Why not arrest CEOs behind the money mess?

John W. Schoen Senior producer • Profile • E-mail

The government's historic $700 billion plan to rescue the creaking financial system, signed into law by President Bush on Friday, has prompted a flood of questions. More than a few readers are wondering, why can't we just find the executives responsible for this mess, round them all up and throw them in jail?

What about consequences faced by the CEOs of these companies? This did not happen overnight and there should be criminal charges faced by these high-paid CEOs. If I had not done my job right, I would no longer have one, and if I mismanaged company funds, I would face charges.
— Rita L.,  Maryland

That chapter of the story is still being written.

As we wrote back in June, the FBI has assigned hundreds of agents around the country to look into possible lending and securities fraud. The initial round of hundreds of low-level arrests will likely help amass the evidence required to bring criminal charges against the bigger fish in these lending schemes gone bad.

The FBI has confirmed that about two dozen companies and their top executives have been targeted by the investigation. The list reportedly includes Fannie Mae, Freddie Mac, and insurer AIG and Lehman Brothers.

It may be awhile before these cases are brought to trial. For one thing, the investment schemes at the heart of the financial meltdown reached a level of complexity that is now confounding the same rocket scientists who created these pools of mortgage-backed bonds. Trillions of dollars worth of these investments were sold based on intricate computer models that turned out to be fatally flawed. Unwinding this mess will take time. So will piecing together the lengthy paper trail to show a jury just how these schemes worked.

The problem is compounded by the legal standard required to prove guilt in a financial crime. You have to show, essentially, that the people who created this mess knew at the time what they were doing was wrong, and that they knew they were taking other people’s money through deceptive means.

In some cases, the people who created these now-worthless investments sincerely believed they were smart enough to turn a risky, sub-prime mortgage into a perfectly safe investment. It was all right there in the computer.

Unfortunately, stupidity is not a crime.

What's in the bailout deal for those suffering foreclosure on their homes?
— John N., New York, N.Y.

Not much.

Many Democrats who balked at approving the plan the first time around cited this as one of their biggest concerns. Both sides have been arguing for over a year about what — if anything — the government should offer in the way of direct relief to homeowners.  So far the best they’ve come up with is a program to help homeowners get in touch with lenders in the hope that those lenders will voluntarily agree to take losses and renegotiate more affordable monthly payments.

But it hasn’t worked very well. The pace of defaults and foreclosures is still rising. Several million more homeowners will likely lose their homes. The estimates are only best guesses at this point; much depends on how much further the economy slides before it begins to recover.  

The latest data aren’t encouraging. Friday’s report on unemployment showed the pace of job losses picking up in September. Until that number peaks and begins falling, the outlook for housing will only get worse. Lost jobs mean lost paychecks — which makes it a lot harder to make a mortgage payment.