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In The Big Short, Michael Lewis describes how the rating agencies and banks effectively committed mass fraud (by declaring a package of loans which were all BBB level AAA). Eventually, the mortgage bubble burst, and millions of jobs were lost. The banks effectively caused all this by creating loans worth less than dirt, and quickly selling them off. However, not a single banker was prosecuted. Why?

  • One obvious consideration: to convict, you have to convince a jury. Michael Lewis is an excellent writer who's very good at explaining difficult technical ideas. Yet he simplified many things quite dramatically, and even so his book is a fairly challenging read, even for a well educated reader. Now suppose you're a prosecutor. You're no Michael Lewis as an expositor, and you'll face opposing counsel who are much better paid and will call you on any oversimplifications. You have to convince 12 Americans of average education, beyond a reasonable doubt. How do your chances look? – Nate Eldredge Jan 22 '16 at 1:57
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    @NateEldredge - The bigger challenge would be proving fraud (which has a narrow legal definition far in divergence with what a politically posturing person might use). If you eff up and use the bad model it's not "fraud". It's only a fraud if you do it knowingly. Having said that.... why was a "prosecuted" question migrated from Law to Politics? None of us here is a prosecutor, most likely, and while everyone knows prosecutors choose cases with an eye towards political career, they aren't supposed to and would never honestly admit that. – user4012 Jan 22 '16 at 2:48
  • I guess because since the question was migrated here the answer is "because politics"? – user1530 Jan 22 '16 at 8:23
  • Probably nobody ever said "let's inflate the market and get short term profit before it collapses". Most likely, upper echelons just said "sell more mortgages", middle management punished whoever refused to sell subprime mortgages because they had to met "objectives", employees did as they were told and calification agencies told their customer what they wanted to hear for fear of being replaced by others. Who of those are you to blame? – SJuan76 Jan 22 '16 at 8:34
  • Are you saying a bank is better off making one huge AAA loan than 100 BBB that total in a similar value? You can argue the 100 BBBs are better. – JeffO Feb 9 '16 at 20:10
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Banks weren't prosecuted for the financial crisis because there wasn't much they could be prosecuted for that wouldn't result in bigger blow back against the government. The banks were giving mortgages to all sort of people that weren't actually qualified, but the government was pressuring them to issue more mortgages because increased home ownership looks good for politicians.

The problem really was the rating agencies who certified packages of mortgages as AAA without really doing any good investigation. At the time though there wasn't much regulation on the debt trading market, and everyone was caught up in making so much money that investors, rating agencies and the government were all happy to essentially look the other way.

When the bubble popped and everything was beginning to come crashing down the primary focus was on preventing the entire market from crashing along with the mortgage debt market. Any prosecution would be at the corporate level resulting in fines of millions to companies that were losing billions, and wold likely exacerbate the crash rather than mitigate it. Now that time as passed and everything has pretty much settled it could be possible to prosecute come companies, but this would be an extremely high profile case and far from a slam dunk for the prosecution. Therefore, its unlikely and DA would risk their career pursuing this.

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    I'm not entirely sure that your first paragraph stands without an example (i.e. how did the government pressure the banks), but the rest of the answer seems quite reasonable. – Bobson Jan 22 '16 at 17:46
  • @Bobson pressuring may be a bit strong, but the lending policy set by the government at the time encouraged a lot of risk see here – Ryathal Jan 25 '16 at 13:27

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