By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
By Eric Nicholson
It may seem that some sort of über-regulator is needed. But Camden Fine, a small-town banker who now leads a trade group of 5,000 community banks, sees a pumped-up, unified regulatory agency as "a big, hairy cyclopean beast" that would protect the megabanks no matter how reckless they are and continue to favor Wall Street over Main Street. Compared with the Obama administration, America's small-town bankers look like populists.
An administration whose claws are far from sharpened shouldn't really surprise us: Obama was Wall Street's preferred candidate in terms of campaign contributions. His SEC chair, Mary Schapiro, ran FINRA, the Street's self-regulatory private agency. Gary Gensler, chair of the Commodity Futures Trading Commission, actually worked a decade ago to exempt credit default swaps and other derivatives from regulation.
More important, the nation's new top prosecutor, U.S. Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.
Under the "Holder Memo," which he wrote in 1999 as deputy attorney general in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.
After leaving government, Holder followed the mandates of his own memo and made a lucrative living by conducting internal probes for companies and negotiating outstanding results for white-collar clients. He was public about it: Holder's 2002 op-ed "Don't Indict WorldCom" in The Wall Street Journal argued on behalf of the corporate perpetrator of one of the sleaziest frauds of the past decade.
Holder takes a hard line on social issues, but not on financial issues: He favors re-dedicating the DOJ to civil rights, and he has vowed to investigate Bush-era torture. But when asked if he plans to prosecute the financial mayhem that erupted under Bush, Holder has said that he isn't inclined to engage in what he calls "witch hunts."
The previous chief of the DOJ's Criminal Division, Rita Glavin, seemed motivated: She testified to Congress last spring, before she was replaced, about the need to hire numerous FBI agents to fight white-collar crime. After 9/11, hundreds of FBI agents had been shifted from financial fraud to counterterrorism, so the agency was perilously thin when the tidal wave of financial fraud inundated the system.
Glavin's successor couldn't be further from the right person to root out white-collar crime. Last spring, Holder tabbed Lanny Breuer, his former partner at the major D.C. firm Covington & Burling, to head the DOJ's Criminal Division. In 2008, Breuer represented Roger Clemens at Senate hearings when the big right-hander denied under oath using steroids or human growth hormones.
More to the point of high-level white-collar crime, in 2006, Breuer represented Mario Gabelli, a billionaire broker and money manager who, in some recent years, has been the highest-paid person on Wall Street, with compensation in former Merrill Lynch CEO John Thain's class. When Gabelli got in hot water for setting up straw entities to bid at federal auctions of coveted cell phone licenses, Breuer savaged the person who blew the whistle on the scheme and kept his client out of criminal court. "Super Mario" eventually paid a $130 million settlement under the federal False Claims Act, but he made more than $200 million from the scam, so the litigation amounted to the cost of doing profitable business.
As chief of Covington's white-collar department, Breuer was known for his "rogues' gallery" of corporations and individuals under investigation or indictment. His clients included Halliburton, the Federal Home Loan Mortgage Corp. (Freddie Mac), Exxon Mobil and big pharmaceutical companies. He also represented Canadian mogul Eugene Melnyk, who was charged with accounting fraud by the SEC, and the lieutenant governor of American Samoa, who was indicted for bribery and bid-rigging. Breuer represented so many companies that had problems with the federal government that the Department of Justice promised to erect "Chinese walls" around him to keep him from traipsing into his former clients' matters. Nevertheless, the napping Senate confirmed him by 88-0.
Breuer's connection to Freddie Mac is especially troubling. One of the executives at the heart of the global meltdown was Franklin Raines, the CEO of Freddie's older sister, the Federal National Mortgage Association (Fannie Mae). Freddie and Fannie bought and securitized mortgages from other banks at a breakneck pace that fueled the bubble and led to their federal bailouts and takeovers in September 2008. Politically wired—he was Bill Clinton's director of the Office of Management and Budget—Raines aided and abetted the process by orchestrating massive accounting and compensation fraud at Fannie Mae. He paid a small civil settlement and has never been criminally charged. Will the DOJ indict him? That would be a problem for the Obama administration: Although Freddie was set up to compete with Fannie, the two often operated similarly, so an investigation of Fannie and Raines' practices could spread to Freddie, which is not something Breuer or any other lawyer would want for a former client. The Justice Department refused requests to interview Breuer and Holder. Asked whether Raines will be indicted, a senior DOJ representative would neither confirm nor deny it.