Why little finished in jail after the financial crisis (Motley Fool)

While accepting the Oscar for best documentary earlier this year, Inside Job Director Charles Ferguson came out with a bang.

"Excuse me, I must begin by noting that three years after our horrible financial crisis due to the financial fraud, not a single financial Executive was imprisoned, and it is wrong," he said.

Now at least a. Lee Farkas, former President of the mortgage lender Taylor Bean, has been found guilty of the week last on 14 counts of fraud and conspiracy. He could spend the rest of his life in prison.

There is therefore a.

But why not others? After a financial crisis which has doubled the rate of unemployment and slaughtered the wealth in the world, person think an Executive and a little heard talk of - was the only one to blame. Or how these things usually work out. After the beginning of the 1990s loan crisis and economies, 800 financial executives went to prison. Not only most executives of the Bank have avoided prosecution this time, but many are still paid by the banks which took place in the economy into the ground.

Why is a difficult question. I think it can be divided into three parts.

1. The ground troops were charged.
The most disgusting, pure and simplefraudulent parties the bubble years took place on Wall Street. It took place on the ground in areas such as Orange County and Las Vegas, where mortgage brokers, real estate agents and borrowers mentis through their teeth, ready documents forged and actively pursues screwing on anyone within reach. The sale of the mortgage industry was a magnet for some of the sketchiest of society characters. As the Commission of inquiry of financial crisis noted in January, "at least 10 500 people with a record between the field [mortgage broker]in Florida, including high which had previously been recognized guilty of such crimes as fraud."", bank robbery, racketeering and extortion.

Thousands of mortgage brokers and borrowers from the scam have indeed been laid and in many cases imprisoned. In June 2008, before the financial crisis unraveled, the FBI busted 400 brokers a single sting. Sting last introduced a borrower has was found guilty of defrauding Bank of America (NYSE: BAC - News) by "" recruitment 'straw buyers' to apply for a mortgage for a House that it itself had the intention to occupy and inflated la value of this House to increase the amount of the loan. "") These guys did the same with loans from jpmorgan Chase (NYSE: JPM - News). These people of loan documents submitted to the financial areas counterfeit (NYSE: RF - News). All were captured. All have been charged. The public had not heard their stories because they do not involve the executive suite.

2 Saving the regulators, the detectives strapped
Some executives were indicted does not mean that they are all innocent, of course.

Fraud level of high-are usually called the Department of Justice by industry regulators. The Department of Health and Human Services, for example, works in tandem with the Ministry of Justice in fraud medical coil. Even for the Department of Agriculture. And the National Association of Insurance Commissioners.

The bank regulators are different. Since 2000, the Office control of savings does not return a single case of fraud in the Ministry of Justice, according to the New York Times. The Office of the Comptroller of the currency within just three cases.

There could be several reasons for this. Two regulatory bodies, however, have a long history of hatching the banks they supervise. They have every reason to do so: existence of regulators depend on banks or "clients", as the OCC refers to them as – since the fees paid by banks to finance their operations. In some cases, banks can shop for the lightest regulator with the key.

This is what made Countrywide in 2007. Then–CEO Angelo Mozilo was frustrated by the requirements of OCC regulators. were getting in his hair. Easy solution: Countrywide changed charters to fall under the blow of a more gentle regulator, the OTS. As noted by Connie Bruck of The New Yorker, the OTS did pressure Countrywide to make the switch.

Not that the OCC is a bull pit regulation itself. When the intended Virginia pursue A Capital (NYSE: COF - News) for abuse of credit card in 2005, the company has applied for a national Charter with the ABC. In so doing, Capital escaped jurisdiction of Virginia, and any lost State power to pursue his case. It was not an isolated incident. The ABC ceased Georgia when he tried to enforce the predatory loans laws. New York regulators were is intervened while pursuing discriminatory ready investigations. The head of the financial crisis Inquiry Commission said former Chief OCC John Dugan, "you linked to the hands of the States and then sitting on your hands."

If regulators have enough hard step, the FBI has seen a radical cut in the number of available agents to investigate financial crimes. Enforcement focus began changing fraud of health in the 1990s, and to terrorism after the attacks of September 11. During the crisis of loan and savings, 1,000 agents the FBI worked to financial crime scene. Today, 240 just do.

3. Stupid is not illegal
Crime deserves to be incarcerated. Idiocy is another matter.

This is what explains why if few major financial executives are behind bars. Explode your business not necessarily a crime. 30 - To-1 leverage effect is not illegal. Or bought securities backed by owners unable to repay. Neither ignores signs of caution. Or without taking account of the history. A large part of which has brought the financial system to its knees was incredibly stupid and unethical, but perfectly legal.

Investors have been shocked, for example, after the discovery of Lehman Brothers has used an accounting trick called repo 105 to hide the health of its balance sheet. Yet, as noted by the Wall Street Journal, "SEC officials have grown more concerned that they might lose a legal battle if they civil charges alleging investor Lehman have been deceived by the leaders of the company." The stone of stumbling block key: the move of accounting, although that controversial is not necessarily illegal. ?

Was this thing not only legal, but lucrative. For many executives markets away rich. Filthy rich. It was heads they win, tails you lose, and in both cases, the prison remains difficult to achieve. You can almost hear them laugh now.

Return every Tuesday and Friday for Morgan Housel columns on economics and finance.

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