Who's to blame for credit crisis?

By Christian Science Monitor

The credit crisis is far from over, but Congress already is pressing federal law enforcement to search for and prosecute financial executives who, by breaking the law, may have helped cause the global money meltdown.

During recent congressional hearings, lawmakers have peppered officials with requests to hold the guilty accountable.

And the feds are responding: The Securities and Exchange Commission already has under way more than 50 investigations into the subprime-mortgage market. The FBI has 42 ongoing mortgage-fraud task forces.

But actually locking up former Wall Street Masters of the Universe may be difficult. It's not illegal to bankrupt your company by making bad business bets.

• Tell us: Who's to blame? And how should guilty parties be punished?

And the legitimate search for fraud shouldn't distract from the larger causes of today's problems, which include many Americans living beyond their means, according to one financial expert.

"It is tempting in midcatastrophe to point fingers at a few malefactors. . . . But the breakdown of financial markets had many causes, of which malfeasance and even regulatory failure played a relatively small role," said Alice Rivlin, the founding director of the Congressional Budget Office, at an Oct. 21 hearing of the House Committee on Financial Services.

At the present, it appears the Department of Justice does not have a central effort to coordinate investigations related to problems caused by toxic mortgage-backed loans.

But individual U.S. attorneys are proceeding on their own. Jeffrey Sullivan, the U.S. attorney for the Western District of Washington state, recently launched a probe into the September collapse of Washington Mutual (WAMUQ, news, msgs). U.S. attorneys in two New York boroughs and in New Jersey are all looking at possible criminal executive actions at Lehman Bros. (LEHMQ, news, msgs) before its bankruptcy.

Credit default swaps, a previously obscure and unregulated corner of the financial futures market, have also drawn federal interest. And House Republicans on Oct. 20 sent Attorney General Michael Mukasey a letter asking him to review the actions of government-sponsored entities Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) as part of any investigation of fraud in mortgage markets.

The FBI is looking at about two dozen large financial firms, including Fannie, Freddie, Lehman and troubled insurer American International Group (AIG, news, msgs), on a range of charges. About 175 agents are assigned to the effort, according to officials.

Financial companies and their products may have become more complex, but at issue are the classic actions of executive lying and cheating that follow every market collapse, according to U.S. Attorney Benton Campbell of the Eastern District of New York.

"The more things change, the more they stay the same," Campbell told The Associated Press this month.

In Congress, Rep. Henry Waxman, D-Calif., the chairman of the House Committee on Oversight and Government Reform, has held a series of hearings on the causes of the credit crisis. Among the subjects have been Lehman's collapse, the problems at AIG and problems with credit rating agencies.

'Is somebody going to go to jail?'

Sessions on hedge funds and Fannie Mae and Freddie Mac will follow the elections.

"In this political season, the search for villains is understandable, and in some respects healthy ... but retribution needs to be tempered by wisdom," said Rep. Thomas Davis, R-Va., the ranking minority member of the House Oversight panel, at an Oct. 23 hearing on the role of federal regulators in the crisis.

At issue in many of the hearings have been questions of financial disclosure and valuation of assets. Lehman officials, for instance, kept insisting their company was solid until just before its collapse. Yet an internal Lehman memo from June produced at a House Oversight hearing Oct. 6 included warnings about Lehman's overleveraged position and asked, "Why did we allow ourselves to be so exposed?"

Richard Fuld, Lehman Bros.' chairman, said the memo did not look familiar to him, and he was adamant that he and other company executives were not to blame.

"We did not mislead our investors," Fuld said.

Will anyone actually be convicted of a white-collar crime in conjunction with the current meltdown -– as Enron Chairman Kenneth Lay and Chief Executive Jeffrey Skilling were in May 2006, after their energy trading company's collapse?

"It's possible that could happen. But it depends on facts that we don't yet know -- many of which will be contested in court," says Carl Tobias, a law professor at the University of Richmond in Virginia.

The very severity of the current crisis could help defendants, for instance. How could anyone have foreseen the scope of the current slowdown in lending and plunges in stock market value?

Proving intent to defraud in financial crimes can be very hard, as jurors must digest much complicated material about internal company actions.

But the push to find anyone guilty is real. If anything, it may become more concerted after the election, as a new administration, Republican or Democrat, may feel less responsible for any regulatory breakdowns that came before.

"Is somebody going to go to jail?" Rep. Bill Sali, R-Idaho, asked SEC Chairman Christopher Cox at a hearing last week.

"There's no question that somewhere in this terrible mess, many laws were broken," Cox replied.

This article was reported and written by Peter Grier for The Christian Science Monitor.