Why Aren’t Any Bankers in Prison for Causing the Financial Crisis?

Sam Buell, the government’s lead prosecutor in the Enron scandal, explains why convicting white-collar criminals isn’t as straightforward as most people think it should be.

Damir Sagolj / Reuters

If hotheaded online commenters ran the Justice Department, would America's prisons be full of traders responsible for the financial crisis? It is tempting to think so—that the lack of corporate prosecutions is due to a lack of will rather than a lack of way.

But convicting bankers—or any other white-collar workers whose decisions at work have ostensibly damaged the economy—is difficult because while it is easy to identify systematic wrongdoing, it's much harder to pin blame, at least in the way a court might approve of, on an individual within that system.

Sam Buell, a Duke law professor, argues in his recent book Capital Offenses: Business Crime and Punishment in America’s Corporate Age that this is no accident. The difficulties that government prosecutors face in cobbling together fraud cases against even the most nefarious executives illuminates the fact that, legally, corporations are big, fancy responsibility-diffusion mechanisms. It’s what they were designed to do: Let a bunch of people get together, take some strategic risks they might otherwise not take, and then make sure none of them is devastated individually if things go south.

In his book, Buell, who served as the lead prosecutor for the Justice Department’s Enron Task Force, sets out to soften some Americans’ lock-’em-up mentalities by providing some perspective on how the criminal-justice system works and why it works that way. I recently spoke with Buell about the anger many Americans feel about corporate crime, other potential targets of that anger, and why convicting white-collar criminals is not as straightforward as many people think it should be. Our conversation has been edited for context and clarity.

Joe Pinsker: I wanted to start by asking you the question that I think is probably the one that people are most likely to have asked at some point: Why are there no bankers in prison as a result of the financial crisis?

Sam Buell: Well, the short answer is we don't know, because prosecutors aren't required to make a report when they decide not to prosecute a case, so we don't know what exactly the evidence is that whichever prosecutors looked at these cases decided wasn't sufficient. So with that big caveat, which is to say we have to speculate, my view is that it's likely that these cases weren't brought because it's very difficult to establish a theory of criminal fraud when you have essentially one sophisticated bank trader selling a product to another sophisticated bank trader and the person who lost in the trade is saying, "Hey, there's more about this that you should have told me that you didn't tell me."

And these are not special fiduciary relationships, like the relationship between some investment advisers and average investors—this is trader against trader in a very sophisticated market. In a criminal case you've got to prove intent to deceive—that is, you've got to prove that there was an individual who at the time they sold that security to the other banker knew that what they were saying was false about that security. So these are hard cases to make, and I think, bottom line, maybe if we were to go through every single one of them, maybe we could find a case here, a case there, to quibble with the government's decision. But the idea that this is an area where you could have imprisoned large numbers of mortgage-backed-securities traders for what they did and the government just sat by and didn't do it, to me, is just totally implausible.

The frustrating thing about the financial crisis is that the victims, of which there were so, so many of us who were severely victimized when this happened, were not parties to the trades that created the problem. We weren't the ones who bought the mortgage-backed securities. So yes, we were victimized in the sense that we were downstream victims in the economy from a sort of risk fiesta that was allowed to go out of control because it wasn't regulated. But because we were victimized doesn't mean that somebody can be put in prison.

Pinsker: It would be easy to, after reading a Matt Taibbi article or watching The Big Short, to come away with the feeling that you just alluded to, that a lot of people should have been locked up. Can you talk a little bit about what narratives like that don't necessarily capture?

Buell: Well, I think what my book's trying to fill the gap in is for a layperson to understand what's going on in the legal system. Certainly the legal system is not optimal, and there are a lot of deficiencies in it, like in any society, but the reason why there's a lot of friction in the legal system is that it's actually very difficult to draw lines between right and wrong in an area where we're essentially saying two things at once: Be aggressive, take risks, make money—but don't hurt people while you're doing it.

So when we have situations like the financial crisis, where a lot of people end up hurt in the end, if you don't look at the question of, “Well, what are the questions that really have to get answered for there to be a result legally?” then it's very easy to say, "Oh, a bunch of people got hurt, so a bunch of people should go to jail."

But would we really want a legal system that did that? Would we really want a legal system that just said, “White-collar crime is going to be the thing that we don't like in retrospect when things go bad.” Which is not the system that we have. We have a system that says, “Look, there need to be rules of the road,” and in order to convict somebody of a crime, you have to really establish that those rules of the road were broken at the time, and that the person who broke them knew that they were breaking the rules.

So in some sense, I agree colloquially with Steve Carell's character in The Big Short when he says, roughly, "Oh my gosh, this was all a big fraud!" In a sense, yes, the mortgage-backed-securities market was a grand deception, but that's not how the law deals with the question of whether Trader Frank or Trader Harry should go to prison for their participation in that system. That's got to be a much more specific question legally. And it should be, because the way we deal with disasters in the capital markets shouldn't be just to have a big sweep and send a bunch of people to jail just to send a message. That's not the way that the American legal system works and I don't think it's the way most people would want it to work.

Pinsker: At various times in the book you liken the American appetite for prosecuting white-collar criminals to some sort of bloodlust. Can you talk about why that attitude may actually be counterproductive for making businesses operate in a way that people probably want them to operate and is fair to anyone involved in the economy?

Buell: I wouldn't use, and I don't think I actually used in the book, the term “bloodlust.” I think that's a little strong. But I do think there is a sense that people are particularly outraged about this form of crime, understandably, because it's generally perpetrated by people who are in a position of economic and social advantage in society. There's no reason to have sympathy for the plight of this person in the way that you might for some kinds of street criminals. So there's an anger there about, how dare the privileged abuse their position in society like this?

And so it's very understandable, then, that people would turn to the criminal-justice system as an outlet for that anger. But as you alluded to, one of the arguments I make in the book is, while that's understandable, it may not be the most productive thing in the end because the criminal-justice system is not well-suited and perhaps should not be primarily a vehicle for venting anger. It should be a vehicle for trying individual cases.

When we go into that system with that anger, number one, we may not get what we're looking for, and number two, it's an entirely backward-looking exercise. We're just saying, "What should we do with these people now that we're angry at them?" As opposed to, "What can we learn about how the systems were set up in a bad way, and how can we fix the systems?" whether it's the regulations that apply in a particular industry—banking, automotive manufacturing, oil drilling, whatever the industry is that has produced the problem—or it's the incentives that apply generally in the corporate structure, the structure of large corporations, and the question of personal responsibility for corporate management. Could we think about maybe arranging corporations in a different way to lower the appetite for risk or at least the appetite for bad kinds of big risks?

And those conversations, it seems to me, can be displaced a bit, and have been, in fact, in the wake of the financial crisis, by the dominance of the "why no bankers in jail?" narrative, which I think has a corollary to it implicit in it, which is, "If only the bankers were in jail, we would have fixed the problem." That's the part that I'm actually quite skeptical of.

Coming in from the Enron prosecutions, and in that era, there were some very serious sentences doled out to the kind of people who, 20 or 30 years ago, it would have been considered unthinkable that they would go to federal prison for a decade or more. I mean, managers of Fortune 500 companies, Fortune 100 companies, Fortune 10 companies, getting long prison sentences.

And yet there's very little evidence that that changed behavior in some larger sense, and in fact a lot of what went on in the banks leading up to the financial crisis was risk-taking and accounting maneuvers that were quite similar in a lot of ways to what went on at Enron—harder to prosecute, because they had lawyer and accountant approvals all over them, but similar in the types of risks that were being taken and the kinds of assumptions that were being made. So in that sense it seems that the prosecution process, as important as it is when there's serious wrong conduct, and there's plenty of examples of that—the Bernard Madoffs of the world, and others—it's mostly a backward-looking exercise. It's not a constructive, forward-looking one.

Pinsker: I think part of that “Why aren’t more bankers in jail?” narrative is an impulse to, as you say in the book, treat them “like common criminals.” And you recognize the mass incarceration of people who commit street crime as morally reprehensible. Can you walk me through, though, what it would have to look like if, when it comes to policing, white-collar criminals actually were treated like common criminals?

Buell: Well, it's an apples-and-oranges problem, because, when we talk about white-collar criminals, certainly in the corporate context, we're talking about people who are working in lawfully created and licensed industries. Not only are they lawfully created and licensed—they're encouraged. This is not the case with dealing cocaine or heroin or human trafficking and the other kinds of things that we see producing large segments of the federal prison population.

To say, "Oh, we just need to police white-collar crime the way we police street crime" kind of makes no sense, because we police street crime the way we police street crime because it's people engaged in entire realms of behavior that are banned. They're black markets, so you can have a pervasive policing presence in that context and any amount of the activity that's observed justifies legal intervention. What are you going to do in the context of lawful industries? Are you just going to send the cops in to patrol the corridors of office buildings? What are they supposed to be looking for?

Now, we do have, obviously, regulators that monitor many of these industries, and we could do a lot better job of regulating some of these industries, but that's different. That's a process of working with the rules to set the boundaries. It's not a question of having cops wandering around making arrests all the time.

Pinsker: How do you bridge the gap between the argument you’re making—which, however sound, is still rationalizing the status quo—and the average person's frustrations with the system?

Buell: I think we're getting to a place where that gap may be bridging a little bit on its own, in that, in contrast to where we were 10 or 20 years ago, we've got a widespread understanding that the system for policing street crime is unfair. But the way to fix street crime is not to necessarily get unreasonably harsh on white collar crime. That may be a way of satisfying some of the anger about the way the criminal-justice system has exploded in the United States with regard to drugs and other forms of street crime, but it doesn't really address the street-crime problem—it maybe just makes people feel better.

If in fact we're going to start looking at street-crime policing and saying—and I'm not the first one to make this point—“What if street-crime policing looked a little bit more like other forms of regulation where we actually have government systems that are trying to deal with the root causes of the problems rather than just locking up enormous amounts of people and expecting it to change something?”

Pinsker: Do you think people will ever be satisfied with how corporate crime is punished in the U.S., or are they just going to continue railing against what is an inevitable frustrating feature of the way the economy is set up?

Buell: Well, I hope that their attitudes will change if they read my book, but I'm not that unrealistic as to think that my book is going to become a bestseller or something. But the book is intended to be more thought-provoking than problem-solving, and one of the points I make in the book is that this whole subject has to do with something that we as a culture are deeply ambivalent about, and I don't expect us to stop being ambivalent about that. I think we have an ambivalent relationship with the large corporation and with capitalism. It's a relationship that involves need and dependency and some level of celebration but also resentment, anger, and victimization. As long as that relationship, as long as the big corporation and the capital economy continue to define us as a society, that relationship is going to remain ambivalent. And as long as that relationship is ambivalent, I don't expect people to reach a point of happiness and satisfaction in the way that the system deals with white-collar crime.

Pinsker: You teach a class at Duke on corporate crime. How do the law students that you teach today differ from your generation and your peers in how they think about corporate crime?

Buell: I think there's a huge difference with the level of awareness of these issues. When I was a law student in the early ‘90s, I was at NYU Law School, which, of all the law schools in the country, is probably the one that's most connected to what's happening on Wall Street and in the corporate-law space. In many ways that's kind of what's defined NYU as a law school. We didn't even have a course in white-collar crime when I was at NYU law school, and most of the big New York firms to which NYU was feeding students didn't even have practices in this space. It's not like we didn't know what white-collar crime was, but it just did not have the prominence in the legal profession and in the public realm.

The students that I get now, they're coming to me having read The Big Short or having seen the movie, or watched Billions. They've been reading about this stuff in the newspapers; they know about the financial crisis. Some of them even remember something about Enron or being told about Enron. There's an understanding among students now that this topic is an important piece of the public-policy space in the United States, in ways that it did not have that prominence when I was in law school.

And I think that's because the scale of the problem's gotten bigger, and crisis after crisis has showed us that these problems are very difficult to get under control. And that's maybe not good news for the American people, but it's great news for me as a scholar and a teacher.