Why the enforcers didn't enforce

December 16, 2009: 10:39 AM ET

USA Today reports this morning that "Federal prosecution of serious financial crime plummeted as the nation headed toward one of the worst economic meltdowns in U.S. history."  The story then goes on to note that, according to government records, between 2003 and 2009 "the number of federal corporate fraud cases plunged 55%; securities fraud charges dropped 17%; and bankruptcy fraud cases fell by 44%."

This, of course, on the heels of prior reports that the SEC had investigated Bernie Madoff and instead of prosecuting him ended up inviting him in for tea and crumpets and a little consultation when he was in town.

The mind boggles. What could be the possible reasons why the government, charged with prosecuting white collar criminals who exploit our sacred financial institutions and the people they serve, would fail so egregiously to pursue their brief with aggression and verve? I'm considering several possible reasons:

  • They were very busy making sure that the corporate annual reports of legitimate enterprises were properly formatted and all footnotes in order;
  • The Administration during the period in question made sure to staff all Federal regulatory agencies with senior officers who were hostile to their core functions;
  • Nobody in Washington at that time considered making a lot of money by any means possible to be a crime;
  • The cat ate their homework.
  • People at the agencies correctly saw that if they started prosecuting anybody for a variety of crimes, they'd have to go after most of the people then doing business in certain portions of the market;
  • There was no perceived institutional upside in going after certain types of criminals;
  • Everybody forgot what a crime was.

These are just a few possibilities. Students of the situation will note that the number of new cases prosecuted for corporate fraud took an immediate hockey stick upward in 2009. Studies are now underway to ascertain the cause of this increase.

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