Weekend Economists Sit on a Wall August 23-25, 2013

[Demeter]

40. On the SEC’s Too Little, Too Late “Fabulous Fab” CDO Victory YVES SMITH

http://www.nakedcapitalism.com/2013/08/on-the-secs-too-little-too-late-fabulous-fab-cdo-victory.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Narrowly speaking, it’s good that the SEC won its case against ex-Goldman staffer Fabrice Tourre for his role in marketing a toxic CDO to bond insurer ACA. The SEC has been depicted, heretofore correctly, as the gang that couldn’t shoot straight when it comes to litigating anything much beyond its comfort zone of insider trading cases. The Tourre victory provides a badly needed boost to moral and may embolden the agency in future cases, particularly now that star litigator Mary Jo White heads the agency.

But let’s not kid ourselves as to what this verdict amounts to. We had a meteor-hitting-the-planet-and-nearly-killing-the-dinousars level financial crisis, with the special part the meteor hitting the planet wasn’t an accident. As pundits, some candid current and ex regulators, deeply frustrated members of the public, and various interest groups, ranging from wonky (Better Markets) to broad-based (Occupy Wall Street) have said, individuals need to be held accountable to prevent this sort of disaster from happening again. CEOs doing the perp walk was what the public wanted to see. Instead, six years later, we have one young guy at Goldman who will disgorge some income and be barred from working in the industry (for how long yet to be determined). This is so far short of what needed to happen that it’s pathetic to see the SEC high-fiving over its win.

There were paths to getting individuals in jail or at least seriously denting their reputations and balance sheets had there had there been political will. Eliot Spitzer set forth one in the movie Inside Job, which was to prosecute individuals on clear criminal abuses, which was hiring hookers and paying for drugs on the company nickel, typically done via “research” paid to improbable vendors, like madams (aside from the information provided by one such recipient of Wall Street “research” money in Inside Job, read another ex-Goldman CDO salesman Testsuya Ishikawa, who’s thinly disguised autobiography, “How I Caused the Credit Crisis” gives some long-form examples of how important prostitutes and drugs were in getting clients to agree to buy dreck). Spitzer argued you needed to treat Wall Street like the mob, bust the foot soldiers on the not-too-hard-to-prove criminal charges, and press to get them to turn state’s evidence on juicier stuff (and one has to wonder how many of the lower rate tranches of CDOs would have been sold absent the suborning of the decision-makers at the employees. Choking off the supply of bribes in the form of hookers and drugs to clients might in and of itself produce meaningful changes in buy-side behavior).

Charles Ferguson, the Oscar-winning producer of Inside Job set forth a second path in his book Predator Nation, that of prosecuting the institutions, with a lengthy discussion of how evidence in the public domain was sufficient to indict several specific players (Ferguson also made clear that he’d merely chosen them as examples, that this was a target-rich environment). The problem with that is that prosecuting a company is a nuclear option. Some counterparties like government investors are prohibited from doing business with a business that has been indicted, others will increase haircuts and reduce exposures in light of the risk that the prosecution might prevail....MORE