MS. SUSAN PAGEThanks for joining us. I'm Susan Page of USA Today, sitting in for Diane Rehm. Pocket change -- that's how our federal judge characterized a proposed fine for Citigroup. The company faces SEC charges of fraud in the run-up to the 2008 mortgage meltdown. But the judge has rejected a proposed settlement and admonished the SEC for its plan to allow Citigroup to pay a fine without any admission of wrongdoing.

MS. SUSAN PAGEJoining me to talk about the case and ongoing efforts to hold Wall Street accountable: Michael Greenberger of the University of Maryland, Peter Wallison of the American Enterprise Institute and, by phone from New York, Gretchen Morgenson, reporter and columnist for The New York Times. Welcome to "The Diane Rehm Show."

MR. PETER WALLISONNice to be here.

MS. GRETCHEN MORGENSONThank you.

MR. MICHAEL GREENBERGERGood to be here. Thanks.

PAGEWe invite our listeners to join our conversation later in this hour. You can call our toll-free number, 1-800-433-8850. Or send us an email at drshow@wamu.org, or find us on Facebook or Twitter. Well, Gretchen Morgenson, explain why this decision that was handed up on Monday has been seen as so significant.

MORGENSONWell, I think, Susan, what it illustrates and really brings a lot of focus to is this really kind of long-standing practice of the SEC not to require the people that it sues, or the institutions that it sues, to admit guilt or any kind of negligence associated with the cases that it brings. And it's been immensely frustrating for people who follow this because what it does is it seems to be -- I think, maybe even the judge talked about this, a wink, wink, nod, nod approach. You know, the SEC gets off easily because it does not have to bring the case to court. It doesn't have to prove the case in court.

MORGENSONAnd the institution, on the other side, gets off relatively easily because the fines typically are relatively small, a rounding error in this institution's financial position. So -- but it really -- this case by -- this opinion by Judge Rakoff really brings this into focus. And I think that it is playing on the frustration that many have felt that this is a dysfunctional system that really does not punish the actual perpetrators of these particular, you know, bad practices.

MORGENSONYou know, they should -- instead of making the shareholders of the company pay these fines, they should, for instance, go after individuals who actually did the deeds the shareholders did not. So I think it focuses a lot on the problems associated with this long-standing practice of these settlements that the SEC strikes.

PAGESo, Michael Greenberger, you yourself a former senior regulator at the Commodities Futures Trading Commission, why has this become such a common practice for decades?

GREENBERGERWell, actually, SEC started this practice in 1972. But throughout the government, there were -- for many years, up through the '80s and various kinds of lawsuits, there would be -- to get the government to agree to settle a case and to take it to a court, to have the court enforce the injunction within the settlement, people did have to admit some kind of wrongdoing. But it's been classic in these cases for people to say, I neither admit -- or the defendant neither admit or deny the wrongdoing, but I will do the following.

GREENBERGERI will pay a fine. You can enter an injunction against me. I think that this case is a little bit of a one-off in this sense. Most times, when settlements are presented to judges, they are on factual situations that are noble to the judges. They don't really know what the facts are, so they're more comfortable saying, well, the defendant says I will neither admit or deny. This activity, which is the allegation, and I emphasize allegation, was that Citigroup had some very toxic investments, mortgage securities on its hand.

GREENBERGERThe allegation is that they passed them off to their customers, saying an independent adviser had selected them. And then they shorted what they sold to their customers. Citigroup profited a $160 million. The customers lost $700 million. Because of people like Gretchen Morgenson, Josh Rosner and their bestselling book, "Reckless Endangerment," and a lot of other books, this kind of activity has been a classic malpractice, alleged, in this meltdown.

GREENBERGERThat is bank selling off their toxic loans to their customers, and then betting against the loans. Customers lose money. Banks make money. And Rakoff, as the judge, had seen a lot of this, not only directly but in other cases in his court. And the Financial Crisis Inquiry Commission, the majority members of that, many Senate studies have talked about this. Sen. Levin brought Goldman to task for this practice. So this is something where you really have to wink, wink, nod, nod for such a well-known -- but as alleged -- a pernicious practice.

PAGEWell, does Citigroup dispute the idea that they misrepresented to their customers how this package had been put together?

GREENBERGERThey do dispute it -- there was an admission of negligence here. That is to say, they didn't know they were doing this, sort of like they made a mistake. They didn't follow the standard of care. The other thing that got the judge aggravated in this case is this was a second case brought against an individual in Citigroup for the same practice. And in that complaint, Citigroup said -- SEC said Citigroup knew that these were toxic assets and knew that they had to misrepresent the sell.

GREENBERGERAnd that angered the judge. You have one case where the SEC says knowledge, which is a much higher standard exposing you to greater penalties, and then in this case, they just used the word negligence.

PAGEWell, Peter Wallison, you have some experience with this, too, former general counsel for the treasury department in the Reagan administration. Do you think that the judge in this case made the right decision?

WALLISONYou know, it's very hard to say that a judge should not get all the facts before he approves a regulatory settlement of this kind. But I think we have to keep in mind that there are reasons why this was done and why it has been a practice for a long time. First of all, I want to say about the case that these are all -- as Michael just said, these are all allegations, yet they are presented as though they are actually facts that Citigroup actually did something wrong.

WALLISONAll we know are the allegations, and, in fact, in the case of the SEC here, they only charged Citigroup with negligence. They didn't even charge them with fraud originally. The agreement was on negligence, also. That's why the penalty was somewhat lower than was invoked in the case of Goldman Sachs.

WALLISONBut the general reason why SEC does this is that any company, if they are going to be charged with these things, are going to -- is going to want to go to trial because if they simply admit that they did something wrong, the private lawsuit bar will take them to task, free riding on that agreement with the SEC or with any other regulatory agency. And then they will have to pay enormous sums in these private settlements or in private litigation.

WALLISONSo the SEC is concerned that if they are going to have to try each of these cases in order to prove the allegations that they are going to have to use a lot of their resources to do this. And in the end, they might not even succeed in many of the cases because, actually, on trials, you -- it's the preponderance of the evidence that you can bring in these civil trials to prove your case, and they might not be able to do it.

WALLISONSo it's a real test for the SEC and for regulatory agencies in general whether they should go to trial on these cases or whether they are not better off just settling them, imposing some substantial fines, and showing the regulated community that they are willing to do this.

PAGEWell, Gretchen, these fines, they're imposed in this case and some others. Do, in fact, the companies think of them as substantial fines, a real sting that would make them not want to misbehave in the future? Or is this pocket change as the judge suggested in his decision?

MORGENSONWell, I think in this case, it's absolutely pocket change, particularly when you look at the alleged losses that the SEC contends the customers endured in this particular matter. So, you know, I think that, typically, yes, these are rounding errors -- these are amounts that are very, very large in the SEC's eyes, but in these companies' eyes are very small and a cost of doing business, ultimately.

MORGENSONAnd, you now, again, to the point of making the wrong people pay, they are paid by the shareholders of the companies, not by the particular individuals who are alleged to have, you know, conducted, you know, and made the bad conduct or done the wrongdoing. So, I think, you know, you have to bring that into the discussion. These are fines that are paid by shareholders, not by the individuals in the preponderance of cases.

PAGEPeter.

WALLISONYeah, I'd just like to mention one thing, and that is that these are negotiated settlements. And so the SEC has to waive -- has to weigh the strength of its own case as these -- the defendant has to weigh the strength of its own case. So if you have a fine that is a what one would call pocket change or something like that, that comes from the fact that the SEC really did not believe that they had a particularly strong case here.

WALLISONSo I'm a little bit concerned about the judge's remarks in this respect. It would be interesting to see what happens after the judge does see the evidence that is available and decide and -- what he finally decides to do.

PAGEAlthough the frustration in that came through in this decision is one that Occupy Wall Street protestors are talking about. A lot of Americans, just regular folks who kind of feel like they -- you know, they helped to bail out Wall Street after we got to the edge of a financial cliff, and then who's being held responsible?

GREENBERGERWell, you know, that's true. And Peter said these are allegations, and they are allegations. But Citigroup has elevated this to beyond allegations. They've said, hey, we don't want to go to trial in this. We want to enter into a settlement agreement with you. So the sort of wink, wink, nod, nod is they are entering into a consent judgment where they -- there are clearly, to the common sense, few of this, as Judge Rakoff said, saying, yeah, we did some wrong things here, and they end up -- they profited $160 million. They have to pay that back in $95 million for penalty on what was $1 billion loss, close to $1 billion loss, to investors.

PAGEWe're going to take a short break. And when we come back, we'll go to the phones, 1-800-433-8850. We're also going to talk on the phone with Harvey Pitt, a former chairman of the SEC. Stay with us.

PAGEWelcome back. I'm Susan Page of USA Today, sitting in for Diane Rehm. We're talking about the Citigroup case, the decision by a judge throwing out a proposed settlement because he thought it wasn't tough enough. We're joined now on the phone by Harvey Pitt, former chairman of the SEC. Mr. Pitt, thank you for joining us. Harvey Pitt, are you there?

MR. HARVEY PITTYes, I'm here. And, you know, listening to this discussion causes me a little bit of concern because I think people are reading a lot into the judge's opinion. There's no question -- as Peter said earlier, it's very hard to argue with a bright and thoughtful federal judge who says, I need to understand why this is in the public interest. But I don't think the judge has held that the SEC has to get admissions and certainly not admissions in every case. I think he said there were enough factors here that raised questions.

MR. HARVEY PITTAnd in the absence of getting answers, the lack of admissions means all he's got to work with are the allegations of the complaint, and that's not sufficient. You have a pleading inconsistency which was mentioned earlier. In the Citigroup complaint, the SEC says Citigroup acted negligently. But in the complaint against the individual from Citigroup, the SEC says Citigroup acted willfully and deliberately, and the judge is sort of saying, which is it? How do I know?

MR. HARVEY PITTBecause if it's a question of deliberate misconduct, then I don't think this is all that great a deal, and I don't understand why there are two different standards that are being plugged for the same party's conduct. So all of that meant that the judge wanted to get some answers, and the SEC's position, which is understandable, is we're entitled to a lot of deference. The judge said, deference won't answer my concerns or problems. I need hard facts.

MR. HARVEY PITTI think there was a way -- and there still is -- that the SEC can provide the judge with the answers he wants and still have its settlement without having to go to trial.

PAGEMr. Pitt, do you think that the SEC is able and is doing a good job in holding to account firms and individuals who made decisions that have proved to be so catastrophic for many Americans and for our economy?

PITTI'm sorry? I missed that.

PAGEDo you think the SEC is equipped to do a good job and is, in fact, doing a good job with what it's charged with doing? In these kind of cases -- holding to account individuals and firms that made decisions acted wrongly and led us to this financial cliff? Do you think that's working the way it's supposed to work?

PITTIn this particular case, the judge said it's not transparent. I don't understand it, and telling me that you have a lot of deference, which I agree you have, doesn't help over my problems. What the SEC needs to do is make a presentation to the court of the evidence it has marshaled. When it files a complaint, its lawyers have to satisfy a standard that they have a reasonable basis to believe the allegations. So they gather their evidence, and each allegation in the complaint is supported in their view by evidence.

PITTAll they have to do is show the judge some of that evidence to give him a sense of what the facts are. Citigroup, as part of its settlement can voluntarily stand silent, and the judge can then find that the settlement is reasonable or in the public interest. But it can't work if the judge is simply told, we're entitled to discretion, which they are, because the judge is simply saying, I don't have to sign every piece of paper that's put under my nose.

PAGEAll right. Harvey Pitt, we want to thank you so much for taking the time to join us today on "The Diane Rehm Show." Thank you for being with us. We were joined there by Harvey Pitt, former chairman of the SEC. Well, Gretchen, Mr. Pitt seems to think this is a case that may have more limited repercussions than others have thought. What do you think about that point?

MORGENSONWell, I think that what he is -- you know, he is obviously sticking to the facts of this particular case to describe what he thinks, you know, the merits of the opinion are and what the SEC has to do about it.

MORGENSONI, you know, am sort of in the business of trying to look broader at, you know, events like this and try to understand what it is -- the meaning, that it has a greater meaning for people and also what it might be tapping into in the way of -- as I think I said at the outset -- a frustration about this perception that there has been a lack of accountability, that the cases that have been brought has been pretty much limited to civil cases, that there hasn't been the kind of prosecutions and a real concerted effort by the government to investigate whether or not there was criminal behavior.

MORGENSONYou know, of course, it's hard to say this is a case where the dog didn't bark. They didn't bring the cases, but when you look back at the S&L crisis of the late 1980s, early '90s, you had 839 individuals convicted and went to jail. So it's a vast contrast to the situation today, and I think people wonder why that is.

PAGEPeter?

WALLISONWell, I think, legitimately, people can wonder, but there is no reason to believe that the government would want to leave anyone out of prosecution if they were -- certainly, if there were some sort of criminal activity here. And so it's really possible that, despite the fact that this was a serious violation, say, of the securities laws, that there were -- these were not criminal acts. And so we ought to give the government at least that, and that is that they have plenty of incentive to bring criminal cases -- Justice Department does -- and they haven't done it probably because the evidence is just not there.

WALLISONI'd like to take one more of a point here, and that is to say that this case has to be looked at in the context of this terrible thing that happened is very unfair. This case is a case having to do with the set of facts involving some investors, involving Citigroup, involving the SEC. It is not a case that you should look at as an example of what happened in the financial crisis. In my view, the financial crisis was caused by huge policy errors by the government in our housing policies, had absolutely very little to do with what occurred in the private sector. And that's very important to understand.

WALLISONThe people who have not been held accountable were the people in the government who made these decisions during the Clinton and the Bush administrations in prosecuting a housing policy that caused this financial crisis. It is not as though Citi and others, like Goldman, for example, are responsible for the housing crisis, or for the financial crisis. I think it's the government.

WALLISONAnd if we wanted to look at people who are actually responsible, those are the people who we should be putting, not on trial -- but they should be brought up as malefactors here and questioned about why they made the decisions that they did.

PAGEWell, Michael, what do you think about that? Is it actually the government agencies -- the responsible for this financial crisis?

GREENBERGERWell, to some extent. There was a lack of regulation here. But, you know, Peter has famously issued a separate descent from the other nine commissioners on the Financial Crisis Inquiry Commission adopting this view that, Wall Street was not to blame. The government was to blame.

GREENBERGERAnd I think, frankly, that's my point about this. The conventional wisdom here, it is in the air, is that these kinds of this transaction that was alleged here, was one of probably hundreds of transactions conducted by people, trying to dump what they knew were weak investments, leading the people they were selling them to to believe they were good investments, and then the seller, shorting those transactions. So you have a situation here where the bank makes $160 million, and its customers lose $700 million.

GREENBERGERAnd to say that's not a problem or these people shouldn't be blamed is absurd. And I think Gretchen is right. There is a sense in the country that the banks who have been rescued by the American taxpayer, to the tune of trillions, are getting away with murder here. When you look at Judge Rakoff's decision from a commonsense perspective, what he's essentially saying is, you guys made $160 million. You're going to give that back. Now, for the $700 million you cost, in a single transaction, you can pay 10 cents on the dollar.

GREENBERGERAnd he's -- essentially, you can read this very technically, but that's what's got his -- got him angry. That's what's got the American people angry. This is commonly viewed as a slap on the wrist and the cost of doing business. Now, the final thing I would say is this is being viewed as a big loss for the SEC, and they should go back and feel embarrassed about this. I think this is a big victory for the SEC. I was involved for 25 years negotiating settlements and litigation. The SEC is going to go back in this case and all other cases and say, hey, you can't just get away with saying negligence.

GREENBERGERThe judge won't approve it. You've got to admit more if you don't want to go to trial in this case and blacken your name. So we want you to say more. And, in fact, the judge pointed out, in a similar case, the Goldman Sachs case where Goldman made $15 million, not $160 million, Goldman paid $535 million in damages, and it admitted a lot more wrongdoing. So I think -- I don't -- I agree with Harvey Pitt. You can't read this too broadly.

GREENBERGERBut this is very broad given the problems we went through and is going to enable all government regulators to say when they're bargaining for a settlement, your willingness to settle this is not enough. We're going to be laughed out of court. And I think Harvey Pitt was also quoted as saying, is, one of the things that's being said here is, well, people will never want to settle if they have to. The option here is to go to trial.

GREENBERGERAnd whether you win or lose the trial, there will be days of documents with low-level employees of Citigroup, as is true of Goldman, calling their investments by disparaging names, that they were trying to sell to its customers. It's bad for business. My view is this case will settle. It will settle for a lot more money than was agreed to initially here, and it will set a template for healthy settlements by the SEC.

PAGEI'm Susan Page, and you're listening to "The Diane Rehm Show." We're going to go to the phones in just a moment, 1-800-433-8850. So, Peter, do you think there will be a settlement and harsher terms for Citigroup than this first proposed settlement was?

WALLISONWell, frankly, I doubt it. I think that when the judge sees the evidence that the SEC has and understands the weaknesses of the case and understands why the SEC did not want to litigate it, that they'll probably settle for roughly the same amount. They might be somewhat more, but I don't think there's going to be much of a difference. There's no way to know, of course, because we don't know what the facts are.

WALLISONAnd that's one of the problems. That's one of the reasons why the judge raised all these questions. But it is still a sensible way for the SEC to proceed, to try to get as many of these cases on the record as possible. Michael just said that there were hundreds of these cases. We have no idea that there were hundreds of these cases. And this is the kind of talk that goes around and makes the American people think that more happened here than might actually have happened. We don't know.

WALLISONThere have been a few cases brought by the SEC. There's no reason to assume they wouldn't bring more. But if you want hundreds of cases to be shown, then you have to have settlements in hundreds of cases 'cause you can't litigate hundreds of cases.

PAGEGretchen, in this particular case, the judge set a trial date. Do you think we'll have a trial in this case? What do you think will happen next?

MORGENSONI doubt it. As Michael said, I think that the optics on this look -- would look pretty bad, probably, for Citi. I think that nobody at Goldman Sachs enjoyed the spotlight that they were under during Carl Levin's hearings in the Senate. So I think that this will settle. I just don't know for what amount.

PAGEAll right. Let's go to the phones and let some of our listeners join our conversation. We'll talk to Michael first. He's calling us from Chicago. Michael, thank you for holding on.

MICHAELYeah. Thank you. Yeah. I have some experience in these kind of cases also. And I think you alluded to it already, but you have to point out that if the SEC is forced to go to trial on these big cases, all of these big cases, you're going to shut down that organization. I mean, you need -- they need to have the flexibility to settle these things. And I think Mr. Wallison is right that, you know, this is a very fact-specific case here.

MICHAELAnd the other thing you should point out is this judge also has somewhat of a history of -- more so than most judges -- of rejecting -- initially rejecting these kinds of settlements. So to over-blow it -- you know, look at district attorney's offices, for instance, in criminal cases. The vast, vast, vast majority of criminal cases don't go to trial. They plead out or whatnot. And it's a resources issue.

MICHAELAnd there's enough private law firms out there to shut down the SEC if everything is going to get pushed to trial. I know that's not what's been happening, but you have to look at that. And then the final thing is also to claim that this is caused -- this was the main reason for the economic downturn in 2008 is really a sideshow and a distraction. I mean, this type of thing may -- fraud may have happened or may not have happened, but that's investor fraud. That's not -- that has nothing to do with collapsing of the housing bubble. This is a result of that, but it's not the cause of it.

PAGEAll right. Michael, thanks so much for calling and giving us your views. You know, Michael Greenberger, we saw the current head of the SEC, Mary Schapiro, send a letter to the Hill late Monday asking for new powers for the SEC to be able to demand much larger penalties in cases like this. Would that -- do you -- what do you think the political prospects are for that change, and would it make a big difference?

GREENBERGERWell, with the inability to get legislation passed because of the inability to override filibusters in the Senate, which have led to a well-known blockage all across the board, I don't think this legislation will pass. But I think it's a very important, symbolic step she took. With respect to the caller's last view, is I go back to my point: This is going to make it easier for the SEC to get better settlements.

GREENBERGERAnd when you say the SEC cannot do all these things, why can't they do all these things? It is well-known that the Republicans have bled the SEC and CFTC from the amounts of money they need to bring these cases. If they brought these cases and we're overwhelmed, it would make it clear to the public that these regulatory agencies have been underfunded, and they need more funding. And there can be things like financial transaction taxes where the banks, rather than the taxpayer, is staffing these agencies to the point that they can enforce the law.

GREENBERGERIf you have crime, you want a strong police department. Here we have a serious wrongdoing -- which I don't want to go into -- that I do believe -- many people agree -- was the cause of the meltdown, not a symptom of the meltdown.

PAGEMichael Greenberger. He is a professor at the University of Maryland Carey School of Law. And we're also joined this hour by Peter Wallison, the Arthur F. Burns fellow in financial policy studies at the American Enterprise Institute, and, by phone from New York, Gretchen Morgenson. She's the Pulitzer Prize-winning business reporter and columnist for The New York Times. She's the co-author of the book "Reckless Endangerment." We're going to take a very short break. When we come back, we'll go back to the phones and get some of your calls and comments. Stay with us.

PAGEWe have an email from Brenda. She's writing us from Springfield, Va. And she writes, "When these criminals are made personally responsible and serve serious hard time and lose their ill-gotten gains, we will see justice and a better future. The fact that corporations can make the public pay for the crimes of individuals is at the heart of many things that are rotting this country away. Let's stop blaming policies over the decisions of individuals to gain the system."

PAGEAnd, you know, her comments reminds me of comments that were made yesterday, I believe, by Sen. Chuck Grassley of Iowa, who's been a real critic of the SEC, saying that perhaps the SEC should go after individuals at these companies rather than the firm so that they kind of feel the financial pinch themselves for these fines rather than having a big company pay for them. What do you think about that, Michael? Could that -- is that an approach that might work?

GREENBERGEROh, it definite -- I think, to the extent individuals who are found to be liable whether civilly or convicted of crimes have to pay individually, it will have much more of a deterrent effect. And, in fact, that was part of the SEC's proposal to Congress. They're limited in the amount of money they can get from individuals, and they ask that that amount of money be expanded so that these people would have to pay out of their pocket. The SEC cannot bring criminal actions. They can only bring civil actions.

GREENBERGERAnd the most serious thing they can charge is fraud, which is a very serious civil crime for purposes that they're prosecutorial authority. But that's one of the problems here. By limiting this to a negligence framework in a kind of transaction that has -- people may argue about this, but, I think, conventionally, wisdom belief may amount in certain circumstances to criminal fraud, veers the whole government in the opposite direction of bringing accountability here, not only through heavy fines on individuals but by putting people in jail.

GREENBERGERNow, you have to prove beyond the reasonable doubt in a criminal trial that somebody has committed felonious fraud here. But when you're letting these banks get off for 10 cents on the dollar and only claiming negligence, you're heading the entire prosecutorial function of the government in the wrong direction. And I might also add -- Gretchen Morgenson has written about this -- the Justice Department has been very, very lax and has not made it a priority to prosecute people who have been involved in serious criminal conduct.

GREENBERGERIn all of our prior banking scandals, there have been criminal indictments that have been much less serious than this one, and I think the American taxpayer, American investor, in their gut, knows that there was criminal wrongdoing here. And rather people in sitting in jail, they're sitting in houses in the Hamptons and not suffering the way the American taxpayer has suffered through this recession.

PAGEPeter Wallison, what do you think about the idea of doing more to hold individuals accountable?

WALLISONWell, let me just say at the outset that there are a lot of allegations being thrown out here. And the American people are justifiably concerned because they've been told this again and again since the financial crisis, that it's the fault of big financial institutions on Wall Street and so forth. So every time people say it's someone else's fault, someone did something wrong, there should be criminal prosecutions, you have to think that the government has plenty of incentive to do this. And the government has not been bringing these cases for probably pretty good reasons.

WALLISONThey are very hard to prosecute because the evidence isn't there of criminal activity. There's no -- you cannot cite to me a reason -- or no one can cite to me a reason why the government would not bring criminal penalties against people when the American people are as upset as they are about what happened in the financial crisis, except for the fact that there may not actually have been any significant crimes. There were errors made, certainly, and there were things done on Wall Street that should not have been done.

WALLISONBut, again, saying, well it was a $700 billion loss for some investors, and Citi made $100 million or whatever the number -- it doesn't even matter what the numbers are. Those are irrelevant because this is a single case in which we are talking about one area where Citi has been charged. There may have been many cases in which the investors made a lot of money. We don't know. There may have been cases where Citibank lost money. In the case of -- in some of Goldman's cases, they actually lost money in some of the bets that they made on similar kinds of transactions.

WALLISONThe point here is that we should be looking at what caused the financial crisis, and what caused the financial crisis is not wrongdoing on Wall Street. What caused the financial crisis is housing policies in the United States that caused a very large number, half of all mortgages in the United States to be subprime or otherwise weak and risky loans. That was government policy. That's how we got to that point. And as a result of that, we should be looking at the government instead of trying to find people to criminally charge for these activities.

PAGEWell, Gretchen, do you agree with Peter Wallison's first point that if there were real instance of wrongdoing, we would be seeing more regulatory and law enforcement efforts against those who did wrong things?

MORGENSONWell, of course, as you know, in a criminal case, you have to prove intent, which is very difficult to do. You know, these are difficult cases. The prosecutors that I have spoken to about this problem or this perceived problem on the lack of prosecutions tell me that, you know, these cases are more -- far more complex than they were in the S&L crisis when it was sort of plain vanilla embezzlement or self dealing.

MORGENSONBut, you know, that is not a very happy outcome either for the American people to feel that, okay, if you just make it complex enough, then you can get away with these kinds of questionable practices. I think that what has happened here is, I think, that there is a real sense, and there was a real sense at the highest levels of the government, that anything that was going to be done that could, you know, really, you know, prosecute these cases aggressively, could be perceived as creating instability.

MORGENSONIt's all been about maintaining financial stability around this terrible crisis. And I think, to some degree, there may have been a view that being super aggressive on cases against these institutions might have contributed to instability. And I think that's unfortunate.

PAGEYou know, we -- it's hard to overstate the anger that we're seeing in the emails we're getting, the tweets. Here's a tweet from Sandelbar, (sp?) who says, "These cases are responsible for the thrashing of the world's financial system. The American people deserve trials." Here's an email we got from Arlee, (sp?) who says, "There's no way to adequately express the anger that hardworking, honest Americans feel toward the Wall Street bankers, hedge fund bosses and Fannie Mae-Freddie Mac executives who have ruined the lives of millions of our families."

PAGEMichael Greenberger, for regulators, as you were yourself for many years, and for judges in these cases, does the context of that kind of public dismay affect what happens? Or is -- are these regulatory actions and enforcement actions kind of divorce from what so many Americans are feeling?

GREENBERGERWell, I think the problem we have is that the regulators, first of all, they are overworked and completely underfunded. The taxpayer has to pay for these in many systems by the tax that's imposed, small taxes imposed on financial transactions. You could have the regulators who are capable with personnel and technology to bring these cases. But I think Gretchen makes a very important point here.

GREENBERGERPeter has said, oh, if there was criminal wrongdoing, they would have brought cases. Well, first of all, Sen. Levin handed the Justice Department 700 pages of documentation about Goldman Sachs and these kinds of transactions, not only alleging criminal fraud but alleging perjury in front of his own committee. And the Justice Department hasn't said one word about it. They haven't said, oh, he's wrong. Or they haven't said, we're going to do something about this.

PAGEAnd why not?

GREENBERGERWell, I think that -- Gretchen, this is my point, instability. The Obama administration has followed a practice in both trying to save banks by throwing trillions of dollars at them and not imposing sanctions on them of saying these banks are important to the financial well-being of the American people. As we sit here today, the S&P is explaining the downgrade of our banks who are in terrible, terrible trouble financially.

GREENBERGERMany of the banks were downgraded yesterday. What the predominant philosophy within the Obama administration has been we've got to save these banks to save the economy. The contrary view within the progressive community -- and I think a lot of taxpayers -- is these banks. They haven't had a darn thing to do with the success of our economy. If anything, they destroyed it.

GREENBERGERThey don't use their financial capability to finance manufacturing, scientific inventions, everything else. They're betting for their own book. And when they win those bets, they pocket it. And when they lose those bets -- and Peter is right, they lost bets to trillions of dollars -- they don't suffer from this. The American taxpayer is told, make these banks whole because they are important to you. And the American taxpayer, to be gentle, does not believe that and is angry that the banks have gotten trillions while the rest of the economy is flat on its back.

PAGEPeter.

WALLISONThis is a fiction. It's a fiction. The U.S. government doesn't work that way. If there were criminal cases to be brought, it would be to the credit of the U.S. government if they brought those cases. If they brought them against individuals, it would not make the banks unstable. The SEC is not part of the U.S. government in the same way that you might say they're part of the Obama administration. They are an independent agency.

WALLISONThey bring these cases -- or don't bring these cases because of the facts that they have uncovered. It is a fantasy to believe that there is some kind of big government conspiracy to protect the banks. It just doesn't exist. And my experience in the government would tell me exactly the same thing. The government doesn't act that way. Each individual agency has its own responsibilities, which it follows its own standards.

WALLISONThe Justice Department is filled with civilian and permanent civil service prosecutors. If they had any idea that the Justice Department was not taking strong action where it could, in criminal cases, there would plenty of leaks to the press about this and plenty of resignations. The idea that the government is conspiring to protect the banks is absurd.

PAGEGretchen, what's your perspective on this?

MORGENSONWell, I wish I could believe what Peter is saying. And, unfortunately, I think that I have a pretty good sense of what many people feel on this because my email box is filled with it, with messages from people that are very similar to the ones you're getting in your email box today. You know, there has just been a tremendous lack of trust. There is a tremendous loss of trust that has resulted because of this crisis, because, of course, we were told that Fannie Mae and Freddie Mac would never cost the taxpayer a nickel.

MORGENSONAnd because we were told that, you know, regulators were alert to these problems and on the case when they weren't, because we were told that these financial institutions were good for America -- and in some cases we find that they were really betting against America -- I think that this has all resulted in a tremendous loss of trust in the very largest institutions including our government. And that is something that is very real and that really has to be addressed.

PAGEI'm Susan Page. And you're listening to "The Diane Rehm Show." Let's go back to the phones. We go to Sarasota, Fla. and talk to Bill. Bill, hi. You're on the air.

BILLHi. Oh, yeah. First of all, it was Bush and the GOP that passed the first stimulus, the $700 million stimulus, and before the mess was even handed to Obama. It seems to me, regulations should be the big topic right here. The Republicans want less and less and less government regulation. And it seems like we learned throughout history, from the Great Depression to the S&L scandal, that we need more and more and more regulation that -- could you address this problem?

PAGEAll right. Bill, thanks very much of your call. Of course, we've had the Dodd-Frank legislation passed. Do you think that it has addressed some of the regulatory shortcomings, Michael, that contributed to the meltdown?

GREENBERGERThe answer is yes, from the purpose of substance. But from the purpose of funding, its Dodd-Frank has essentially been, de facto, repealed by underfunding of the agencies who need to enforce it. We talked about the SEC. They should settle these cases because they don't have enough personnel. They don't have enough staff. Just go in, settle the case as best as you can. Don't require anything. The Justice Department should not bring prosecutions, and basically that's happening from massive underfunding of these agencies.

PAGEPeter, do you think that the Dodd-Frank legislation is a step in the right direction the terms of increasing enforcement or step in the wrong direction?

WALLISONI think it's -- I have -- and thought from the beginning, that is was a step in the wrong direction, a very dangerous piece of legislation that can actually change our financial system in very harmful ways. But let me just go back to the regulation that we had before, because after the S&L crisis, we had very strong legislation adapted, the so called FDIC Improvement Act in 1991. And at that time, people said, well, this is it.

WALLISONI mean, we now have very, very strong regulation. We don't have to worry anymore about banking crisis. It applied to both S&Ls and banks and, of course, less than 20 years later we had another banking crisis, which is what we just went through in 2008. So regulation is really not a solution to things. And we ought to be very careful about trying to put in more and more regulations, as the caller suggested, because things have gone wrong.

WALLISONWhat we ought to look at is the cause that things got went wrong. And we haven't actually looked at the cause of why things went wrong. We are, again, trying to find -- place blame on individuals or place blame on firms when we should have been looking at what the government did. And, in fact, Gretchen Morgenson's book points out that it was Fannie Mae and Freddie Mac, two government-supported agencies, that were responsible for the financial crisis. That's what they say in the book, and I happen to agree with that.

PAGEGretchen, what do you think?

MORGENSONWell, I think, Peter, what we say in the book is that it was a concerted effort, joint effort by Fannie Mae, who led the way with Freddie Mac, and then Wall Street took it up with a vengeance. So it wasn't that they, alone, caused the crisis. By any means, Wall Street took notice of what they were doing and went to town with it in --, as you know, in the early 2000s. So, you know, my feeling is that we're in a dangerous position because of this lack of trust that I mentioned earlier, and the government really has to earn that back.

MORGENSONAnd I'm not quite sure how we're going to do that, but I'd love to hear from the other guests, Michael and Peter, how can we do that because I think that is the problem that is central to all of these discussions.

PAGEWe are almost out of time. Michael, I'll give you the last word if you want to briefly address that issue.

GREENBERGERWell, I would just say, there's $700 trillion dollars notional transactions of this kind extant in the world that are to-date completely unregulated. Dodd-Frank is trying to regulate them. To say that, 20 years ago, we had regulation that would deal with this problem, I think, is just completely wrong and off the track. Dodd-Frank tries to do it. It will not do it because the Republicans are repealing it, de facto, by underfunding the agencies.

PAGEI know there's more we could say with this debate. We'll have to continue it another time. I want to thank Michael Greenberger, Peter Wallison and Gretchen Morgenson, for joining us this hour on "The Diane Rehm Show."

GREENBERGERThank you.

WALLISONThank you.

PAGEI'm Susan Page of USA Today, sitting in for Diane Rehm. Thanks for listening.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Monique Nazareth, Nikki Jecks, Susan Nabors, and Lisa Dunn, and the engineer is Tobey Schreiner. A. C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts, and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.