By: Adham Hashish and Mucahit Ayden
While the US economy recovers from the 2008 financial crisis, the legal system is still digesting the lessons learned from this crisis. The crisis, according to the U.S. Senate's Levin–Coburn Report, was the result of
As the senate report reveals, inadequate due diligence is one of the main problems behind the 2008 crisis. Investment banks, willingly or mistakenly, did not examine mortgage loans carefully before underwriting them. Buyers of mortgage' backed securities simply trusted investment bankers who sold them those securities. The buyers were not aware that overwhelming majority of debtors were unable to pay back their mortgage loans. Although these buyers knew that those mortgage' backed securities were constituted of sub-prime loans, they were not informed of debtors' inability to pay back. Here, the important question is whether the investment banks employed inadequate due diligence intentionally and knowingly, or whether they merely engaged in this process negligently. While mere negligence might result in civil liability of those banks, the intentional and knowing application of flawed and cursory examination of mortgage loans might induce criminal liability for the banks and their executives.
In November 2013, JPMorgan Chase, one of the few financial brokerages that emerged largely unscathed from the 2008 crisis, reached a $13 billion civil settlement with the Justice Department for its practices. This amount includes a $4 billion payment for consumer relief, along with a payment to investors of more than $6 billion and a large fine. As the Guardian reported, it is
To be clear, there are two potential targets for criminal liability: the business entities as well as the individuals involved. While the DOJ seems inclined to go after the business entities, one critical question remains unanswered. As Jed S. Rakoff, a United States District Judge for the Southern District of New York titles his article: Why Have No High-Level Executives Been Prosecuted? In sum, without targeting the individuals involved, they will continue to consider this kind of fraudulent practice in a context of "cost-benefit" approach of doing business.
While the US economy recovers from the 2008 financial crisis, the legal system is still digesting the lessons learned from this crisis. The crisis, according to the U.S. Senate's Levin–Coburn Report, was the result of
"high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street. [Senate Financial Crisis Report, 2011, at 1]"President Obama pledged to hold companies legally responsible for unethical conduct leading up to the financial crisis. This pledge is important as the his administration tossed $16 trillion emergency lifeline to banks and corporations to keep the global economy from total collapse.
As the senate report reveals, inadequate due diligence is one of the main problems behind the 2008 crisis. Investment banks, willingly or mistakenly, did not examine mortgage loans carefully before underwriting them. Buyers of mortgage' backed securities simply trusted investment bankers who sold them those securities. The buyers were not aware that overwhelming majority of debtors were unable to pay back their mortgage loans. Although these buyers knew that those mortgage' backed securities were constituted of sub-prime loans, they were not informed of debtors' inability to pay back. Here, the important question is whether the investment banks employed inadequate due diligence intentionally and knowingly, or whether they merely engaged in this process negligently. While mere negligence might result in civil liability of those banks, the intentional and knowing application of flawed and cursory examination of mortgage loans might induce criminal liability for the banks and their executives.
In November 2013, JPMorgan Chase, one of the few financial brokerages that emerged largely unscathed from the 2008 crisis, reached a $13 billion civil settlement with the Justice Department for its practices. This amount includes a $4 billion payment for consumer relief, along with a payment to investors of more than $6 billion and a large fine. As the Guardian reported, it is
"the biggest civil settlement with any single company, ends several investigations and lawsuits brought by the US authorities related to the sale of home loan bonds between 2005 and 2008. It is more than three times the previous record $4bn fine the US levied against BP for the Deep-water Horizon oil spill."The settlement leaves open the possibility of potential criminal charges. Using criminal law to sanction business misconduct has always been a topic for scholarly debates. However, the magnitude of this crisis and the nature of the fraudulent and aggravated breach of trust involved should help settling this debate.
To be clear, there are two potential targets for criminal liability: the business entities as well as the individuals involved. While the DOJ seems inclined to go after the business entities, one critical question remains unanswered. As Jed S. Rakoff, a United States District Judge for the Southern District of New York titles his article: Why Have No High-Level Executives Been Prosecuted? In sum, without targeting the individuals involved, they will continue to consider this kind of fraudulent practice in a context of "cost-benefit" approach of doing business.
