I haven’t written much about US politics lately, but a decision this morning by federal District Court Judge Jed Rakoff has me fired up, and lest it fly under your radar, I’d like to explain why. In the years leading up to 2008, many of the country’s biggest investment and insurance firms developed a chain of interrelated financial products that enabled them to sell ultimately worthless subprime mortgage debt to investors while simultaneously betting against these same investments. In other words, they encouraged their clients to buy products they knew, in the words of one Goldman Sachs executive, to be “shit” and collected large bonuses for doing so. When the bubble burst, investors like the Mississippi state pension plan took a huge hit while the banks (and their bonus-happy bankers) profited.
(It’s ethically bankrupt and, to my eye, transparently illegal practices like this that led me to detest the unmatched influence that “i-banks” and their enablers wield over the undergrads and career services offices of Harvard and other “elite” schools. When my classmates and I went searching for jobs, no career path was more clearly delineated than the one that led right to Goldman’s door. But, crankily, I digress.)
Since long before the US financial crisis of 2008, the Securities and Exchange Commission–the federal entity responsible for enforcing the laws that supposedly govern the sale of securities in the US–has developed the habit of charging investment firms with fraud or negligence and then negotiating settlements with these firms instead of taking them to court. This practice has continued to govern the agency’s pathetic response to the widespread fraud that contributed to our recent crisis–like, for instance, the $550 million fine the SEC negotiated with Goldman Sachs last year.
Settlements like this might sound like a win for the public–firms get bad publicity and have to pay big bucks, and the SEC can avoid committing its limited manpower to an all-out court battle. But in truth, it’s anything but. Hundreds of millions of dollars in fines would be pretty tough for you or me to swallow, but to a monstrously outsized, too-big-to-fail investment firm like Goldman Sachs, these settlements are chump change–the cost of doing (personally lucrative, morally decrepit) business. But much worse is that they enable the firms to pay up without admitting or denying wrongdoing, and because they forgo the public fact-finding of a trial, there’s no evidence for the victims of these terrible practices to use to recover their losses in civil suits. Perhaps this complete lack of accountability is just an unintended byproduct of the SEC’s pursuit of the public interest, but given the notorious revolving door between the commission and the firms it’s supposed to be regulating, I’m hardly convinced.
Excitingly, neither is Judge Jed Rakoff, who just this morning rejected a $285-million version of the Goldman Sachs settlement that the SEC had negotiated with Citigroup. (In this case, investors lost $700 million through Citigroup-designed securities while the bank itself made $160 million betting against them.) Assuming his decision stands, Citigroup will be going to court to face accusations of fraud, and the SEC’s shamefuly toothless enforcement practices will likely change in what I can only hope to be a substantial way.
Rakoff’s decision is rife with deliciously quotable and oh-so-appropriate moral indignation. Decrying the complete lack of accountability inherent in the SEC’s blame-free settlements, Rakoff observes, “Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.” He takes particular aim at the lack of fact-finding, writing, “An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous, serves no lawful or moral purpose and is simply an engine of oppression.”
Here here! At a time when the federal agencies and Congressional committees charged with overseeing the finance industry often seem less like genuine counerweights than launching pads for lobbying careers, and the federal courts little more than a rubber stamp, muscular judicial oversight from judges like Rakoff is exactly what we need more of. The days when our government is accountable to the public over the narrow interests of our country’s greediest sector still feel impossibly far in the future, but this decision fills me with hope. Our system of legalized corruption is under attack, and not just from Occupy Wall Street. Somebody needs to buy Jed Rakoff a beer!