Humans everywhere have an evolved finely-honed sense of justice. This protects the community against selfish individuals who harm others for their own benefit.

Yet, white collar criminals recently brought the world economy to its knees. and our complex criminal justice system is almost powerless to deal with them. Why? They escape justice mainly because it is so difficult to establish that a crime has taken place, or even to distinguish between criminals and victims.

Ponzi schemers such as Bernie Madoff, and Alan Stanford, who vaporize the assets of innocent people are an exception. Once unmasked, it is clear that they have committed crimes and that their numerous victims have suffered terrible harm. When prosecuted, they are relatively easy to convict and pay stiff penalties.

In the recent worldwide financial chaos, it has been difficult to separate the sheep from the wolves, however. At least two issues are salient. First, dishonesty prevailed all the way up the food chain. Second, bad actors at each level of the financial system were ignored by financial regulators.

Dishonesty all the way up the food chain
At the base of the food chain some homebuyers lied about their income and received loans that were beyond their means to repay. Loan officers required no documentation so that anyone could buy a house - hence the "liar loans."

The financial meltdown has been thoroughly described many times before and will not be rehashed here except to point out that the same sort of duplicity worked its way up the feeding chain of the financial system. Banks used fraudulent loan vehicles that were designed to make mortgage holders default, such as the infamous teaser rates. Then they bundled up the junk mortgages into "investment grade" bonds with the collusion of corrupt rating agencies. Wall Street traders used complex derivatives that levered up the already colossal sums involved in real-estate backed bonds by a factor of about thirty and gambled like drunken sailors.

The ensuing debacle, is well known, the loss of household wealth, the worldwide recession, the loss of tens of millions of jobs. Despite the worldwide chaos and pain, no successful charges have been brought against the banks or Wall Street firms who precipitated the collapse through their sharp practices and shady dealings despite some trials (e.g., Ralph Cioffi and Matthew Tannen). Why?

The real reason may be that it is so difficult to separate the sheep from the wolves. The apparent victims and the apparent confidence tricksters were in cahoots at all levels of a complex worldwide fraud. If you have lied on your loan application, it is hard to complain that the loan officer exploited you.

If the borrowers and the loan originators were co-conspirators at the base of a financial pyramid of fraud, it would make little sense to prosecute the loan officers without prosecuting the borrowers with whom they conspired. Now one is criminalizing those who have just lost their homes, nor to mention bank officers who have lost their jobs.

Were the loan officers victimizing the borrowers, or helping them to purchase their first home by sugar-coating the truth? That depended on the direction of the housing market. This is just not the extreme conflict of interest found in Ponzi schemes.

How could such a corrupt financial system operate? Clearly, there was a complete failure to implement financial regulations. Fraudulent liar loans were prevalent and common public knowledge, the subject of repeated journalistic exposes. Yet nothing was done thanks to a crippling political aversion to government regulation.

Most white collar crime goes undetected, unprosecuted, and unpunished. Last year hedge fund managers Ralph Cioffi and Matthew Tannen of Bear Sterns were acquitted of conspiracy charges because jurors could not distinguish their activities from those of honest executives caught in a tough situation. If wolves, they wore sheep's clothing.
The pain they caused is real, however.

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