How Eric Holder Failed the Economy

His successor will have some work to do.

Attorney General Eric Holder, who plans to step down after more than five years in office, has efforts and achievements to be proud of, no doubt, but will probably be remembered above all for something he didn't do: prosecute top executives for their role in the 2008 financial crisis.

He declined to hold senior executives accountable not because he wished to be soft on financial crime but because of a strategic error. In a 1999 memorandum, written when he was deputy attorney general under President Bill Clinton, he'd explained how prosecutors could charge corporations as criminal enterprises. In 2002, the testing of that doctrine on Enron Corp. auditor Arthur Andersen LLP caused the company to fold, and thousands of innocent people lost their jobs.

During and after the financial crisis, Holder kept the focus on corporations, but moved more cautiously. Fearing a repeat of the Arthur Andersen debacle, prosecutors were careful to leave companies standing, even as they extracted tens of billions of dollars from banks for transgressions ranging from mortgage-related fraud to laundering money for drug cartels. "Some of these institutions have become too large,” Holder famously said in 2013 Senate testimony. "It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate."

The inhibition was understandable. Yet it arose because, under Holder's leadership, prosecutors lost sight of what mattered most: holding individuals, not companies, accountable for crimes. Of 21 separate actions against major financial companies from 2009 through May 2014, only eight were accompanied by charges against individuals, and none of them were high-level executives. The authors of any offenses related to the 2008 financial crisis can relax: In most of the cases, the statute of limitations now applies.

Could it be that nobody went to prison because no crimes were committed? This seems unlikely, at the very least. As we've noted before, more than 1,000 people were charged after the savings-and-loan bust of the 1980s, and more than 100 company officers and directors served prison terms. The accounting and other corporate scandals of the early 2000s led to criminal charges against at least 30 top-level executives, most of whom were convicted or pleaded guilty.

Failing to pursue individuals has sent executives the message that if they commit crimes, the worst that can happen is they'll lose their jobs and shareholders will have to pay up. This undermines the finance industry, and capitalism more broadly, by supporting the perception that Wall Street is a den of iniquity whose leaders operate with impunity. It fuels contempt for the country's politicians and the rule of law as well -- suggesting that the former are for hire and that the latter is a sham.

Holder's successor should strive to put this right. First, insist that prosecutors taking action against companies charge individuals, too. Second, eliminate non-prosecution agreements, in which prosecutors settle without pressing charges. These make it too easy to hide bad behavior or subject companies to shakedowns. Third, ask Congress -- or the Judicial Conference, which drafts changes to the rules of criminal procedure -- to give judges power to review deferred prosecution agreements, in which prosecutors file and settle charges, to make sure these serve the public interest.

It's too late for prosecutors to change their approach to what happened in 2008. But that won't be the last financial crisis. Holder's successors need to do better.

--Editors: Mark Whitehouse, Clive Crook

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net