Why Isn't Wall Street in Jail?

Oh stop whining. Even the President has moved on from this shit.

Greedy stupid people who didn't read their paperwork, overspent, over leveraged and blew their credit cards to hell, and then claim zero responsibility and blame it all on Wall Street for not being willing to live within or below their means in the first place - and now they walk away from their homes and their debt, and have the nerve to preach responsibility.

"Greedy stupid people who didn't read their paperwork,"

How do you read paperwork that only a lawyer can understand?

That old saying, "if it's too good to be true, it probably is" is a standard that doesn't require legal understanding of the paperwork.

Too rich to fail.

Socialist: I'll give you lots of money for little interest and don't worry about paying us back or what the rate is or when it goes up or how much it goes up or how fast it might change - in fact, no need to even have your lawyer review anything on your behalf - oh, and have kitty pettin' flower sniffin' sunshine cotton candy unicorn glitter rainbows snowflakes on your tongue kinda day.... :-))))))))

The article is not about a failure to read paperwork. It's fraud on a massive scale and the regulator's shocking failure to do their job. I'd like to blame it on lax regulation starting with Clinton and way worse under Bush, but the Obama crowd seems just as bad. The laws are there to protect investors and those laws were clearly broken, but instead you guys blame the victims.

matsonjones, if the Helicopter Ben Bernanke were to drop bales of cash all over the country, would you blame the people for running to exchange those pieces of paper for some hard assets, thereby causing massive price appreciation bubbles in those asset classes?

Is this starting to sound familiar?

cause jail is the system that USA uses to punish those that are poor?

http://www.businessweek.com/news/2011-02-09/wall-street-justice-means-nobody-gets-pinched-jonathan-weil.html

Feb. 10 (Bloomberg) -- Here’s another discouraging lesson for anyone hoping the people who caused the financial crisis will be brought to justice someday. Just because the Securities and Exchange Commission has accused a too-big-to-fail company of committing an outrageous fraud, that doesn’t mean the agency will hold anyone accountable for it.

Imagine that: A fraud without fraudsters. To believe the SEC, this is exactly what happened at General Electric Co.

It’s been 18 months since GE paid a $50 million fine to settle the SEC’s claims that it had resorted to accounting fraud to avoid missing Wall Street analysts’ earnings predictions back in 2002 and 2003. At the time the deal was disclosed, the SEC said it had concluded its investigation with respect to GE, which neither admitted nor denied the commission’s allegations.

However, the SEC left open the possibility it would sue one or more of the individuals responsible for the alleged fraud at some later date. There’s been no word from the SEC about the case since it filed its settled complaint in August 2009.

Now we can say how the story ends. An SEC spokesman, John Nester, told me the SEC’s investigation is over, and has been since spring 2010. The SEC won’t be suing any individuals as a result of its probe. Nester declined to comment further.

For all the times the SEC has been criticized for going soft on corporate fraud, the GE settlement stands apart. To understand why, you need to dig into the details of the SEC’s allegations against the company.

Knowing It’s Wrong

The SEC accused GE of committing fraud with scienter --that is, with intent or knowledge of wrongdoing -- in violation of section 10(b) of the Securities Exchange Act of 1934. There’s no more serious claim in the SEC’s arsenal. Yet somehow the SEC couldn’t finger a single person at GE who violated any rules at all, much less anyone who committed fraud deliberately.

The case is now such a distant memory that Jeffrey Immelt, GE’s chief executive since 2001, last month was named chairman of President Barack Obama’s Council on Jobs and Competitiveness. A GE spokeswoman, Anne Eisele, declined to comment.

We can only guess why the SEC decided not to sue any actual people in this case. Maybe the evidence was weak, and GE paid the equivalent of greenmail just to make the SEC go away. Perhaps the SEC’s original targets threatened to litigate until the end of time if they were sued, draining the agency’s limited resources. Or maybe the SEC’s lawyers decided to cut them a break for some nobler reason.

We don’t know and probably never will. Too bad the U.S. district judge who approved the settlement, Robert Chatigny of Hartford, Connecticut, rubber-stamped it without asking the parties any questions.

Corporate Collectivism

Another possible explanation: Perhaps the SEC reasoned that a bunch of individuals collectively had enough information to know GE’s accounting was wrong, but no one person knew everything. In legal circles, this theory sometimes is called collective scienter. In other words, in a civil claim against a corporation, the knowledge of one or more employees is combined with the misstatement of another employee to establish scienter, even if none of them acted with scienter individually.

The problem with this theory is that most federal appeals courts have rejected it, according to a 2009 New York University law review article by Bradley Bondi that was published while he was counsel to SEC Commissioner Troy Paredes, one of the commission’s two Republicans. To be sure, all the judicial rulings in the area of collective scienter involve private securities litigation. So the question of whether the SEC can use the theory remains unanswered, Bondi wrote. Bondi, now a partner at the law firm Cadwalader Wickersham & Taft in Washington, in his article urged the SEC to avoid the approach.

Proving Liability

Here’s how the Second Circuit Court of Appeals described the traditional approach to corporate liability in a securities fraud suit: “To prove liability against a corporation,” the court wrote in a 2008 decision, “a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.”

The court where the SEC filed its GE complaint is part of the second circuit. By the logic of the appeals court’s 2008 decision, the SEC couldn’t have established that GE acted with scienter unless it proved one of its employees did, too. Now we know the SEC gave up trying to bring such a case.

Given all this, here’s why the GE case would worry me if I were the general counsel for a public company. Even if the SEC had no evidence that any of my company’s employees committed a 10(b) violation, its lawyers still could try to string together a bunch of diffuse facts to make it look like the company had deliberately committed fraud, in hopes of pressuring it into a settlement that would lead to a splashy press release.

The message for investors is equally troubling. It makes no sense that GE could have defrauded its shareholders unless some living, breathing people committed the same violations. So either the wrongdoers got off scot free, or the SEC shouldn’t have brought the case it did against the company.

This isn’t enforcement. It’s a charade.

Wasn't it Reagan who gave the reins of government to the wealthy? As long as they're fat & happy, they'll take care of the rest of us - & don't you forget it!

almost drdrd, they were given the reins and the rest of us were told to pull ourselves up by our own bootstraps.

You can blame the last congress as well. Until the SEC is allowed to self-fund, it won't have the money to go after the criminals. This is no accident. Right now the SEC is flat broke!

WASHINGTON (MarketWatch) - Senate and House lawmakers on a panel seeking to work out differences in two sweeping bank-reform bills late Thursday agreed to continue to have the Securities and Exchange Commission's budget be approved by Congress. The measure rejects previous legislation that would have allowed the SEC be self-funded through fees it charges corporations. Instead, it allows the SEC to set up an emergency reserve fund for capital-improvement projects or for times of crisis. It would also allow the SEC to submit its budget directly to Congress without needing prior approval by the White House. "This approach ensures the SEC has the funding it needs while still ensuring it be accountable to Congress," said Sen. Richard Shelby, an Alabama Republican.

Thank you MatsonJones. You hit the nail on the head.

"Yet somehow the SEC couldn%u2019t finger a single person at GE who violated any rules at all, much less anyone who committed fraud deliberately."

I'm not surprised. You ever try to find out who does what in a corporation? With all the directors, managers, administrators and so on, it's impossible to tell who's actually responsible for anything.

I got a resume the other day, from some chick, and I stared at it for 20 minutes and couldn't figure out what she did. I finally emailed her and asked her. Still couldn't figure it out, even with her explanation. I suspect her job used to be what we called a secretary but I'm not sure. Threw it out.

I see right into a guy's office from my window. He plays computer solitaire for 6 hours a day. I'll bet he's vice president of something.

No wonder the SEC couldn't finger anybody. It's the nature of corporations these days: obfuscate, obfuscate, obfuscate.

It's sad that MatsonJones & 5thGenNYer blame the victims of these financial terrorists to protect their industry.
It's like blaming the Ripped off victims of a crooked mortgage broker because they picked the wrong guy except that with Wall Street, everybody was involved into fraudulent activity!

Right sledgehammer - it's ALWAYS the OTHER guy's fault. These mental giants refuse to take any accountability for their own stupid actions, and feel free to walk away from all their responsibilities (mortgage, credit card debt, everything). And then they preach corporate fiscal accountability and responsibility. They expect the Government to simply eat their debt, and bail them out personally. And then attack corporations when they get a bailout.

Wall Street may indeed be a bunch of greedy f*cks for sure, but middle America sure is a bunch of hypocritical f*cks.

sledgehammer, while i agree with your general sentiment, i'm not sure the parties are as easily separated as financial terrorists and their hapless victims. imho, the sides are (1) the accumulated decades long massive effort of institutions and political interests vs (2) an individual and his limited capacity. but both sides are comprised of individual self serving people, who are usually more foolish than evil.

After the Madoff scandal, Obama should have fired the entire SEC team alla traffic air controllers circa Reagan era, and replaced them with a new team of Eliot Ness like untouchables.

it doesn't really work like that

>It's the nature of corporations these days: obfuscate, obfuscate, obfuscate.

Really?

>Obama should have fired the entire SEC team alla traffic air controllers circa Reagan era, and replaced them with a new team of Eliot Ness like untouchables.

From where?

Guys:

1. fraud is the mistatement or deliberate concealment of a meterial fact
2. scienter means actual knowledge of such misstatement or concealment
3. or maybe "constructive" knowledge based on improper failure to learn relevant facts
4. materiality, fact, concealment/misrepresentation and scienter are frequently if not
generally intensively itigated when there is a basis to do so, no matter how flimsy
5. sometimes one or more of those facts can be proven from documents
6. other times they must be inferred from known facts
7. inference and fact-finding are the responsibility of juries
8. juries are easily confused or overwhelmed by complex cases
9. your faith in the legal system is misplaced
10. talk to any trial lawyer and they will tell you judges in ultra-simple cases decided
after trial or on written motion papers often get basic facts wrong.
11. most large corporate cases are settled before trial partly for that reason
12. cost and exhaustion of limited resources are also legitimjare grounds for settlement
13. the SEC could achieve prophylactic results much more chealy if it filed ethics
complaints with state regulators about dishonest CPAs and attorneys because most major
frauds involve at least one dishonest accountant or lawyer.

OpinionWashington WhispersCongress TrackerWhite House TrackerSubscribe |Contact Us |Newsletters Home > Opinion > Mort Zuckerman: Congress Had a Role in the Financial Crisis

Mort Zuckerman: Congress Had a Role in the Financial Crisis
By Mortimer B. Zuckerman

Posted: April 30, 2010
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Corn and hogs in the Midwest seem a long way from condos in Florida. There is, in fact, a direct link and it's one worth contemplating in light of the pursuit of Goldman Sachs by Congress and the Securities and Exchange Commission.

Derivatives—the new bad word—used to be called "futures." They've existed since the Civil War, invented basically to protect farmers, traders, and merchandisers from ruin when they could not sell a crop to cover their costs because a bumper harvest created a glut, or, conversely, to protect buyers when a bad harvest led to price inflation. Hence the creation of contracts with third parties who agreed to buy or sell at a certain price, whatever the future might bring. This stabilized the market and freed farmers from looking around for a buyer in what might be a frantic market.

The original futures markets in commodities functioned virtually without incident throughout our recent roller-coaster financial crisis. Put simply, this was largely because the markets had evolved a guarantee system following periodic defaults on futures deals by one party or another. Middlemen stepped in to assume that risk for a price, provided the parties posted collateral. In this way, clearinghouses minimized both the risks and the interconnections brought about by derivatives transactions.

In the evolution of these necessary instruments furthering stable trade, financial traders came to bid on the value of the paper guarantees: Bid offers went up if the risks seemed high, and down if they seemed safe.

We have come a long way from the original trading in futures contracts for corn and hogs, first standardized in Chicago in 1865. A huge market also emerged in mortgage bonds. Today the new derivatives account for trillions of dollars in face amounts, and were a significant factor in the financial panic that swept the world in 2008.

These are mortgage-backed securities fundamentally transacted between "shorts" and "longs." The "shorts" judge that the price of the security will go down, so they promise to buy it at some price lower than current. If they judge wrongly—if it goes up, or goes down more than they assumed—they suffer, since they have to deliver the security at a loss. The "longs" judge that mortgage bonds will strengthen in price, so they stand to earn more for the security than they paid. A perfect illustration is the now-famous case involving Goldman Sachs and a buyer and seller. One was betting that the housing market would collapse, another that it would continue to rise.

Synthetic CDOs (collateralized debt obligations), of which we have heard a lot, are really instruments for betting on the housing market; their value is linked to a series of mortgage bonds. Again, if the price of those bonds declines, one set of investors will win, whereas if the mortgage bonds strengthen, the other side wins. This is the way in which a player bets on the success or failure of other people's investments—a financial version of high-stakes poker.

These securities also reduce the costs of the loans that lubricate our economy. They make them more affordable and available by enabling lenders to offload risks to other investors with steadier nerves—in short, to hedge their bets.

When the U.S. housing market collapsed, so too did the value of investments in residential mortgage-based securities, especially those tied to subprime mortgages of borrowers who could not meet their payments.

Not so long ago, these mortgage-based securities were viewed as among the safest investments in the market. Before the housing bubble burst, the overwhelming view of investors, rating agencies, and economists was that the housing market was strong and would continue to strengthen. Average housing prices rose by double-digit percentages in every year from 2002 to 2006. Investment-grade, mortgage-backed securities between 2005 and 2007 were considered almost as safe as U.S. Treasury securities but paid a higher interest rate. Defaults on these investment-grade securities, most of which were rated AAA, were virtually nonexistent.

There was enormous global demand for these products. Experts estimated that for every $1 invested in going "short"—anticipating a decline in the market—other investors were willing to put up $5 in anticipation of growth. Many sophisticated and educated investors were eager to bet that the value of mortgage-based securities would continue to increase. They were gambling on the solidity of the bonds that actually owned mortgages. But after the crash, virtually every mortgage investment created in 2006 and 2007 got crushed.

The markets in the fancier new derivatives didn't have the instruments that the original futures markets for corn and hogs had developed with the clearinghouses. They didn't have rules for transparency. The original clearinghouses compiled and released data on volume and prices so investors could see, with some degree of clarity, what was happening by watching trades over time, or by comparing related instruments, like oil and gas futures.

What we have learned from the financial crisis is that we not only had institutions that became too big to fail, but also some that became too interconnected to fail. Today, roughly 90 percent of over-the-counter trading in derivatives is between two financial entities, including banks, finance companies, pension plans, insurers, and hedge funds. The danger is the domino effect—that one entity's failure can mean a run on the other, which is interconnected through their derivatives. This poses difficult decisions for public officials.

What we now need is to greatly reduce the risks of a domino effect (and a government bailout) by imposing standards for over-the-counter derivatives so they can be cleared by central clearinghouses.

But we also need to understand how the housing market got as hot as it did. Why did it keep rising, generating more and more derivatives geared to a rising market? It turns out that Fannie Mae, Freddie Mac, and the Federal Housing Administration had financed a lot more subprime and Alt-A (alternative documentation) loans than anyone realized, mostly as a result of congressional mandates. Indeed, of their total outstanding mortgage portfolios of $10.6 trillion, roughly half turned out to be of low quality. Had this been known, it would have been clear that the American public's capacity to assume this amount of housing debt was at great risk.

That is at the heart of the now-famous Goldman-Paulson saga. Hedge fund manager John Paulson judged that the housing market was a bubble, so he shorted the securities through Goldman Sachs and an insurer called ACA, which sold the package to a German bank. The buyers judged that it was safe to count on housing prices continuing to rise. They chose which mortgage securities would be bundled by Goldman. And they have paid a heavy price for their judgment.

The American public has hereby had a peek into the bewildering complexities of the world of finance. The natural instinct is for the public to blame the housing decline on those who shorted. But it is the other way around. They should be blaming those who let the market get pumped up, inviting a dramatic and painful correction that took most people by surprise.

This is one thing that must be reformed. Derivatives should be on exchanges and, to a large degree, in standard contracts, so they would be more fully disclosed and transparent. Companies that rate these securities should be given stronger incentives to provide independent and accurate analyses—and remove the suspicion that high ratings can be bought. Lenders that bundle loans secured by mortgages or other financial assets for Wall Street to sell should be made to have a stake in the performance of such loans. As it is, they offload every risky penny onto other investors.

Many of the reforms touched on here are included in the financial overhaul bill moving through Congress. There could have been a sensible and constructive review, especially now that the Republicans seem to have given up their unhelpful negativism. The problem is that the Obama administration is eager to blame the economic decline on a bunch of "fat-cat," "greedy bankers" from Wall Street who were bailed out by the government. The president himself stated to the bankers, "You guys caused the problem." They did not. These particular problems were caused by the bubble in the housing market created in large part by Congress. Democrats who seek to cast Wall Street as the villain forget the congressional mandate they placed on Fannie Mae and Freddie Mac to put 55 percent of their funding into mortgages for people at or below the median income. This SEC civil fraud charge against Goldman conveniently fits into their political agenda.

As the administration tries to assess blame for the economic decline, let's not forget the role of Congress and the acceptance by members of millions of dollars a year in lobbyist contributions to support Fannie Mae and Freddie Mac. Had the housing market soared for a couple of more years, as many believed it would, Goldman and Paulson could have lost billions. But in this case, their purchase virtually coincided with the housing collapse. Within five months after the securities were sold, 83 percent of the bonds in the packaged securities were downgraded by rating agencies. The plunge in prices brought a fortune to those who sold them short and great losses to those who bought them long. The investors acted, in both cases, in what they judged would be best for their interests.

The oversimplification of these issues in hostile congressional hearings is a disservice to the public.

I agree with pretty much all your points, rb345. I'd like to add that the SEC has been much more active and responsive post-Enron, post-Spitzer and post-Madoff than in years past. For a long time, the SEC had no political will (or enough juice) to act aggressively against fraud. Between Sarbannes-Oxley (consequence of the Enron/Arthur Andersen failure) and Dodd-Frank (consequence of the Wall street bail-out), we have seen a ramping up of the willingness to shine a light on fraud. It doesn't mean everyone (or even anyone) will end up in jail, for the reasons you outlined, but it does bring a measure of new regulations. The point shouldn't to have show trials and scapegoats, but reasonable rules to prevent scam-artists from flourishing.

Anyone who wants to blame just one group is a partisan hack. Wall Street, irresponsible borrowers, Freddie and Fannie, Congress, etc., are all to blame.

LIC - precisely - EVERYONE is to blame. Consumers included. No throwing stones in glass houses, etc...

While we're on the topic of glass houses, floor to ceiling glass walls makes me nervous. Sure they look nice and are probably very strong, but I can get myself to stand too close to it. Anyone else feel the same?

cannot

Wall Street acted as a middle man in a transaction that was essentially fraudulent.

It created a product to sell to a gullible public -- a super-cheap home mortgage -- that would be bought, ultimately, by bond investors.

Wall Street made this product saleable to the bond investors by misrepresenting the product as safe and reliable. It said to the investors, "We have obtained high-level ratings from impartial rating agencies" when all along, Wall Street was gaming the rating agencies and essentially bribing them by giving them a cut of the loot.

The Street also committed fraud by creating servicing departments to support the bond pools. It said these servicing departments were reliable and up to the task of servicing those home loans under any circumstances.

But we know now that Wall Street did not create adequate servicing departments and never intended to do so -- hence we have the robo-signing dilemma.

This was without a doubt fraud, in both instances, that could be prosecuted by a justice department inclined to do so.

If you are looking for culpability you should look at what Wall Street had to do to sell this stuff to the institutional guys. It was harder to hoodwink them than to hoodwink the average consumer. But the Sreet did hoodwink many of those institutional guys -- that's why AIG went under, and had to be bailed out by the US taxpayer.

this Wall Street guy sounds terrible, he really does belong in jail.

What I think is that we in this country (as well as other places) have made the art of kicking the can down the road into an end in itself so that Can Kicking is now an acceptable occupation and a means to an end.

The last great depression was resolved by WWII and so what will save us this time? Answer %u2013 Can Kicking!

I for one see the beauty, simplicity, and truth to this approach. That%u2019s why it%u2019s OK to buy stocks and assets, in fact they represent a bargain down the road.

Sorry for the format errors.

What I think is that we in this country (as well as other places) have made the art of kicking the can down the road into an end in itself so that Can Kicking is now an acceptable occupation and a means to an end.

The last great depression was resolved by WWII and so what will save us this time? Answer - Can Kicking!

I for one see the beauty, simplicity, and truth to this approach. That's why it's OK to buy stocks and assets, in fact they represent a bargain down the road.

as politically incorrect as he sounds, "Greedy stupid people who didn't read their paperwork, overspent, over leveraged and blew their credit cards to hell, and then claim zero responsibility and blame it all on Wall Street for not being willing to live within or below their means in the first place - and now they walk away from their homes and their debt, and have the nerve to preach responsibility"
Mastonjones is right.

you can not put the blame on "Wall Street". you can blame it on Greed. It is about time people should take some personal responsibility for buying things they could not afford and stop placing the blame on someone else including their government. We put them in power, we can certainly take them out. VOTE.