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Not One Top Wall Street Executive Has Been Convicted Of Criminal Charges Related To 2008 Crisis

  Posted: 09/13/2013 7:50 am EDT

By Sarah White

LONDON, Sept 13 (Reuters) - Will top bankers' behaviour ever land them in jail? Or are bad business decisions even a crime at all?

Five years on from the bankruptcy of Lehman Brothers, the debate over how to hold senior bank bosses to account for failures is far from over, but legal sanctions for top executives remain a largely remote threat.

Even as laws evolve - in Britain, the government wants to criminalise recklessness in banking - a repeat of the global financial crisis and near-collapses of 2008 would not necessarily result in many more prosecutions today, lawyers say.

At issue is the difficulty in pinning the blame on any one person for risks and decisions taken throughout a firm - one of the main obstacles to building such cases so far.

"It's a case of the confused lines of responsibility and accountability," said Judith Seddon, director in law firm Clifford Chance's business crime and regulatory enforcement unit in London. "When you're pursuing an individual, if they've delegated responsibilities ... it's much more difficult in a big organisation."

Regulators the world over stepped up their scrutiny of banks and cracked down on financial crime in the wake of public anger over costly bailouts and subsequent scandals. But that has so far translated into relatively few attempts to bring charges against those in the highest echelons of banking.

In the United States, home to Lehman Brothers, no top executives at large Wall Street or commercial banks have been convicted of criminal charges relating to the 2008 crisis.

Across Europe, the implosion of Iceland's financial sector five years ago has resulted in some of the most prominent convictions so far, with the former chief executive of failed lender Glitnir among those sentenced to jail time.

In Germany and the Netherlands there have also been isolated high-level convictions, and some landmark cases could yet materialise. The entire former executive board of German lender HSH Nordbank is being put on trial over actions taken in the run-up to the crisis.

But in Britain, where Royal Bank of Scotland and Lloyds were bailed out to the tune of 66 billion pounds ($104.37 billion), no senior bankers faced criminal charges.

Three executives at Ireland's failed Anglo Irish Bank face trial in 2014, five years after the probe into the lender began, while in Spain, around 100 people are being investigated by courts over failings at banks devastated by a property market crash, though none have gone on trial.

RECKLESS BANKERS?

The low rate of convictions partly stems from the fact that in some countries laws which could have addressed the way that banks were run simply did not exist.

Britain's Finance Minister George Osborne said in July he would adopt recommendations made by an influential body of lawmakers that bankers should face jail for a new offence of "reckless misconduct in the management of a bank".

"The regulator has got to be holding people personally accountable for their actions. They need to be frightened of the regulator, which certainly wasn't true in the past," said Mark Garnier, a Conservative member of the Parliamentary Commission on Banking Standards.

In the United States, federal prosecutors are still exploring new strategies for criminally charging Wall Street bankers who packaged and sold the bad mortgage loans behind the financial crisis, including using an old law intended to punish individuals for scamming commercial banks.

Britain's push to create a "recklessness" offence could in theory make it possible to punish senior executives for taking misguided decisions. But proving that such decisions were made recklessly at the time could still be tough.

"Board level meetings are carefully minuted and you might therefore have detailed evidence, but however reckless someone appears with the benefit of hindsight, will it stand up in court?" said Gregg Beechey, a London-based partner at law firm SJ Berwin. "You wouldn't get the whole board to vote for an acquisition if the case wasn't reasonably convincing at the time."

U.S. regulators' approach since the crisis has reflected some of these challenges. Although the Securities and Exchange Commission has charged over 150 firms and individuals in relation to the financial crisis, critics have still said it has not done enough to go after high-level bank executives.

"We go where the evidence leads," former SEC enforcement director Robert Khuzami has said in the past, noting that cases could not be brought against people merely for "bad judgment".

A perceived lack of political will in some countries to pursue senior bankers and firms could also cloud future cases.

Despite costly state rescues in Spain for example, mainstream politicians have shied away from calling for investigations into various failures in the same way as British ones, after the UK government came under pressure from an intense public backlash in the wake of the crisis.

"(In Spain) it's more an absence of any willingness to pursue the cases than because of a lack of tools, as some cases could be proved without much difficulty," said Juan Torres, an economics professor at the University of Seville, adding that some related to clear instances of fraud.

Claims from customers and activist groups have instead led Spain's High Court to investigate several high-profile failures, including that of Bankia, which was bailed out in 2012 less than a year after listing on the stock market.

Frustrations over the slow progress of legal probes in Spain is even leading some activist groups to consider lobbying the United Nations to list economic crimes as a crime against humanity, even though they admit it is unlikely to happen.

If the scope for legal prosecutions of senior bankers has not broadened drastically in the past five years, however, some argue that life at the top is much harder than it used to be, in part as countries pursue other lines of action.

"Regulatory tools can be more powerful than criminal law, although whether or not it's what the public want to see is another question," Beechey at SJ Berwin said.

"There's more of a sense with regulators that they can do things without fulfilling the burden of proof, and they are definitely working to try and pursue senior management more and more."

What We Haven't Learned From the Crisis

Our old theory of what to do was wrong, and we don’t have a new one.

By Matthew Yglesias|Posted Thursday, Sept. 12, 2013, at 5:20 PM

Former Lehman Brothers CEO Richard Fuld is sworn in before testifying Sept. 1, 2010, to the Financial Crisis Inquiry Commission about the causes of the 2008 financial and banking meltdown. We don't know much more now than we did then, or in 2008.
Photo by Chip Somodevilla/Getty Images

This weekend marks the fifth anniversary of Lehman Brothers’ final, chaotic descent into bankruptcy. The investment bank wasn’t the first American financial institution to drown in bad bets on mortgage-backed securities. But unlike those that had come before, Lehman wasn’t covered by the FDIC and its resolution process. And despite the scrambling efforts of the Treasury Department and Federal Reserve, there was no way to quasi-save it through the kind of shotgun marriage that was deployed to sell Bear Stearns to JPMorgan Chase. Lehman was going down, and all officials could do was wait to see what happened next.

What happened next, of course, was a full-scale financial panic—one that the Fed and the Treasury spent the next year fighting under two presidents. They wanted, desperately, to avoid the collapse of the American banking system. And contrary to loud and fashionable lines of criticism then and now, they overwhelmingly did it not out of corruption or fealty to Wall Street but out of sincere belief that ending financial panic would be critical to helping real people and the real economy. To their credit, they succeeded at stemming the disaster much better than their contemporaneous critics allowed.

But they don’t like to admit to a plain truth that’s obvious to most everyone else: that ending the financial crisis and healing the banking system turned out to be much less important than we believed at the time.

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One of the most infamous documents of the Obama era is a January 2009 projection attributed to Jared Bernstein and Christina Romer making the case for the president’s stimulus plan. They forecast that with the president’s plan in place, unemployment would peak in the third quarter of 2009 at 8 percent and then fall to about 5 percent by the second quarter of 2013.

Oops.

The really striking thing about the paper isn’t what they say about the stimulus. It’s what they say about a world of no stimulus. In this world unemployment peaks at 9 percent in the middle of 2010. After that it falls quite rapidly to about 5.5 percent in early 2013 and then precisely matches the no-stimulus scenario by the end of this year. Which is to say they believed then what policymakers at all levels believed—that there was simply no way to have a grinding years-long period of seemingly endless slow growth and mass unemployment. A harder recessionary fall would mean a sharper snapback. Cushioning the blow was sensible and humane, but the actual difference would be short-lived.

And yet experts knew that, at least in an academic sense, prolonged slumps were possible. That’s what happened during the Great Depression of the 1930s. Ben Bernanke summed up the conventional wisdom on this point in 2002, in his

tribute speech on Milton Friedman’s 90^th birthday—back when Bernanke was a Fed governor but not yet running the show. “Regarding the Great Depression,” Bernanke said, addressing himself directly to Friedman, “you’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

The embedded meaning here: The Depression occurred because the Federal Reserve of the time had allowed widespread bank failures to sharply reduce the amount of money circulating in the country. This shortage of currency led to falling prices, which became a vicious cycle. With prices headed downward, everyone wanted to defer business investments and major purchases as far into the future as possible. That only increased the excess demand for money and intensified the cycle of deflation. The lesson was clear—at all costs, prevent a spiral of bank failures, currency shortage, and falling prices. Get that done, and the system will return to equilibrium.

By this standard, the powers that be have performed quite well. Leading measures of financial system stress spiked during the crisis but rapidly returned to normal. Banks have failed, but the banking system is alive. Ordinary households and businesses have no trouble finding someplace safe to put their money, and creditworthy borrowers can get loans. There’s been no cycle of deflation.

Yet the self-correcting economy we were promised hasn’t materialized. The unemployment rate remains high, even as the share of the population looking for a job keeps shrinking. And there’s no real mystery as to why the labor market has remained sick. Despite the hype about robots and jobless recoveries, employment growth has been about as weak as you’d expect given weak overall GDP growth. This is the deepest and most frightening lesson of the financial crisis—the automatic bounce-back mechanism doesn’t actually exist. The need for some extra boost—whether from fiscal stimulus, or monetary policy aimed at deliberately increasing inflation—is deeper and more profound than the Obama administration realized at the time.

Putting the measures in place for that extra boost would be an extremely difficult political lift. But the emergency measures that saved the banking system in the fall and winter of 2008–2009 were a tough lift too. They got done because policy elites regarded them as necessary. Today, those at the helm at the time defend that judgment, but add the qualification that what was necessary was “not sufficient.” Yet the insufficiency of the banking rescue ought to raise the question of whether it really was necessary. The bailouts of financial institutions were supposed to put the country on a self-correcting long-term path, even in the absence of other pro-growth measures. If they don’t do that, then the billions spent on TARP are like any other kind of fiscal stimulus spending—just a form targeted at a segment of society that’s unusually undeserving of public assistance. 

Bailout fatigue is rampant, but there’s absolutely no consensus on what we should do when faced with the next major economic downturn. Five years ago Bernanke and others at least had the excuse that they thought they knew what to do. Today we know that bank-centered theory of depression prevention was wrong, but haven’t embraced a new one. The continued imperfections in America’s financial regulations are scary. But the lack of a plan for what to do next time those flaws come to light—that’s much scarier.

While we pay, they play

To bad the victims of their crimes didn't come out with something , other than handouts. 

Bank of America Corp.'s CEO Ken Lewis arrives at the building that houses the New York Attorney General Andrew Cuomo's office, Thursday, Feb. 26, 2009 in New York. (AP Photo/Mary Altaffer)

Five years after the near-collapse of the nation’s financial system, the economy continues a slow recovery marred by high unemployment, hesitant consumers and sluggish business investment.
Many of the top Wall Street bankers who were largely responsible for the disaster — and whose companies either collapsed or accepted billions in government bailouts — are also unemployed. But since they walked away from the disaster with millions, they’re juggling their ample free time between mansions and golf, skiing and tennis.
Meantime, the major banks that survived the crisis, largely because they were saved with taxpayer money after being deemed “too big to fail,” are now bigger and more powerful than ever.
The Center for Public Integrity looked at what happened to five former Wall Street kingpins to see what they are up to these days. None are in jail, nor are any criminal charges expected to be filed.
Certainly none are hurting for money.
Take Richard Fuld. Five years after Lehman Brothers Holdings Inc., the 158-year-old company he ran, collapsed under the weight of bad investments and sent a tidal wave of panic through the global financial system, Fuld is living comfortably.
He has a mansion in Greenwich, Conn., a 40-plus-acre ranch in Sun Valley, Idaho, as well as a five-bedroom home in Jupiter Island, Fla. He no longer has a place in Manhattan, since he sold his Park Avenue apartment in 2009 for $25.87 million.
The other four bankers the Center caught up with — Jimmy Cayne (Bear Stearns), Stanley O’Neal (Merrill Lynch), Chuck Prince (Citigroup) and Ken Lewis (Bank of America) are also living in quiet luxury.

Meltdown primer
A quick crisis refresher: During the early years of the last decade, U.S. home values were soaring, fueled by ultra-low interest rates.
Wall Street investors, eager to get in on the party, developed an enormous appetite for bonds backed by the mortgages of everyday homeowners. Firms like Lehman would buy up thousands of mortgages, pool them together into a security, and sell the cash flow from the mortgage payments to investors, including pension funds and hedge funds.
The bonds were thought to be almost as safe as U.S. Treasuries, but they carried a higher interest rate.
The demand was so great that eventually mortgage lenders loosened their underwriting standards and made loans to people who couldn’t afford them, just to satisfy hungry investors.
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When the housing market turned down in 2007 and homeowners began to default on their loans, the whole system began to crumble.
In March 2008, Bear Stearns almost collapsed and was sold. Six months later, Lehman failed, setting off a chain reaction that killed dozens more banks and mortgage lenders. Weeks later, Congress approved a $700 billion bailout of the financial system and soon nearly every major financial institution was on the dole.
The ensuing recession destroyed as much as $34 trillion in wealth and sent the unemployment rate soaring above 10 percent for the first time in 25 years.
“Every single one of these companies was insolvent,” said Neil Barofsky, the former special inspector general overseeing the bailout, which was called the Trouble Asset Relief Program.
“Clearly there was a large underpinning of fraud,” said Barofsky, a former federal prosecutor, who argues the government didn’t adequately pursue criminal charges against those who caused the crisis. “There was never really a comprehensive investigation. The Justice Department largely outsourced this to the Securities and Exchange Commission.”
Five years after the meltdown, the potential for a criminal prosecution of any of those involved in the events leading up to the collapse has faded as the statute of limitations for financial fraud ran out.
The five ultra-rich former Wall Street chieftains have simultaneously faded into luxurious obscurity while the survivors — Jamie Dimon of JPMorgan Chase & Co. and Lloyd Blankfein of Goldman Sachs — have only consolidated their power as they alternate between being seen as great villains or near statesmen depending on the changing fortunes of their companies.
Fuld checks in
Five years after Lehman Brothers declared bankruptcy, Fuld is keeping a low profile. He’s not giving interviews or lectures, and he’s not done an apology tour.
At times he picks up the phone and calls up former Lehman co-workers — those whom he considers friends — to check in.
Kevin White, a former managing director at Lehman, says he hears from Fuld about once a month. The former CEO asks about White’s family, checks on how business is at the hedge fund White founded after Lehman, offers to help, and perhaps introduce him to someone.
“Dick’s a family man and he’s someone who takes this whole Lehman bankruptcy very personally,” White says. He admits that some of his former colleagues hate Fuld and don’t understand why White stays in touch.
Fuld has been widely criticized, by former Lehman workers and in official investigations, for allowing the firm to drown itself in too much debt. When it went bankrupt, for every dollar of capital Lehman held, it was borrowing at least $30. Some reports say the rate was higher than 40 to 1.
That gave it no cushion to absorb losses when the market began to decline.
The myriad investigations into the causes of the crisis revealed that under Fuld’s watch, Lehman executives toyed with the company’s finances to make that leverage look better than it really was using what some Lehman employees called an “accounting gimmick” called Repo 105, according to the official bankruptcy report by Anton Valukas of the law firm Jenner & Block.
The tactic allowed the company to characterize a short-term loan as an asset sale and then use the money from that false sale to cut debt. By doing so, Lehman appeared to have less debt and more cash. Lehman used Repo 105 transactions to cut the debt on its books by as much as $50 billion just before it announced quarterly earnings, giving investors a false impression of the bank’s financial health.
In a legal filing in an investor lawsuit, Fuld and other Lehman executives said investors were informed that Lehman’s leverage was often higher than it was at the end of each quarter.
"Lehman specifically disclosed that its balance sheet ‘will fluctuate from time to time’ and could be and at times was larger than its balance sheet reported at quarter- or year-end,’ the filing said.
Fuld, in testimony before the Financial Crisis Inquiry Commission, blamed Lehman’s failure on the government’s decision not to give it a bailout.
“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors,” he testified.
“There is sufficient evidence … that Fuld was at least grossly negligent,” Valukas wrote in his report.
Negligence isn’t necessarily a crime, however, so Fuld has faced no punishment for the wreckage caused by his company’s collapse, save perhaps banishment to irrelevance.
Last year a federal judge approved a $90 million settlement of a class action suit brought by Lehman investors against Fuld and several other company executives and directors. The judge, Lewis Kaplan, questioned whether the settlement, which will be paid entirely by Lehman’s insurers, was fair given that none of the individuals would pay out of pocket. He agreed to the deal, however, because litigation expenses for a trial were likely to deplete the funds available for compensating the investors.
Fuld quietly opened his own advisory firm called Matrix Advisors in a Third Avenue office building in Manhattan, across the street from the headquarters of Avon, the cosmetics company. He’s landed a few clients, according to news reports, SEC filings and court records. Matrix advised AT&T Inc. on its failed bid to purchase T-Mobile. And it has consulted with GlyEco, a company that recycles the chemical glycol, and Ecologic Transportation Corp., a company that rents out environmentally friendly cars.
He was recently spotted at Doubles, the private dining club in the Sherry-Netherland Hotel in Manhattan, according to a former Lehman employee.
Still, companies haven’t been eager to have their names associated with Fuld, so landing clients hasn’t been easy, according to two people familiar with the business.
Fuld, through his lawyer, declined several interview requests for this story. He wasn’t in his office when a reporter paid a visit in July. His assistant, through a security guard, declined to say where he was.
Even if business is slow, it may not matter much to Fuld. Unlike many of his former employees, and unlike the millions of people still out of work after the 2008 financial collapse, Fuld has money.
When Lehman Brothers filed for bankruptcy on Sept. 15, there was a sense that if Fuld had mismanaged Lehman to death, at least he had lost a load of cash in the process as the value of his company stock dropped to nothing.
And he did lose plenty.
Fuld’s 10.8 million shares of the company that may have once been worth more than $900 million, according to a study by Harvard University Professor Lucian Bebchuk, became worthless.
However, he wasn’t exactly on his way to the poor house. From 2000 through 2007, Fuld took home as much as $529 million from his Lehman job. That includes his salary and cash bonuses, as well as the Lehman shares granted him by the company that he sold before the bankruptcy in September 2008.
That total comes from an analysis by Oliver Budde, a former Lehman associate general counsel who left the firm in 2006 because, he says, Lehman was underreporting its executive compensation to shareholders.
That income allowed Fuld to buy some very high-end real estate.
In Greenwich, he has an $8 million, nine-bedroom home with a guest house. He and his wife, Kathleen, bought the house in 2004 after they sold their previous Greenwich home to Robert Steel, a Goldman Sachs executive who became undersecretary of the Treasury in 2006 under Henry Paulson. Steel then became CEO of Wachovia, which nearly collapsed 11 days after Lehman and was sold to Wells Fargo at the direction of federal regulators.
When he’s looking to get out of Greenwich, Fuld can head south to Jupiter Island, Fla., a ritzy barrier island that’s home to Tiger Woods and Greg Norman. He transferred ownership of the $10.6 million beachfront home, with a pool and tennis court, to his wife in November 2008, a common strategy for protecting assets from legal judgments.
He also spends a lot of time at his 40-plus-acre ranch in Ketchum, Idaho, in the center of the Sun Valley resort area. The spot offers “ultimate privacy,” according to Daryl Fauth, CEO of Blaine County Title in Ketchum.
The ranch is located just five minutes from downtown Ketchum, east of the Baldy Mountain ski resort and west of the Reinheimer Ranch, a 110-acre spread that’s owned by the Idaho Foundation for Parks and Lands and can’t be developed. The house is situated on a bend in a river that runs through the property.
Fuld even managed to make a killing in real estate during the depths of the collapse. A Park Avenue apartment that he and his wife bought in 2007 for $21 million was sold in 2009 for a $4.8 million gross profit.
What he hasn’t done is make any public statement or gesture or obvious effort to rehabilitate his image. He hasn’t made any public overtures to major charities.
He appears to have wound down his family foundation after Lehman went bankrupt, distributing the last $10,948 in 2009, according to tax filings. And last summer Fuld sued his estranged son-in-law seeking to recover money he had lent the younger man to buy a home with Fuld’s daughter.
Fuld was looking to be paid in cash and stock by those he advised, according to a person familiar with the company. That’s the type of agreement he struck with Ecologic, which paid him a $10,000-per-month retainer and granted him options to buy 2.29 million shares of its stock at 25 cents per share.
Jimmy’s playing bridge
While Fuld has tried to stay in the business, Jimmy Cayne of Bear Stearns has withdrawn completely.
Cayne, who lives in a $25 million apartment in New York’s Plaza Hotel, can be found almost every day in cyberspace hosting an online bridge game.
Last month in the Hyatt Regency hotel in Atlanta, Cayne sat for hours in a crowded ballroom with orange, brown and yellow swirled carpet competing for the coveted Spingold Cup.
Cayne sat in a crisply pressed shirt with his team — two Italians and two Israelis — chomping a cigar and talking in hushed tones over one of the dozens of folding tables. He likely pays his players more than $100,000 a year each to help him remain atop the world rankings, according to two people who have played in tournaments against him.
He’s ranked 22nd in the world, according to the American Contract Bridge League. Last month he lost in the round of 16 of the Spingold knockout match.
That he’s opted for bridge over finance is telling, as Cayne was much criticized for spending more time on golf and bridge than on dealing with the crises that were crushing his firm.
While at Bear, Cayne would leave every Thursday and take a helicopter to his New Jersey beach house for long weekends of golf at the Hollywood Golf Club. He’d emerge from the chopper behind sunglasses and chomping the trademark cigar, according to people who saw him there.
Cayne had survived the bankruptcy of two Bear Stearns hedge funds the summer before but succumbed to the inevitable when, in the fourth quarter of 2007, the company had to write down $1. 9 billion in bad home loan bets, leading to its first quarterly loss ever.
He retired as CEO in January 2008, two months before the firm collapsed under the weight of its subprime mortgage investments, but remained as board chairman. As the market became doubtful that the mortgage bonds on Bear’s books were worth what the company claimed, companies pulled their business, suddenly and en masse.
Bear Stearns was sold on March 16, 2008, in a late night deal to JPMorgan Chase & Co., which eventually paid $1.2 billion, about what it would have cost to buy the company’s Madison Avenue headquarters.
The company’s leverage ratio was 38 to 1 or higher, according to Phil Angelides, the chairman of the Financial Crisis Inquiry Commission. Cayne acknowledged in his testimony before the commission that it was too high.
“That was the business,” he said. “That was really industry practice.”
He told Angelides that he believed in Bear so strongly that he almost never sold its stock. “I rarely sold any of the firm’s stock except as needed to pay taxes,” he testified on May 5, 2010.
Like Fuld, Cayne lost about $900 million on paper when Bear’s stock plunged, but he took home plenty before the crash. He earned $87.5 million in cash bonuses from 2000 to 2007 and sold stock worth about $289.1 million in those years, according to Bebchuk’s study.
In addition to the Plaza Hotel condo, he and his wife have a second apartment on Park Avenue. They put that home on the market last month for $14.95 million. When they want to get out of the city, they can head to their $8.2 million mansion on the Jersey Shore, about a mile from the Hollywood Golf Club, or their $2.75 million condo at the Boca Beach Club in Boca Raton, Fla.
Cayne, like many of his fellow CEOs, has apparently worked to shield his assets from potential liability.
In November and December 2009, he transferred ownership of four pieces of real estate to four separate limited liability companies, called Legion Holdings I, II, III and IV, for a total of $21. Some of the LLCs share Cayne’s Plaza Hotel mailing address in public tax records.
“I take responsibility for what happened. I’m not going to walk away from the responsibility,” Cayne told the FCIC.
He hasn’t had to take any for the demise of Bear, however. He’s paid no judgments or settlements from any lawsuits, according to his lawyer, David Frankel.
Chuck Prince is helping his friends
While Fuld went down with his ship and Cayne remained until close to the end, two of their CEO brethren were pushed aside earlier — when the subprime collapse began taking its toll on profits — only to watch their companies falter from a distance.
Charles O. Prince III resigned as CEO of Citigroup on Nov. 5, 2007, when the company announced it had lost between $8 billion and $11 billion on subprime mortgage bets.
“Given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down,” he said in a statement. Prince walked away with a golden parachute worth about $33.6 million.
From 2000 through his resignation, Prince took home $65.2 million in cash salary and bonuses, according to an analysis by the Center. There are no SEC reports showing that he sold any shares from 2000 through 2008. It’s unclear whether he’s sold any since he resigned. Citigroup shares were priced at more than $300 the week Prince resigned and today hover at about $50 after a 1-for-10 reverse stock split.
His downfall came only months after he famously justified Citi’s continued involvement in subprime:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he told The Financial Times in July 2007.
Prince was succeeded by Vikram Pandit, a former hedge fund manager whose firm was acquired by Citi just months earlier for $800 million. While Pandit was trying to right the listing ship, the company continued to provide Prince with an office, an administrative assistant and a car and driver for up to five years, a package worth $1.5 million a year, according to SEC filings.
By the end of 2008, Citigroup had received $45 billion in bailout money from the U.S. Treasury and the Federal Reserve had guaranteed hundreds of millions of dollars of its debt.
Prince apologized for the disaster that the financial crisis caused in testimony to the FCIC in 2010. "I'm sorry the financial crisis has had such a devastating impact for our country," he testified. "I'm sorry about the millions of people, average Americans, who lost their homes. And I'm sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before us."
After Citigroup, Prince joined the global consulting firm Stonebridge International, which was founded by former National Security Advisor Sandy Berger. The company merged in 2009 with the Albright Group, founded by former Secretary of State Madeleine Albright to form Albright Stonebridge Group.
Prince described his move to Albright Stonebridge as “helping my friends with their activities,” in a 2009 interview. When pressed about what his exact job was he said, “I’m just a friend.”
He’s no longer listed as an executive on the company’s website and a spokeswoman for the company did not respond to an email and phone call seeking an update on his status.
He serves on the boards of directors of Xerox Corp. and Johnson & Johnson Inc. He’s represented by the Harry Walker Agency as a speaker for hire on topics including “Corporate Governance: A Five-Point Plan to the Best Business Practices,” and “Inside the Current Financial Crisis.”
Last year Prince, along with Citigroup and several members of the company’s pre-2008 board, settled a class action lawsuit for $590 million that accused them of misleading investors about the amount of subprime-related securities the company held on its books and underreporting losses related to those investments. Prince and the other defendants didn’t admit any wrongdoing in the settlement.
It’s unclear how often Prince went to the office held for him at Citi, but what is clear is that Prince had plenty of other places to spend his time.
He has a $3.6 million Nantucket getaway and a $2.7 million house in a Jack Nicklaus golf community in North Palm Beach, Fla., called Lost Tree Village.
Stan O’Neal goes to the Vineyard
Prince’s ouster from Citigroup was prefaced just days earlier by the departure of Stanley O’Neal from Merrill Lynch.
O’Neal had taken over Merrill when it was mostly a retail brokerage firm and turned it into a major manufacturer of collateralized debt obligations, a type of security, backed by home mortgages.
By 2006, it was the biggest underwriter of CDOs on Wall Street and a year later the company had $55 billion worth of subprime loans on its own books that no one wanted to buy.
As the losses mounted, O’Neal made overtures, first to Bank of America, then to Wachovia, about buying Merrill Lynch — without the approval of the board, according to a 2010 interview O’Neal gave to Fortune Magazine. When in October 2007 Merrill announced it was writing off $8 billion of its mortgage-backed securities, and then news broke that O’Neal was thinking of selling the firm, it was over. He was fired.
O’Neal floated out of Merrill comfortably, however, buoyed by a golden parachute worth $161.5 million. In the eight years leading up to his ouster, O’Neal earned $68.4 million in cash salary and bonuses, and he sold Merrill stock at a profit of at least $18.7 million, according to a Center review of annual reports and SEC filings.
He was succeeded by John Thain, a former CEO of the New York Stock Exchange, who convinced Bank of America to buy Merrill Lynch for $50 billion just as Lehman was imploding and taking much of the financial system with it.
(Thain himself was eventually fired after it became public that he spent more than $1 million renovating his Merrill office — including $87,700 for a pair of guest chairs — as the company was on the verge of bankruptcy.)
O’Neal, however, is flush. On top of his $161.5 million, he and his wife have a Park Avenue apartment. NBC anchor Tom Brokaw sold his apartment in the building for $10.75 million in 2011. O’Neal transferred full ownership to his wife in November 2008, a common strategy to protect the home from any legal judgments.
The couple also owns a $12.4 million vacation home in Martha’s Vineyard through an LLC called KZ Vineyard Land.
Today he sits on the board of Alcoa Inc., the world’s top producer of aluminum and is on the audit and corporate governance committees.
Ken Lewis moves to Florida
Kenneth Lewis survived the September 2008 bloodbath and even came out looking like a hero to some when he arranged Bank of America’s hasty purchase of Merrill Lynch — O’Neal’s former employer — for $50 billion on the same weekend that Lehman failed, possibly saving it from the same fate as Lehman.
It soon became clear that Merrill was no bargain. That, combined with Lewis’ ill-advised purchase of subprime giant Countrywide Financial just as the housing market went into free fall, led Bank of America to start hemorrhaging cash.
It eventually got $45 billion in bailout money from the federal government to stanch the bleeding.
Lewis knew of Merrill’s excess losses before shareholders approved the final deal, according to his 2009 testimony to then-New York Attorney General Andrew Cuomo. He said he kept the losses hidden under pressure from Treasury Secretary Henry Paulson who worried that, if the deal fell through, it would hurt the already wounded market and overall economy.
Bank of America last month was accused by the Justice Department in a civil lawsuit of understating the risks that the loans included in $850 million of mortgage-backed securities would default. The Justice Department said the company was so hungry for loans to securitize that it let its quality controls slide and didn’t adequately verify borrowers’ incomes or ability to repay. The suit did not name Lewis as a defendant.
The company already settled a civil fraud suit with the SEC for $150 million and another lawsuit brought by pension fund investors for $62.5 million.
Lewis retired in September 2009 with a going-away package worth $83 million, even though the company was largely dependent on the federal government for its survival. He had already banked at least $86.4 million from Bank of America stock sales between 2000 and 2008, according to SEC filings. He also brought in $52.4 million in salary and bonuses in that time.
He and his wife Donna sold their house in Charlotte, N.C., in January for $3.15 million and their mountainside mansion in Aspen for $13.5 million, $3.35 million less than what they paid for it in 2006.
They appear now to have only one home, a $4.1 million condo in a beachfront high-rise in Naples, Fla.
The winners
While Lewis and several of the CEOs that led their companies into the thicket of mortgage-backed securities have ended up rich but unemployed, two have seen their fortunes soar.
Jamie Dimon and Lloyd Blankfein, the leaders of JPMorgan Chase & Co. and Goldman Sachs Group Inc., today stand atop the global financial system, their banks bigger and more powerful than ever and their personal fortunes growing.
Blankfein was a magnet for scorn and envy before the crisis when Goldman awarded him a $68 million bonus in 2007, just as the economy was going bad. He then became the target for much of the public wrath that followed the collapse of the economy when he flippantly declared that Goldman was doing “God’s work” by lending money to businesses.
His reputation plummeted to its lowest point in 2010 after revelations that Goldman Sachs packaged and sold mortgage securities that appeared designed to fail, and then shorted the bonds, making a killing for the firm while customers lost money.
The company was sued by the SEC over one such deal, called Abacus, and Goldman settled the case for $550 million without admitting any wrongdoing.
While Blankfein was the villain, Dimon was treated as a rock-star statesman.
He was welcome at the White House and lauded as one of the only bankers who didn’t need a bailout — even though he took one, allegedly at the direction of Paulson.
Obama sang his praises in February 2009, just weeks after entering the Oval Office.
“There are a lot of banks that are actually pretty well managed, JPMorgan being a good example,” Obama said. “Jamie Dimon, the CEO there, I don't think should be punished for doing a pretty good job managing an enormous portfolio.”
Dimon’s popularity in the White House began to fade because he was a vocal opponent of many of the financial reforms being advocated in response to the crisis. Then in 2012, JPMorgan announced it had lost billions because of bad bets by a rogue derivatives trader in London.
Dimon came under investigation for minimizing the issue to investors — he called the problem “a tempest in a teapot.” The company was sued by the SEC, and Dimon had to testify before Congress. Last spring he barely survived a shareholder vote that would have separated his two jobs, chairman of the board and chief executive.
Last month the company said it was under civil and criminal investigation by the Justice Department over its subprime mortgage-backed securities.
When he hit the nadir of his troubles, Dimon reportedly sought advice from Blankfein on how to weather the storm and maintain his and his company’s reputation.
Earlier this summer, Blankfein held forth before a roomful of journalists and lobbyists at Washington’s swank Mayflower Hotel where, like an elder statesman, he was asked about everything from immigration reform to his first job selling hot dogs at Yankee Stadium. BusinessWeek Magazine wrote a story about the fashion impact of his new beard.
Through the ups and downs, neither CEO has suffered financially.
Blankfein was paid $21 million last year and he was the highest-paid chief executive of the 20 biggest financial companies, according to Bloomberg. Dimon earned about half that, or $11.5 million, as a result of the derivatives loss that became known as the “London whale.” Blankfein owns about $256 million of Goldman shares, according to Forbes magazine.
Dimon bought a Park Avenue apartment in 2004 for $4.9 million and bought a second unit in the same building this year for $2 million. He also owns a $17 million estate in Mt. Kisko, N.Y. Blankfein’s Central Park West penthouse is valued at $26.5 million, according to New York property records. Late last year, he and his wife also bought a 7.5-acre estate in the Hamptons with a pool and tennis court for $32.5 million. Forbes estimates Dimon owns $223 million of JPMorgan stock.
While Dimon and Blankfein held on to their power, the banks they lead, and other U.S. megabanks, have grown larger and more powerful.
JPMorgan’s assets — one common measure of bank size — have grown to $2.44 trillion from $1.78 trillion shortly before Lehman failed in 2008. Bank of America’s assets have ballooned to $2.13 trillion from $1.72 trillion, while Wells Fargo more than doubled to $1.44 trillion from $609 billion five years ago. Goldman Sachs, which wasn’t on the list of top 50 bank holding companies in 2008 because it was a pure investment bank at the time, is now the nation’s fifth largest with $939 billion in assets.
Citigroup, beset by financial problems, is the only one of the top five banks whose balance sheet has shrunk in those years.
Total assets don’t even adequately measure the full size of these institutions because the measure does not take into account derivatives contracts or off-balance-sheet items that could still put the banks at risk. If those assets were counted, JPMorgan’s size would rise to $3.95 trillion, according to a worksheet prepared by FDIC Vice Chairman Thomas Hoenig.
‘Bad guys everywhere’
Since that epic month in 2008 that began with the bankruptcy of Lehman early Monday, Sept. 15, and ended with the $80 billion bailout of insurance giant American International Group and the sales of Merrill Lynch to Bank of America, Wachovia to Wells Fargo and Washington Mutual to JPMorgan, thousands of hours and millions of pages have been filled trying to determine what happened.
The most comprehensive, the Financial Crisis Inquiry Report, said the financial collapse was avoidable.
“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble,” the report said.
That those “captains of finance” have suffered few consequences of that “big miss” is now part of the legacy of the crisis, and has cast a shadow over the U.S. justice system, which prosecutes small-time offenders but appears to turn away from what many see as crimes of the wealthy.
“This is the greatest white-collar fraud and most destructive white-collar fraud in history and we have found ourselves unable to prosecute any elite bankers,” said Bill Black, an economics and law professor at the University of Missouri and author of The Best Way to Rob a Bank is to Own One. “That’s outrageous.”
U.S. Attorney General Eric Holder appeared to confirm that view earlier this year when he said he’s hesitant to criminally prosecute big banks because he’s afraid of the damage such a move could do to the economy.
“When we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, … that is a function of the fact that some of these institutions have become too large,” he said during a Senate Judiciary Committee hearing in March.
Since that time, the Justice Department has walked back those statements and assured lawmakers and the public that they have aggressively investigated and pursued any criminal acts related to the financial crisis.
The hurdle, officials say, is that to prove a crime, they must prove intent. That means if the government wanted to bring charges against any of the CEOs of the companies that led the nation to financial disaster, prosecutors would have to prove to a jury beyond a reasonable doubt that these individuals intended to commit fraud.
“They tend to have to work in a much more black and white misconduct universe,” said Jordan Thomas, a former lawyer for the SEC who worked with Justice on many financial fraud cases. Proving criminal misconduct is such a high hurdle that the government has resorted mostly to civil charges, where the burden of proof is lower. That doesn’t mean, Thomas says, that nobody did anything wrong.
“The financial crisis had bad guys everywhere,” he said.

Ex-Citi CEO John Reed: We Need To Break Up The Big Banks

Sen. Elizabeth Warren (D-Mass.) has a friend in former Wall Street CEO John Reed.
The former CEO of Citicorp, which merged with Travelers Insurance in 1998 to create the mega-bank Citigroup, told the Financial Times in an interview published Sunday that it's time to reinstate the Glass-Steagall Act. The act largely separated investment banking from commercial banking until its controversial repeal in 1999.
Reed, who played a critical role in the creation of Citigroup, now the nation's third biggest bank by assets, told the Senate Banking Committee in 2010 that he helped create "a monster" by combining Travelers and Citi.
Still today, he told the FT, bankers are being pushed to become more like high-risk traders and take bigger risks to get bigger payouts.
“These cultures [investment from commercial banking] don’t mix well and one tends to push out the other," Reed said. "It does result in institutions whose behavior isn’t necessarily productive for the economy."
Warren has Glass-Steagall on her radar as well, and proposed a bill earlier this year with Sen. John McCain (R-Ariz.) and others that aims to reinstate the division between investment and commercial banks. Some say the act's repeal helped create the conditions for banks to become "too big to fail" and require taxpayer bailouts.
Reed also argued his point in a 2009 letter to The New York Times, saying that separating commercial and investment banking activities “makes sense."

Two Sentences That Explain the Crisis and How Easy It Was to Avoid

Everyone should read and understand the implications of these two sentences from the 2011 report of the Financial Crisis Inquiry Commission (FCIC).

"From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers... it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were 'blacklisting honest appraisers' and instead assigning business only to appraisers who would hit the desired price targets" (FCIC 2011: 18).

Those two sentences tell us more about crisis' cause, and how easy it was to prevent, than all the books published about the crisis -- combined. Here are ten key implications.
1. The lenders are extorting the appraisers to inflate the appraisal.
2. No honest lender would inflate an appraisal, the lender's great protection from loss.
3. The lenders were overwhelmingly the source of mortgage fraud.
4. The lenders were not only fraudulent, but following the "recipe" for "accounting control fraud." They were deliberately making enormous numbers of bad loans.
5. This had to be done with the knowledge of the bank CEOs. One of the wonderful things about being a CEO is the ability to communicate to employees and agents without leaving an incriminating paper trail. Sophisticated CEOs running large accounting control frauds can use compensation and business and personnel decisions to send three key messages: (a) you will make a lot of money if you report exceptional results, (b) I don't care whether the reports are true or the results of fraud, and (c) if you do not report exceptional results or if you block loans from being approved by insisting on effective underwriting and honest appraisals you will suffer and your efforts will be overruled. The appraisers' petition was done over the course of seven years. Even if we assumed, contrary to fact, that the CEO did not originate the plan to inflate the appraisals the CEOs knew that they were making enormous numbers of fraudulent "liar's" loans with fraudulent appraisals. It is easy for a CEO to stop pervasive fraudulent lending and appraisals. Where appraisal fraud was common it was done with the CEO's support.
6. Fraudulent loan origination creates a "Gresham's" dynamic (bad ethics drives good ethics from the marketplace or profession because cheaters prosper) will be created among lenders. The CEO of lenders that follow the fraud "recipe" can count on three "sure things." The lender will report exceptional income in the near term. The controlling officers will promptly be made wealthy by modern executive compensation. The lender will (later) suffer severe losses. The controlling officers of honest lenders will report far lower income and receive far less compensation. The CFO will rightly fear losing his job. This turns market forces perverse and makes accounting control fraud surge.
7. The Gresham's dynamic and the fraud "recipe" cause an enormous expansion in bad loans. This can hyper-inflate a financial bubble. As a bubble grows the fraud recipe becomes even more wealth-maximizing for unethical senior officers. The trade has a saying that explains why bubbles are so criminogenic -- "a rolling loan gathers no loss." The fraudulent lenders refinance their bad loans and report (fictional) profits.
8. Once fraudulent loans are fraudulently originated they cannot be cured. There is no loan exorcist. All subsequent sales of the mortgage (or cash flows from the mortgage) in the secondary market will require additional fraud and will transfer bad assets with a greatly increased risk of loss. (Not every fraudulently originated mortgage loan will default and suffer loss, but a portfolio of such loans has such a greatly increased risk of loss that the portfolio will have a negative expected value.) Liar's loans do not "become" bad; they are endemically fraudulent when they are originated and mortgage loans made on the basis of deliberately inflated appraisals are always fraudulent. Only accounting fraud, failing to provide appropriate allowance for loan and lease losses (ALLL) at the time the loans are made, can produce the fictional income that drives the fraud scheme.
9. The Gresham's dynamic that causes us the most wrenching pain as regulators is the one that the officers controlling the fraudulent lenders deliberately created among appraisers. They created the blacklist to extort the most honest appraisers. The fraudulent lenders, of course, do not have to successfully suborn every appraiser or even most appraisers in order to optimize their frauds. A fairly small minority of suborned appraisers can provide all the inflated appraisals required. The honest appraisers will lose a great deal of income and many will be driven out of the profession by the lost income or because the degradation of their profession disgusts them. These non-wealthy professionals, the ethical appraisers, were injured by the fraudulent CEOs because the appraisers knowingly chose honesty over maximizing their incomes. The CEOs of the lenders and the officers and agents they induced (by a combination of de facto bribery and extortion) to assist their frauds chose to maximize their incomes through fraud.
10. The U.S. government did nothing in response to the appraisers' petition warning about the black list of honest appraisers. The federal banking agencies' anti-regulatory leaders' hatred of effective regulators caused them to do nothing in response to the appraisers' petition. The anti-regulators did nothing for years, as the number of appraisers signing the petition grew by the thousands and surveys and investigations confirmed their warnings about lenders extorting appraisers to inflate appraisals. The appraisers put the anti-regulators on notice about the fraud epidemic for seven years beginning in 2000.

Look at what the GOP can do for you - NOT!

After reading this and you still decide to vote for the GOP , than I would be clueless.

WASHINGTON -- The House Appropriations Committee approved an agriculture budgeting bill last month that would significantly restructure the U.S. bank regulatory regime as part of a GOP effort to protect Wall Street's offshore trading in derivatives -- the complex financial products at the heart of the 2008 economic meltdown.
Republicans in Congress have been pressuring regulators for years to exempt derivatives that U.S. companies sell overseas from the new rules set by the 2010 Dodd-Frank financial reform law. For much of 2013, the deregulatory drive enjoyed bipartisan support in the House, with lawmakers casting their efforts as an attempt to harmonize U.S. law with international regulations. But financial reform advocates have attacked the initiative for padding Wall Street profits at the expense of important public protections, and Democratic support has eroded.
In June, the House passed a bill that would completely exempt from U.S. oversight derivatives sold through the nine most popular foreign derivatives jurisdictions. The legislation is occasionally derided as the "London Whale Loophole Act" on Capitol Hill -- a reference to the overseas trades that cost JPMorgan Chase more than $6 billion in 2012. London was the epicenter of much of the derivatives trading by U.S. financial firms leading up the 2008 crash, including AIG's infamous Financial Products division. If banks can simply route trades through loosely regulated overseas affiliates, financial reform advocates warn, the most critical aspects of Dodd-Frank will be effectively nullified.
The "London Whale Loophole Act" faces opposition from Senate Democrats and President Barack Obama, so it's unlikely to be signed into law. But June's House Agriculture Committee funding bill has much stronger prospects for passage, since it's tied to approximately $19 billion in other spending. That bill would require the Commodities Futures Trading Commission -- the agency with responsibility for more than 90 percent of the derivatives market -- to negotiate its regulations with the Securities and Exchange Commission, which oversees the remainder of the derivatives business.
Big banks have railed against the CFTC guidelines for taking a broad view of what constitutes an American firm. The SEC's proposed rule, by contrast, would bar American regulators from overseeing many offshore partnerships run by U.S. firms, and many trades between U.S. firms and overseas companies. Forcing the CFTC to negotiate with the SEC would almost certainly introduce loopholes into the CFTC's rules, and may shut down the rulemaking process altogether.

"The House bill is nothing more than a backdoor way of killing derivatives reform," said Dennis Kelleher, president and CEO of the financial reform advocacy group Better Markets. "It's Christmas in July for Wall Street."

Prior to Dodd-Frank, derivatives trades were essentially secret deals between two companies, with no market or regulatory scrutiny. The 2010 law required companies to trade through a third party that guaranteed each side’s ability to make good on its bets. To buttress the guarantee, each side of the trade was required to post margin -– a small upfront deposit just in case the trade went bad. An offshoring loophole would allow firms to evade these requirements, provided they meet the technical definitions of the loophole.

While Wall Street has pursued multiple avenues to derail the CFTC’s rule, some Senate Democrats cautioned that even the more aggressive regulatory interpretation may ultimately undermine the essence of Dodd-Frank.

Eight Democratic senators, organized by Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.), on Wednesday signed a letter to CFTC Chairman Gary Gensler and SEC Chairman Mary Jo White stating that both the CFTC and the SEC have failed to deal with shadowy financial entities “sponsored” by U.S. banks without any explicit legal guarantee for their obligations.

This type of arrangement was common in the years leading up to the 2008 crash. Citigroup held nearly $50 billion in complex derivatives off its official balance sheet in so-called structured investment vehicles, and Bear Stearns operated risky hedge funds that it officially had no financial obligations to. The financial crisis began in August 2007 when two such Bear Stearns funds failed, and the company decided to pay off its investors rather than take the damage to its reputation from leaving clients out to dry. By the fall of 2008, Citi had decided to suck up its losses on structured investment vehicles, rather than signal to the market it was incapable of doing so.
"A U.S.-based firm should not be able to escape U.S.-mandated swaps oversight simply because its swaps trading is conducted through an offshore affiliate or branch," the letter from the Democratic senators reads. "It is likely that, if your agencies’ current proposals were adopted, foreign firms doing business with the foreign affiliate of a U.S.-based derivatives dealer would opt to forego an explicit guarantee from the U.S.-based entity in return for: (1) more favorable pricing, and (2) the ability to avoid U.S. trading regulations and any attendant costs."
Both the CFTC and SEC standards would allow an offshore fund organized by a U.S. bank that formally rejected any responsibility for the fund’s solvency to evade American oversight. Reform watchdogs said they worry that U.S. firms will simply route much of their derivatives business through these nebulous entities, leaving the financial system to operate much as it did in the years before the crash.

Read the full letter, signed by Sens. Merkley, Levin, Elizabeth Warren (D-Mass.), Tom Harkin (D-Iowa), Jeanne Shaheen (D-N.H.), Barbara Boxer (D-Calif.), Richard Blumenthal (D-Conn.) and Dianne Feinstein (D-Calif.) here.

http://big.assets.huffingtonpost.com/derivativesletter.pdf

On Too Big to Fail, All the Warning Lights Are Flashing Red

"Too Big to Fail" banks played a key role in causing the last financial crisis. Since then they've grown even bigger, without much discouragement from the government (and in some cases with government support). Not a single executive has been prosecuted, despite their rampant lawbreaking, which means that there's been no effective deterrent against reckless and illegal behavior.
And, with millions still unemployed and hundreds of millions still suffering the economic after-effects of the last crisis, we're just about due for the next one.  That's why we convened a panel at last weekend's Netroots Nation conference titled "Stopping the Next Depression: Ending Too Big to Fail."  And that's why our first question was, "What would happen if the 40 million people who live in underwater American homes went on a mortgage strike?"
The panelists included Sen. Jeff Merkley, D-OR; Phil Angelides, former California State Treasurer, gubernatorial candidate, and Chair of the Financial Crisis Inquiry Commission; author Robert Kuttner (Debtors' Prison); and professor/author Anat Admati (The Bankers' New Clothes).
Here are some of the key points we addressed:
The jobs crisis created by the 2008 crisis is much deeper and long-lasting than that caused by any recession since the Great Depression of the 1980s. (See Figure 1, below.)
The total economic loss from 2008 crisis is roughly the same as that we experienced during the Great Depression, but stretched out over a longer period of time. (See "The Long Depression.")
Without proper regulatory protections, we're  likely to see recessions re-occurring every five to seven, or seven to ten, years. JPMorgan Chase CEO Jamie Dimon even bragged about it, saying in 2010:

"It's not a surprise that we know we have crises every five or 10 years. My daughter came home from school one day and said, 'Daddy, what's a financial crisis?' And without trying to be funny, I said, 'it's the type of thing that happens every five, 10, seven, years.' And she said: 'Why is everybody so surprised?'"

Dimon later said, "This bank is anti-fragile. We actually benefit from downturns." In other words, misery is their business model.
Recessionary cycles have more or less tended to follow the "Dimon's daughter" pattern during periods of regulatory underenforcement, which is what we have now.  That means the next recession could come along at any time. With mega-banks even bigger than they were before, and with so much economic damage and fragility left over from the last crisis, the next recession could lead to a major worldwide depression.
The financial sector had exploded in size before the last crisis, sucking all the oxygen out of the economy by diverting profits into nonproductive financial speculation.  (See Figure 2, below.) After the 2008 crisis it promptly began expanding again.  And Too Big to Fail became an even bigger problem: Assets at the top five U.S. banks now exceed half the Gross Domestic Product of the entire country, up from 42 percent. (See Figure 3.) That growth was spurred in part by mergers conducted with the government's approval -- or even at its insistence.
There is still an enormous amount of outstanding derivatives risk, and markets for several over-the-counter (OTC) securities are even more concentrated than they were before the 2008 crisis. (Slides that cover those last two points, and several of those which follow, are included in the PowerPoint presentation embedded at the bottom of this post.)
The bankers who inflated the real estate market in the run-up to the crisis are up to their old tricks, using their old tools.  Dead economic ideas have risen from the grave to threaten us again, thanks in large part to the systemically corrupt relationship between money and political power.
What's Washington doing about it? Republicans are working feverishly to neutralize the already-weak Dodd/Frank reform act, while the Obama Justice Department's shameful lack of prosecutions has given bankers free rein to continue defrauding customers (see David Dayen's piece on Bank of America) and laying the groundwork for future economic disasters.
We ran out of time for questions during the panel, in part because we on the panel talked for a long time. It was exacerbated by a couple longish questions, including one which I thought haranguing Sen. Merkley a little unfairly.
(As an aside, "Q&A time" at these events is always heavier on the "A" than the "Q."  Occasionally a questioner may act as if they were on some inverted version of Jeopardy!, where "your questions must be phrased in the form of an answer" rather than vice versa. You know what I mean...)
Here are the questions I would've liked to ask the panel, if we had found the time:
Why are bankers treated as economic experts? Reporters and politicians are still asking their opinions, which encourages them to engage in self-serving political stunts like "Fix the Debt." It's like going to the captain of the Exxon Valdez for advice on navigation. They shouldn't even be treated as banking experts, much less as economic ones.
How do we explain to the public that top bankers are actually quite unimpressive and have underperformed both managerially and economically?
How do we educate decision-makers and influence leaders? Anat Admati and her co-author wrote in The Bankers' New Clothes: "In trying to engage with policymakers and others on the issues, we discovered that many of them had no interest in engaging in the issues - not because of what they knew or did not know but because of what they wanted to know."
Or, I would assume, what they wanted not to know.  How do we address this problem among a) economists, b) politicians, and c) journalists and pundits?
Can the Fed do more? Should it step outside its traditional role to do so?
If you could tell the average American one thing she or he doesn't know about America's big banks, what would it be?
What is one government response to the financial crisis which you simply -- and naively -- assumed would be done and hasn't been done?
How great a danger does shadow banking pose?  How can it be controlled?
What's the right amount of allowable leverage?
How can we generate a shift in general or cultural perception, so that people understand we don't have to submit to unjust banking behavior or tolerate too-big-to-fail banks? And, in a related question:
How can we implement a "culture of shame" against bankers behaving badly?
I'm sure you'll have some questions of your own after watching the video. Here are some figures, pulled from my slide presentation (which is at the bottom of this page).
Figure 1: Jobs lost since onset of recession


Figure 2: Growth in financial sector


Figure 3: Bank size as percent of GDP


Its coming and no one is watching again

The Scam Wall Street Learned From the Mafia

The Last Mystery of the Financial Crisis

It's long been suspected that ratings agencies like Moody's and Standard & Poor's helped trigger the meltdown. A new trove of embarrassing documents shows how they did it

by Matt Taibbi

JUNE 19, 2013

What about the ratings agencies?
That's what "they" always say about the financial crisis and the teeming rat's nest of corruption it left behind. Everybody else got plenty of blame: the greed-fattened banks, the sleeping regulators, the unscrupulous mortgage hucksters like spray-tanned Countrywide ex-CEO Angelo Mozilo.
But what about the ratings agencies? Isn't it true that almost none of the fraud that's swallowed Wall Street in the past decade could have taken place without companies like Moody's and Standard & Poor's rubber-stamping it? Aren't they guilty, too?
Man, are they ever. And a lot more than even the least generous of us suspected.
Everything Is Rigged: The Biggest Price-Fixing Scandal Ever
Thanks to a mountain of evidence gathered for a pair of major lawsuits by the San Diego-based law firm Robbins Geller Rudman & Dowd, documents that for the most part have never been seen by the general public, we now know that the nation's two top ratings companies, Moody's and S&P, have for many years been shameless tools for the banks, willing to give just about anything a high rating in exchange for cash.
In incriminating e-mail after incriminating e-mail, executives and analysts from these companies are caught admitting their entire business model is crooked.
"Lord help our fucking scam . . . this has to be the stupidest place I have worked at," writes one Standard & Poor's executive. "As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it," confesses a high-ranking S&P analyst. "If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value," complains another senior S&P man. "Let's hope we are all wealthy and retired by the time this house of card[s] falters," ruminates one more.
Ratings agencies are the glue that ostensibly holds the entire financial industry together. These gigantic companies – also known as Nationally Recognized Statistical Rating Organizations, or NRSROs – have teams of examiners who analyze companies, cities, towns, countries, mortgage borrowers, anybody or anything that takes on debt or creates an investment vehicle.
Their primary function is to help define what's safe to buy, and what isn't. A triple-A rating is to the financial world what the USDA seal of approval is to a meat-eater, or virginity is to a Catholic. It's supposed to be sacrosanct, inviolable: According to Moody's own reports, AAA investments "should survive the equivalent of the U.S. Great Depression."
The Scam Wall Street Learned From the Mafia
It's not a stretch to say the whole financial industry revolves around the compass point of the absolutely safe AAA rating. But the financial crisis happened because AAA ratings stopped being something that had to be earned and turned into something that could be paid for.
That this happened is even more amazing because these companies naturally have powerful leverage over their clients, as they are part of a quasi-protected industry that enjoys massive de facto state subsidies. Largely that's because government agencies like the Securities and Exchange Commission often force private companies to fulfill regulatory requirements by retaining or keeping in reserve certain fixed quantities of assets – bonds, securities, whatever – that have been rated highly by a "Nationally Recognized" ratings agency, like the "Big Three" of Moody's, S&P and Fitch. So while they're not quite part of the official regulatory infrastructure, they might as well be.
It's not like the iniquity of the ratings agencies had gone completely unnoticed before. The Financial Crisis Inquiry Commission published a case study in 2011 of Moody's in particular and discovered that between 2000 and 2007, the agency gave nearly 45,000 mortgage-backed securities AAA ratings. One year Moody's doled out AAA ratings to 30 mortgage-backed securities every day, 83 percent of which were ultimately downgraded. "This crisis could not have happened without the rating agencies," the commission concluded.
Thanks to these documents, we now know how that happened. And showing as they do the back-and-forth between the country's top ratings agencies and one of America's biggest investment banks (Morgan Stanley) in advance of two major subprime deals, they also lay out in detail the evolution of the industrywide fraud that led to implosion of the world economy – how banks, hedge funds, mortgage lenders and ratings agencies, working at an extraordinary level of cooperation, teamed up to disguise and then sell near-worthless loans as AAA securities. It's the black box in the American financial airplane.
In April, Moody's and Standard & Poor's settled the lawsuits for a reported $225 million. Brought by a diverse group of institutional plaintiffs with King County, Washington, and the Abu Dhabi Commercial Bank taking the lead, the suits accused the ratings agencies of conspiring in the mid-to-late 2000s with Morgan Stanley to fraudulently induce heavy investment into a pair of doomed-to-implode subprime-laden deals, called Cheyne and Rhinebridge.
Stock prices for both companies soared at the settlement, with markets believing the firms would be spared the hell of reams of embarrassing evidence thrust into public view at trial. But in a quirk, an earlier judge's ruling had already made most of the documents in the case public. Although a few news outlets, including The New York Times, took note at the time, the vast majority of the material was never reported, and some was never seen by reporters at all. The cases revolved around a highly exotic and complex financial instrument called a SIV, or structured investment vehicle.
The SIV is a not-so-distant cousin of the special purpose entity, or SPE, which was the main weapon of destruction in the Enron scandal. The corporate scam du jour in those days was mass accounting fraud, in which a company would create an ostensibly independent corporate structure that would actually be controlled by its own executives, who would then move their company's liabilities off their own books and onto the remote-controlled SPE, hiding the firm's losses.
The SIV is a similar concept. They first started showing up in the late Eighties after banks discovered a loophole in international banking standards that allowed them to create SPE-like repositories full of assets like mortgage-backed securities and keep them off their own books.
These behemoths operated on the same basic concept as an ordinary bank, which borrows short-term cash from depositors and then lends money long-term in the form of things like mortgages, business loans, etc. The SIV did the same thing, borrowing short-term from investors and then investing long-term on things like student loans, car loans, subprime mortgages. Like banks, a SIV made money on the spread between its short-term debt and long-term investments. If a SIV borrowed on the commercial paper market at 3 percent but earned 6.5 percent on subprime mortgages, that was an easy 3.5 percent profit.
The big difference is a bank has regulatory capital requirements. A SIV doesn't, and being technically independent, its potential liabilities don't show up on the books of the megabank that created it. So the SIV structure allowed investment banks to create and take advantage of, without risk, billions of dollars of things like subprime loans, which became the centerpiece of the new trendy corporate scam – creating and then selling masses of risky mortgage-backed securities as AAA investments to institutional suckers.
Ratings agencies helped this game along in two ways. First, banks needed them to sign off on the bogus math of the subprime era – the math that allowed banks to turn pools of home loans belonging to people so broke they couldn't even afford down payments into securities with higher credit ratings than corporations with billions of dollars in assets. But banks also needed the ratings agencies to sign off on the safety and reliability of these off-balance-sheet SIV structures.
The first of the two SIVs in question was dreamed up by a London-based hedge fund called Cheyne Capital Management (pronounced like Dick "Cheney"), run by an ex-Morgan Stanley banker duo who hired their old firm to build and stock this vast floating Death Star of subprime loans.
Morgan Stanley had multiple motives for putting together the Cheyne deal. For one thing, it earned what the bank's lead structurer affectionately called "big fat upfront fees," which bank executives estimated would eventually add up to $25 million or $30 million. It was a lucrative business, and the top dogs wanted the deal badly. "I am very focused on . . . getting this deal done to get NY to stop freaking out" and "to make our money," said Robert Rooney, the senior Morgan Stanley executive on the deal. A spokesman for Morgan Stanley, however, told Rolling Stone, "Our sole economic interest was in the ongoing success of the SIV."
But that wasn't Morgan Stanley's only motive. Not only could the bank make the "big fat upfront fees" for structuring the deal, they could also turn around and sell scads of their own mortgage-backed securities to the SIV, which in turn would be marketed to investors like Abu Dhabi and King County. In Cheyne, 25 percent of the original assets in the deal came from Morgan Stanley – over time, $2 billion of the SIV's $9 billion to $10 billion portfolio of assets came from the bank as well.
Internal Morgan Stanley memorandums show that the bank knowingly stuffed mortgages in the SIV whose borrowers were, to say the least, highly suspect. "The real issue is that the loan requests do not make sense," complained a Morgan Stanley employee back in 2005. He noted loans had been made to a "tarot reading house" operator who claimed to make $12,000 a month, and a "knock off gold club distributor" who claimed to make $16,000 a month. "Compound these issues," he groaned, "with the fact that we are seeing what I would call a lot of this type of profile."
No matter – into the soup it went! Morgan sold mountains of this crap into Cheyne's SIV, where it was destined to be sold off to other suckers down the line. The only thing that could possibly get in the way of the scam was some pesky ratings agency.
Fortunately for the bank and the hedge fund, these subprime SIVs were a relatively new kind of investment product, so the ratings agencies had little to go on in the area of historical data to measure these products. One might think this would make the ratings agencies more conservative. In fact, caution in the face of the unknown was supposed to be a core value for these companies. As Moody's put it, "Triple-A structures should not be highly dependent on untestable assumptions."
But when it came to the Cheyne SIV, Moody's punted on caution. In an e-mail sent to executives from both Morgan Stanley and Cheyne in May 2005, David Rosa, a Moody's senior analyst, admitted that when it came to this SIV, he had nothing to go on.
"Please note that in relation to assumed spread [volatility] for the Aa and A there is no actual data backing up the current model assumptions," he wrote. In lieu of such data, he went on, "We will for now accept the proposal to use the same levels as [residential mortgage-backed securities] given that this assumption is supported by the analysis of the Aaa data . . . and Cheyne's comments on their views of this asset class."
Translation: We have no historical data, so we'll just accept your reasoning for the time being, even though you have every incentive in the world to lie about the quality of your product.
At one point, a Morgan Stanley analyst even claimed that the bank had written, in Moody's name, an entire 12-page "New Issue Report" for the Cheyne SIV – a kind of ratings summary in which Morgan Stanley appears to have given itself AAA ratings for large chunks of the deal. "I attach the Moody's NIR (that we ended up writing)," yawns Morgan Stanley fixed-income employee Rany Moubarak in a March 2006 e-mail. The attached document came proudly affixed with the "Moody's Investors Service" logo. (Both Moody's and Morgan Stanley deny that anyone other than Moody's wrote that report.)
Morgan Stanley ended up getting both Moody's and S&P to rate the deal, and that was not only common, it was basically industry practice. There were many reasons for this, but a big one was a concept called "notching," in which the agencies gave ratings penalties to any instrument that had not been rated by their own company. If a SIV contained a basket of mortgage-backed securities rated AA by Standard & Poor's, Moody's might "notch" those underlying securities down to A, or even lower. This incentivized the banks to hire as many ratings agencies as possible to rate every investment vehicle they created.
Again, despite the fact that the ratings agencies enjoyed broad quasi-official subsidies, and despite the powerful market leverage that techniques like "notching" gave them, they still routinely chose to roll over for banks. And the biggest companies were equally guilty. In the case of the Cheyne deal, Standard & Poor's was every bit as craven as Moody's.
In September 2004, an S&P analyst named Lapo Guadagnuolo sent an e-mail to Stephen McCabe, the agency's lead "quant" on the Cheyne deal, who apparently was on vacation. The e-mail chain was mostly a bunch of office gossip, where the two men e-whispered about an employee who was about to quit. But sandwiched in the office banter was an offhand line about the Cheyne deal and how full of shit it was. "Hi Steve!" Guadagnuolo wrote cheerily, adding, "How is Australia and how was Thailand????Back to [Cheyne] . . . As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it . . .
"Thanks and regards . . . have you heard that [redacted] has resigned . . . and somebody else will follow suit today!!"
McCabe, blowing off the "no science behind it" comment, answered eagerly, "Who, Who, Who????" The quadruple question mark must be an S&P-ism.
A month later, McCabe seemed more concerned about the lack of science in the Cheyne deal. He complained in an e-mail to his boss, Kai Gilkes, who was the agency's senior quantitative analyst in Europe.
"From looking at the numbers it is quite obvious that we have just stuck our preverbal [sic] finger in the air!!" he fumed.
Gilkes was experiencing his own crisis of conscience by mid-2005, complaining in an oddly wistful e-mail to another S&P employee that the good old days of just giving things the ratings they deserved were disappearing. "Remember the dream of being able to defend the model with sound empirical research?" he wrote on June 17th, 2005. "If we are just going to make it up in order to rate deals, then quants are of precious little value."
Frank Parisi, Standard & Poor's chief credit officer for structured finance, was even more downtrodden, saying that the model that his company used to rate residential mortgage-backed securities in 2005 and 2006 was only marginally more accurate than "if you just simply flipped a coin."
Given all of this, why would top analysts from both Moody's and Standard & Poor's rate such a massive deal like Cheyne without any science to back it up? The answer was simple: money. In the old days, ratings agencies lived on subscriptions sold to investors, meaning they were compensated – indirectly, incidentally – by the people buying the financial products.
But over time, that model morphed into the current "issuer pays" model, in which a company like Moody's or Standard & Poor's is paid directly by the "issuer" – i.e., the company that is actually making the financial product.
For Cheyne, for instance, the agencies were paid in the area of $1 million to $1.5 million to rate the deal by Morgan Stanley, the very company with an interest in getting a high rating. It's the ultimate in negative incentives, and was and continues to be a major impediment to honest analysis on Wall Street. Michigan Sen. Carl Levin, one of the few lawmakers to focus on reforming the ratings agencies after the crash, put it this way: "It's like one of the parties in court paying the judge's salary."
Thanks to this model, ratings-agency business soared during the bubble era. A Senate report found that fees for the "Big Three" doubled between 2002 and 2007, from $3 billion to $6 billion. Fees for rating mortgage-backed securities at both Moody's and S&P nearly quadrupled.
So there were powerful incentives to whitewash deals like Cheyne. The eventual president of Moody's, Brian Clarkson, actually copped to this awful truth in writing, in a 2004 internal e-mail. "To put it bluntly," he wrote, "the issuer could take its business elsewhere unless the rating agency provides a higher rating."
Both Moody's and Standard & Poor's employees described complex/exotic new financial products like CDOs and SIVs as "cash cows," and behind closed doors, executives talked openly about the financial pressure to give scientifically unfounded analysis to products the banks wanted to sell.
The minutes from a 2007 conference of Standard & Poor's executives show that the raters knew they were in way over their heads. Admitting that it was virtually impossible to accurately rate, say, a synthetic derivative loan deal with underlying assets in China and Russia, one executive candidly admits, "We do not have the capacity nor the skills in house to rate something like this." Another counters, "Market pressures have significantly risen due to 'hot money.'" The first retorts that bankers are pushing boundaries, asking the raters to help them play the highly cynical hot-potato game, in which bad loans are originated en masse and then instantly passed off to suckers who will take on all the risk. "Bankers say why not originate bad loans, there is no penalty," the executive muses.
Hilariously – or tragically, depending on your point of view – an S&P executive at the conference even tossed off a quick visual sketch of their company's moral quandary. The picture is atrociously drawn (it looks like a junior high school student's rendering of a ganglion cell) and comes across like the Wall Street version of Hamlet, showing the industry traveling down a road and reaching a "Choice Point" crossroads, where the two options are "To Rate" and "Not Rate."
The former – basically taking the money and just rating whatever crap the banks toss their way – is crudely depicted as a wide, "well marked super highway." Meanwhile the honorable thing, not rating shitty investments, is shown to be a skinny little roadlet, marked "Dark and narrow path less traveled."
Obviously, the ratings agencies like S&P ultimately decided to take the road more traveled, choosing profits over scruples. Not that there wasn't some token resistance at first. For instance, some at S&P hesitated to allow the use of a questionable technique called "grandfathering," in which old and outdated rating models were used to rate newly issued investments.
In one damning e-mail chain in November 2005, a Morgan Stanley banker complains to an S&P executive named Elwyn Wong that S&P was preventing him from putting S&P ratings on Morgan Stanley deals that used this grandfathering technique. "My business is on 'pause' right now," the banker complains.
Wong took the news that S&P was holding up deals over the grandfathering issue badly. "Lord help our fucking scam," he said. "This has to be the stupidest place I have worked at." Wong, incidentally, was later hired by the U.S. Office of the Comptroller Currency, our top federal banking regulator.
The purists, however, couldn't hold out for long. In the Cheyne case, when one of the "quants" tried to hold the line, Morgan Stanley went over their heads to someone on the business side at the company to get the rating it wanted.
In July 2004, for instance, analyst Lapo Guadagnuolo sent an e-mail to Morgan Stanley's point man on the Cheyne deal, Gregg Drennan, and told him that the best he could do for the "mezzanine capital notes" or "MCN" piece of the SIV – a piece that Drennan wanted at least an A rating for – was BBB-plus. Drennan responded in an e-mail that CC'd Guadagnuolo's boss, Perry Inglis, telling him that Morgan Stanley "believe[s] the position the committee is taking is very inappropriate."
Ultimately, the analyst committee agreed to give the dubious Mezzanine Notes an A rating, marking the first time these middle-tier investments in a SIV ever received a public A rating. For Wall Street, this was occasion to par-tay. In the summer of 2005, one of the Cheyne hedge-funders sent out a celebratory e-mail to Morgan Stanley execs, bragging about getting the ratings companies to cave. "It is an amazing set of feats to move the rating agencies so far," the hedgie wrote. "We all do all this for one thing and I hope promotions are a given. Let's hope big bonuses are to follow."
Later on, S&P caved even further, agreeing to allow Morgan Stanley to lower the "capital buffer" in the deal protecting investors without suffering a ratings penalty. As late as February 1st, 2006, Guadagnuolo was defiantly telling Morgan Stanley that the one-percent buffer was a "pillar of our analysis." But by the next day, Morgan Stanley executive Moubarak had chopped Guadagnuolo's knees out. He cheerfully announced in a group e-mail that the bank had managed to remove this "pillar" and get the buffer knocked down to .75 percent.
Tina Sprinz, who worked for the Cheyne hedge fund, sent an e-mail that very day to Moubarak, thanking him for straightening out the pesky analysts. "Thanks for negotiating that," she says. The ratings process shouldn't be a "negotiation," yet this word appears throughout these documents.
In the Cheyne deal, just the plaintiffs in the lawsuit invested a total of $980 million in "rated notes," and those who invested in these "MCNs" were completely wiped out. Analysts from both agencies would express regret and/or trepidation about their roles in unleashing the monster deals and their failure to stop the business-side suits running the companies from selling them out. Gilkes, the S&P analyst who worried about shunning real science in favor of just making things up, later testified that the subprime assets in such SIVs were "not appropriate."
"They should not have been rated," he said.
If the significance of Cheyne is that it showed how the ratings agencies sold out in an effort to get business, the significance of the next deal, Rhinebridge, is that it showed how low they were willing to stoop to keep that business.
Rhinebridge was a subprime-packed SIV structured very much like Cheyne, only both the quality of the underlying crap in the SIV and the timing of the SIV's launch were significantly more horrible than even Cheyne's.
Not only did Morgan Stanley insist that the ratings agencies allow the bank to pack Rhinebridge full of a much higher quantity of subprime than in the Cheyne deal, they were also pushing this massive blob of toxic mortgages at a time when the subprime market was already approaching full collapse.
In fact, the Rhinebridge deal would launch with high ratings from both agencies on June 27th, 2007, less than two weeks before both Moody's and S&P would downgrade hundreds of subprime mortgage-backed securities. In other words, both Moody's and S&P were almost certainly in the process of downgrading the underlying assets in the Rhinebridge SIV even as they were preparing to launch Rhinebridge with AAA-rated notes.
"It was the briefest AAA rating in history," says the plaintiffs' lawyer Dan Drosman. "Rhinebridge went from AAA to junk in a matter of months."
There is an enormous documentary record in both agencies showing that analysts and executives knew a bust was coming long before they sent Rhinebridge out into the world with a AAA label. As early as 2005, S&P was talking in internal memorandums about a "bubble" in the real-estate markets, and in 2006 it knew that there had been "rampant appraisal and underwriting fraud for quite some time," causing "rising delinquencies" and "nightmare mortgages."
In June 2007, the same month Rhinebridge was launched, S&P's Board of Directors Report talked about a total collapse of the market. "The meltdown of the subprime-mortgage market will increase both foreclosures and the overhang of homes for sale."
It was no better at Moody's, where in June 2007, executives were internally discussing "increased amounts of lying on income" and "increased amounts of occupancy misstatements" in mortgage applications. Clarkson, who would become president two months later, was told the week before Rhinebridge launched that "most players in the market" believed subprime would "perform extremely poorly," and that the problems were "quite serious."
Yet the two ratings agencies not only kept those concerns private, they both took outlandish steps to declare just the opposite.
In a pair of matching public papers, both Moody's and S&P proclaimed that summer that while subprime might be going to hell, subprime-packed investments like SIVs might be just fine. The Moody's report on July 18th read "SIVs: An Oasis of Calm in the Sub-prime Maelstrom," while an S&P report on August 14th, 2007, was titled "Report Says SIV Ratings Are Weathering Current Market Disruptions."
The S&P report was so brazen that it even shocked a Morgan Stanley banker involved in the SIV deals. "I cannot believe these morons would reaffirm in this market," chortled the banker in an e-mail the day after the paper was released.
Rhinebridge, cheyne and a hell of a lot of other subprime investments ultimately blew to smithereens, taking with them vast amounts of cash – 40 percent of the world's wealth was wiped out in the aftermath of the mortgage bubble, according to some estimates. 2008 was to the American economy what 9/11 was to national security. Yet while 9/11 prompted the U.S. government to tear up half the Constitution in the name of public safety, after 2008, authorities went in the other direction. If you can imagine a post-9/11 scenario where there were no metal detectors at airports and people could walk on carrying chain saws and meat cleavers, you get a rough idea of what was done to reform the ratings process.
Specifically, very little was done to change the way AAA ratings are created – the "issuer pays" model still exists, and the "Big Three" retain roughly the same market share. An effort by Minnesota Sen. Al Franken to change the compensation model through a new approach under which agencies would be assigned to rate new issues through a government agency passed overwhelmingly in the Senate, but in the House it was relegated to a study by the SEC – which released its findings last year, calling for . . . more study. "The conflict of interest still exists in the exact same way," says a frustrated Franken.
The companies by now are all the way back in black. In 2012, for instance, Moody's profits soared 22 percent, to $1.18 billion. McGraw-Hill, the parent company of Standard & Poor's, scored $437 million in profits last year, with the rating business accounting for 70 percent of the company's profits.
In February, the Obama Justice Department, in an action that seems belated, filed a $5 billion civil suit against Standard & Poor's, drawing upon some of the same data and documents that were part of the Cheyne and Rhinebridge suits. As part of that action, high-ranking officials at S&P were interviewed by government investigators and admitted that they had shaded their ratings methodologies to protect market share. In this deposition of Richard Gugliada, head of S&P's CDO operations, the government asks why the company was slow to implement updates to its model for evaluating CDOs:
Q: Is it fair to say that Standard & Poor's goal of preserving an increasing market share and profits from ratings fees influence the development of the updates to the CDO evaluator?
A: In part, correct.
Q: The main reason to avoid a reduction in the noninvestment grade ratings business was to preserve S&P's market share in that category, correct?
A: Correct.
Years after the crash, it's a little insulting to see industry analysts blithely copping under oath to having traded science for market share, especially since the companies continue to protest to the contrary in public. Contacted for this story, Moody's and S&P insisted many of the documents in this case were simply taken out of context, and that their analysis throughout has been rigorous, objective and independent.
It's a thin defense, but it's holding – for now. McGraw-Hill stock plunged nearly 14 percent when news of the Justice Department suit leaked, and dropped nearly 19 percent for February, but has since regained much of its value – its stock rose nearly 16 percent in March and April, as markets reacted favorably to, among other things, its recent settlement of the Cheyne and Rhinebridge suits. The markets clearly think the ratings agencies will survive.
What's amazing about this is that even without a mass of ugly documentary evidence proving their incompetence and corruption, these firms ought to be out of business. Even if they just accidentally sucked this badly, that should be enough to persuade the markets to look to a different model, different companies, different ratings methodologies.
But we know now that it was no accident. What happened to the ratings agencies during the financial crisis, and what is likely still happening within their walls, is a phenomenon as old as business itself. Given a choice between money and integrity, they took the money. Which wouldn't be quite so bad if they weren't in the integrity business.
This story is from the July 4 - July 18, 2013 issue of Rolling Stone