City University of New York (CUNY) CUNY Academic Works Dissertations, Theses, and Capstone Projects CUNY Graduate Center 2-2021 Incentivizing Injustice: Why No High-Level Executive Prosecutions from the Financial Crisis? Sari Krieger Rivera The Graduate Center, City University of New York How does access to this work benefit ou?y Let us know! More information about this work at: https://academicworks.cuny.edu/gc_etds/4113 Discover additional works at: https://academicworks.cuny.edu This work is made publicly available by the City University of New York (CUNY). Contact: [email protected] Incentivizing Injustice: Why no high-level executive prosecutions from the financial crisis? By Sari Krieger Rivera A dissertation submitted to the Graduate Faculty in Political Science in partial fulfillment of the requirements for the degree of Doctor of Philosophy, The City University of New York 2021 i ii © 2020 SARI KRIEGER RIVERA All Rights Reserved iii Incentivizing Injustice: Why no high-level executive prosecutions from the financial crisis? by Sari Krieger Rivera This manuscript has been read and accepted for the Graduate Faculty in Political Science in satisfaction of the dissertation requirement for the degree of Doctor of Philosophy. Date Charles Tien Chair of Examining Committee Date Alyson Cole Executive Officer Supervisory Committee: Thomas Halper David Jones THE CITY UNIVERSITY OF NEW YORK iv ABSTRACT Incentivizing Injustice: Why no high-level executive prosecutions from the financial crisis? by Sari Krieger Rivera Adviser: Professor Charles Tien More than ten years after the financial crisis of 2008, which sparked America’s Great Recession, many citizens are still asking why no high-level bank executives were prosecuted for criminal fraud. This question becomes even more perplexing when they remember that many powerful executives did face jail time during the Enron-era accounting scandals of the early 2000s and the savings and loan crisis of the early 1990s. This sense of injustice Americans felt in the wake of the biggest economic disaster of their lifetimes has had reverberating political consequences, such as populist movements like Occupy Wall Street and populist political campaigns from Bernie Sanders and Donald Trump in 2016. Millions of Americans were left in financial ruin, but the banks were bailed out, with no lasting consequences for their leaders. If this represents a high- water mark in recent memory for most citizens’ distrust and anger in their government, why do we still have no satisfying explanation of how the bankers “got away with it?” v Commentators, journalists and lay people have offered seemingly plausible, yet shallow explanations over the years since the crisis. Many of these explanations say powerful, wealthy Wall Street people use campaign donations and lobbying connections to get bailed out by the politicians who take this money. However, this explanation falls short because wealthy campaign donors existed in the previous crises where they did face jail time for their fraudulent behavior. This study uses the lens of political science to attempt a deeper and more satisfying explanation for the phenomenon of “Too Big to Jail.” The popular idea that wealthy campaign donors bought their way out of trouble will be more thoroughly explored, as will the clubby atmosphere between Washington and Wall Street, and presidential leadership. However, I ultimately reject them as less compelling explanations in favor of the internal incentive structure of the Justice Department itself and external incentives for prosecutors. Prosecutors who are hired as civil servants, not political appointees, are responsible for the majority of the work in bringing cases. They are disincentivized to bring difficult and lengthy cases that they may lose, as this kind of high-profile loss may reduce their chances for private sector, high-paying partnerships in the near future. Prosecutorial discretion is an underappreciated and under studied topic in political science literature, considering its vast power and importance to American society. The discretion prosecutors have to bring cases and the incentives they face within the institutions in which they operate offer the most compelling evidence for an answer. vi Acknowledgments The completion of this doctoral thesis could not have been possible without the assistance of many others. Firstly, Professor Tom Halper believed in this project before it existed. He pushed me to use the years of experience I had in business journalism and add an academic lens to a topic that is highly relevant and concerning to American society. Professor Charles Tien generously took over the advisory role toward the end of this project and helped me across the finish line. I consider myself lucky to have had two advisors with differing perspectives. The project is better for both of their extensive involvement. Additionally, thank you to Professor David Jones for applying a unique expertise to this project as well. Thank you to all of my students at Hunter College. In the five years teaching there I relished getting to know them and I enjoyed all of our classroom moments, some more serious than others. I was continually impressed with the bright and compassionate group that showed up in my classroom each semester. Their intellectual contributions and encouragement have certainly made their mark on this project. Additionally, thank you to Graduate Center friends and professors, and to my academic and journalistic sources listed and unlisted here. The later stages of editing this project took place partially during breaks working at the Animal Care Centers of New York City in Brooklyn. Various “Boroughbreds” – shelter dogs, cats, rabbits and Guinea pigs – kept me company during those edits. Thank you to them. The most constant writing and editing companions have been my own dogs, rabbits and Guinea pigs (Aurora, Franklin, Eleanor, Teddy, Nennie, Pumpkin, Piglet, Wilbur and Miss P) who have always kept me going. Thank you to the close friends who have cheered me on during this process; Zoe Kobrin, Regina Darby, Kate Bennett and Allison Bassin. Thank you to my husband Edwin Rivera for his endless devotion, love and intellectual curiosity. Thank you to my mother Nori Krieger and stepfather Steve Coan. My mother is my biggest fan and supporter. Lastly, thank you to my father, David Krieger. He left this world after I was accepted to this PhD program, but before I began it. Now it has been nine years and I am passing an important milestone without him physically present. His intellect, sense of justice and so much more live on in this project and in me, forever. vii Table of Contents Chapter 1: Introduction ……………………………………………….Page 1 Chapter 2: Literature Review ………………………………………... Page 18 Chapter 3: Setting the Scene - White Collar Crime …………………..Page 42 Chapter 4: A Summary of the Crisis ………………………………….Page 79 Chapter 5: Case Studies from the Crisis: Potential Evidence for a Case?......................................................................................................Page 92 Chapter 6: Justice Department Prosecutors’ Incentives/Prosecutorial Discretion ………………………….………………………...................................Page 121 Chapter 7: Alternative Explanations………………………………......Page 143 Chapter 8: Conclusions………………………………………………..Page 172 Bibliography…………………………………………………………...Page 181 viii List of Figures Figure 1.1: Gallup Poll June 2016 Shows Americans’ Confidence in Banks Sinks …………………………………………………..…………………Page 3 Figure 3.1: Federal White-Collar Crime Prosecutions at 20-Year Low ……………………………………………………………..………Page 53 Figure 3.2: White Collar Crime Prosecutions as of July 2015….....Page 53 Figure 3.3: U.S. Attorney’s Office Conviction Rate 1991-2013......Page 55 Figure 3.4: Justice Department Settlement Agreement Trends……Page 72 Figure 4.1: Residential Mortgage Backed Securities Illustration.…Page 81 Figure 4.2: Frequency of Subprime Mortgages…………..………..Page 83 Figure 4.3: Collateralized Debt Obligation Example………….…..Page 88 Figure 4.4: Synthetic CDO Example…………………………...….Page 89 Figure 5.1: Rejected Loans Waved In, By Bank……………….….Page 99 Figure 6.1: Consumer Price Index for All Urban Areas……………Page 127 Figure 6.2: Consumer Price Index for New York City Metropolitan Area …………………………………………………………………….. Page 128 Figure 6.3 : Change Over Time in Pay Disparity Private v. Public Sector …………………………………………………………………..….Page 132 Figure 7.1 : Top Campaign Contributions to George W. Bush 2004 Election Cycle………………………………………………...Page 159 Figure 7.2 : Top Campaign Contributors to Barack Obama and John McCain 2008 Election Cycle………………………………..……………………. Page 160 “What the 2008 crisis exposed was a fragile underpinning of a highly leveraged financial system. Had bank capital been adequate and fraud statutes been more vigorously enforced, the crisis would very likely have been a financial episode of only passing consequence.” – Alan Greenspan, former Federal Reserve chairman, Financial Times, August 17, 2015 “We need to value the public sector again,” Jon Lovett, Lovett or Leave It, June 1, 2018 Chapter 1: Introduction After the $700 billion Wall Street bailout passed by Congress and signed by President Bush in October 2008, millions of middle class and poor Americans who lost their homes or jobs were seething with anger. People were tired of a government that they believed favored Wall Street millionaires at the expense of ordinary people suffering on Main Street. Nor was their plight quickly remedied. By January 2011, four