Viewpoint: In the Blame Game, Banks Need to Mount a Comeback

The federal investigative behemoth sometimes resembles a supersized ship: slow to be brought about but hard to stop when it gets up a head of steam. Banks are about to see this federal dreadnought come out of the gloom and fog of the financial crisis, with firepower arrayed for a broadside against them.

The irony of that change in course is that, until very recently, banks were on federal life support and so had to be off limits to prosecutors. But along with the battleship, the worm has turned.

Banks, including investment banks, now displaying financial vitality, are ripe to be painted as villains by a political establishment casting about for people and institutions to blame for the financial crisis. Never mind that a root cause of the mortgage meltdown was an orgy of government-inspired subprime loans designed to achieve a political and social objective that was deemed better than a chicken in every pot: everybody a homeowner, even those for whom the financial math did not add up.

What can the banks do? Fight back!

What can sensible politicians do who understand business as usual in Washington is a sure ticket home in this electoral cycle? Support the banks. Sound crazy? It's not.

Banks are special and have been so treated, both in our financial system and in our laws. No private industry or set of institutions has more established protection in the federal criminal code than banks. The law is fashioned to shield them from the influence of corruption, theft, fraud and greed nearly to the same extent as it does the operations of government itself. Why? Because healthy banks fuel the engine of our economy. Is it any accident that unemployment remains high and growth sluggish when commercial credit from banks is hard to come by?

So why are federal investigators and prosecutors now looking back and seeking to lay blame on banks for the financial crisis? Probably because no cooler head has the nerve to tell them not to. One does not need to believe in grand political conspiracies to nonetheless conclude that those with common political aims look to pull on common oars. This turnabout of investigative interest coincides with consideration of so-called financial reform legislation, now mired in legitimate debate about the role of integrated financial institutions in our economic system and which parts of what they do should be subject to greater regulation.

Are prosecutors seeking to aid one side of that debate? Maybe. But more directly motivating them is a desire to be seen as doing something in the aftermath of the crisis and not being branded as lagging behind the enforcement curve. Indeed, nowadays, that curve is often led in New York by politically ambitious state officials, which means the U.S. attorney in Manhattan can not be seen as far behind. The same is true in Washington, where the SEC's enforcement division, more or less labeled as asleep at the switch as the crisis unfolded, has become hyperactive and the Justice Department beefs up the fraud section in its criminal division so as to get aboard this bandwagon.

The substantive question this enforcement initiative poses is whether it is a fraud to do things like bet short on your own while going long in advice to other investors. The issue is not whether banks were doing some things like that; perhaps they were. Rather, the key criminal law query is whether evidence shows the fundamental indicator of fraud — that is, the intentional deceit by affirmative material misrepresentations or omissions to parties when a duty to inform or disclose existed.

Giving current investigative motivation the benefit of the doubt, questions on that issue may be a legitimate line of inquiry. But unless unequivocal evidence shows such criminal intent, prosecutors should remember the recent banking crisis and exercise discretion against prosecuting on less troubling facts. They should so act not because banks need to be recognized as too big to fail or immune from enforcement but because public and marketplace confidence in financial institutions is fragile, particularly now. Perp-walking them to demonstrate prosecutorial toughness may be the equivalent of bullying Humpty Dumpty off the wall — with similar dilemmas to follow.

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