I don't really write about that in the book. My book is about the other side of this coin, which is that we fail to prosecute the very powerful and the very wealthy.

Eisinger: I think that is a threat to democracy. It undermines the basic fairness of our justice system, the legitimacy of, not only our justice system but our regulatory efforts. In fact, I think it under-girded the rise of Trump, to some extent. It was debilitating to Hilary Clinton. If we had prosecuted differently after the financial crisis, which is really the core of the book, my argument is that this goes beyond the financial crisis and beyond the big banks and affects major retailers like Walmart and tech companies like Google and pharmaceutical companies and industrial companies and persists to today. But without being able to prosecute these powerful actors, we don't have a fair system in America and people understand it and it undermines our government and the legitimacy of our democracy.

Beckworth: Yes, and in reading this book, I think it's important for our listeners to note, what you're writing about is not just going after people for making bad business decisions and you're not advocating kangaroo courts. I think there's some folks who may get that impression. Once I read this book, going through it, I walked away almost seeing what economists might call a public choice argument in this. I'm not sure if you're familiar with that literature but the public choice argument is that the same humans who commit crimes, cut corners in the marketplace, are also the same humans that work for government. They, too, can be influenced in the wrong direction.

Beckworth: You bring this out very articulately with the revolving door story. You have a whole chapter, in fact, on a law firm, Covington & Burling, and how a number of DOJ employees go from the Department of Justice to the law firm back and forth and how it really affects incentives and its corrupting influence. So, speak to that a little bit, as well.

Eisinger: Sure. To go back to the original point that you just made here, I absolutely am cognizant that government power is awesome and worthy of great respect and fear and should not be abused, even when brought to bear on a powerful actor, a wealthy individual. I absolutely do not want cowboy prosecutors and prosecutorial abuse.

Eisinger: I think that the potential for prosecutorial abuse has lessened in the white collar arena because the executives who would be charged are wealthy and they can afford very good lawyers. I think there's a check on prosecutorial power there from these lawyers but I absolutely think that that check is valid and important. I do not want show trials and kangaroo courts. That's absolutely true.

Eisinger: Really what this is is a matter of discretion and prosecutorial priorities. Prosecutorial discretion is a thing that prosecutors lean on often to decide not to do these cases. They decide well, the evidence just wasn't there. Often, these are the superiors, not the line prosecutors who built the case and I'll get to that in a second who those people tend to be.

Eisinger: My argument is that really I think that there should be a shift in discretion that one, we should prioritize focusing on investigating and prosecuting individuals where I think that skillset has been lost and needs to be relearned and regained. You're not focused on settling with corporations because I don't think that regime works. When you focus on individuals, you should not focus on low-level individuals at companies or chicken feed Ponzi schemes and boiler room operations. You should focus on the most powerful company wrongdoing and work your way up to the highest echelons you can and seek the highest echelons but you're not necessarily going to reach them. Sometimes the CEO really doesn't know, really did not commit a crime. So, that's that point.

Eisinger: The second point is why this has become corrupted. I am not an academic so I'm not steeped in the literature of public choice but I know enough to probably be dangerous at cocktail parties and get it slightly wrong. When I first learned that regulatory capture was an idea that started on the right, I was very surprised because I had thought of it as a liberal or a left-wing idea, which is that corporations co-op the regulatory process for their ends. In fact, I think it's a legitimate argument from the right and the left simply because it is true.

Eisinger: There is a terrible revolving door problem at the Department of Justice. It is not the only reason why. It's not the core of my argument but today the Justice Department is a training ground for future corporate defense lawyers. Most of the prosecutors in the lead offices are young, most of them are only going to spend a few years, and most of them are going to go on to the major league law firms who represent corporations often in front of regulators and the government, which means that they are negotiating with their boss' former boss and their future possible employers.

Eisinger: Their current bosses at the DOJ are usually now, today, people who have come recently from those corporate defense firms themselves. They rarely are, or certainly they were not in the Obama administration, career prosecutors. If you're in a democratic regime, they've come from a democratic-leaning firm like Covington & Burling. If they're in a republican administration, they're coming from a republican-leaning firm like Jones Day. These are very similar milieus.

Eisinger: In fact, there is an environment, a kind of ecosystem, that everyone is operating in with a bunch of shared assumptions about how the world should work. This is a very dangerous thing and what it does is it undermines their ability to seek the right kind of cases.

Beckworth: Yeah, and just to reiterate the point you made earlier, the response of the Department of Justice to the financial crisis was truly different, truly anomaly relative to past crisis. You mention a number of them, the SNL crisis, the Junk Bond crisis, even you spend a whole chapter on Enron and Arthur Anderson, the early 2000s.

Beckworth: There were always prosecutions and what makes this striking is, as you mentioned in those numbers a few minutes ago, is the absolute level of prosecutions has gone down, even as population has grown the economy has grown. There was literally a trend change, an inflection point that speaks volumes. On top of that, the other important trend you've noted is just this switch from prosecuting individuals and going to these settlements, these agreements with corporations where they pay out.

Beckworth: This is a nice segway into the other point. I want to reiterate why this is so consequential. One of the points you raised in the book, there's several I want to go through just to review with you, one of them is that these firms don't really learn, there's not really a signal there, there's not any incentive to improve behavior. You mention recidivism is high for these big firms. We'll get to some of these examples later but they keep having problems.

Beckworth: Preparing for the show, I was looking at KPMG, which has had a number of problems and just recently, they've had a problem in South Africa. They were in cahoots with a Gupta business, which was tied to the government, and they're having to do some internal policing.

Beckworth: So, there's repeat offenders. That's one consequence. You know what? This matters. You also mention the political consequences, I think that's very important, both on the left and the right. You mention in your book that Donald Trump, one of the things that was appealing about him was his criticism of Wall Street and the people that voted for him, they saw him as a savior and Bernie Sanders, similar appeal on the left. It has a huge consequences if there's a sense of lack of fairness. Again, you're not advocating kangaroo courts but you are saying look, if we just follow the trends, right? There would have been some prosecution. There's plenty of evidence you show in the book that there were things that were wrong.

Beckworth: I would also add one last thing to tie this into our theme, macro musings, this is the rule of law, as you mentioned. You mentioned democracy, the two-tiered justice system, but as a finance person stepping back, we want the rest of the world to continue to invest in the U.S., we want them to view our markets as a place where the rule of law does govern.

Beckworth: I've written some papers, I've talked to people on this show about the safe asset shortage and the U.S. government and our private firms provide that. Everything you detail in this book is a slow eating away of our capacity to be that country, those institutions. I do think this is hugely consequential and it speaks to some of these issues.

Beckworth: I don't know if you're familiar with, there's another new book by Brink Lindsey and Steven Teles called "The Captured Economy," very similar themes in that about a lot of rent-seeking by these incumbents.

Eisinger: Yeah, I'm looking forward to reading that, yeah.

The 1960s and 70s: The Silver Age of White Collar Crime Enforcement

Beckworth: This is a very topical point and I think you've done a great job of documenting the particulars and the troubling trends. Again, it is not just that there was this lust for blood, it was literally an internal rot in our justice system. Let's go back a bit, then, let's start this conversation kind of historically, and let's talk about what you outline in the book as a silver age of white collar crime enforcement. I think that's the 1960s, 1970s, and tell us what happens during that period and how that sets the stage for the rest of the book.

Eisinger: Sure. Your listeners should also know that it's a rip-roaring narrative full of interesting characters. This is not just vegetables that are being force-fed down their throats.

Beckworth: Absolutely. I enjoyed it. It really was, it was good.

Eisinger: Thank you. You're quite right that there's sort of been an ebb and flow of white collar enforcement and I say in the book that there's never really been a golden age where the wealthy and powerful had to really fear for their liberty if they committed crimes but there have been silver ages. There was a silver age in the '60s and '70s. In the '60s, the U.S. attorney for the southern district is Robert Morganthau who becomes this legendary Manhattan D.A. figure, he serves as Manhattan D.A. for 40 years but for a decade before that, he was U.S. attorney.

Eisinger: Morganthau realizes that the Department of Justice federally doesn't really prosecute top executives to the extent that they do white collar crime at all. It's the [inaudible 00:21:59] room operations and Ponzi schemes. He wants to prosecute a higher class of criminal, essentially, white collar criminal. It's an interesting thing coming from the son of Henry Morganthau, he's really kind of a traitor to his class [inaudible 00:22:16] guy. He starts to raise the sights and he's working closely with the FCC. At this point, the SDNY is really the only game in town for these kind of prosecutions. Today, being justice in Washington D.C. does a lot of these Brooklyn EDNY's, eastern district of New York, and the EVDA, eastern district of Virginia, do these kind of prosecutions. There are a few officers around the country but back then in the '60s, it's really the SDNY. They start to prosecute it.

Eisinger: What he does and what the FCC expands on in the 1970s is they start to focus, not just on the companies themselves, they're always focused on individuals, but they're focusing on individuals at higher publicly traded companies, bigger companies. What they also do is they focus on the gate keepers. This is really a theory that's picked up from Morgenthau and expanded on by a guy named Stanley Sporkin at the FCC who's the director of enforcement at the FCC.

Eisinger: Sporkin is like a Falstaff character. He is huge, he is corpulent, he is slovenly and beloved at the FCC and he's got a bunch of young, all of them, male lawyers who surround him and he deeply inspires them. He sits on this hideous-looking couch and his trick was to sink into this hideous-looking couch and have these lawyers come in. The lawyers from these fancy law firms would be very well dressed and trying to explain why their clients were innocent. He would sink into the couches and his tie would spread over his belly one piece of the tie going left, one of the other piece of the tie going right. He probably had some food on his shirt from lunch and he liked to eat Jell-O. There would be Jell-O bits hidden in the couch. He would look like he would fall asleep and these lawyers wouldn't know what to do with themselves. Should we continue? They would go on and he would be seemingly sleeping on the couch, they didn't know if he was paying attention. Suddenly he would leap up and he caught some inconsistency that they'd had and all the sudden, they were in his power and he had them right where he wanted to. It was this Columbo routine that he had.

Eisinger: He was a legend in the '70s, probably the most powerful bureaucrat in the federal government protected by senators. When people came in to be commissioners on the FCC, senators would say, "Are you going to support Stanley Sporkin, your director of enforcement?" He was even arguably more powerful than the chair of the FCC. His theory, taken from Morgenthau in the seventh district in the sixties, was prosecute, let's focus on the gatekeepers. Now, of course, these FCC didn't have criminal prosecutorial power but they worked very closely with the Department of Justice when they would refer crimes. What they focused on was the accountants, the lawyers, and the investment bankers. The theory being that if you focus on these people who are the gatekeepers of publicly traded companies, you are going to be at a choke point where you can really influence behavior, clean those acts up, and you will get much more bang for your buck. You'll leverage these enforcement actions.

Eisinger: What they did was, they brought enforcement actions and prosecuted, on occasion, accountants and lawyers. Today, there's a big change. They do not do that.

Beckworth: Yeah, and a point you bring up from that period, the silver age, is they were very successful relative to previous periods and relative to the current time in prosecuting white collar crime, but their success created kind of this secondary effect, which is it created a new industry of white collar criminal law firms that today are still with us. That earlier success was great but it kind of bred its own downfall in a way by planting the seeds of big, powerful law firms to fight white collar crime.

Eisinger: Exactly, exactly. So, within these seeds of Stanley's revolution were its own destruction, both because of his techniques and because what he gives rise to. First on the technique, what he does is, when he's not referring cases criminally to the southern district, he is settling with corporations for money. He is creating consent decrees. I should add, there are consent decrees where they don't admit or deny wrongdoing. What he did was he brought actions against companies and individuals and they would sign consent decrees. They wouldn't admit, they couldn't deny what they had done wrong, but they would pay up some money.

Eisinger: Stanley was exploring new areas, making new law, groundbreaking stuff. The main thing that he did was try to police a corporate America for bribery overseas, which ends up becoming, because of Stanley's actions, the Foreign Corrupt Practices Act in 1977 or '78. I can never remember. William Proxmire, one of Stanley's great protectors, brings that law. That's Stanley's baby.

Eisinger: What he's doing there is kind of inventing this new standard of behavior. He's saying, "You can't go and bribe people," but he didn't have the power to because bribery wasn't illegal overseas, so he didn't have any powers to charge them with that, so he very brilliantly charged them for books and records violations because they were leaving material information off their financials so they didn't have a line item for bribery.

Eisinger: This was kind of brilliant and he was redefining the way regulators should enforce behavior in corporate America, but unfortunately, this became corrupted overtime and the FCC only did no-admit no-deny settlements. By the 2000s, they were just slaps on the wrist because people just paid checks to make things go away as a cost of doing business so this early innovation of Stanley's becomes corrupted.

Eisinger: The second thing that happens, as you alluded to, is that now that the SDNY and the FCC are going after a higher class of criminals, the white collar firms that have previously looked down upon criminal law and not done it... So when Debevoise & Plimpton had a corporate client or White & Case or some of these tony law firms had clients, Simpson Thacher, corporate clients where somebody ran into some criminal trouble, they would refer that to a boutique firm. The firm would be a bunch of scrappy, often Jewish, lawyers who took criminal cases.

Eisinger: The big firms, often suppressive white shoe firms, start realizing that if the government is going to start to look at high-level individuals at these corporate levels, we should get in this business. The way we should get in this business is to hire prosecutors. They start hiring prosecutors. Prosecutors start leaving the office and not going to criminal boutiques but going to the top echelon firms and creating white collar defense practice. This is no longer looked down upon.

Eisinger: They start building these businesses and then it turns out that this is a very lucrative business. What really is the lucrative exciting opportunity is internal investigations of corporate wrongdoing. What they realize is that when they can do these internal investigations of corporate wrongdoing and have the appearance of cooperation with investigations, then they can head off both a charge for the company and charges for individuals. So, they have this high-margin lucrative business that also works to undermine the corporate law enforcement.

Beckworth: It's a win-win for everybody.

Eisinger: Yes, except the society.

Beckworth: The law firms get your business, the corporations move on, and the FCC can wipe its hands, we did our part.

Eisinger: Exactly.

Prosecution in the 90s

Beckworth: I'm going to have to fly through some of this history. It's a really great history. I encourage the listeners to get the book and read it but I'll just summarize some of it. I want to jump to the 2000s but in the '90s, you do mention there was the Sentencing Commission in '91 that went from regular criminals to the white criminal. One of the things that I took out of that, the big changes, and correct me if I'm wrong, is I think it was '91, they added this term collateral consequences so that maybe it wasn't as big a deal then but over time this idea became hugely consequential and whenever the possibility going after big corporation was possible, the attorney generals might pull back because of collateral consequences.

Eisinger: Yeah.

Beckworth: That was in the early '90s, right, that idea was first planted?

Eisinger: Yes, exactly, but doesn't become really significant.

Beckworth: Okay.

Eisinger: Then Eric Holder outlines the principles of corporate prosecution in the 1990s. The Department of Justice is struggling with how to approach corporate criminality. You can charge corporations if one employee in the course of his or her job commits a crime but they don't really want to do that. They don't want to charge Exxon because somebody bribed an official in Kuala Lumpur.

Eisinger: So, they come up with these principles for prosecuting companies and Holder introduces this idea taken from the Sentencing Commission of collateral consequences. What do we mean by that? Well, we mean two things. We mean innocent employees losing their jobs if a company is prosecuted and the second thing we mean, which we heard a lot about in the too-big-to-fail argument after the financial crisis, is if you prosecute a large company like a giant bank, you'll have disruptions in the capital market, maybe failing banks and crises like that.

Beckworth: Right.

Eisinger: The issue doesn't come to the fore until after Larry Thompson, the deputy attorney general under John Ashcroft after the Enron-era prosecutions, when they prosecuted Arthur Anderson, as you alluded to, the accounting firm that worked for Enron, after they prosecuted Arthur Anderson and Arthur Anderson goes out of business, the corporate defense bar and the corporate lobby lead a terrible backlash, a huge backlash against the prosecutorial overreach, arguing that they were cowboys and arguing that the prosecution of the company, Arthur Anderson, the firm, Arthur Anderson, was unjust because of the collateral consequences of having had all these innocent employees lose their jobs, and they win that argument.

Eisinger: The second chapter in my book is meant to rehabilitate the Arthur Anderson prosecution and to argue why that it was such a successful PR effort. It's such a successful PR effort that even democrats, even the Obama officials, absorb it and think that was a mistake to prosecute companies. That's really why, that's the heart of why, and the beginnings of why they start to shift to settling with corporations rather than prosecuting corporations. Then when they realize that settling with corporations is much easier than prosecuting an individual and doesn't dim your career prospects for going to big law after you're done with the Department of Justice, this becomes the way to enforce corporate law in America.

Beckworth: Yeah, you had a great line in your book where you said, "Anderson had to die so that all other big corporations might live free of prosection." So, they were the sacrificial lamb, they went to the altar, they died for the other corporations. Very interesting way of framing this point.

The 2000s: The Enron and Arthur Anderson Periods

Beckworth: Let's move forward. That was an important development, the collateral consequences. All these Arthur Anderson accounting firm employees lost their jobs. Moving forward, let's go to President George Bush, early 2000s, and here it's a little surprising what you detail in the book, given what happens later. Tell us about the Enron period and the Arthur Anderson period. Did you find anything surprising about how President Bush responded to these investigations?

Eisinger: Absolutely! I was a big critic of the Bush administration and had the impression that it was riven with crony capitalism and incompetence. That's true, in the later years when we get the Harriet Myers years, the Alberto Gonzalez years, the DOJ, and their firing of the U.S. attorneys, but in their first term under Ashcroft, it's a highly professional Department of Justice and they take white collar criminality very seriously. There's an old line law and order republican that seeks to protect capitalism from rotten capitalists. This is the ethos at the Department of Justice at the time exemplified by Larry Thompson, another big character in my book who is an African American who has grown up in segregated Missouri and then becomes a gold water republican soldier in the Regan revolution and then rises to become deputy attorney general at the DOJ and is confronted with a pandemic of corporate wrongdoing at, not just Enron, but World Com and Adelphia and Global Crossing and all these companies, and realizes that these need to be prosecuted aggressively and takes it very seriously and rides herd on the prosecutions.

Eisinger: The main thing they do is they create a special task force of prosecutors, a SWAT team, drawn from around the country of mainly young prosecutors who go and concentrate on the investigation into the failed energy trader, which was a big supporter. Ken Lay, who founded the company, was a major republican donor and friend of George Bush. So, Larry Thompson and a guy named Bob Muller, which may ring some bells also, who was head of the FBI then, they form the Enron task force and Bush is hearing from his politicos in the White House that these guys are out of control and he's getting complaints. So, he calls Muller and Larry Thompson in and says, "What's going on here? What are you guys doing?" They carefully lay out the evidence that they have so far that they've gathered about a bunch of these cases and stun George Bush who, to his credit, says, "You go forward." They end up prosecuting one of George W. Bush's main political backers, a very admirable thing that I was very impressed by.

Eisinger: So, Stanley Sporkin's a republican, Morgenthau was not, but Larry Thompson is. They're a bunch of republicans that I admire and have principles. I think that that breed of republican doesn't really exist anymore and that it's fallen by the wayside and now it's a much more crony capitalist ethos. I'm much more critical of the democratic Obama appointees in the book who I think have really colossally failed handling the financial crisis and I admire some of the republican officials in the early 2000s.

Beckworth: Just to reiterate that point, so Ken Lay of Enron, as you outline in the book, Bush's Department of Justice, they go aggressively after Ken Lay, schilling top executives at Enron, they also go after Arthur Anderson about the time same time and a number of other firms you mentioned, the World Com, Quest Communications, Adelphia, Tyco. It's a huge list. Just stepping back and comparing with the recent years, you're like that was another universe. That's earth two or earth one.

Eisinger: Yeah.

Beckworth: But they did this and I think what's remarkable, as you laid out, number one, Ken Lay was friends with and had ties to President Bush, as well as Vice President Chaney, as well as the attorney general. I think you mentioned in the book he did a fundraiser for the attorney general when he was running for Senate, Ashcroft.

Beckworth: These were people who knew each other so imagine, I think any of us would have a hard time, if you're president and the lawyers come and say, "Hey, your buddy's corrupt," or, "he's made bad decisions," to say you have the green light, I think that's very admirable.

Beckworth: The other thing that was, I think, impressive was that the Department of Justice was able to corral all the efforts into a task force. Because you mentioned in the book, during the Obama administration it was tough to do, and then the attorney generals don't like to listen to the main justice in D.C., but the fact they're able to organize that effort. So, maybe speak of that a little bit that it is kind of this beast that's out of control by its very nature.

Eisinger: Yes, you mean the Department of Justice.

Beckworth: Yeah, and the offices.

Eisinger: Yeah, it's a very strange bureaucracy because it's 93 offices around the country and the U.S. attorney sort of consider themselves have two jobs, one is to prosecute criminals in their jurisdiction and the other is to ignore Washington as best as possible. So, Larry Thompson had to work through a lot of persuasion and a moral suasion and threats here and there, well placed, and things like that, and riding herd on these prosecutions to make sure that they went forward. Then he also helped form this task force for the Enron prosecution.

Eisinger: You need to devote resources to these cases, they are infernally complex, and you're going to make enormous numbers of mistakes, and you need people concentrating on this. They did make a lot of mistakes, the Enron task force, they did lose some trials, they weren't afraid to bring trials. They also engaged in some very aggressive tactics. The number two with the Enron task force who then takes over the Enron task force is a guy named Andrew Weisman, who is now Bob Muller's number two and essentially running Muller's special counsel investigation into the Russia collusion matter. You're already seeing him engage in very tactics and very smart tactics with that. So, he learned during the Enron task force of how they do these kind of cases and he's taken what he's learned and applying it to the Russia collusion investigation, which I think is heartening because I think it means they're going to do a credible and thorough and serious investigation, which is warranted.

Eisinger: Back to the Enron task force, there was nothing inevitable about prosecuting Lay and Skilling, the CEO of Enron. Lay and Skilling did not have a lot of direct evidence, they didn't have wire tap evidence against those executives, the prosecutors. Lay and Skilling barely used email and hadn't said anything incriminating in email so they had to make cases the old fashioned way. The way they made those cases is the way you make cases against mob bosses or drug dealers, which is you flip soldiers to get to the capo to get to the capo di tutti i capi. They developed cases slowly over time. You see this in the Muller Special Counsel, they're slipping low-level individuals probably to get to the high-level individuals. This is an art that has been lost at the Department of Justice. They don't do that anymore. They know, of course, that this is the technique that is necessary but they don't do it. But they did it with Enron.

Beckworth: The first Bush administration seems pretty aggressive, pretty active, pretty thorough in its prosecution of white collar crime. As you mentioned, there's wins, there's losses. You outline in your book in the second term of President Bush, it doesn't go as well. Some issues begin to emerge and by the time you get to the Obama administration, Eric Holder and another individual you mentioned, Lenny Brewer, they come in and they have a lot of problems, they're slow to fill positions at the Department of Justice, they're timid, lack of coordination for the U.S. attorney offices.

The Obama Approach

Beckworth: Another interesting point that you brought up in the book I didn't really think about until you said it is the Obama administration, they were worried about these big financial firms but they took a different approach. They saw the approach to legislate away every and all possible forms of bad behavior through Dodd-Frank as opposed to going after the individuals. I'm skeptical. I've had some podcasts discussing some of the challenges with Dodd-Frank. No human can plan and foresee all of the contingencies and then do it in a very effective way. So, they gave something up by taking that tack as opposed to following through with the prosecution.

Beckworth: Finally, Eric Holder became famous for his too-big-to-jail thinking. You have a nice quote in the book on page 285. I just want to read it really quickly because it's striking and coming back to read it in your book reminded me how brazen it seemed at the time. This is in 2013, he is in front of the Senate, and he says, the attorney general, "I am concerned that the size of some of these institutions become so large that it does become difficult for us, the Department of Justice, to prosecute them when we are hit with indications that if you do prosecute, it will have a negative impact on the national economy, perhaps even the world economy. I think that this is a function of the fact that some of these institutions have become too large," he added.

Beckworth: He invoked too big to fail or as it kind of colloquially became the too big to jail, did he really believe that or was he using that as an excuse or did it make it easier for him to justify his behavior?

Eisinger: It's a very good question. I would have to say it's a combination of all of those, that to some extent they really did believe that, that they thought, especially in 2009 and 2010 coming right out of the financial crisis, and they're faced with an investigation of UBS right at the time. They're worried about the financial markets so they don't want to prosecute UBS. Of course, the solution to this is prosecuting individuals because if you prosecute the individual executives at a Goldman Sachs or a Citigroup or a JP Morgan, you're not risking the collapse of the institution. To some extent, it is an excuse that he is trying to provide that doesn't hold water.

Eisinger: I think that in general, it shows a failure of imagination, timidity, a cavalier response to this lawlessness in corporate America. I think it was a shocking and scandalous thing that he admitted to. Of course, he rose it back very shortly afterwards but I think he was really reflecting his true beliefs but I don't think that they were particularly well thought out.

Beckworth: Yeah. You mentioned in the book Loretta Lynch follows him at the Justice Department. What's interesting is her Deputy Attorney General Yates. What was Yates' first name?

Eisinger: Sally.

Beckworth: Sally, yeah, who's also become well known since then.

Eisinger: Yeah, she ends up getting fired, too.

Beckworth: Yeah, under President Trump. She does a Yates move. What's fascinating, you tell this narrative, all these different memos are written. That's another takeaway from this is part of this is an art, right? There's maybe the science of law, there's the art of law, how do you actually go about doing this. You've got to give some flexibility there to the lawyers but Loretta Lynch comes in and Yates does this memo that kind of implies that the Holder Justice Department wasn't doing its job. It was shocking to read that some of Holder's crew then go on the record, they go out in the media, and they say, "That was wrong for Loretta Lynch's Department of Justice."

Eisinger: Yeah.

Beckworth: They're both in the Obama administration and they're going after each other. Well, the Holder crew is going after the Loretta Lynch crew. I found that pretty surprising. The other thing was fascinating is that the-

Eisinger: Well, where is the Holder crew now? The Holder crew is now in corporate defense groups.

Beckworth: Yes, that's a good point, the revolving door.

Eisinger: They just revolved right out and they're speaking for their clients now happily to attack the democratic administration just as aggressively as Mullins.

Beckworth: It's easy to get cynical after reading your book, I can say. You want to believe in the character and fabric of this country, but there is on the margin, we're inching away from some of the important, I think, institutions that have made this country great.

Beckworth: One other highlight from that period, the U.S. attorney for the southern district, again, the premier office for U.S. attorneys in Manhattan, and you mentioned the individual they put in there. What was his name? Preet?

Eisinger: Preet Bharara.

Beckworth: Prett Bharara, okay. He goes in there and he focuses on the easy targets, insider trading. So, it's easy to kind of pick off these individuals. They may be rich, they may get hedge funds, but they don't have a big organization behind them. You see they go after that, he gets a lot of publicity, but as you mentioned in the book, it distracts from going after the financial firms.

Beckworth: Now in the time we have left, I'm going to have to summarize. I want to actually just go through just real fast some of the actual financial firms and acknowledge they actually did exhibit bad behavior that arguably could be called crime. I just want to go through them fast, maybe have you comment on them.

Beckworth: One of the more egregious ones was AIG. I won't go through all of them but in the book, they spent the whole decade entangled with the FCC and the Department of Justice but it's not until the very last part, during the crisis with the financial products group of AIG, where, and many of you may know this story already, Joe Cassano, he misled his counter parties, he misled his own bosses about the value of the assets they were holding. They purposely were misleading and then, of course, AIG takes this big hit. What makes it even more troubling, maybe politically toxic, is the fact that tax payers, the government bailed out AIG to the order of $182 billion, $75 billion goes to creditors. Then there's the big bonus scandal, AIG pays out these bonuses after they get bought out by the government. This looks really bad. It's hard to justify.

Beckworth: Something else I believe tied to this, and correct me if I'm wrong, this wasn't in the book but I believe this was the episode where Tim Geithner, he gets dinged because AIG bailed out, well you do mention they bailed out Golden Sachs and some of these big banks on Wall Street. My understanding is that they bailed them out 100 cents on the dollar so for every-

Eisinger: Yep.

Beckworth: ... deposit that Goldman Sachs had at AIG, they got full 100 cents back where normally you ask the creditors take a bit of a haircut, maybe 80 cents, 90 cents on the dollar. Then what made it troubling was that Tim Geithner was associated and they were on the boards of each other. It just didn't look very nice, especially to people losing their jobs.

Beckworth: So, you've got the AIG financial products, you've got Bank of America, Merrill Lynch. Bank of America was misleading this investor, you've got Leeman. Leeman misled about the amount of liquid assets that it held in its balance sheet. I encourage listeners to go through all of this because we're running out of time.

Beckworth: Goldman Sachs, I've got to mention Goldman Sachs, because this seems particularly egregious. They had an Abacus 2007, which is a CDO that they created. What was particularly troubling is John Paulson, the hedge fund manager, he designed this. A CDO is a collection of other mortgages and other debt instruments underneath it. It's a securitization of those other bonds. He designed it purposefully to fail. He put in bad mortgages into the CDO and then he bet against it. That by itself may not be a criminal act as long as it's disclosed to anyone who buys it, but Goldman Sachs took it, they sold it to this German bank, and as you point out in the book, the German bank actually asked for verification and Goldman Sachs failed to do it properly.

Beckworth: There's a number of other firms we could go through but what my question to you is, is it fair to say that there were crimes that a reasonable lawyer could point out in all of these firms? It wasn't just lust for blood, it was true legitimate crimes that were committed.

Eisinger: Yes, my firm belief is that there were crimes committed and that you could have, if you were devoted, the proper resources and attention to this, prosecuting dozens and dozens of bankers. One thing is it just stands to reason and I just do not believe that there were no crimes committed by any executives in the wake of the financial crisis and most prosecutors don't believe that either. The way they defend it, they say, "I never saw any evidence in the particular cases I saw." But my argument is, "Well, you didn't really look and if you don't look in a sufficient way, then you're not going to find the cases."

Eisinger: So, some of the cases were borderline, I'm sure, some of the cases were complex but I believe that there were cases. I think that there is one knockout argument for this which is that there actually was one guy prosecuted for financial crimes with the financial crisis. His name is Kareem Serageldin. He was a kind of mid-level executive at Credit Suisse and what he did was oversaw two traders who lied about the value of their assets in the books, their residential mortgage backed securities. He knew that they were lying and he passed that on to management without revealing the lie and then he admitted that he did something wrong to the government and went to prison. There is no way that Kareem Serageldin is the only one on Wall Street at Credit Suisse who lied about the value of their assets in the midst of the collapse of so many different markets and panicked in 2007, 2008.

Eisinger: Those crimes were there to be investigated and were not. That is the essence of my book and this is the mystery of my book. The explanation is the book itself.

Beckworth: Again, just to repeat the point you made earlier in the show, the number of prosecutions fell in absolute value. You would expect at least maintain the trend and if anything go up during a crisis, right?

Eisinger: Right.

Beckworth: But it actually declined. As you detail in these stories, again I encourage listeners to read it, see for yourself, the Department of Justice and the FCC were engaged in some of these prosecutions but they just dropped the ball, they fizzled out, they let it go after a while because as time went on, people left their job, transitions occurred.

Beckworth: I want to bring up one other observation I made. I want to see what your view is on this. There are a number of stories you tell in there where the regulators failed as well as the prosecutors and the banks themselves and financial firms. There was a story of the PNC Bank. The PNC Bank out of Pittsburgh was engaged with a deal with AIG, one of AIG's many failings, to take off assets off its balance sheet. What was interesting in your story is that the Federal Reserve, which was one of its main regulators in the Office of the Comptroller of the Currency, another one of its regulators, it tried to talk down the prosecutor from the Department of Justice who was going after this and they said they had fixed the problem.

Beckworth: Another story you tell the Bank of America, Merrill Lynch story, there's a judge in the story, one of the good guys in the book, he's appalled at this settlement. The FCC really didn't put any kind of effort into looking over what Bank of America was doing to fix its behavior.

Beckworth: So, you see this pattern, at least I do, of regulators failing to do their job and in some ways emboldening and, I would say, making these bad behaviors possible. It seems to me, if there was prosecution, not only of some of these financial firms but the regulators themselves have some blood on their hands, as well. What are your thoughts about that?

Eisinger: Oh, absolutely, and I detail that, when the colossal failure to properly investigate the Goldman Sachs advocates CEO at the FCC, so there is an entire chapter on that. One of the emails in that chapter, they've gotten this low-level Goldman Sachs 20-something banker and they're about to bring civil charges against him but they have literally not interviewed his bosses. There's been a guy, another hero of the book, Jim Kidney of the FCC, a lawyer, who says, "Well, at least we have to interview this guy. What does he know? We've got to find out. We can't just think that they'll hold just this one little kid accountable for this." They ignore him and they blow Kidney off and they finally just bring the charges against fabulous Fab Tourre.

Eisinger: After they do that, the official in charge of the investigation says, "You guys all should be really proud and I want you to reflect on the fact that the people we bring charges against are rude people who have made one bad mistake." This is an extremely damning email, I think, a corrosive attitude that permeates the regulators as well as prosecutors and they think of these people as essentially good, that these executives are cultured and sophisticated and well-educated and they dress well and they're articulate. These regulators and prosecutors think of them as fundamentally good people who, if they have become targets of an investigation, it must have been some kind of mistake or some of aberration instead of thinking we don't know, maybe this is the only thing we've found and these guys have been committing lots and lots of crimes over and over again. I think that it's an elite affinity that permeates the regulatory apparatus that really undermines their ability to go after these people aggressively.

Beckworth: Yeah, as you mention in the books multiple times, they don't give that same benefit of the doubt to someone on the street who gets picked up for drugs or for robbery. That Goldman Sachs story is a very fascinating one in the book, as well. I encourage listeners to take a look at that, that Jim Kidney really fought a hard fight to just do, what seems to me, basic investigation. They didn't. It was almost like negligence. The FCC did not put forth a good effort.

Beckworth: Again, this is not saying that the targets of the investigation shouldn't have due process. They definitely should have due process but the FCC didn't really even put any effort forward. It seems like, because of politicized FCC in an environment that didn't want to waste political energy on it.

Beckworth: Let's close on a final question. What are your recommendations moving forward? What do we need to do to bring more balance? We don't want to go to one extreme or the other but how do we get balance back in our justice system?

Eisinger: Yeah, I have a variety of recommendations. We could spend another 20 minutes on that but I'll try to do that really quickly, which is one, you have to reorient the focus on individuals. The settling with corporations for money doesn't work, you see this with recidivist corporations. I think you get more bang for your book, much more deterrence of corporate crime for prosecuting a few high-level individuals.

Eisinger: Then you have to have the proper incentives institutionally to protect prosecutors from career-altering losses, to protect them from the lack of accomplishment of only doing one case every several years because they're so much more difficult. One of the ways you would do that is to pay prosecutors a lot more money than they're paid now instead of topping out at about $150,000, $160,000, you give them $450,000, say. I'm not saying that this is ever going to happen anytime soon but these are my suggestions.

Eisinger: Then another suggestion would be to have much more policy thinking. As I said, it's a very strange bureaucracy and they don't really know what they're doing. All these institutions sort of protect their autonomy and don't focus on the institution themselves and itself. What you need to do is have some policy thinking, going how are we approaching white collar crime, what has changed? If things have changed, is it working or not? If it's not working, how to change it so then I would encourage more thinking there.

Eisinger: Then there are some exploration of some statutes that they should use that they don't use like conspiracies, RICO statutes, also willful blindness, so explore those kind of schemes, those kind of charges, and then finally to the extent that they're lost in the courts because courts have read statutes narrowly. They should go to the legislature and scream bloody murder and raise a stink about these things and set themselves up that eventually if there is a change in the attitude about prosecuting corporate crime that legislatures could give them statutes that would replace the ones that they've lost.

Beckworth: Very interesting. I have one more thing. I lied, I've got one more.

Eisinger: Okay, sure.

Beckworth: This is more of a personal question. One of the reviews I was going through of your book was by a law professor named Paul Butler from Georgetown University and he wrote a review in the Washington Post. His last paragraph was very interesting and it's more of, again, a personal question. It says that you are a fearless reporter and you apparently do not care much about eating lunch on either Wall Street or K Street. Any lawyers who would have prosecuted or defended white collar cases over the past 30 years are likely to go first look to the book's index to look for their names and more than a few will be crushed by what they read.

Beckworth: There are a lot of bad characters in the book, or there are a lot of people in the book that aren't shown in a great light. There's a few good people but most of the people you see have some flaw, some decision making that doesn't look great in retrospect. Have you encountered any of these people in the book that you've written about? How have you been received? Anything like that?

Eisinger: Yeah, well, those were very flattering things that Professor Butler wrote, maybe a little overstated. Capitalism has a way of co-opting its critics. I've gone down to speak to these people who I've been very critical of, the enforcement lawyers, and many of them came up to me and say, "I really enjoyed the book. I'm glad I wasn't in it." Things like that.

Eisinger: I've wanted to say sometimes, "Why are you guys receiving me like this? Aren't you really furious with me? Didn't I hit you hard or did I not hit hard enough?" I would like there to be some change in this and I think, in fact, there may be that some people have absorbed the criticism. It's meant to be constructive.

Eisinger: I have this obscene title but it's not a polemic. What I'm attempting to do was build a case carefully and reasonably and seriously. I think it has been taken seriously. I don't know if there's going to be real change that's come about, but I've been very pleased and flattered by the reception but I have been a little surprised that people have not... I don't want a car bomb underneath my car but I wouldn't mind one tree in front of my apartment building to be toilet papered or something just to get some sense that I've gotten under their skin.

Beckworth: Well, maybe it is a good sign. Maybe they have taken to heart your comments, your constructive criticism.

Eisinger: Maybe.

Beckworth: Well, on that positive, hopeful note, we'll end. Our guest today has been Jesse Eisinger. Jesse, thank you so much for coming on the show.

Eisinger: Thanks so much for having me. This was fun.

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