Where are the perp walks?

Last summer, as a number of sinister revelations were made about the goings-on in the financial services sector, I speculated that we would definitely see the government going after individual executives for illegal activities. I saw Angelo Mozilo, the man with a tan, as the most likely scapegoat – a mortgage industry Ken Lay, if you will (see my August post “Ex-Countrywide CEO is the new Ken Lay“).  In August, it seemed perp walks were imminent. Yet, none of this came to pass.

Now, mind you, we have busted a few executives on Wall Street.  And we just got a conviction on Bernard Madoff for the world’s biggest financial fraud.  But, there have really been few convictions of the nature of Ken Lay, Jeffrey Skilling, Bernie Ebbers, Joseph Naccio or any of the others convicted after the tech bubble burst.  I have my ideas as to why.  Let me make my case here.

This past Monday, I posted an article about comments made by Kansas City Fed Chair Hoenig which have received zero press despite their significance.  Here they are (I have bolded the significant part):

“The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed to fail.”

Now, I don’t know about you, but I certainly do not remember hearing about the Bank of America transactions with Countrywide and Merrill Lynch as deals foisted upon BofA by the government.  In essence, Hoenig is suggesting that Bank of America is a US-equivalent of Lloyds Bank.

If you recall, HBOS, a very reckless lender in Britain, was on the verge of collapse after Lehman Brothers declared insolvency in September.  Gordon Brown, desperate to save his legacy as Chancellor during the asset bubble, coerced Lloyds into taking over HBOS without proper due diligence.  This deal has failed spectacularly as HBOS has many more writedowns than was anticipated and Lloyds has effectively been nationalized along with Royal Bank of Scotland (not before the executives involved came under criticism).

If one looks across the pond at Bank of America, Countrywide and Merrill Lynch, circumstances are not too dissimilar. To my mind, it makes sense that no one has gone to jail if the government basically foisted Countrywide and Merrill on to Ken Lewis and BofA in return for assurances down the line that the government would not make waves.

Nevertheless, two questions remain unanswered.  First, why has the Obama Administration not shown prosecutorial zeal with financial executives for alleged wrongdoings?  I would have anticipated that Eric Holder at the Justice Department  would have  signalling to the American public that the new administration was breaking with the old – that Barack Obama wanted to at a minimum investigate wrong-doing.

I foresaw the new Administration making a big to-do about this.  But, it has not. To my mind, this makes political sense and would certainly give Barack Obama more political capital with a rightly indignant American public.  It would certainly make bailouts at Citgroup and Bank of America more palatable.

Second, why is Hoenig coming out proclaiming that Countrywide and Merrill were government-enabled deals?  Was there a deal — and, if so, what were the terms of that deal?  I reckon the American public has a right to know, just as it should know who is getting money in deals with AIG and what kind of assets the Federal Reserve is now accepting as collateral.

My understanding is that investigations regarding criminal activity are indeed ongoing, especially at AIG.  However, I am still puzzled as to whether the Obama Administration is more interested in burnishing its populist pro-Main Street credentials or its business pro-Wall Street ones.