Jail for what exactly? No laws were broken, at least no laws that existed at the time.
At best the whole situation in 2008 was a bank run[0] caused by a freeze in global liquidity.
Sure the financial institutions made some risky speculation that lost them some money. Losses were big in absolute terms but quite tiny relative to the assets under management and profitability.
a. Do I agree with (any company) functioning in the grey area. -- No.
b. Do I agree with bailouts of any kind. -- No.
c. Can I ever agree with people who ignorantly believe $20B in a recoverable overnight line of credit is more valuable than >$600B in assets and >$10 trillion loss in market capitalization. -- No.
There ought to have been some convictions but none were related to the TARP directly or indirectly.
Unfortunately, most quoted "crimes" were caused by human incompetence, a large number of other ones are caused by public ignorance and confusion about market making.
Designated market makers were regulated and were required to stand opposite to their own clients when necessary. This was by design and regulation. I quote this because invariably someone is going to cry about how these designated market makers bet against their clients.
During the savings and loan crisis in the 80s there were a dozen task forces in the DOJ, over 1000 FBI agents were tasked with investigating the banks. It resulted in over 1,000 felony convictions.
This financial crisis is significantly worse and we've had virtually no effort put into finding out the root causes. If nothing else we have internal e-mails from banks like Bank of America acknowledging that they knew they were selling junk bundled as AAA rated bonds which amounts to fraud. There's all sorts of evidence of collusion in the industry around getting those bond ratings and around selling them as something they were not. And that's just the stuff an armchair investigator can pull out of news articles over the years. Nothing compared to what a forensic accountant could determine.
It's of course unrelated but when it was found that HSBC was found guilty of laundering money for drug lord the DOJ decided not to prosecute because doing so was a systemic risk. It doesn't take much to understand that there were no prosecutions from the banking crisis because of a fear of systemic risk.
> This financial crisis is significantly worse and we've had virtually no effort put into finding out the root causes.
The root causes are quite well known. The primary reasons were:
a. Recent changes to how credit rating agencies (Standard & Poor's, Moody's etc.) calculated ratings - Specifically they started using the stock price to increase credit rating's - this has little to do with actual quality - it was all good when it was a bull market, they were to short sided to see that a sell off would cause the ratings to collapse, which is exactly what happened. This resulted in the initial liquidity crisis.
b. Repealing the Glass-Steagall Act in 1999 that was introduced in 1933 to limit affiliations between commercial banks and security firms. This resulted in excessive leverage being given by banks in 1999-2000 for purchasing investments (also contributed majorly to the greater portion of the bull run and pop of the tech bubble - explained in point d. and e.) which later morphed into sub-prime mortgages being offered in the early 2000's by the people who were not allowed to conduct these activities under Glass-Steagall.
c. The Community Reinvestment Act of 1977 aggravated the situation - but this is overlooked as it leads to political finger pointing. I will skip over it too as it would make me sound too much like the GOP. Though if you do research it, factor the effects of point b. into the analysis.
d. Rapid increase of Fed Rate in the months/year following repealing Glass-Steagall made it too expensive for investors to carry their investment loans and turn a profit. This lead to rapid liquidation of investments and popped the tech bubble. It's really that simple.
e. Following the tech bubble burst the fed rates dropped rapidly which made it easier for people with sub-prime credit ratings to qualify for mortgages. As it dramatically affected qualifying using the Gross Debt Service and Total Debt Service ratios.
f. Once the rates started increasing the only choice was for banks and security firms to structure them into exotic investments i.e. Credit Default Swaps. When ratings dropped due to erroneous credit rating algorithms (point a.) this became a huge issue. (Anyone ever wondered how anyone could have been confused by the risk of something with "Default" in its name?)
g. The most important reason of them all. All of this would have been a blip and not gone out of control at all if it unfolded in 2006-2007 or 2009. That is if it was not an election year with a guaranteed change of a President.
This crisis was caused by bad timing and the shortsightedness of both parties, the law makers, the independent regulators and of the feds. The real systematic risk comes from ending all their careers.
Sure they made a good investment with TARP, but it could have all been avoided if they had not deliberately let Lehman Brothers go bankrupt that resulted in erosion of $10 trillion in market capitalization in a matter of weeks.
I'm not saying the banks are innocent, nor do I accept the "it's all fair in capitalism" argument.
The one thing I haven't been able to wrap my head around is why the lawmakers found it necessary to repeal Glass-Steagall if they did not want financial institutions to conduct the very activity that the Act forbade.
I want to take a step back here. Two things are fairly clear to me. The first is that there would've been a housing bubble with or without illegal activity. I think that's something we agree on. I personally feel the biggest contributing factors were the repeal of Glass-Steagall, as you mentioned, coupled with the need for the fed to keep interest rates too low for too long. They were low from the dotcom bust, but after 9/11 had to be extended to prop the economy back up. What's also clear to me, but perhaps not to you, is that there was also a lot of illegal activity going on by the banks that took advantage of what was going on in the industry. I mean seriously, there have been exactly 2 banker convictions since all this started going down. There should be more than 2 banker convictions just as a matter of course due to the statistical probability at any person might be committing a crime at a random time. That so much money was made under so many shady circumstances followed shortly by the open admission by the DOJ that they would not prosecute HSBC bankers due to systemic risk make it pretty clear that there was plenty for the feds to go after but they chose not to.
How do you know that no laws were broken? I think the most we can be sure of is that federal prosecutors decided it was either ineffective or politically inconvenient to investigate. Without an investigation, I don't think we can know that nothing illegal happened.
Indeed, given the string of multi-billion dollar Wall Street settlements over the last few years, suggesting that there were no laws broken leading up to TARP implies that the banks were atypically clean.
If what bushido said is true, then I'm glad that those executives are still in charge. After all, they took a very bad situation, combined with a boat-load of money, and turned that into a bigger boat-load of money. Imagine if they were all fired, and new inexperienced decision makers took their place. That big bucket of money dumped into them could have easily evaporated.
