The Financial Crisis in the Courts

UPenn’s David Zaring comments in Dealbook:

Courts are supposed to put the policies of presidents and Congress to the test of judicial review, to evaluate decisions by the executive to sanction someone for wrongdoing and to resolve disputes between private parties. But the really sweeping programs that Congress and the president put in place during the financial crisis will not receive much courtroom attention at all, even as the executive’s individual enforcement decisions receive scrutiny. It is only in private disputes that the facts of the financial crisis will get a judicial airing – and even then, all signs point to the airing being a modest one.

The courts have played such a low-key role for three reasons: the government has rarely been challenged for its own crisis-related conduct; at the same time, the Justice Department and other federal agencies have hesitated to prosecute the financial executives in place during the crisis; finally, private litigation over losses sustained during the crisis has been slow to develop, and quick to settle. In all, it is likely to be a disappointment to those who believe that the blame for the financial crisis can only really be apportioned through verdicts and judgments. . . .

In many ways, this modest turn to the courts is underwhelming. Practicing finance during a recession should not necessarily be a criminal offense, but holding no executives responsible for the actions that led to the housing market collapse, after hundreds were imprisoned during earlier downturns, suggests arbitrariness. Even worse, it sets a different standard for Wall Street financiers of today and the bankers who went to jail in the wake of the 1980s bailout of the thrifts.

And while the government has been criticized for not holding individuals accountable for the crisis, the really huge decisions it made – on whom to bail out, and how to stimulate the economy – will be subject to little judicial oversight. Even though those are precisely the kinds of decisions for which a second look might be helpful.