Reprinted from neweconomicperspectives.org
The New York Times' editorial board published an editorial on March 12, 2017, praising Preet Bharara as the "Prosecutor Who Knew How to Drain a Swamp." I agree with the title. At all times when he was the U.S. Attorney for the Southern District of New York (which includes Wall Street) Bharara knew how to drain the swamp. Further, he had the authority, the jurisdiction, the resources, and the testimony from whistleblowers like Richard Bowen (a co-founder of Bank Whistleblowers United (BWU)) to drain the Wall Street swamp. Bowen personally contacted Bharara beginning in 2005.
You were quoted in The Nation magazine as saying that if a whistleblower comes forward with evidence of wrongdoing, then you would be the first to prosecute [elite bankers].
I am writing this email to inform you that there is a body of evidence concerning wrongdoing, which the Department of Justice has refused to act on in order to determine whether criminal charges should be pursued.
Bowen explained that he was a whistleblower about Citigroup's senior managers and that he was (again) coming forward to aid Bharara to prosecute. Bowen tried repeatedly to interest Bharara in draining the Citigroup swamp. Bharara refused to respond to Bowen's blowing of the whistle on the massive frauds led by Citigroup's senior officers.Bharara knew how to drain the Wall Street swamp and was positioned to do so because he had federal prosecutorial jurisdiction over Wall Street crimes. Whistleblowers like Bowen, who lacked any meaningful power, sacrificed their careers and repeatedly demonstrated courage to ensure that Bharara would have the testimony and documents essential to prosecute successfully some of Wall Street's most elite felons. Bharara never mustered the courage to prosecute those elites. Indeed, Bharara never mustered the courtesy to respond to Bowen's offers to aid his office.The editorial lauds Bharara for his actions against public corruption in New York.
New Yorkers, who have had a front-row seat to his work over the last seven years, know him for his efforts to drain one of the swampiest states in the country of its rampant public corruption.
We are all for rooting out public corruption. The editorial ignores three key facts. First, New York politics are less corrupt than many other states, but Wall Street's leaders created the "swampiest" region in American business. Further, the Northern District of New York has jurisdiction over Albany, so the swampiest part of New York State politics did not lie in Bharara's jurisdiction. Second, Wall Street CEOs created, and infest, the swampiest of regions over which Bharara had jurisdiction. They led the epidemics of "control fraud" that hyper-inflated the housing bubble, drove the financial crisis, and caused the Great Recession. Third, Bharara did not prosecute any of them even when whistleblowers brought him the cases on platinum platters. Indeed, Bharara did not prosecute even low-level bank officers who were minor leaders in implementing those fraud epidemics.I will summarize briefly Bowen's story as it intersects Bharara. Bowen held a senior position with Citigroup supervising a staff of several hundred professionals that conducted risk assessments on roughly $100 billion in annual mortgage purchases -- a majority of which Citigroup resold to Fannie and Freddie or mortgage securitizers. Citigroup was exposed to enormous losses on these mortgages because the sellers had strong incentives to provide false "reps and warranties" to Citigroup and sell them fraudulently originated loans that were particularly likely to default and suffer larger losses upon default. Citigroup could only sell these fraudulently originated mortgages to others through making essentially the same fraudulent reps and warranties that it received from the original sellers. Bowen's staff found originally that 60% of the loans it was buying had false reps and warranties. He warned his superiors about the problem, but they responded by weakening Citigroup's already inadequate underwriting by buying pervasively fraudulent "liar's" loans. Bowen put Citigroup's senior management, including Robert Rubin, on written notice of the growing crisis and called for immediate intervention to stem the crisis. Citigroup's senior management responded by removing Bowen's staff and responsibilities. The incidence of fraud grew to 80 percent.Bowen was blowing the whistle internally at Citigroup and acting exactly as he was supposed to do -- as Citigroup articulated what an officer should do in such circumstances. He was not looking for money or a lawsuit. He was the opposite of a disgruntled employee. He had never gone public.Citigroup's top leaders forced Bowen out -- for doing exactly the right think according to Citigroup's own policies. Bowen did eventually blow the whistle to the public about the Citigroup's top leadership and the banks hundreds of billions of dollars in sales of mortgages through false reps and warranties. Those sales, because of the losses they caused to Fannie and Freddie, were substantial contributors to Fannie and Freddie's failures and the public bailout of both firms. Bowen met with the SEC staff and Assistant U.S. Attorneys (AUSAs) in several districts to provide them with the critical facts and documents. Bowen also testified before the Financial Crisis Inquiry Commission (FCIC), which made multiple criminal referrals against Citigroup, including a referral based on Bowen's testimony. Bowen was the perfect witness for a criminal prosecution of Citigroup's senior managers and for an SEC enforcement action against Citigroup for securities fraud.Assistant U.S. Attorneys (AUSAs) in Denver, the Eastern District of New York (where Loretta Lynch was then the U.S. Attorney), and Bharara's office told Bowen that the Department of Justice (DOJ) had never sent the criminal referrals that FCIC made about Citigroup to them. Bowen met with the AUSAs to assist them in what he had expected to be a series of prosecutions in 2016. Phil Angelides, FCIC's Chairman, made public in 2016 the fact that the FCIC had made a criminal referral about Citigroup based on Bowen's testimony before the inquiry. Bowen was by 2016 one of the best-known and most respected whistleblowers in America. FCIC's chair found his testimony about Citigroup's leaders highly credible, leading him to make the criminal referral, but DOJ's leadership not only refused to prosecute, but also buried the criminal referrals to discourage any U.S. Attorney from prosecuting Citigroup's fraudulent leaders.AUSA Jonathon Schmidt (San Francisco) called Bowen on July 10, 2010. Bowen gave him everything. Schmidt was excited and said that they were going to pursue the claims that Bowen had laid out, particularly Citigroup's fraudulent reps and warranties. Bowen challenged Schmidt, telling him that I believed that once he talked to DC DOJ that Bowen would never hear from him again. Schmidt promised he would be back to Bowen within a week. Bowen never heard from him again.Alayne Fleischmann, also one of the most famous whistleblowers to emerge from the crisis, provided vital information and documents to DOJ prosecutors about frauds led by JPMorgan's senior managers. Fleischmann continued to seek to aid a DOJ prosecution after the Attorney General transferred responsibility for the case to Bharara's office. No prosecution has occurred.Bharara is like every other federal prosecutor and the SEC's top leaders. Bowen met with the SEC staff and five Assistant U.S. Attorneys (AUSAs) in four different districts (including Bharara's) to provide them with the critical facts and documents. Each failed to prosecute the elite Wall Street officials who drove the three epidemics of fraud that drove the financial crisis. What is different is that because his office had jurisdiction over the elite frauds and the staff to conduct sophisticated investigations and prosecutions he could have drained the Wall Street swamp. Bharara simply had to take advantage of the courage and competence of whistleblowers like Bowen and Fleischman who brought him cases against the top managers of two of the world's largest banks on a platinum platter. Bharara also could have taken advantage of the expertise and experience of regulators and prosecutors who worked together to produce over 1,000 felony convictions in "major" cases against financial executives and their co-conspirators in the savings and loan debacle. Bharara (and Lynch and their counterparts) failed to take either approach.Bharara knew how to drain the Wall Street swamp. He had the facts, the staff, and the jurisdiction to drain the Wall Street swamp. Bharara refused to do so.
William K Black
, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...