ProPublica

Journalism in the Public Interest

Cancel

The Year in Wall Street Investigations

.

(Michael Loccisano/Getty Images)

It's been over three years since credit markets started shaking with the early tremors of the subprime crisis, and two years since that spread into a marketwide collapse. Prosecutors, regulators, Congress and journalists have spent the year uncovering the financial shenanigans that brought the market to its knees. It's been marked by a few blockbuster settlements and more revealing investigations -- as well as by some noticeable inaction in the reckoning.

Let's start at the ground level, with selling risky mortgages to homeowners. Nobody symbolized the subprime market -- from its growth to its downfall -- better than former Countrywide CEO Angelo Mozilo. This fall, the Securities and Exchange Commission reached a $67.5 million settlement with Mozilo in its only major case against a financial executive. The SEC charged Mozilo with praising Countrywide to investors while internally doubting its lending standards. As part of the settlement, Mozilo admitted no wrongdoing.

Moving up the finance chain, we come to the banks that sold mortgage deals to investors. Much of the scrutiny focuses on a type of mortgage deal called collateralized debt obligations, or CDOs, which are essentially bundles of other mortgage bonds that were sold off to investors.

Though nearly every bank is rumored to be under investigation, the year was marked by one major case looking at the CDO business. In April, the SEC accused Goldman Sachs of creating a mortgage deal that was designed to fail. The SEC's argument was that Goldman's hedge-fund client helped design the deal specifically to bet against it -- without Goldman explaining the relationship to investors. In July, Goldman settled for $550 million (or about two weeks' worth of profit), admitting a "mistake" but no wrongdoing.

The idea of betting against deals lies at the center of a number of other investigations as well. The SEC is looking into whether JPMorgan Chase allowed a hedge fund named Magnetar to choose assets for a mortgage deal without disclosing Magnetar's role in selecting what went into the deal. As ProPublica reported in April with the radio programs This American Life and NPR's Planet Money, Magnetar encouraged banks to put together riskier deals and bought the riskiest bond slices that otherwise may have been unsold. Magnetar then bet against some of those deals, standing to make far more by shorting its losses on those risky slices if the housing market went south.

U.S. prosecutors are also looking into whether Morgan Stanley created a series of CDOs that its own trading desks bet against, the Wall Street Journal reported in May. A few months later it reported on how Deutsche Bank also bet against the souring housing market at the same time it was marketing new mortgage deals.

The SEC is also looking into whether Citigroup improperly encouraged an independent manager to stuff a deal with leftover pieces of other deals that it couldn't sell in the market. In September, ProPublica and NPR's Planet Money reported on self-dealing among CDOs, showing how banks structured deals to buy portions of each others' often leftover inventory of hard-to-sell pieces. This created a daisy-chain of investments that manufactured demand, thereby prolonging the housing bubble. The SEC has said it is investigating one independent management firm and looking into about 50 others.

The year ended with rumors of mass settlements, where banks and the SEC settle broadly over their CDO practices rather than battling over individual deals, according to the Wall Street Journal.

Deal-by-deal fights may flame up in courts, however, with investors pushing banks to buy back sour deals, egged on by new evidence that banks may have known the mortgages underlying the deals were flawed. With such complicated shenanigans going on behind the scenes, investigators also want to know how banks hid their exposure to these risky securities from investors. The investigations are looking into various tactics, from general misstatements, like the Citigroup's $75 million settlement with the SEC for not disclosing $40 billion in subprime risk, to accounting maneuvers that moved certain deals off bank balance sheets.

In the spring, a court-appointed examiner in the bankruptcy of failed investment bank Lehman Brothers shined a light on a practice known as "Repo 105," where Lehman moved $50 billion in assets off its books right before it had to submit investor reports. Last week, the New York attorney general filed civil charges against the accounting firm Ernst & Young, saying it had "substantially assisted" Lehman's "house-of-cards business model" that misled investors. Executives from the now-bankrupt Lehman have not been charged.

Despite revelations coming up and down the financial spectrum, there have been no major criminal charges and almost no civil charges against executives. And while the SEC and some government prosecutors have been active, federal bank regulators have so far been quiet.

This all comes as Congress passed the Dodd-Frank financial reform bill this summer, seeking to overhaul the oversight of everything from mortgage securities to how banks make bets with their own money. As regulators hammer out the rules of the reforms, the devil may lie in the hotly contested details.

Steve Feldmann

Dec. 27, 2010, 3:27 p.m.

While I don’t dispute the major points of this article, and am dismayed at the failure to target major investment houses for continuing in the behaviors that nearly wrecked our economy, there is a significant point (to me, at least) with which I must take exception.

I don’t consider Goldman Sachs, Deutsche Bank, Morgan Stanley and their competitors to be “banks” in the general meaning of the word.  Banks take deposits and lend them out to individuals and businesses.  They may have subsidiaries that engage in brokerage activities for individuals, and that sell insurance products.

But the media’s persistent lumping of, what I would more accurately call “investment houses” in with FDIC-insured banks does banks a great disservice.  Many banks were victims of the investment scandals the investment houses perpetrated. And when they found themselves in trouble, the great investment houses scrambled to seek FDIC safety.  By doing so, many argue that they have dealt actual banks yet another serious blow. 

Unfortunately, it appears that the financial regulators will regulate real banks unnecessarily, while allowing far too much poor judgement and, frankly, dangerous behavior on the part of investment houses go unnoticed.

Hassan Naguib

Dec. 27, 2010, 4:07 p.m.

I do not disagree with the article, however, I find that betting against the CDOs if you purchased it and have an insurable interst, is not as bad as speculating and collecting from AIG 100%.  Taxpayers enabled AIG to pay all claims, and traesury allowed a 100% payments on all claims including sepeculative ones that do not have an insurable interest in the CDOs.  The size of the speculation was many times the size of the actual investment in the CDOs
In the insurance world one could not collect on a claim unless one has an insurable interest.

We have Phil Gramm and the repeal of the Glass Steagall Act to thank for all this greed. Phil Gramm now works for UBS and takes home $10 million a year for consulting.  Take your money out of Bank of America and deposit it into your local credit union.  Then tell the big financial services companies to take a hike.  Vote with your paycheck, your 401(k) and your mortgage payments.  Then call your Senator and/or Congressman tell them you want a law against this type of murderous greed.

Let’s face it, the SEC, or the FBI or the Attorney General is investgating doesn’t mean much.  I’m sure that many are well meaning and dedicated but I surmise many are taking off this week as part of the government generous benefit package.  A lot of fanfare with far too few results.

Kevin-Yes RICO would be appropriate…probably not happen.
Tom-I think in regards to this matter that they have taken off more than just this week!

I see where Ally (formerly GMAC) has settled claims by Fannie Mae for $462 million.  Given that both received billions in TARP bailout funds, isn’t this in one pocket and out the other?  So how about all the other mortgage originators that sold Freddie and Fannie bad paper?

Claude Morris

Dec. 27, 2010, 7:40 p.m.

The scale of chicanery/fraud/theft is sooo great that I have begun to doubt that any real justice will ever be delivered to those of us who lived with the system called capitalism and really got hurt. I read daily of old timers who are now going into their 70’s and 80’s, having lost up to 40% of their investments and currently down 33% on the value of their homes. As one of these guys I can attest to the fact that unregulated capitalism can easily lead to crime. Where is the law? When will we see some frog marchers? How will old people ever recoup their losses? Sadly, many will never do so. Good article.

The problem here is that there are not enough investigative reporters doing enough reporting. There are a lot of P.R. releases being tossed around as news articles, usually with the author being the reporter of record. Whether this is due to the media owners stonewalling or the ineptness of the reporters, the public is not being told the truth the way they should be. I’d venture to say that people who read this & the other online blogs are way less than the unemployed in the country, even the ones who have lost their homes. It’s great to see a few people voice their opinions here, even the trolls, but they are only a few, and nobody takes the time to read comments especially nonsensical ones.

Far be it from me to defend the investment houses and banks, but the primary cause of the debacle was congress.  But for the force of the CRA coaxing imprudent loans with the carrot of government guarantees, and the threat of charter loss,  the rampant corruption and cooking of the books at FANNY, and the connivance of congress, primarily by the actions of Barney Frank, and Chris Dodd, the meltdown could not have occurred. 

The idiot congress has never been able to foresee the unintended consequences of its corrupt activities.  The entire debacle owes its genesis to democrats trying to solidify its low income voting block by extorting the banks to make home loans they would never write but for the government’s (Fanny & Freddy) guarantee.  This made it possible for a bunch of crooks (mortgage brokers) to make a fortune signing up any person who had a pulse for a home loan.  The banks, knowing the mortgage would be backed up by the government turned a blind eye to the practices of the mortgage brokers.

Yes the banks and the brokers did not play the game the way they should have, but congress was 100% the enabler.  Moreover, for many years as the bubble grew, the alarm was sounded on at least three occasions, and on each of these, democrats shouted down the attempts to reign in what was happening. 

As the CRA is 100% the creature of the democrats, and as the entire mess owes its genesis in the CRA and the democrats pushing it, I lay the blame for this economic catastrophe directly at the feet of the democrats.  Having said all this. let me make one more point.  While the republicans didn’t have their fingerprints on this mess the way the democrats did, they have proved themselves little more than the slightly lesser of the evils.  There is more than enough to blame them for, but the mortgage meltdown is not one of their many maledictions.

Barry Schmittou

Dec. 27, 2010, 9:54 p.m.

Please look at the evidence at http://www.judgesquotes.blogspot.com

Numerous U.S. Judges have written that Metlife and doctor’s paid by Metlife are intentionally ignoring life threatening symptoms of disabled claimants.

The Department of Labor’s website states they have a duty to investigate all fiduciary fraud in U.S. Title 29, but after 3 years of attempts to get someone to stop Metlife from endangering lives the DOL Regional Director in Atlanta responded in writing that they will keep the evidence “under advisement”

I am very concerned that every day they delay can lead to the death of a claimant who has no money for medical treatment like I experienced.

I wish ProPublica would cover this and maybe something will happen. The Judges quotes I have placed at http://www.judgesquotes.blogspot.com provide some of the most profound evidence of complex fraud in the history of the U.S. and that is only part of the evidence I have submitted

In response to Mr. Kurzet, publicly funded elections.

Throw the self-sanctimonious Angelo Mozilo admit his fraud and throw him in jail with the rest of the clowns who caused the financial crisis.  How does everyone get off without admitting their guilt???

Mozilo made $561 million from 2000-2008 so paying a fine of $67 million is getting off pretty easy.  One set of rules for the rich and powerful and another set of rules for us poor working slobs.

Correction:  Mozilo made $521.5 million between 2000-2008 per this NY Times article…  http://www.nytimes.com/2010/10/16/business/16countrywide.html

No charges against executives? Will ProPublica investigate the players at the major banks responsible for these abuses so the public can hold them responsible?

It amazes me that this is occurring during an Obama administration.  I am not well versed in bank fraud, so I don’t grasp most of this stuff, but I would certainly think the DOJ. Dept Of Treasury, SEC, etc., would have someone on the payroll that understands it, and would have the guts to take some effective action to stop it.

Where is Attorney General Eric Holder?!? Glad to see the state AG’s filing lawsuits, but this is at an epidemic level!  I guess Holder probably doesn’t want the public to know how much money Obama and the Democrats took from these bankers…

check out: http://www.opensecrets.org 

Find out where the money in politics comes from…

I appreciate the work ProPublica has been doing with regard to its coverage of our incompetent and decrepit banking and investment institutions.

However, I think it’s time for them to focus on the real problem: our incompetent and decrepit gov’t which grows more incompetent and decrepit by the day.

Gov’t creates the enviroment in which business and the economy operate. Any systemic failure in business or the economy can be traced to a source of gov’t participation - or a lack thereof.

An astute observer here already mentioned the repeal of Glass-Steagall but the horror of imbecilic gov’t doesn’t end there.

For example, to head off a recession after the dot-com bubble blew, Bush and the Fed - like good Keynesians - injected money into the markets. That injection helped the next bubble form elsewhere - in housing.

Another example, Barney Frank and his ilk pressed to incorporate aspects of FDRs Second Bill of Rights by insisting that people have a Right to home ownership. Subsequently, the gov’t pressed banks to issue subprime loans and when the danger of having done so began to become manifest, Frank is on record as denying that there was any problem. Shortly after that, the 2008 Crash occurred.

I don’t dispute the fact that our banking and investment systems are abject failures. However, singling them out misses the mark.

We have years (actually decades) of moronic economic, fiscal and monetary policy - by both republicans and democrats - which are at the root of our problems in America. And that is not being reported by anyone.

Dumping on banks and investment firms simply expose the symptoms.

Gov’t is the disease.

Gov’t is the problem.

So why not take a breather from crucifying business and put our near-worthless gov’t on the cross for a change.

To quote my favorite President, Government is not the answer to our problems, Government is the problem.”

Randy Stebbins

Dec. 28, 2010, 3:10 p.m.

Mr. Kurzet,

Fannie and Freddie didn’t get into the subprime market until late in the game.  Wall Street investment houses created “securitization” and it was that new financial instrument that drove the subprime loans, not government policy.  All a “lender” had to do was generate a loan to any knucklehead that walked in the door, collect the commission, then sell it to an investment house, which took what it knew was a bad loan, mixed with a bunch of other loans most bad, some good, then paid Moody’s to rate it AAA and voila, fees for everyone.  And lots of fees equal big bonuses. 

P.S. Your favorite president presided over one of the largest tax increases and the mismanagement of the subsequent revenues in the history of America: to wit, the increase in Social Security withholding.  Look it up.

Mr. Stebbins,
Most of what you say is true. However I can’t let your, “Your favorite president presided over one of the largest tax increases and the mismanagement of the subsequent revenues in the history of America: to wit, the increase in Social Security withholding.”, comment go unchallenged.  That’s your opinion, mine most assuredly differs.  In any event, the Obama Stimulus Trillion dollar slush fund, thus far spent predominantly on keeping union goons on the payrolls of democrat run States and Municipalities, plus 26 billion to the teacher’s union to plug the hole made in their retirement fund by the money they donated to get Obama elected most certainly exceeds the mess Tip O’Neil made of the budget by breaking his deal with Reagan. 

But back to the subprime meltdown.  I agree with most of what you say, but none of it alters the fact of the democrats pushing CRA was the enabling act, but for which the catastrophe could not have occurred.  Yes, a bunch of crooks wrote mortgages for anyone who could fog a mirror, and yes, the bundlers made piles of money peddling the paper as investment grade (because Moody’s rated it AAA because Uncle Sam stood behind it), but in the final analysis, it all stemmed from CRA and the democrats stubbornly pushing it to the final and predictable calamity.

RR and taxes:
“In fact, no peacetime president has raised taxes so much on so many people.”
NYT June 8, 2004 Paul Krugman Opinion Page
http://query.nytimes.com/gst/fullpage.html?res=9B05E5DE1F31F93BA35755C0A9629C8B63

Government is not the problem; it’s who we elect that is/are the problem.
What is/was that incomparable phrase?
“Eternal Vigilance” by a citizenry???????

Nissim Sasson

Dec. 28, 2010, 7:40 p.m.

My proposal
Fire Shapiro head of SEC
Fire Timothy Geithner Dep Treasury
Fire Bernanke. Federal Reserve
Fire John Walsh head of COC
Fire Eric Holder

Nissim Sasson

Dec. 28, 2010, 7:48 p.m.

Jay on your comment Today, 2:31 p.m you are right about that the government is also to blame but i will add one more, The Supreme Court which ruled that the corporations and institutions are persons too and can give money to politicians in secret they don’t have to disclose it That will finlay make the corporations, banks institutions etc run the country that is the real problem with our country!

Jay,
If unions and Pac’s can be persons, The SC correctly ruled that Corporations can be persons also.  How else can those opposed to the policies purchased with hundreds of billions of union money (most of which comes from the taxpayers ) have a chance to challenge those policies.  The unions poured 400 Billion, and put tens of thousands of their members to work on behalf of the Obama campaign on their off days.  That kind of support puts the opposition at a terrible disadvantage, even with corporate support.  Pray that the stranglehold that the public service unions have on the public purse can be broken before the unions suck all the blood out of the nation.  They have already destroyed the States of California, and New Jersey.  Moreover they are rapidly sucking the national treasury dry.  It’s fair to say that the public service unions are the greatest threat this country faces.

nissim sasson

Dec. 29, 2010, 3:16 a.m.

Stan Kurzet, greater treat than the Republicans?

“Mozilo made $561 million from 2000-2008 so paying a fine of $67 million is getting off pretty easy.”

That might be the understatement of the year!

Civil penalties or fines against companies whose employees simply walk away with their fortunes in tact and let the company sink like a scuttled (pirate) ship in their wake are pointless—civil penalties against companies are not punishments against the individuals within those companies. Even seemingly huge fines against individuals, like the one Mozilo paid, do not represent proportional punishment for the havoc their self-serving embezzlements/internal asset transfers wrought.

These people are criminals who deserve prison time, as well as complete and total seizure of every penny they own. That would still not be sufficiently proportional to the damage they have caused, but could at least serve as a warning to the let-them-eat-cake crowd that controls our country’s money.

Letting people get away with this kind of theft doesn’t do capitalism any favors—if you oppose communism, then you need to really protect property rights, like the rights of the defrauded investors in the CDO debacle, and do protect property rights by punishing those like Mozilo whose actions threaten to undermine our capitalist system.

Randy Stebbins

Dec. 29, 2010, 11:44 a.m.

Mr. Kurzet, et al;

The CRA required banks to stop “red-lining” poor and minority neighborhoods.  The CRA required the banks to provide credit based on standard assessments of a person’s ability to repay a loan.  The federal government did not “force” banks to extend credit to anyone who asked for it; the banks, and mortgage lenders, feely sold the crack, er, loans, knowing full well that the loans would soon be off their books, parked temporarily on Wall Street, then settled onto an “investor’s” back.

Blaming the CRA is a tattered veil covering the real accusation, that “those people”—that is the poor and other minorities—are responsible for the following (pick as many as you like):  the crime rate, drug abuse, decay of the inner cities, the federal deficit, the subprime loan meltdown, illegal immigration, immigration in general, war, pestilence, famine, and the fact that, as I’ve heard more than once from those who blame government for our real or perceived problems:
“Wah, bread used to be a nickel when ah was a kid.  An lookit now.”

Sage you said: “Civil penalties or fines against companies whose employees simply walk away with their fortunes in tact and let the company sink like a scuttled (pirate) ship in their wake are pointless—civil penalties against companies are not punishments against the individuals within those companies.

As I recall a number of executives at Freddie and Fannie left after having earned millions in salaries.  Not saying there was any fraud at Freddie and Fannie but certainly questionable management. 

Obviously no fines against companies that the government is bailing out with billions of taxpayer dollars.

Fining corporations for the transgressions of its officers is not really a fair practice.  It damages the stockholders who’s only act was to elect those officers.  Fines and JAIL TIME for the officers is the appropriate action, and should be pursued through the courts rather than by arbitrary politicized bureaucrats who frequently couldn’t find their own arse, with both hands, standing in front of a full length mirror.

Mr. Stabbins,  Thank you for your amusing, and again, on balance essentially correct post.  However, when all is said and done, but for the acts of Congress, the way would not have been opened for the transgressions of others that followed.  Virtually every catastrophic problem this nation faces has its genesis in the unintended consequences of the acts of the charlatans in Congress.

Tom,  The crooks at Fannie and Freddy were format democrat party bigwigs.  First they got the boards (also democrats) to authorize bonuses for specific profit milestones.  Then the crooks cooked the books to make it appear that the bonus targets were met.  The worst offender was Franklin Raines, a former official in the Clinton regime.  Raines walked away with $90 million.  Since then, Raines settled a civil suit by paying back $25 million, and Fanny had to pay $400 million in fines to the SEC for all the corruption.  Raines as all democrats usually do, walked free.  The corruption in this country is starting to resemble a banana republic.

the only difference between bernie madoff and goldman sach and others was friends in high places

acmodspecialists

Dec. 30, 2010, 2:23 a.m.

MR. Stan Kurzet in ref to ur comment on Dec. 28, 8:18
Unions disclose openly how much and who the give money to But with new SC ruled that corporations are people, now Banksters, Pharmaceuticals, Oil companies, Telecommunications, Defense contractors, Agricultural business (just to name a few) Don’t have to disclose how much and who they give the money to But Unions do tell. That is the difference!

Matthew Slaughter

Dec. 30, 2010, 6:21 p.m.

“The problem here is that there are not enough investigative reporters doing enough reporting”

that’s because thousands of them have lost their jobs. ProPublica had something like a thousand applicants for very few jobs when it started up.

there are a lot of great reporters who simply have no way to make a living doing full time investigative reporting.

the internet has come up with no way to monetize this stuff properly.

Joseph Collins

Dec. 30, 2010, 6:29 p.m.

it’s fraud. SEC Staff Accounting Bulletin #99 “Materiality” states that in determining materiality (or ipso facto a material mis-statement), companies must consider qualitative factors as well as quantitative thresholds. These qualitative factors include: recording (or failing to record) transactions in order to meet analysts’ consensus; increase management compensation; preserve positive earnings, etc. Under SEC jurisdiction, such self-dealing is prosecutable ..... . if provable

ArticleDirectory

Jan. 20, 2011, 2:24 a.m.

Nice post keep it up I like this post :D I have subscribed to your blog and hope to get more updates soon :D you can visit http://www.articl­euary.com for more articles about medicine

Add a comment

Email me when someone responds to this article.

Get Updates

Stay on top of what we’re working on by subscribing to our email digest.

optional