Nearly all the financiers who headed powerful American firms in the run-up to the 2008 economic crisis remain wealthy, powerful, and free. Not so in Iceland, where jail sentences handed out last week bring the number of bankers imprisoned over the meltdown to 26.
Combined, the bankers will spend 74 years behind bars. While critics of such stringent treatment of the business community often warn that cracking down on finance hurts the economy, Iceland’s experience has shown it’s possible to pursue corporate accountability and broad growth at the same time.
The American form of justice for banking titans has been rather less robust. Prosecutions for all white-collar crime are at a 20-year low. Criminal prosecutions of corporations dropped 29 percent from 2004 to 2014.
Instead of trying to make cases in court, the Department of Justice (DOJ) has sought settlements in a long list of cases tied back to the crisis and its fallout. Most did not require the company that bought its way out of prosecution to admit wrongdoing or even acknowledge the validity of the facts alleged by government investigators.
Headline figures about the dollar value of these settlements routinely exaggerated both their punitive effect on corporate bottom lines and their restorative impact for wronged consumers. And in the handful of cases where corporate felons were forced to plead guilty, the federal government has repeatedly acted to minimize the impact of the plea on the firm’s ability to make money.
The upshot is that “deterrence has been eliminated,” corporate criminologist and financial expert William Black told ThinkProgress. An industry that created a super-sized housing bubble then mishandled trillions of dollars’ worth of mortgage paperwork in order to facilitate a foreclosure epidemic that’s ruinous for the national economy has, in effect, gotten away with it. That makes another crisis more likely, according to Black.
“I’m a big believer in looking forward rather than backwards,” President Obama said months after his inauguration in response to a question about how he would address the still-unfurling financial crisis. With veteran white-collar defense attorneys running the DOJ for him at the time, Obama’s administration pursued a course that’s effectively opposite to Reykjavik’s response to the collapse.
When Iceland first opted to let its banks fail and seek an International Monetary Fund bailout, it seemed like a disaster. But Iceland returned to economic growth much faster than skeptics expected after breaking from the conciliatory approach toward financial industry actors that most countries took in the wake of the global collapse. The tiny economy’s growth rate outpaced the average for European countries in 2012. It’s halved its unemployment rate since the peak of the crisis.
Like other countries with a large financial industry presence, Iceland spent a lot of money on bailouts after the crisis. But it bailed out workaday citizens instead of bankers, forgiving mortgage debts that exceeded 110 percent of the actual value of the home linked to the loan. The banks, which had swarmed to the north Atlantic island after aggressive deregulation of Icelandic finance law around the turn of the century, were allowed to fail and go bankrupt.
Comparing Iceland and the U.S. isn’t entirely fair, since the latter is over one thousand times larger in both population and total economic output. It’s far easier for a country of 320,000 people to nationalize its banks, devalue its currency, and bounce back rapidly after a couple years of deep economic pain.
A new paper from economists Alan Blinder and Mark Zandi illustrates that the policy course chosen by Presidents Bush and Obama in the aftermath of the crash has at least delivered dramatically better outcomes than doing nothing at all. But there are a variety of adapted versions of the core idea behind Iceland’s actions that might well have delivered a far better outcome for the average American than what bank bailouts, out-of-court settlements, and lax pursuit of criminal cases against the industry’s worst actors.
With those failures already in the rear-view, both Obama’s administration and several of those vying to replace him in the 2016 election have tried to make course corrections on white-collar crime.
Months after Attorney General Loretta Lynch came on-board, the DOJ replaced decades-old guidance on seeking corporate cooperation in investigations with a new set of policies for such cases. They set a higher standard that corporations must meet in order to qualify as cooperating with an investigation, which dramatically reduces the penalties they face for wrongdoing.
The Yates Memo, as the new rules are known, is a moderate course correction rather than a drastic reversal. At best, it could mean that more corporate crime cases go to trial because fewer companies clear the higher cooperation standard. At worst, it could mean companies just tick the check-boxes on the new rules by throwing out junior executives as scapegoats — an outcome that would not meaningfully increase accountability and deterrence.