The founding myth of progressive economics

Did Obama really let banks off the hook for crimes?

Nidhi Hegde, executive director of the American Economic Liberties Project, has a piece out titled “Anti-Monopoly Is the Path Forward,” part of a package in Democracy making the case that Democrats should continue the failed anti-neoliberalism crusade of the Biden years.

The most provocative thing that Hegde says in the article isn’t about antitrust policy or the Biden Administration, though — it’s about financial regulation under the Obama Administration. She argues that these topics are linked because (emphasis added):

The anti-monopoly movement came together as a response to the 2007-08 financial crisis and the mistakes the Obama Administration made in handling it. Opting for short-term stability over systemic change, Obama-era regulators let major banks off the hook for their criminal behavior despite widespread outrage from across the political spectrum.

This notion has become surprisingly mainstream over the past five years.

AELP was an influential player on Biden-era antitrust policy. Democracy itself hosted its second annual conference last week featuring lots of Biden economic policy appointees. David Dayen has acceded to the editorship of The American Prospect since pioneering this thesis. And I’ve often thought that what Hegde writes here on the record is, in a sense, correct, that lurking beneath the surface of some technical-sounding arguments about antitrust is this conviction that Obama failed to prosecute bankers for crimes that led to the financial crisis.

And that is really quite a remarkable thing to say.

As proponents of this anti-Obama conspiracy theory have moved closer to the mainstream of Democratic Party politics, Obama himself continues to be the most popular Democrat in the country, an in-demand speaker and surrogate every election cycle and the most accomplished progressive politician of recent generations. I know that a lot of people who are not particularly in the weeds on policy think I sound crazy when I talk about the extent to which diehard Obama-haters were steering the ship of state during the Biden Administration. But every once in a while, this kind of thing slips out.

So it’s worth actually asking: Is it factually true that the Obama administration deliberately tanked winnable criminal cases against major American banks?

The answer, of course, is no. But it’s hard to prove this kind of negative. And the accusation has been repeated enough that a writer can now casually drop it into a magazine article without being asked to provide any evidence for this nuclear-strength assertion.

Dodd-Frank was a big deal

I don’t want to spend too long rehashing ancient history, but one of the reasons that the Obama Administration was so consequential is that not only did they pass significant economic rescue measures and a major permanent expansion of the social safety net, they also enacted a major overhaul of America’s financial regulatory system.

This law, Dodd-Frank, was a huge political battle at the time, fought tooth and nail by America’s financial services industry. It was eventually enacted on a basically party line vote in the House with the backing of three moderate Republican senators to get it over the filibuster hurdle. The need to obtain 60 votes ended up limiting the bill in some respects relative to what I (or the then-president) would ideally have done. On the other hand, the filibuster-proof majority that enacted Dodd-Frank has also given it a fairly robust and enduring legacy. Various implementing regulations have been written and enforced differently across administrations, and in Trump’s first term, Congress (unwisely, in my opinion) raised the threshold for how large a bank needs to be before it is subjected to the highest level of regulatory scrutiny.

Still, whatever its shortcomings, Dodd-Frank was (and is) a very big deal.

It provides regulators with additional surveillance tools to understand what’s going on in the banking system, and it also requires banks to conduct themselves with more restraint and less risk. This last part is key. If a restaurant business manages its finances recklessly and goes bankrupt, that’s unfortunate but life moves on. But banks pose stability risks to the entire economy when they go bust. This is really important to understanding the whole debate about Obama-era policy, because the thing that got everyone so mad is that the whole economy was in the toilet. But it was definitely not against the law for banks to engage in riskier behavior pre-Dodd-Frank — that’s why there was a whole political debate about changing the law.

I bring Dodd-Frank up just to underscore how wild the theory that Obama was deliberately tanking criminal cases is.

All administrations make mistakes. I thought at the time that Obama-era Democrats were much too inflation-averse in their approach to fiscal policy and negotiations with congressional Republicans.¹ But reasonable people can disagree about this kind of thing — Biden-era policymakers decided to err in the other direction and that turns out to have some downsides as well. The accusation that Hegde and others are making is essentially that Obama decided to engage in a huge, high-stakes legislative showdown with the banking industry over new post-crisis legislation that wasn’t actually needed because he could have just prosecuted banks under existing statutes. On some level, I think incredulity is the right response to this theory.

The laws have changed

What’s true is that the Savings & Loan bank failures of the 1980s resulted in a lot of criminal prosecutions, which reasonably raised the prospect that we’d see a lot of criminal prosecutions in the wake of an even larger set of bank failures.

But rather than positing an Obama-led conspiracy, consider that after Bear Stearns collapsed (and before Obama was inaugurated), two traders at the firm were arrested and prosecuted, only to be acquitted in the fall of 2009. The ruling was that despite various incriminating emails and Blackberry messages indicating that the traders’ private views of the situation were at odds with their external-facing communication, the government had not proved beyond a reasonable doubt that they were willfully lying about the securities at hand. To quote from the New York Times coverage, the evidentiary bar for winning a white collar criminal case was just very high:

“These acquittals provide a cautionary tale for white-collar investigations premised on facially ‘smoking gun’ e-mails,” said John Hueston, who prosecuted Enron’s former top executives, Jeffrey K. Skilling and Kenneth L. Lay. “The texting, twittering, BlackBerry-toting jurors of today understand that an e-mail capturing a concern, doubt or momentary distress does not reflect thought over time, much less a vetted public statement.”

Speaking of Skilling and Lay, despite Hueston’s efforts, the Supreme Court eventually overturned Skilling’s conviction on honest services fraud (Lay was already dead) in an opinion written by Ruth Bader Ginsburg. In a related move, the Supreme Court unanimously overturned a criminal conviction of the accounting firm Arthur Andersen in 2005.

Despite the failure of the Bear Stearns cases, the DOJ did eventually bring a case against a bond trader named Jesse Litvak that they felt they had even stronger evidence on. They won, had the conviction overturned, then won again, then had it overturned a second time. You don’t need to like the shifting judicial standards with regard to white collar crime, but you do need to acknowledge that there has been a real change since the 1980s. This is particularly notable in the political space, where former Virginia Governor Bob McDonnell got a conviction overturned. So did a New Jersey mayor. What’s striking about former Senator Bob Menendez’s corruption is that it was blatant enough for him to actually get convicted after having gotten off once.

One point that I would make about all these cases is that in our increasingly polarized climate, these were generally not divisive Supreme Court rulings. Republicans love white collar criminals, but progressive justices also voted for these rulings and the decisions were hailed by the ACLU, which has a pretty consistent soft on crime ethic.

It is, of course, true that the Obama administration had choices. They chose to follow the guidance of the courts in terms of greatly narrowing the scope of broadly worded fraud statutes. They could have tried their hand at prosecutions that were objectively unlikely to succeed. They could have tried to pick a huge political fight with the court system and criminal justice reform groups. I don’t think that either of those things would have been a good idea, but if someone wants to write an article taking the other side of the argument, it would be a reasonable thing to suggest. But this is a far cry from the charge that, “Obama-era regulators let major banks off the hook for their criminal behavior despite widespread outrage from across the political spectrum.” What happened is the courts became much more hostile to the practice of turning widespread outrage into criminal fraud prosecutions via the use of broadly worded statutes. That change in judicial doctrine is a much more parsimonious explanation of why things played out so differently from how they did in the wake of the S&L collapse.

Instead, a lot of political effort went into writing new laws and then writing new implementing rules that were narrowly tailored to addressing behavior that regulators saw as problematic.

It’s good to proceed from true, rather than false, premises

What does any of this have to do with “anti-monopoly” policy? I’m not entirely sure, because Hegde doesn’t fully spell out the relationship.

But one common thread between these two policy areas is the search for ways to be dramatic and left-wing that don’t involve the tedious work of assembling legislative coalitions.

I know that a lot of people got sick and tired during the Obama years of hearing about the need to strike bargains with the Blanche Lincolns and Kent Conrads of the world. And now that those types of senators are gone, they’re sick and tired of hearing from people like me that the real question facing Democrats is how to put Iowa and Alaska and Ohio and Texas and Florida and North Carolina in play. The idea that passing laws about taxes and the welfare state is relatively unimportant compared to wielding executive authority under existing legislation is tempting.

But it seems to me that to get there, you end up needing to say things that aren’t true.

The Obama administration didn’t give the banks legal impunity. They brought civil cases on a variety of grounds and reached settlements that secured various amounts of money for various things. But the upshot of all of that was less than earth-shattering. What really mattered was passing the Affordable Care Act and passing Dodd-Frank.

What didn’t quite work as well as it should have was a legislative agenda for rapidly restoring full employment. The gambit to secure comprehensive immigration reform came really close to working, but ultimately fell apart and left us empty handed. The idea that there was some route to progressive paradise that could be achieved purely through bold executive actions is, I think, just wrong. Most big concerns about the influence of tech companies on society are about the content — is ubiquitous streaming video making us lonely and wrecking our attention spans? — not about the size of the companies or the level of competition.

Of course, you see something very similar in DOGE. Why bother with the hard work of passing laws when you can just install Elon Musk and try to rule by fiat?

But what I think we are seeing with DOGE is that this works if, and only if, you are able to subvert the rule of law and ultimately set up some kind of extra-constitutional government. And maybe Trump can! Certainly, it seems easier to do that as a right-wing party that can count on some degree of sympathy from the business community than to do it from a left-wing perspective. But even for Trump, I am pretty skeptical. The bond market, certainly, does not appear to believe that whatever Trump is doing is actually going to generate the trillions in spending cuts that are needed to make the math work on Republican fiscal policy. Dealing with Congress and public opinion and normal politics is annoying and frustrating. But within the bounds of the law, at least, that’s what you have to do to govern.

1. Watching the political reaction to inflation in 2022-2023 has somewhat tempered my convictions about this, but it hasn’t totally changed my mind.