How 'Too Big to Jail' Will Haunt the 2016 Election

First in a series about "too big to jail"

WASHINGTON — In the roughly seven years since the failure of Lehman Brothers and Bear Stearns and the near-failure of many of the largest U.S. financial institutions, it is abundantly clear that criminal or civil charges against individuals related to the 2008 meltdown are never going to come.

Former Attorney General Eric Holder said in February that, as one of his final acts as the nation's top prosecutor, he was asking his deputies to identify any individuals who should be charged individually for actions related to the crisis within 90 days. His comments, notably, weren't made in an announcement at all, but instead were in response to a question from the audience — almost as an afterthought. That 90-day window expired in May without any new charges being brought.

And yet the issue is far from settled, and it is increasingly likely to play a significant role on the 2016 campaign trail, observers said.

"I don't think anybody believes it's getting better," said H. Rodgin Cohen, a partner at Sullivan & Cromwell. "There still is a lot of hostility towards the industry … among elected officials, certainly, and it is a truly nonpartisan issue. You see it in the media, and you see it at dinner tables, honestly."

In Democratic presidential frontrunner Hillary Clinton's first substantive speech on financial issues last month, she staked out the position that bankers and other financial institutions have made profits by breaking the rules, and said that individuals responsible for such wrongdoing should and will be punished.

"While institutions have paid large fines and in some cases admitted guilt, too often it has seemed that the human beings responsible get off with limited consequences or none at all, even when they have already pocketed the gains," Clinton said. "This is wrong, and on my watch it will change."

Rep. Maxine Waters, the lead Democrat on the House Financial Services Committee, lamented the lack of criminal prosecutions in an American Banker op-ed in June, while Sen. Elizabeth Warren, D-Mass., has based her entire brand on criticizing Wall Street and the concept of "too big to jail."

But the notion that Wall Street bankers got off easy after the crisis is not a Democrats-only game.

Republican presidential hopeful and former Texas Gov. Rick Perry has been most pronounced on the issue, saying in a speech July 29 that Wall Street banks and other firms "should not be let off the hook" for misdeeds.

"Banks made a lot of mistakes regarding risk management leading up to the crisis," Perry said. "Some financiers intentionally misled investors and customers. They pushed people into deceptive financial products. This is wrong. But instead of them being punished, it was average Americans who paid a tremendous price."

Other GOP lawmakers have made similar comments. Sen. Charles Grassley, R-Iowa, has been vocal on the issue, saying during a 2013 Senate Judiciary Committee hearing that "the best deterrent to crime is to put people in prison" and that principle "includes those at powerful banks and corporations." And Republican presidential candidate Sen. Rand Paul, R-Ky., similarly said during the Conservative Political Action Conference in 2013 that "there is nothing conservative about bailing out Wall Street."

It isn't just lawmakers. Regulators have also opined that prison terms associated with financial crimes can give the public a sense that justice has been served and the industry a visceral reason to be diligent in its compliance. Federal Reserve Board Gov. Daniel Tarullo said in a June 25 panel discussion that when the Department of Justice prosecuted General Electric and other firms for electricity price fixing in the 1960s, the rest of the industry took notice.

"I think the watershed moment was the moment at which some … executives went to jail," Tarullo said. "Within a very short period thereafter, every major U.S. corporation had a very robust antitrust compliance program. Those individuals, even though they were higher up the chain, had been directly involved in the price fixing activities, but there really is no substitute for, where appropriate, criminal prosecution."

Dennis Kelleher, president of public advocacy group Better Markets, said the ongoing hostility toward Wall Street is partly because there was no such catharsis after the housing bubble burst. Prosecutors not only did not pursue criminal charges against the banks, they also did not charge financial actors individually — all the many settlements that have been reached with banks and other institutions have been at the corporate level, rather than against individuals.

"What should have happened and what must happen is the Department of Justice and SEC have to … enforce the law fully against individuals, and especially against executives and supervisors," Kelleher said. "I guarantee you if the SEC and DOJ started doing that, there would be significant increases in compliance all over finance."

Karen Shaw Petrou, managing partner of Federal Financial Analytics, said that public distrust of humiliated areas of the economy — the auto industry in the 1980s, trial lawyers in the 1990s, and so on — tends to remain intense until it is dethroned by the next scandal. When or how that may occur, and whether the distrust of the banking sector will be strong enough to affect the 2016 election cycle, is hard to predict, she said.

"These things tend to have a life of their own," Petrou said. "It could simply be that a new scandal comes along and takes the attention off of the banking industry. These things tend to move from sector to sector, where bad boys — and they are mostly boys — tend to congregate in a rotating fashion."

But Wayne Abernathy, an executive vice president with the American Bankers Association, argues that though anger toward Wall Street might play a rhetorical role in the 2016 race, it's not a deciding factor.

"I think you'd be hard-pressed to find anybody who cast his or her vote based on his or her attitude toward banks, and I think that would be an even tougher sale today," Abernathy said. "I think it did affect how some people voted in 2008, and maybe in 2012. I don't think it did in 2014 and I'm really doubtful that it will in 2016."

Cohen doesn't think banks will get off so easy. Where prosecutors may have been unable to prove guilt, regulators have been proceeding with almost a presumption of guilt, Cohen said. In the case of living wills, capital surcharges and nonbank systemic designations, regulators are moving to encourage broad restructuring of financial institutions. Political considerations aside, that trend is likely to continue with future rules on executive compensation and elsewhere.

"I think probably … this emotional outrage will translate into laws and regulations which will be negative for the industry going forward," Cohen said. "You could see it in more fundamental restrictions on banks, where we can't prosecute anybody so we're going to make them less profitable. It feeds into an environment that remains very hostile to the banking industry."