On Wall Street Crime Pays - A 350% IRR To Be Exact

Previously we showed that when it comes to Wall Street's returns, the 8% market return benchmark that every first year analyst finds in Ibbotson's is for naive amateurs. With corporate lobbying returning anywhere between 5,900% and 77,500%, the real money is to be made in the buying and selling of politicians. Yet in our day and age, when information propagates rapidly and when political muppets can be exposed for the Wall Street purchased frauds they are, lobbying is getting increasingly more complicated. Which leaves one other high returning "investment", which unlike lobbying is completely riskless when one is a Wall Street firm: crime. But not just any crime, the type of crime where a firm settles "without admitting or denying guilt" and in the process is slapped with a fine that barely covers the government's legal fees. Case in point: U.S. v. Morgan Stanley, U.S. District Court, Southern District of New York Case #11-6875, where MS was punished with the epic disgorgement penalty of $4.8 million. Of course, the fact that Morgan Stanley, who did not admit wrongdoing, generated profits of $21.6 million, is merely a triviality. But a useful one: it allows to calculate that on Wall Street crime does pay, and the IRR is in give or take 350%.

This is what happened:

Morgan Stanley (MS) won approval of a $4.8 million accord with the U.S. over claims it helped manipulate electricity prices, in what the Justice Department called its first effort to get disgorgement from a financial firm that used derivatives to aid anticompetitive behavior.


In accepting the agreement, U.S. District Judge William Pauley in Manhattan turned aside complaints from a not-for- profit organization that Morgan Stanley didn’t admit wrongdoing. Pauley, citing the Justice Department, said the case marks the first time the government filed an antitrust suit against a financial firm involving derivative agreements.


Disgorgement of $4.8 million is a relatively mild sanction,” Pauley wrote. “But despite this court’s misgivings, the government’s decision to settle for less than full damages is entitled to judicial deference, particularly in view of the novelty of the government’s theory.”

The ever efficient US government did such a bang up job it could not even get Morgan Stanley to admit guilt. But at least it paid up... a full 25% of what it made in profit as a result of the crime:

Critics of the settlement sought an admission of wrongdoing by Morgan Stanley and said the New York- based firm should have been required to pay the full $21.6 million it earned to settle claims it aided efforts by Brooklyn, New York-based KeySpan Corp. to manipulate electricity prices.

Of course, by now a red light should be going off at the memory of a firm caught manipulating electricity prices and using any and all Wall Street inspired derivatives at its disposal to engage in anti-competitive behavior. The memory of course is of a firm called Enron, which promptly liquidated after being crucified in a court of public law. Naturally, when it comes to Wall Street corporations, which by now are fully in control not only of the legislative but the judicial branches, the best one can hope for is that the profit said firm makes at the final ruling is not enough to cover the deal team's bonus... assuming 1,000,000% inflation.

As for the punchline:

This settlement should send a message to the financial services community that the antitrust division will vigorously pursue anyone who engages in anticompetitive conduct in the derivatives industry,” Gina Talamona, a Justice Department spokeswoman, said in an e-mail statement.

It is unclear if the proper response to this idiotic statement is crying or laughter.