Over the past few months, we have learned about extraordinary levels of excessively bad corporate behavior.
As bad as the Bailouts were from an economic, wealth transfer, and moral hazard perspectives, it turns out that the grim reality was an order of magnitude worse than previously believed.
We have since learned that many TARP recipients, bailed out banks and other ne’er-do-wells were actively engaged in cooking their books. I don’t mean various FASB 157 permission to lie, and other legal but nefarious activities. I am referring to the 2002-2007 era of scams, frauds, and outright theft.
The public’s righteous indignation over the lack of just desserts for the perpetrators of these frauds has morphed since September 2008 into an unresolved, unfocused anger. When this all plays out, we might very well see bonus clawbacks, fines and penalties, disgorgement of ill gotten gains, and criminal arrests for some of the major names at the biggest brokerage houses.
Why do I think that 2 years later, some justice might be done? The truth is slowly coming out, as insiders provide testimony, release papers, and even offer up recordings of conversations to various investigators and prosecutors.
"¢ Lehman Brothers: used “Repo 105 transactions” to remove $50 billion of liquid assets from the balance sheet at quarter-end in 2008 in order to mislead investors as to Lehman's net leverage. It also hid from view billions of dollars worth of troubled assets. The latest reveal is that Lehman CEO Dick Fuld was aware of this accounting technique. Do not be surprised to see some form of indictment of Dick Fuld over the next 12 months;
"¢ Merrill Lynch: Engaged in a different but just as nefarious technique to hide leverage and losses , thereby to misleading public investors, the NYT reported yesterday:
“Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.”
This took place during the riegn of Stan O’Neal, who left Mother Merrill with an egregious $161.5 million in severance.
"¢ Citigroup: Similarly shifted CDO risks and leverage off its books, failing to disclose them to investors and regulators during the era of Citi with Chuck Prince as CEO (who walked away with over $40 million in severance).
"¢ Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A: What of the rest of the major banks and investment houses? I recently asked a very savvy credit analyst about who else engaged in these SIVs, swaps, off balance transactions, and other fraud with the intent to deceive investors and regulators.
His answer?
“Pretty much all of them. The only exceptions are probably Goldman Sachs and JP Morgan (I have no evidence they did this). The rest of the Street either are known to, or are unknown but likely to have engaged in the same behavior. Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A, all of them.”
Lacking evidentiary proof, I was not permitted to quote him by name.
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I have long believed that the general anger of the public about the bailouts were about the inherent injustice in bailing out incompetent bankers who made tidy profits and huge bonuses through their own incompetence.
It turns out that this was more than mere incompetence, this was a malicious fraud, a full on intent to deceive the investing public in order to grab huge bonuses, economic consequences tot he nation be damned.
But the noose is slowly tightening. The FCIC has undercovered documented illegal behavior, while a newly revitalized SEC opens more cases.
In the post Sarbanes-Oxeley era, where CEOs signed off on their accounting statements and quarter earnings release, that calls for investigation, prosecution, confiscation — and jail time. As much as the public has been frustrated, they may very well see some justice soon . . .
The following paragraph from Louis Story’s NYT article demanded reproduction:
“In forming Pyxis and other programs, Merrill guaranteed the notes they issued by agreeing to take back any securities put in the programs that turned out to be of poor quality. In other words, these vehicles were essentially buying pieces of C.D.O.'s from Merrill using the proceeds of notes guaranteed by Merrill and leaving Merrill on the hook for any losses.”
How could that possibly go wrong?
Can you promise this will happen?:)
Bad Bankers ,that was so yesterday. Get with it Ritholtz.
While perp walks and clawbacks will make some people feel better, will it really change how Wall Street works? Really?
well, there are mid-terms (Elections) coming up..
prob., as good a time as any for some add’l GS/Blankfein-style ‘Show Trials’..
I’ll riff from the statement “as insiders provide testimony, release papers, and even offer up recordings of conversations to various investigators and prosecutors.” OK, so there are lot of mid-level managers who can see that the gravy train is not going to stop for them this time around and the only way to get ahead is to shaft the guys above them. for ancientone, yeah, for a couple of years if we are lucky.
BR daydreamed:
As much as the public has been frustrated, they may very well see some justice soon . . .
reply: ————- I love the smell of hopium in the morning. More realistically define “some justice”. In the real world, the best you will see is a minor flunky being chastised in the papers or on the web about a snarky email relating to one of these subjects that was unfortunately discovered.
I could go on and on but why bother. Nothing is going to happen to 99.9% of these people and they know it. Uncle Stupid has unending excuses about not getting involved beyond the dog and pony show hearings.
~~~
BR: Care to make it interesting?
I bet you a C-level exec from a major finance institution is indicted over the next 18 months.
How about betting me Family Guy – The Total World Domination Collection (Stewie Head Packaging) ?
In the case of “Repo 105″, I am yet to be convinced that this was not a complete shell game with no actual cash committed by any third parties. AT that point in time, what third party would commit real cash to any transaction with LEH against a whole load of cr*p securities and why?
Follow the money?
I am glad you specifically focused the timeframe on “2001-2008″ because I keep forgetting we haven’t had any fraudulent banker activity before or after.
To be more precise, I should have said 2002-07.
The CDO boom did not take hold until after the housing spiral began in earnest in ‘02. From 2008 forward, the banks were too busy writing down billions in bad debt to worry about hiding anything
This is not about fraud in general or scams over history — i am referencing the specific Housing/securitized debt/derivitive hiding/leverage criminilatiy of the last boom and bust.
Try to keep up . . .
you’re in la la land
Just a reminder: The Pecora Commission was the fourth attempt at investigation into Wall Street’s evil ways back in the day. There were indictments and trials into the late ’30s. Barry’s right, there’s lots more to come especially if we have a double dip with equities hitting new lows.
BR – how do you feel about Citi getting off with a slap on the wrist after defrauding shareholders to the tune of $40 billion? especially in light of GS’s hefty fine for a crime which, well, I’ll argue at length was much less egregious. And no – this is not an attempt to restart the GS guilty/innocent debate – only to point out that the Citi escape has gone largely unnoticed, while their crime (lying on a much larger scale to a much less sophisticated counterparty) was much greater.
“I am referring to the 2001-2008 era of scams, frauds, and outright theft.”
You believe it stopped in 2008, do you? Why would that be?
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BR: Once a bank collapse, it no longer has the need to hide its losses . . .
“But the noose is slowly tightening” At turtle speed. I bet the rabbit wins in the end.
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