In the aftermath of the financial crisis, it was truly amazing to watch as the world slowly came to grips with the reality that the vaunted institutions entrusted with promoting and preserving the stability of the global financial system were not only responsible for its collapse, but had for years engaged in the rigging of everything from benchmark rates to FX to gold.
It wasn’t so much that the public completely trusted Wall Street. Rather, it was the blatant character of the manipulation and the sheer scope of the endemic corruption and greed that took average investors off guard. The public, for instance, couldn’t understand how a Wall Street firm could create a product based on mortgages for the sole purpose of betting against that product even as it encouraged investors to take the other side. Similarly, the notion that there were cabals of bankers calling themselves things like “The Cartel” working in concert to rig the very benchmarks on which trillions in lending is based was beyond the imagination of the naive masses.
To be sure, the novelty has worn off at this point. Everyone knows it was all rigged and indeed, it doesn’t even seem like anyone is amused by the ridiculous “cartel” chat room transcripts anymore.
Part of the reason the public has become so numb to the nefarious activities of bulge bracket bankers is that none of them are ever held accountable. As we’ve joked on a number of occasions, Washington’s inept regulators (who are for the most part in Wall Street’s pocket anyway) routinely put bank logos in jail and levy token fines that amount to a fraction of firms’ operating profits, but no real people are ever punished.
Recently, London took the unprecedented step of sending a banker to jail, when the “Rain Man” Tom Hayes was sentenced to 14 years, but that’s a far cry from an Iceland-style situation where the government embarks on a serious effort to punish those responsible for financial chicanery.
Could the US be about to change course and actually go after bank executives? We doubt it, but as WSJ reports [8], Federal prosecutors are actively pursuing criminal cases against executives from RBS and JP Morgan in connection with their roles in packaging shoddy mortgages. Here’s more:
Federal prosecutors are actively pursuing criminal cases against executives from Royal Bank of Scotland Group PLC and J.P. Morgan Chase & Co. for allegedly selling flawed mortgage securities, people familiar with the probes said, as the clock ticks down for bringing cases from the 2008 financial crisis.
Officials are working to establish that the bankers ignored warnings from associates that they were packaging too many shaky mortgages into investment offerings and are weighing whether they can prove that constituted fraud, the people said.
At RBS, prosecutors are scrutinizing a $2.2 billion deal that repackaged home mortgages into bonds in 2007, the people said. In a 2013 civil settlement with RBS, the Securities and Exchange Commission described the lead banker on that deal, whom it didn’t name, as trying to push it through over concerns of the diligence department.
At J.P. Morgan, prosecutors are focusing on two people who worked on a different residential-mortgage deal, the people said.
J.P. Morgan noted the existence of a criminal probe in a Nov. 2 quarterly securities filing. A spokesman declined to comment beyond that document.
Some Justice Department officials said they believe they have a viable criminal case in the RBS probe, although a decision on whether to bring charges isn’t expected until early next year, the people said. The J.P. Morgan probe has long been stalled because officials have been divided over whether they have sufficient evidence to charge anyone with a crime but it has recently picked up steam, they said.
If filed, the charges would be among the first pursued against specific employees of the largest Wall Street firms over the housing collapse. Since the crisis, big banks have paid billions of dollars in settlements, but the lack of convictions has sparked political controversy.
Several U.S. attorney’s offices have used funds from the bank settlements to hire additional temporary staff for mortgage-backed securities investigations. The Brooklyn, N.Y., office recently advertised four such positions that are expected to end in September 2017.
The RBS and J.P. Morgan probes are the most concrete criminal investigations currently active under the effort.
The J.P. Morgan criminal probe flows directly from the Sacramento civil investigation, in which prosecutors unearthed a 2007 memo written by a bank employee warning her bosses before the financial crisis hit that they were putting bad loans into securities—warnings that were ignored. That memo helped the Justice Department develop a legal basis for the then-record 2013 settlement.
The RBS investigation by the U.S. attorney’s office in Boston mirrors a November 2013 civil settlement in which the bank agreed to pay $150 million to resolve SEC claims that it misled investors on a $2.2 billion subprime-mortgage offering in 2007, people familiar with the probe said.
So there you go America. Just hold your breath and wait for federal prosecutors to haul away some folks in handcuffs nearly a decade after they made billions selling you on a mortgage you couldn't afford so they could package it and sell it back to you in the form of a security they knew was bad.
And while the US Attorney's office debates whether to open Pandora's Box by actually holding real people accountable for their actions, we're sure they'll be plenty of lobbying and campaign donations and perhaps a few regulatory appointments which should help to ensure that at the end of the day, crime on Wall Street does indeed still pay.
