There’s been no shortage of federal prosecutions stemming from the global financial crisis, but the headlines belie a crucial distinction: The crimes tackled so far are predominantly the kind revealed by a meltdown, not the type that cause it in the first place.

Ponzi schemes, of course, are Exhibit A; they’re running all the time, but only surface when the economic tide goes out. The Department of Justice (DOJ) has taken down a number of mortgage fraudsters and corrupt borrowers, but they’re small fries in the grand scheme of the financial meltdown and comparatively low-hanging fruit for prosecutors.

Notably absent, so far, is the prosecution of individual executives for accounting control fraud.

“I don’t know whether it’s lack of political will or lack of expertise,” says Solomon Wisenberg, co-chair of the white-collar crime defense group at Barnes & Thornburg. “It seems mind-boggling to me because in the S&L crisis it was instantly understood what kind of fraud was going on. It was control fraud; it was the people who ran the places. I want to make it clear: I’m not saying lock them up and throw away the key. I’m just saying there’s a duty to seriously investigate and put the resources into it, because all the signs are there for elite accounting control fraud.”

No Referrals

Few are beating the drum on this issue as loudly as William K. Black, an associate professor of law and economics at the University of Missouri-Kansas City. Black, a high-ranking bank regulator during the S&L crisis, is an outspoken critic of weak financial sector oversight.

There’s not a single, concise reason for why the kind of control fraud prosecutions that followed the Enron era and the S&L scandal aren’t happening now. Rather, Black says, the blame is spread across the entire justice system.

“The story is one of incredible weakness in regulation, incredible weakness in prosecution,” he says. “It’s absurd.”

The first step in a criminal investigation of a bank executive is often a criminal referral from the low-level examiners who constantly oversee financial institutions. Black draws a stark comparison between the volume of those referrals at the height of the S&L era and today.

“In 1987 and ’88, I believe there were more than 11,000 criminal referrals from the agencies,” he says. “In the current crisis, we have numbers from two of the agencies, the Office of the Comptroller of the Currency [OCC] and the Office of Thrift Supervision [OTS]: The number is zero.”

The OTS and OCC, of course, are the regulators that were responsible for much of the subprime lending markets that led to the housing bubble. (The FDIC has issued a small number of related criminal referrals.)

Wisenberg, who as a federal prosecutor in the late 1980s prosecuted a number of S&L cases, says bank examiners are often in a difficult position. They are very modestly paid individuals investigating multibillion-dollar institutions and powerful executives, so intimidation can be a factor. Moreover, they are not trained to think as criminal prosecutors and may be more inclined to administer a slap on the wrist than issue a criminal referral.

Still, he says, lying to an examiner is a black-and-white issue.

“When you’re running a bank, you’re not allowed to lie in any way. It’s simple. If I’m a regulator examining any financial institution and find out that you’ve lied to me, that immediately takes it to a new level. There should be a heightened investigation. There should be a criminal referral,” Wisenberg says.

Given the massive scope and obvious corruption of the sub-prime market, it would be extraordinary if such misrepresentations had not occurred, says Black.

“It would be the only crisis in recent history where there wasn’t major fraud at the top,” he says. “There’s no reason to believe it.”

Stretched Thin

Any investigations that do get off the ground are hampered by a considerable resource crunch. The number of FBI agents currently investigating financial fraud is just a fraction of what it was a decade ago.

“In response to 9/11, a couple thousand FBI agents were transferred to Homeland Security, and about 500 of those came from white collar,” Black says. “We can’t infiltrate Al Qaeda, but we can follow the money, so it turned out the white-collar folks were some of the most effective investigators. That’s all perfectly sensible, but what wasn’t sensible was the way the [Bush] administration refused to allow the FBI to replace those white-collar folks.”

Wisenberg says there are now just 140 FBI agents working on financial institution fraud nationwide.

“During the S&L era, there were 100 in Dallas alone,” he says, “just in that one task force.”

Add to scant investigation resources the fact that complex financial cases are never a favorite of prosecutors. They are paper intensive, hard to explain to juries and can take years to bring to trial.

Because prosecutors are usually judged by the number of cases they win and the money they recover, taking on a single big financial case can represent a significant career risk.

“It’s always surprising to me how many federal prosecutors are scared of prosecuting white-collar fraud,” Wisenberg says. “They feel that they don’t understand it, and they feel that they don’t have the expertise, but that’s why you bring in experts. There’s maybe not so much fear in places like the Southern District of New York and the Central District of California where they have a history of doing white collar. But in other places, you usually only find one or two prosecutors in the office who really do that stuff.”

Not Too Late

The elephant in the room is the question of political will. Some have speculated that neither party wants to open this particular can of worms because both sides of the aisle pushed hard for easy mortgages before the bubble burst. Then again, it could just be a matter of time.

Black says the S&L investigations didn’t really take off until Doug Barnard, a Georgia congressman and former banker, held hearings in 1986 that shamed regulators, investigators and prosecutors alike for their lack of action. Criminal referrals started flowing in, and prosecutors ultimately convicted more than 1,000 executives.

“These were not the little guys. These were major case designations by the FBI,” Black says. “I’m still weirdly hopeful something similar will happen here.”

Criminal referrals can be filed up to 10 years after an infraction, so there’s still time for authorities to act. The more time that passes, however, the harder the cases become to investigate.

“It’s not too late for the government to really start looking at this stuff,” Wisenberg says, “though incredibly valuable time has been lost.”