What is a bank robber?

Christopher L. Peterson
University of Utah, S.J. Quinney College of Law
Associate Dean for Academic Affairs, Professor of Law

In the wake of the financial crisis internet bloggers, newspaper columnists, and many middle and working class Americans have called the financiers responsible for the residential mortgage backed securities are “crooks,” “criminals,” and even “Wall Street gangsters.” While this populist rhetoric is widespread, neither the nation’s academics nor mainstream policy makers have taken this name calling particularly seriously. But perhaps there is more to these claims than initially meets the eye: there are some profound organizational similarities between organized crime and the behavior of many of the most important American bankers in the past ten years.

While there are many different forms organized crime, the prototypical gangsters in the American experience were the so called Italian-American “mafia” families in large north-Eastern U.S. cities. Although sensationalized by Hollywood, these criminal organizations exerted significant influence on the U.S. economy and even, at times, political institutions. Mafia organizational structure relied on insulating leadership positions from government prosecution through the use of expendable soldiers. Soldiers were expected to suffer through periodic arrests, incarceration, and violence associated with the illegal acts upon which these criminal enterprises depended. But because the compensation for soldiers was high relative to their other employment prospects, crime families could maintain adequate staffing in the soldier class.

In residential mortgage backed securitization deals, the management of investment banks, insulated themselves and the bonuses they received through the use less powerful, less capitalized mortgage origination and brokerage companies. Like mafia soldiers, mortgage brokers and originators were expected to commit or abet fraud, violate sound underwriting practices, and ignore or undermine consumer protection statutes. As law enforcement claims and bad debts accumulated, the collective understanding was that mortgage originators and brokers would shed their corporate identity through insolvency—doing their time so to speak—only to reappear in another business form when the opportunity presented itself. Originator and broker insolvency absorbed and deflected government sanctions, preserving the vital link to world capital markets provided by the large investment banks. Both the mafia and structured finance systems featured and relied on high, but manageable, casualty rates and instability in the soldier class.

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