There is a sense out there that what Wall Street did to the rest of America is downright criminal.
Financial wizards created a multitrillion dollar, unregulated market of derivatives that few Americans knew about much less understood. Wall Street raked in billions of dollars, lavishing executives and traders with unfathomable bonuses even after the mortgage market tanked while the rest of us saw net worth plunge, homes and savings lost.
Now comes news that offers some comfort, however cold. The ever-fatter cats on Wall Street are getting a serious look by prosecutors digging for possible crimes.
Good. Dig into the e-mails and the prospectuses, draft and final versions. Question anyone who can shed light. Look for evidence of traders touting mortgage-related securities they knew were overpriced, hiding crucial information that should have been disclosed to buyers.
And while the feds are doing that, New York Attorney General Andrew Cuomo's office is trying to find out whether investment banks misled rating companies into over-rating the derivatives they concocted, the New York Times reports.
But for all this investigating, don't assume that agents will be parading handcuffed financiers before cameras any time soon. It may feel like we've been robbed, but proving a crime even occurred is tough when the weapon isn't a Colt .45 but a synthetic collateralized debt obligation.
The Justice Department learned the pitfalls of prosecuting securities fraud when a New York jury found two former Bear Stearns Cos.
hedge fund managers not guilty in November. As the government's debut case against Wall Streeters on charges of misleading investors in mortgage-related securities connected to the financial crisis, it flopped.
Jurors, not angry enough at the defendants to overlook gaps in the government's evidence, reasonably doubted that Ralph Cioffi and Matthew Tannin lied. Yes, the funds they managed lost $1.6 billion, but jurors told reporters afterward that the two seemed to have been prosecuted as scapegoats for the financial crisis, not its instigators.
This zapped any zeal toward bringing similar indictments. Federal grand jurors were at that point deep into an investigation of what went wrong at Lehman Brothers Holdings Inc. No indictments have resulted.
Prosecutors will have to do more than prove that an e-mail snippet here or there contradicts a prospectus. It won't suffice to show the firm marketing a long position on a security while going short on it with its own proprietary trades.
What they have to show is an outright scam in which investors were bamboozled. It would help if the traders enriched themselves while cheating their clients. For that, you need lots of documents or insiders willing to flip.
And if they want to argue that material information was withheld, as the Securities and Exchange Commission claims in its civil fraud suit against
Goldman Sachs Group Inc., prosecutors will have to show the firm had a legal duty to disclose that information.
That is a legal question a judge would decide ahead of any trial.
Goldman Chief Executive Officer Lloyd Blankfein tried to explain to a Senate subcommittee last month that it has no obligation to reveal its own opinion of the instrument when putting together deals for clients. When it's acting as financial adviser, yes. But as a market maker? No, it isn't material.
(Other information might be material, such as whether a
hedge fund wanting to short the CDO was helping select its components. But that's a whole other can of worms.)
All the bank is doing then is acting as a facilitator between, say, one investor who wants to bet against the housing market and another investor who wants to bet it would remain strong.
As for placing its own bet against a client's bet, that looks pretty sleazy. Congress should consider outlawing proprietary bets when firms underwrite the deals.
But is it criminal now? It isn't.
If there was no duty to disclose, and if as a market maker the firm's opinion of the security was as irrelevant as Blankfein claims, where's the fraud?
That
Goldman Sachs is under the federal scope comes as little surprise, given the SEC civil fraud case filed last month.
This week the Wall Street Journal reports Morgan Stanley has got investigators peering into its conduct, citing unnamed sources. This came as a surprise to the firm's chief executive, James Gorman, which is itself surprising.
And yesterday the paper reported the SEC and federal prosecutors are joining forces in a preliminary probe that's resulted in civil subpoenas for JPMorgan Chase & Co.,
Deutsche Bank AG,
UBS AG, and
Citigroup Inc.
Fine. Check them all out.
But I would short any bet on the long-term chances of criminal charges against them.
(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)
