PERSPECTIVE ON SCANDAL : Why the S & L Gang Isn’t in Jail : Federal insurance bailed out depositors, reducing the hue and cry for criminal prosecution.

Charles Keating, convicted of criminal fraud in California and facing a 77-count federal indictment, must surely feel like the sacrificial goat in the savings and loan scandal. After all, there have been few other criminal indictments and convictions in this fiasco, and even they attracted little national attention.

For a $200-billion cash drain, the crisis has been a real non-event in American criminal justice. But the facts of the Keating case may help us understand why the role of criminal law has been so modest in this, the most expensive white-collar crime wave in history.

If it is true that Keating committed major frauds in managing Lincoln Savings & Loan, he was by no means alone in this respect. Whatever the explanation for the small criminal docket in the S&L; scandal, it can’t be a shortage of potential cases. Every lie told to regulators is a federal felony, and each untruth uttered to obtain a loan from a federally chartered financial institution qualifies its teller for the federal penitentiary.

Many of the people who offered the notorious “cash for trash” deals meet the inclusive criteria of the federal criminal code, as do many of the citizens who took the loans. Yet only a fraction of our potential S&L; felons are on their way to jail, and there is little pressure to greatly expand prosecution. The reason is hardly an unsolved mystery: It is deposit insurance.

The social pressure to imprison Keating grew out of his company’s sales of now-worthless securities to California investors. Since these were not deposits covered by federal insurance, the buyers lost their money when Lincoln collapsed. The palpable harm these people suffered and their resulting anger supplied the basic pressure that made prosecutors give priority to their claims. This group can be distinguished from the millions of S&L; depositors who received full refunds of all deposited money.

Federal insurance reduces the sense that criminal prosecution is needed. It is hard, after all, to stay angry on a full stomach. If those who who make prosecutorial decisions and the citizens they serve see no depositor suffering, they may think that our scarce prosecution resources are better spent on hate crimes, drug cases or pollution threats. Deposit insurance has in this sense turned S&L; fraud into a victimless crime, The way in which this transition influences the criminal-justice process is worth serious attention.

When insurance removes the pain from individual depositors, does the pressure for criminal prosecution sink too low? Should the government insurance fund take an independent role in pressing for criminal prosecution? Or does the fact of insurance truly make criminal proceedings unnecessary? What is the moral or utilitarian point of putting a high priority on these cases if the depositors are safe?

On the other hand, if much of the suffering that produces pressure for criminal prosecution can be avoided through insurance, why blame the thief for all the harm caused by his uninsured theft?

If the auto thief wrongly thought your car was insured, shouldn’t we go easier on him because he didn’t intend the totality of the harm he caused? Or because the lack of insurance is his victim’s fault? Is the special anger directed at Keating in some measure a result of blaming him for employing the one scam in the S&L; mess that wouldn’t result in victim compensation.

There are many programs that can influence the harms that fall on the victims of crime, including compensation schemes, health insurance, compulsory property insurance and income-security programs. When these programs reduce the suffering of victims, they also reduce any pressure for prosecution and punishment of the guilty. In this sense, many of the major beneficiaries of programs like deposit insurance are the people who have most flagrantly abused the system.