The Real Injustice

 | Jul 16, 2014 | 2:00 PM EDT
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Reality stars Teresa and Joe Giudice, of the Bravo TV series "The Real Housewives of New Jersey," are facing 35 years in prison for a $4 million Ponzi-type fraud. While I'm not condoning what they did, take a look, by comparison, to the punishment recently meted out to Citigroup (C).

Citi has been ordered to pay $7 billion ($4 billion of real money and $3 billion promised) for a fraud that Attorney General Eric Holder called "egregious," yet not a single executive who was there at the time has been sent to jail or even prosecuted.

I think this is lopsided justice, if there ever were such a thing.

The crimes committed by the Giudice's pale in comparison to what was done at Citi. We're talking billions in fraudulent securities sold, homes seized and all the while bank executives knew what was going on.

Moreover, Citi is just one example of this kind of activity. We have seen similar admissions and so-called punishment doled out to JPMorgan Chase (JPM), HSBC (HSBC), Bank of America (BAC), Goldman Sachs (GS) and others for everything ranging from securities fraud to money laundering and, again, not a single bank executive sent to jail. Yet the Feds are beside themselves at the prospect of sending a couple of clownish reality TV stars to the slammer for the better part of the rest of their lives.

All told, economists have estimated the bank fraud that caused the Great Recession to have cost the economy some $21 trillion. That is million of times bigger than the $4 million Giudice fraud, yet the total fines paid out by the banks has been something like $80 billion, or about 0.8% of the size of total bank assets in this country. It's miniscule and abhorrent, to use Holder's term. But it's abhorrent in the sense that the punishment falls way short of fitting the crime.

Lots of people want to blame the government for this, as in pointing to such things as the Community Reinvestment Act and whatnot, but those excuses have been widely and thoroughly debunked. Moreover, the banks have admitted to these crimes and whistleblowers in many cases have spoken out and shined a light on what was going on.

It should be no surprise that the public takes a dim view of Wall Street and has been largely absent from the market. Who could possibly have confidence after seeing these things occur on almost a daily basis? I admit that Wall Street's past has largely looked this way. I recently finished a book on the life of J.P. Morgan and if you blocked out the dates, there are passages in there that you would swear were clipped from current news stories: fraud, manipulation, criminality. In n time when we are having a national debate about inequality, it is disheartening to see how our government responds. It only reinforces the public's dim view.

Some might argue that the public's interest is not needed. Look at the market averages today, kiting higher into record territory even as mom and pop mostly sit out. Fine, you can make that argument. But I still believe that broad participation is much healthier. Confidence in the system and a fair playing field has at least been a goal here in the U.S. and that's been a factor in the rest of the world's desire to come here and invest. That may be a lofty goal, but I'd like to see more of that.

In the meantime, we don't need such a large financial sector and 7,000-plus banks and we certainly don't need them speculating and trading in all kinds of crazy, high-risk instruments. If it were up to me I'd limit the banking industry to a very narrow focus of plain-vanilla banking. There is no reason for them to enjoy the benefits of taxpayer-backed deposits and be allowed to trade and speculate in high-risk activities where taxpayers may be left on the hook. Investment banks and other non-bank financial entities should be free to do that, but without the benefit of taxpayer bailouts if they lose.

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