By Alan Bean
According to this article in the New York Times, Kareem Serageldin, once a top executive with Credit Suisse, has been sentenced to two-and-a-half years for his role in the derivatives meltdown. Like so many others, Serageldin bundled toxic mortgages and sold them to unwitting investors.
But why did a federal judge sentence the defendant to half the term outlined in the non-binding federal sentencing guidelines? Fortunately, we don’t have to guess because Judge Alvin K. Hellerstein explained his actions. According to the Times:
“He was in a place where there was a climate for him to do what he did,” the judge said. “It was a small piece of an overall evil climate inside that bank and many other banks.”
No one who has studied the sad trajectory of the mortgage crisis and the economic collapse it spawned can quibble with the judge’s assessment–the accused was caught up in an evil corporate climate. I have no problem with a judge taking that into account. We are all accountable for our individual decisions, but we are all dancing with the culture and, most of the time, the culture leads.
But can you imagine a judge cutting a member of a drug gang some slack because he operated within an evil climate? I can’t.
In fact, we have artificially jacked up sentences for narcotics-related crimes on the theory that the tougher we get, the greater the deterrent effect. Other street punks will notice that Tony got thirty years for a second offense and mend their ways. It has never worked, but that’s the rationale.
There is no fundamental difference between a street gang involved in drug dealing and a financial firm on Wall Street peddling worthless mortgages to gullible investors. Well, there is one minor difference. People who do business with drug dealers generally get what they pay for; it’s simple supply-and-demand. The folks who bought the poison Credit Suisse was peddling thought they were getting triple-A stock because, in most cases, the worthless bundles of garbage carried that rating.
So, yes, you can’t blame one isolated guy for the sins of a corrupt corporate culture. A measure of mercy is fitting. On the other hand, if this defendant must serve 2.5 years in federal prison without the benefit of parole, why aren’t we rounding up his brothers and sisters in crime throughout the financial industry?
The answer is simple. If we did that, we would devastate hundreds of thousands of families indirectly associated with the financial sector. In other words, we would be doing to the upper-middle and upper classes what we have done to the poorest of the poor via our ill-considered war on drugs.
Friends of Justice 
In my opinion, Goldman Sachs executives and others should be prosecuted. They sold poison financial instruments to clients globally and shorted the same ones they sold. They won going and coming. It is like buying life insurance policies on persons and then mailing them time bombs.
The enablers were politicians. They caused the home loan industry, starting with Fannie and Freddie to make home loans to poor people, to abandon normal home loan qualification process, to avoid verification of income, credit history, and ability to pay.
Anyone with a pulse could get a loan. Those bad loans were sold to financial firms, who used them as collateral for bonds pedaled around the world.
It is a classic example of unintended consequences of political interference in markets, something done with good intentions, but with disastrous results for billions of people in most countries. Even poor people, who did not own assets, experienced reduced ability to earn a living when economies contracted.
Forensic accounting is the most complicated task imaginable. Our district US Attorney is about to bring criminal charges against JP Morgan people in addition to securing a major economic settlement. I think from this point forward we will see arrests – but proving who did what in corporations with both global operations AND hidden accounts is a mess beyond imagining. The other issue is that during the 90s and prior to the meltdown, too many of us slept through the lobbyists’ ability to make what they did LEGAL.
One must remember that it was NOT Freddie and Fannie that made the bad deals – it was UNREGULATED mortgage brokers. They were NOT covered by the CRA laws or any others for that matter. Countrywide and all the others large and small immorally pushed people into subprime loans that Harvard International Business Review says included upward of 55% of people who qualified for conventional mortgages. Banks did some of it and were culpable for buying and selling these illegitimate financial instruments, but the point of sale to the unwitting (largely first time buyers who did not know they had rights) was these unscrupulous and unregulated mortgage brokers.
It was not the fault of “political interference” but of absolute greed and lies perpetrated by unregulated mortgage brokers on an unwitting public, without the knowledge of the government at all, and often not even known by the purchasing banks. It was the offspring of banking and financial lobbyists hard at work to change laws that benefitted one group – themselves.