Little penalty for those who caused Great Recession

Arrow falling down on chart.

So far, lots of companies have reached settlements or paid penalties, but very few individuals have been found liable for their part in the wishful thinking and outright lies that crashed the markets in 2008.

Yes, plenty of people got caught in the housing bubble.

But you can't convince me that every banker who wrote a $1 million balloon mortgage for a modestly employed person believed nothing could go wrong.

Bank managers told employees to falsify incomes on loan applications.

Investment banks bet against the securities they sold or misrepresented the quality of those investments.

Yes, giant corporations helped cause the Great Recession, but the individuals who worked at those corporations drove the bus. Those people deserve to pay for the lies they knowingly told.

Yet the government repeatedly has failed to charge the guilty parties — or has lost when charges have been brought.

Recession By the Numbers

Number Explanation
150 Number of people and institutions charged by the SEC
$2.68 billion Penalties won by government
0 Number of Wall Street execs prosecuted for fraud
8.8 million Number of Americans left jobless after crash
$700 billion Cost of government bailout of Wall Street
Source: PBS' "Frontline"

Here's just one recent example.

Late last year, a jury acquitted a father-and-son team of fraud in the 2008 collapse of the pair's money market fund.

The Securities and Exchange Commission had charged that Bruce Bent and Bruce Bent II had falsely assured investors they would support the fund they started, the Reserve Primary Fund, when it was drowning under the weight of millions of dollars in worthless bonds.

Rather than support the fund, the Bents closed it down two days after making those soothing noises toward their investors.

Look, I don't know whether or not the Bents gave their investors an adequate picture of their fund's situation. It's also possible that prosecutors simply didn't prove their case.

Reading about it later, however, suggests that no reasonable investor would have left money in that fund if they had heard a truthful accounting of what was happening to it.

The senior Bent helped invent the concept of a money market fund, which is a mutual fund that invests in short-term debt, including commercial bonds and U.S. Treasury bills. Money market funds strive to maintain a stable share value of $1 and are widely considered safe, conservative investment vehicles.

In September 2008, the Reserve Primary Fund was invested in $785 million of Lehman Brothers' debt. When Lehman Brothers filed for bankruptcy, the Reserve Primary Fund fell to 97 cents, a rare phenomenon known as "breaking the buck."

Two days later, the fund closed altogether.

Its management company, the Reserve Management Co., froze shareholder withdrawals from virtually all its money funds. Twenty-nine investors filed lawsuits seeking the return of their money.

The resulting anxiety caused a run on other money market funds; funds had to impose withdrawal limits or liquidate assets to meet withdrawal demands.

All those redemptions caused a huge drop in demand for commercial bonds, because money market funds can't buy bonds when their investors are withdrawing so much money.

If companies can't issue new debt, they'll default on their existing loans, potentially pushing the companies into bankruptcy and causing big damage to the overall economy.

In May 2009, the SEC charged that the Bents had falsely assured investors, the fund's board and debt rating agencies that their fund was safe and liquid when it clearly wasn't.

In November 2012, after a monthlong trial, a jury acquitted the senior Bent of all charges. It agreed that the younger Bent had made negligent statements and the parent company had made fraudulent statements. The Bents will appeal.

The funds are gone, but the court could still use some company assets to pay damages. Those damages are likely to be a small fraction of the money investors lost.

In the meantime, regulators are working on new rules to protect the money market fund industry against a future collapse. A few new rules appeared right after the crisis, but the funds are still vulnerable.

That's chilly comfort for the people who lost so much money.

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