Thursday, May 01, 2014

WALL STREET - The ONLY Executive Jailed as Part of Financial Crisis

An example of justice NOT served.

"The Rise of Corporate Impunity" by Jesse Eisinger, ProPublica 4/30/2014


This story was co-published with The New York Times Magazine.  It is not subject to our Creative Commons license.

On the evening of Jan. 27, Kareem Serageldin walked out of his Times Square apartment with his brother and an old Yale roommate and took off on the four-hour drive to Philipsburg, a small town smack in the middle of Pennsylvania.  Despite once earning nearly $7 million a year as an executive at Credit Suisse, Serageldin, who is 41, had always lived fairly modestly.  A previous apartment, overlooking Victoria Station in London, struck his friends as a grown-up dorm room; Serageldin lived with bachelor-pad furniture and little of it — his central piece was a night stand overflowing with economics books, prospectuses and earnings reports.  In the years since, his apartments served as places where he would log five or six hours of sleep before going back to work, creating and trading complex financial instruments.  One friend called him an "investment-banking monk."

Serageldin's life was about to become more ascetic.  Two months earlier, he sat in a Lower Manhattan courtroom adjusting and readjusting his tie as he waited for a judge to deliver his prison sentence.  During the worst of the financial crisis, according to prosecutors, Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse's mortgage-backed securities portfolio.  But on that November morning, the judge seemed almost torn.  Serageldin lied about the value of his bank's securities — that was a crime, of course — but other bankers behaved far worse.  Serageldin's former employer, for one, had revised its past financial statements to account for $2.7 billion that should have been reported.  Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed.  Merrill Lynch, in particular, announced a loss of nearly $8 billion three weeks after claiming it was $4.5 billion.  Serageldin's conduct was, in the judge's words, "a small piece of an overall evil climate within the bank and with many other banks."  Nevertheless, after a brief pause, he eased down his gavel and sentenced Serageldin, an Egyptian-born trader who grew up in the barren pinelands of Michigan's Upper Peninsula, to 30 months in jail.  Serageldin would begin serving his time at Moshannon Valley Correctional Center, in Philipsburg, where he would earn the distinction of being the only Wall Street executive sent to jail for his part in the financial crisis.

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns.  After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison.  After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks.  In the '90s and early aughts, when the bursting of the NASDAQ bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison.

The credit crisis of 2008 dwarfed those busts, and it was only to be expected that a similar round of crackdowns would ensue.  In 2009, the Obama administration appointed Lanny Breuer to lead the Justice Department's criminal division.  Breuer quickly focused on professionalizing the operation, introducing the rigor of a prestigious firm like Covington & Burling, where he had spent much of his career.  He recruited elite lawyers from corporate firms and the Breu Crew, as they would later be known, were repeatedly urged by Breuer to "take it to the next level."

But the crackdown never happened.  Over the past year, I've interviewed Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors to understand why the largest man-made economic catastrophe since the Depression resulted in the jailing of a single investment banker — one who happened to be several rungs from the corporate suite at a second-tier financial institution.  Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic.  During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime.  The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms.  By the time Serageldin committed his crime, Justice Department leadership, as well as prosecutors in integral United States attorney's offices, were de-emphasizing complicated financial cases — even neglecting clues that suggested that Lehman executives knew more than they were letting on about their bank's liquidity problem.  In the mid-'90s, white-collar prosecutions represented an average of 17.6 percent of all federal cases.  In the three years ending in 2012, the share was 9.4 percent.  (Read the Department of Justice's response to ProPublica's inquiries.)

After the evening drive to Philipsburg, Serageldin checked into a motel.  He didn't need to report to Moshannon Valley until 2 p.m. the next day, but he was advised to show up early to get a head start on his processing.  Moshannon is a low-security facility, with controlled prisoner movements, a bit tougher than the one portrayed on "Orange Is the New Black."  Friends of Serageldin's worried about the violence; he was counseled to keep his head down and never change the channel on the TV no matter who seemed to be watching.  Serageldin, who is tall and thin with a regal bearing, was largely preoccupied with how, after a decade of 18-hour trading days, he would pass the time.  He was planning on doing math-problem sets and studying economics.  He had delayed marrying his longtime girlfriend, a private-equity executive in London, but the plan was for her to visit him frequently.

Other bankers have spoken out about feeling unfairly maligned by the financial crisis, pegged as "banksters" by politicians and commentators.  But Serageldin was contrite.  "I don't feel angry," he told me in early winter.  "I made a mistake.  I take responsibility.  I'm ready to pay my debt to society."  Still, the fact that the only top banker to go to jail for his role in the crisis was neither a mortgage executive (who created toxic products) nor the C.E.O. of a bank (who peddled them) is something of a paradox, but it's one that reflects the many paradoxes that got us here in the first place.

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