Criminalizing Failure

The Obama administration on Tuesday created a new interagency Financial Fraud Enforcement Task Force to strengthen the government’s efforts to fight financial crimes.

Attorney General Eric Holder said the task force will “strengthen our collective efforts—in conjunction with our federal, state and local partners—to investigate and prosecute financial crimes related to the current financial crisis, to recover ill-gotten gains, and to ensure just and effective punishment for those who perpetrate financial crimes.”

Worthy goals, indeed. The problem is that Holder seems to think that criminal activity, not just excessive risk-taking, is largely responsible for last year’s financial meltdown.

“Mortgage, securities and corporate fraud schemes have eroded the public’s confidence in the nation’s financial markets and have led to a growing sentiment that Wall Street does not play by the same rules as Main Street,” Holder said. “Unscrupulous executives, Ponzi scheme operators and common criminals alike have targeted the pocketbooks and retirement accounts of middle-class Americans, and in many cases, devastated entire families’ futures.”

That characterization certainly applies to Bernie Madoff, and the Justice Department deserves credit for finally catching up to his Ponzi scheme and locking him up for the rest of this life.

But most of us didn’t lose money in our 401(k)s because of fraud; we lost it because of our own greed—chasing high returns on stocks instead of putting more money in safer investments—and because of bad decisions made by our money managers.

Failure should not be criminalized. That at least is what a jury in Brooklyn seemed to conclude last week in the trial of two former hedge fund managers at Bear Stearns. The Justice Department charged the two with securities fraud, alleging they lied to investors about the health of two funds that later collapsed. The jury, however, wasn’t convinced the two hedge fund managers deliberately misled investors. It concluded the two may have just been holding onto hope that the funds would recover.

That acquittal should make Holder and his prosecutors a little more careful about pursuing criminal charges in cases where people lost their shirts in the financial meltdown.

But that’s not the message Holder is sending, at least in his rhetoric.

“The task force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening,” Holder said. “By punishing criminals for their actions, we will send a strong message to anyone looking to profit from the misfortune of others. We will investigate you, we will prosecute you, and we will incarcerate you. We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.”

Those are strong words, and let’s hope it does deter any future Bernie Madoffs out there. But we shouldn’t let ourselves off the hook by blaming the financial meltdown on fraud. It was a factor in the collapse, but not the primary cause.

Good old-fashioned greed was the main culprit, whether it was on Wall Street or on Main Street. The party got too wild, and now we’ve got a hangover. Don’t put the guys who threw the party in jail just because we drank too much.