The Year in Wall Street Investigations

The year has been marked by a few blockbuster settlements and more revealing investigations – as well as by some noticeable inaction in the reckoning.

Palm Coast, FL – December 28, 2010 – It’s been over three years since credit markets started shaking with the early tremors of the subprime crisis, and two years since that spread into a marketwide collapse. Prosecutors, regulators, Congress and journalists have spent the year uncovering the financial shenanigans that brought the market to its knees. It’s been marked by a few blockbuster settlements and more revealing investigations – as well as by some noticeable inaction in the reckoning.

Let’s start at the ground level, with selling risky mortgages to homeowners. Nobody symbolized the subprime market — from its growth to its downfall — better than former Countrywide CEO Angelo Mozilo. This fall, the Securities and Exchange Commission reached a $67.5 million settlement with Mozilo in its only major case against a financial executive. The SEC charged Mozilo with praising Countrywide to investors while internally doubting its lending standards. As part of the settlement, Mozilo admitted no wrongdoing.
Moving up the finance chain, we come to the banks that sold mortgage deals to investors. Much of the scrutiny focuses on a type of mortgage deal called collateralized debt obligations, or CDOs, which are essentially bundles of other mortgage bonds that were sold off to investors.
Though nearly every bank is rumored to be under investigation, the year was marked by one major case looking at the CDO business. In April, the SEC accused Goldman Sachs of creating a mortgage deal that was designed to fail. The SEC’s argument was that Goldman’s hedge-fund client helped design the deal specifically to bet against it — without Goldman explaining the relationship to investors. In July, Goldman settled for $550 million (or about two weeks’ worth of profit), admitting a "mistake" but no wrongdoing.
The idea of betting against deals lies at the center of a number of other investigations as well. The SEC is looking into whether JPMorgan Chase allowed a hedge fund named Magnetar to choose assets for a mortgage deal without disclosing Magnetar’s role in selecting what went into the deal. As ProPublica reported in April with the radio programs This American Life and NPR’s Planet Money, Magnetar encouraged banks to put together riskier deals and bought the riskiest bond slices that otherwise may have been unsold. Magnetar then bet against some of those deals, standing to make far more by shorting its losses on those risky slices if the housing market went south.
U.S. prosecutors are also looking into whether Morgan Stanley created a series of CDOs that its own trading desks bet against, the Wall Street Journal reported in May. A few months later it reported on how Deutsche Bank also bet against the souring housing market at the same time it was marketing new mortgage deals.
The SEC is also looking into whether Citigroup improperly encouraged an independent manager to stuff a deal with leftover pieces of other deals that it couldn’t sell in the market. In September, ProPublica and NPR’s Planet Money reported on self-dealing among CDOs, showing how banks structured deals to buy portions of each others’ often leftover inventory of hard-to-sell pieces. This created a daisy-chain of investments that manufactured demand, thereby prolonging the housing bubble. The SEC has said it is investigating one independent management firm and looking into about 50 others.
The year ended with rumors of mass settlements, where banks and the SEC settle broadly over their CDO practices rather than battling over individual deals, according to the Wall Street Journal.
Deal-by-deal fights may flame up in courts, however, with investors pushing banks to buy back sour deals, egged on by new evidence that banks may have known the mortgages underlying the deals were flawed. With such complicated shenanigans going on behind the scenes, investigators also want to know how banks hid their exposure to these risky securities from investors. The investigations are looking into various tactics, from general misstatements, like the Citigroup’s $75 million settlement with the SEC for not disclosing $40 billion in subprime risk, to accounting maneuvers that moved certain deals off bank balance sheets.
In the spring, a court-appointed examiner in the bankruptcy of failed investment bank Lehman Brothers shined a light on a practice known as "Repo 105," where Lehman moved $50 billion in assets off its books right before it had to submit investor reports. Last week, the New York attorney general filed civil charges against the accounting firm Ernst & Young, saying it had "substantially assisted" Lehman’s "house-of-cards business model" that misled investors. Executives from the now-bankrupt Lehman have not been charged.
Despite revelations coming up and down the financial spectrum, there have been no major criminal charges and almost no civil charges against executives. And while the SEC and some government prosecutors have been active, federal bank regulators have so far been quiet.
This all comes as Congress passed the Dodd-Frank financial reform bill this summer, seeking to overhaul the oversight of everything from mortgage securities to how banks make bets with their own money. As regulators hammer out the rules of the reforms, the devil may lie in the hotly contested details.
Source: Propublica 

1 reply
  1. Palm Coaster
    Palm Coaster says:

    The big fish gets away with it….

    The real culprit of our financial tragedy yet is not told as it really was. In 2004 Fed Chairman Greenspan kept interest rates artificially at 1% all time lows alleging the bogus reason to prevent inflation, when actually inflation was triggered by gas at the pump at $4/gal. Meanwhile he was advising all lending institutions (Banks, Countrywide alike etc) and applicants (credit troubled individuals and businesses) to load on variable rates loans as means of achieving their American Dream. In 2005 to 2006 almost at the same time Wall Street Hedge Fund founders and VIP’s like John Paulson, Paulson Hedge Fund and other elites with insider access to Goldman Sachs and other priviledged close to the Fed Chief were betting billions that all lending institutions stock, will hit bottom soon if a mortgage bubble would burst!! When all these scenario was in place…Mr. Greenspan raised interest rates about 19 times in about 12 months all the way up to over 5.5 percent from the original 1 percent…Sure he knew what he was doing as Fed Chairman and who’s bet was he favoring on the backs of all those that took the variable rates loans…That was the last orchestrated action Greenspan took before finishing his term. He made John Paulson and other elite billionaires, as were betting down lenders and mortgages. It took since 2006 after Greenspan outrageous interest rate, until 2008 for the snow ball effect that we are still enduring today!
    Now I happen to learn recently that Greenspan has been hired in 2008 and works for John Paulson Hedge Fund among others. The very guy he made a billionaire with his interest rates increases in 2005-06 just before his term in the Fed was over with. What about being prosecuted for insiders information all people from the Goldman Sachs school. Goldman Sachs has been investigated over their double betting with John Paulson…but nothing came out of it…simple because the big fish gets away with it meanwhile the American middle society and lower classes pay for it and go homeless, jobless, hungry, sick and businesses bankrupted. As usual the millions of small fish took the bait!
    Greenspan started his term and immediately the Black Friday of 1987 was orchestrated and ended his term with the greatest financial tragedy endured by our middle society since the Great Depression.
    You can find all bove historical data from Greenspan nomination in 1987 until 2006 and beyond in 2008, in the following link:
    https://en.wikipedia.org/wiki/Alan_Greenspan

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