Why We Need Criminal Investigations

Watch a bit of jousting during the hearings on AIG today:

Now one can take the position that Grayson is merely trying to score points, but I don’t see it that way. Instead, he is trying to make a response to a basic and unanswered question:

Who were these people who wrecked AIG and other companies? How did it come about? And was the nature of their actions such that they should be permanently barred from the securities and banking industries?

Now I have said repeatedly the reason no one wants to pursue this line of action is that it is likely to reveal fraud, including at high levels (remember, post Sarbox CEOs and CFOs are now required to certify financial statements) and Team Obama does not want to do anything that would jeopardize confidence in the financial system. But this is completely wrong-headed; the reason there is no trust is the public at large sees considerable evidence of malfeasance. So the confidence is already gone, and an organized process to root out at least the worst instances of rot would be salutary.

Ah, but we don’t take down banksters in this country. The only major case was Mike Milken, who did engage in less than above board behavior (I know someone who joined the firm and resigned at the end of his first day based on what he saw), but Drexel was also shaking up the status quo, so the interests of enforcing the law happened to coincide with the interests of defending the Wall Street establishment.

Why, for instance, wasn’t there an effort to keep the crowd at LTCM from ever setting up a hedge fund again? Given the unregulated nature of hedge funds, that might have been hard to do, but pretty diligent discovery (the fact gathering that happens once a suit has been filed and the defendants are required to respond to prosecution demands for information) would probably have uncovered enough dirt to make it very difficult for them to ever raise money in meaningful amounts again.

Consider Bankers Trust. As far as I am concerned, Proctor & Gamble did not have a case, yet they prevailed (in that they got a very favorable settlement) and wound up bringing down BT. Look at the fact set:

The root cause appears to have been that BT’s clients felt that BT had unfairly exploited their comparative lack of sophistication in handling these sophisticated derivative products. For example, Procter & Gamble (P&G), the client whose case received the most publicity, had entered into complex interest-rate derivatives transactions with the bank. These transactions represented a bet on P&G’s part that U.S. interest rates would remain stable, or decline, over the transaction period. If interest rates rose, however, P&G would lose a substantial amount of money. In addition, P&G made its bets more aggressive by leveraging its positions twenty-to-one.

Levered twenty to one? P&G had a treasury that was punting, not hedging, lost out, and decided to go after BT. Now knowing BT, the derivatives were overpriced (they had a reputation for that sort of thing among dealers), but P&G’s officers also have a duty of care, and buying something they didn’t understand and then gearing it up heavily would seem to run seriously afoul of that.

But P&G hit pay dirt, and unearthed hugely embarrassing tape recordings in fact discussing overpricing and other not so nice behavior towards customers. That pretty much killed BT as a derivatives trader, which had become its core business, and it was acquired by Deutsche Bank.

A serious investigation of LTCM, whether criminal (a creative prosecutor could come up with something that would have passed summary judgment) or Congressional hearings would have been salutary. It would have made it clear that taking undue risk with customer money could do permanent damage to one’s career. But no, making them take what they considered to be inadequate pay to wind down the operation (there was much bitching and moaning on this point,) was deemed sufficient punishment. Now one can argue that LTCM did not have a corrupt culture like BT, but Roger Lowenstein, a mere journalist with no discovery powers, found that in the later days LTCM was punting, taking massive bets in markets where it had no historical data (which is contrary to its sales pitch to investors).

Of course, it isn’t clear whether deterrence works against white collar criminals, but the flip side is William Bratton style zero tolerance policing was successful in seemingly ungovernable New York. The theory was that allowing minor infractions, like window breaking, to go unpunished sent a very visible signal that misdeeds were tolerated. Of course, zero tolerance wasn’t the only technique used by Bratton (he also was big on flexible deployment, shifting officers to neighborhoods that suffered an increase in crime), but it is considered to be an effective policing tool. And Wall Street is so far from having any meaningful policing that it’s a joke.

It seems anything short of regulatory or legal moves that limit career options (read future earning power) is an insufficient disincentive to risky trader and investor behavior.

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  1. Anonymous

    Yes lets put it on Liddy’s shoulders to read off a list of names in front of the public to feed the already rampant lust for blood (including threats of violence). Bullshit. He knew it wouldn’t be answered for this reason (Liddy had already declined naming names for the threat reason after reading off a nice letter about strangulation by piano wire). This was posturing and point scoring plain and simple – just like every other member of congress does in these useless show interrogations (“Look – we’re mad too – we’re doing something!”)
    That said – if I actually believed Grayson meant what you took out of it – I agree with the sentiment.

  2. Anonymous

    why doesn’t congress look into the law firms which wrote the contracts? it seems to me their instructions must have been to create a contract that is, in all of its essential elements an insurance contract, but is not technically an insurance contract. this does away with reserve requirements and sets aside any insurable interest requirements.

  3. Chris

    I find it disgusting that the authorities are still pouring money over AIG. Just let it go, the world won’t end.

  4. Independent Accountant

    Milken’s real crime was taking too much business from Goldman, Morgan, etc. Absent that, he would never have been touched.

  5. Anonymous

    I have a hard time believing that the names of these people can’t be discovered through some serious online searching, or revealed by other finance insiders.

    The world of finance seems to be pretty small. If 25 people were to comprise this group.. couldn’t they be sifted out? Business cards passed at lunches, anecdotes told at cocktail parties…

    Yves, could you or someone with greater exposure just put a line out, that you’re collecting anonymous info on the AIGFP team? Names alone. The list could be shared with a couple trusted select insiders, to verify as completely as possible. The list is then forwarded to AIG with a 24 hour deadline to verify before it is forwarded to more non-AIG individuals for secondary confirmation, then onto Congress, and/or the media.

    Nasty as it may sound, it is an out for (or at least pressure on) them to release the information.. before it is released by ‘private investigators’, and they’re left appearing as though they have something to hide.

  6. Carrick

    re:Anon @ 9:00pm,

    I think this was a bit of theater, in that he probably didn’t expect a substantive response.

    It did however, probably want to put Liddy in a corner and impress on him the power of Congress over him (and the public support behind them in that regard.)

    The sentiment was probably genuine, but an expectation of having his question answered, probably not. I don’t think it was an empty gesture to appease the public.

  7. Anonymous

    This whole bonus thing is the biggest smoke and mirrors move I have ever seen and it is successfully working, sometimes things just stare you in the face….. AIG has paid out 100s of billions to counterparties to make them whole on their trades, CDSs, etc., when in fact they were grossly bankrupt, Bernanke admitted it. Talk about taxpayer money flying out the door directly to GSs door courtesy of our pals at the Treasury.

  8. jh

    The deed is already done. The
    populist anger will fade away.
    The players will always find a
    way into the casino. The markets
    have perennial short term memory loss.

    Fraud is so rampant at all levels
    that the kettles and the pots are
    indistinguishable. Could be wrong.
    Doubt it.

  9. Yves Smith

    Anon of 9:36 PM,

    I believe there were more than 300 people in the group, so collecting random names is not going to reveal who had what decision-making authority.

  10. Anonymous

    Aren’t there any pissed-off AIGFP customers willing to anonymously disclose the names and titles of the AIG folks they did business with?

    I’m not looking for blood.. but I think them dodging this is painting them in a terrible light, and forcing Obama’s hand to do something they’re ultimately not going to like anyway. You think Obama will tell the mob to not only back off, but attempt to also convince them that AIG deserves to hide their dirty players? Either they play ball a bit, or Obama has to assert that he is in agreement with the mob — that publicly adversarial relationship is not something easily relaxed. AIG really wont have many friends then.

  11. lineup32

    Bailouts are political in that the government is busy picking winners and losers now the AIG bonus flap exposes those in political power to sharp downdrafts in public opinion so while it may fade in view as several posters have mentioned it will also be a kick in the arse and a reminder that they are playing a dangerous game.

  12. Anonymous

    Economist Michael Hudson thinks that the attention to the bonuses merely serves to conceal the more damaging fact of the identity of the counterparties. He believes that this concealment is purposeful. Thoughts?

  13. Anonymous

    Anonymous at 9:56: Yes.

    Ultimately, if the system was working as it should no one except the shareholders should care what any of these companies paid their execs…and if you didn’t like it, you could sell your shares. This would be the case if there was still an antitrust law, if glass-steagal was still in effect, etc.
    This was all back in the good ol’ days when capitalism meant something, and businesses that were mismanaged went under.

    It all stems from a fundamental failure to regulate through the legal and regulatory system. Ultimately, if capitalism is to survive, the legal and regulatory system will need to be revived. This kind of state-funded privately-managed enterprise is rediculous and gets on your nerves…and I’m talking about Goldman, BofA, and those guys, AIG is just a distraction.

  14. Anonymous

    I agree, but it seems like a start. If only as a point from which AIGFP customers could anonymously disclose what they know about the chain of command there. Depending what their morale and loyalty is there, little fish and straight people might anonymously point some fingers, to draw heat off of themselves. Whereas a business news reporter is going to massage his/her contacts for info, a blog has more anonymity and wider reach.

    It might be a dud, but it seems like the “power of the Internet” could flush this out.

  15. Mannwich

    The entire system was/is fraudulent. They don’t want to start peeling the rotten onion to expose just how much criminal activity was and is still going on. This criminal activity comprised of most of our Ponzi-based financialized economy in recent years. They’re not going to blatantly expose that to everyone. It would blow up the system even further and chaos would likely ensue. The irony, however, is that many of us now get that anyway regardless of what they decide to expose or not expose.

  16. Anonymous

    I agree with anon that it would be a start. We need to get to the AIGFP bonus people in order to get further up the ladder – and they know it – this is their line in the sand, their firewall…

  17. Anonymous

    I don’t buy the whole “AIG did it!” The prime brokers knew exactly what they were buying and why. Heck, the prime brokers put AIGFP in business! I don’t suppose anyone is going to go after the Goldman, SG and DB bonuses?! I wonder how many different derivative trades depended on the AIG “insured” securities as written by the prime brokers.

    AIG is the “antidote de jour” to the duplicitous behavior of the prime brokers. Gotta defend Wall Street; let’s throw AIG under the bus.

  18. polit2k

    I find it interesting that you, unlike most other bloggers are fully aware of the likelyhood that fraudulent behaviour is/was lurking inside AIG. Others who allude to this probability (Willem Buiter and Simon Johnson) have seen it up close in practice in other financial implosions. Unfortunately it seems that the powers that be are still delusional and think covering up gaping wounds with duct tape is the answer.

    Restoring the proberty of Wall Street and the City of London by bailouts and propoals for better regulation while hopelessly damaged and suspect institutions remain the primary money lenders to the real economy beggars belief.

    The downside risk to taking bold action to clean the decks is now very small but I’m not holding my breath.

    Another good and relevant piece from Willem Buiter here: http://blogs.ft.com/maverecon/2009/03/slaughtering-sacred-cows-its-the-turn-of-the-unsecured-creditors-now/

  19. doc holiday low on blood sugar

    Yes indeed, is the porridge too hot or too cold, or maybe too acidic versus too alkaline and who can say if Americans or citizens around the globe really need justice after watching their savings vanish:
    American’s Net Worth Down $15.5 Trillion
    In terms of wealth destruction, this downturn is already like a half a Great Depression.

    Credit crunch wipes £1.9 trillion off household wealth

    Falling property and equities prices have knocked around £1.9 trillion off household wealth since July 2007 – the equivalent of a £40,000 loss for every adult in the UK, a new report has claimed.

    And, gosh and gads, I wonder why the three month Treasury is falling backwards the last month, as the market is being temporarily pumped in this current dog and pony head fake? Anyone recall the good ol days > Treasury 3-Month Bill Rates Drop to Lowest Since at Least 1954

    > My two cents says that with greater losses in GDP, increased debt, lack of confidence and not a whiff of justice or accountability — the three year Treasury will head back to where it was and this mess will just grow worse and worse — and as Obama said, the buck stops with him, so let's see it big boy — are we gonna play games with the crooks and bullshit America, and continue to crash our economy, or are we gonna get tough and hunt down the financial terrorists and restore order in this chaos? Which side are you on punk … huh, huh?

  20. American Goy

    “Now I have said repeatedly the reason no one wants to pursue this line of action is that it is likely to reveal fraud, including at high levels (remember, post Sarbox CEOs and CFOs are now required to certify financial statements) and Team Obama does not want to do anything that would jeopardize confidence in the financial system. But this is completely wrong-headed; the reason there is no trust is the public at large sees considerable evidence of malfeasance.”


    The service based economy (remember – we are over 70% service and only 30% or less real economy in USofA) is what makes us tick.

    And service economy is not waitresses, barmans, barbers – it is banking, finance and insurance.

    Without it, we have nothing left in America.

    So, business and politicians cooperate to keep the system going, no matter the cost, as the bailouts show.

    The whole housing bubble was made to order for banking, insurance and finance.

    It was kept going beyond any sane reason, by both democrats and republicans, ‘w’ bush and b. clinton, for the same reasons and with the same goal.

    It is the only thing left we have left.

    Our gigantic military is here to make the world see it our way, and to prevent too many questions about our house of cards.

    Because, in reality, all our economy is based on lies and obfuscations, on shuffling papers and cons – it is smoke, bull**** and mirrors (my trademark phrase, if you will).

    If it’s OK, here’s my blogspam for posterity:


    If not, just delete this comment.

    I feel better for venting (it is cathartic).

    Anyway, lets work ourselves into a mob frenzy over less than 1% of the bailout moneys, like the media propagandists and the politicians want us to, and do not look too closely at the rest, 99%, of the money.

    Fundamentally (and I got this light bulb moment after reading comments on this very blog), the whole crisis can be summed up in three sentences:

    1) Why are we pumping taxpayer dollars into these companies to make their imaginary wealth real?

    2) Why didn’t the SEC detect any of this, including the Madoff ponzi scheme?

    3) Why aren’t those questions asked every fucking day on the media, but instead we get the outrage de jour everyday?

  21. selise

    we need an investigation – not a lynch mob. demanding suspects be named publicly in this political environment is playing to the lynch mob, not the need for an accurate accounting and real justice.

  22. doc holiday

    And another thing..

    Grayson needs to stop grandstanding and begin his time by saying he will not tolerate bullshit and that if people do not respond to questions they will be charged with Contempt of Congress

    Anything less than aggressive action for The American People is bullshit and no amount of banter and harsh tones matters a bit at this stage. There needs to be a line drawn that has clear ramifications and if these wall street-pigs want to stand under the skirts of lawyers, they all need to go to prison on the same bus and serve the same sentences!

    I really want to see action and not more words spun around in The TARP Spin Cycle, I want action, I want justice and I want my local representatives out of office if they can’t do the job that needs done!

  23. Anonymous

    while the outrage is understandable, what is being suggested is really ill advised. suppose you were given an offer to work at AIG FP in January 2008 and given a one year contract for 500k per year. You performed well. You did not put AIG into the mess. The mess was well along by this time. Now, you are supposed to give the money back or risk being put on TV as some criminal? True, if AIG went bankrupt (which it effectively did), you would be a general creditor. But that is not what happened. This was a choice made by our elected officials in the name of protecting systemic risk. By virtue of protecting the bondholders, the employee contracts are protected as well. To abrograte these contracts is a disaster that will do real and lasting long term damage to our system. We are already seeing it with mortgage cramdown legislation. I am not sure where all the anger comes from especially several BILLION of taxpayer money just went to AIG and then immediately to Goldman to satisfy mark to market exposure on derivatives. Goldman is also a TARP recipient and continues to pay their people quite well. It’s all the same thing. One last point, if we should get the names of everyone at IG getting a bonus, shouldn’t we also get the names and amount of each person who benefits – AT THE EXPENSE OF ALL OTHER TAXPAYERS WHO ACTUALLY PAY THEIR MORTGAGES – from mortgage cram down ? Shouldn’t we be able to track how these individuals spend their money in the same way we track how Wall Street spends its money (golf tourneys etc). Is it fair for a person to benefit from a mortgage bailout and then go to Las Vegas or out to a fancy dinner? Let’s not forget that at the center of this entire crisis is a group of people that borrowed well more than they could afford. The destabilization of the system seems to be pinned on Wall Street only. Are the borrowers not responsible as well?

  24. Anonymous

    The lynch mobs are out for revenge again.
    And who were the other sides of AIG’s counterparties?
    And what were the terms of AIG’s settlement of its CDS counterparty exposure using taxpayer Largesse?

  25. dh

    Sorry, but this seems so right and I’d like to know, why these pigs keep walking away without providing info:

    FYI: Inherent contempt
    Under this process, the procedure for holding a person in contempt involves only the chamber concerned. Following a contempt citation, the person cited is arrested by the Sergeant-at-Arms for the House or Senate, brought to the floor of the chamber, held to answer charges by the presiding officer, and then subjected to punishment as the chamber may dictate (usually imprisonment for punishment reasons, imprisonment for coercive effect, or release from the contempt citation.)

  26. rahuldeodhar

    I was more surprised at how much control is with the “owners” of the company (US tax payers – they are majority shareholders now). They cannot get their servants (board serves the shareholders) to give names!

    So what chance does a lay-shareholder have of getting a company to steer clear of such behavior?

    What example is US setting here? This is totally disgusting.

  27. Anonymous

    Hey doc! Keep that blood sugar up. What is Obama going to do? I keep waiting and holding my breath but am turning blue…

    It is breathtaking that there is not a whiff or mention of criminality in all this. Where does society go from here? If there really is no shred of rule of law or prudence in the financial industry enabled by our government, what is keeping the social fabric from disintegrating entirely.

    Oh boy, something to look forward to, class warfare.


  28. Yves Smith

    Anon of 11:04 PM,

    AIG quit writing new CDS as of end of 2006, so it isn’t clear to me what the people there were doing, save collecting premiums on old deals and waiting (hoping) for payout (AIGFP employees collectively got 38% of the unit’s profit).

    And I don’t buy the argument about talent. AIG appears not to have vetted these deals much, if at all; these deals are not being restructured (and AIG couldn’t restructure them anyhow, the CDOs and exotica were created by the iBanks). I would think a a lot, if not close to all, of the AIG contract language was standardized.

    So what kind of “talent” was at work here, and is ANY talent require to oversee a portfolio runoff?

  29. Anonymous

    Obama’s credibility and his ability to comprehend the on going Financial Armageddon are in shambles.

    He is proving himself another two bit, opportunistic politician. Apparently he has received at least 110K contribution from AIG. So is Chris Dodd.



  30. Anonymous

    You do realize that this entire issue of compensation at AIG comprises less than 1/1000 of the total bailout so far.

  31. Yves Smith

    Anon of 11:56,

    Yes, and billions in losses were created to extract what in comparison is teeny compensation. The Wall Street firms were much more efficient in the ratio of losses versus what they paid themselves.

    The issue is that the perps are in place, still (mis)managing a massive operation. They still have incentives to gamble with taxpayer money. If they can deliver what looks like performance (remember, in all insurance, the revenues come up front and the liabilities can and often are long tailed), they might get the government out of their hair. That is the hope, anyhow.

    If this were properly nationalized, with many of the old guard shown the door, instead of economically nationalized with inadequate governance, it would be a very different story.

  32. Warm, Dry and Well Fed


    I could not disagree with you more. This was a systematic regulatory failure. AIG failed because a subsidiary in London took on a very risky book of insurance business, each part of which appeared on the surface to have limited risk. But the risk was heavily concentrated and a regulatory failure in the U.S. and the U.K. allowed this heavily concentrated risk to go undetected- or at least unregulated- by the two nations’ regulators. Congress and the U.S. regulators have much to answer for here. It was as if all of the hurricane insurance in Florida was reinsured through a series of entities around the world who appeared to be unconnected but in reality all the policies were written against one name- and that name was unregulated and didn’t have nearly the financial strength required to pay for the claims resulting from one huge hurricane in Florida. All over the CDS insurance business for the past few years people have been asking “But who is taking on all this risk?” The regulators remained oblivious- or at the very least strangely silent and uninterested. Now we know where the risk was. It was in one company, AIG. And Congress, when faced with a systematic regulatory failure which appears to be intimately linked to campaign contributions made by all the players- banks, hedge funds and AIG- to members of the House and Senate Banking and Finance Committees, is trying to say “Why it was all the fault of those evildoers in London- give us their names.” It is grandstanding, scapegoating and potentially life-threatening for the victims, sort of like the Soviet leadership blaming the bad grain harvests on “Wreckers” and “British agents” or the Maoist dunce-cap-for-the-revisionist episode.

    If there is Sarbox crime here, let a grand jury look into it. Sarbox requires CEOs and CFOs to certify financial statements. Having looked at the AIG financial statements and Annual Reports, and knowing only a bit about how overseas entities are accounted for, I defy you to show me one international insurance company- or for that matter investment bank- that will pass a Sarbox review after a failure. If the U.S. Government had chosen to let AIG fail, would the Directors of Goldman Sachs be guilty of a crime under Sarbox for failure to foresee the consequences of Goldman’s concentrated risk? What about the ones who purchased Goldman paper?

    I’m sure there is a story to tell in the London AIG office, but it so far appears to be the story of aggressive businessmen taking advantage of a regulatory vacuum.

    One more comment on AIG. The usual story of the company’s Shanghai founding by Cornelius Vander Starr in 1919 appears to be materially misleading. Follow the money; insurance companies are not founded without capital… The end result was that a huge portion of the company’s common shares- roughly one quarter- ended up not in the hands of any usual stockholder but, after Mr. Vander Starr’s death, in the hands of an offshore entity in Bermuda controlled by, but not owned by, the executives of the Corporation. The executives first used the stock to make all of the senior executives from the Vander Starr era (including Mr. Greenberg, Vander Starr’s successor) billionaires on the theory that the money was intended for “innovators” and that they were just such innovators. Logically, they then had to use subsequent grants from this kitty to reward other innovators, meaning successful risk takers, this in a business, insurance, which usually shuns risktaking. This high-risk culture, still being rewarded out of the Bermuda shares, has invited extreme risk-taking in all parts of the company. The London boys went with the traditional AIG culture; huge risks taken and huge rewards for the winners.

    To further complicate the story, there is good reason to believe that the U.S. government may have had a hand in AIG’s founding and may have some claim on the Bermuda shares. Also, after Mr. Greenberg was forced out, the new executives running AIG began litigating over control of these shares, which Mr. Greenberg’s Bermuda faction still claims to rightfully control.

    This could turn out to be an extremely complicated story, but the risk-taking by the London office is only part of the story, and a minor part of it at that. I suspect that the fear that other parts of the story might surface are among the reasons why there has been no serious demand for an Anglo-American investigation of the regulatory lapses.

    In my view Mr. Liddy did exactly the right thing under extreme pressure. A howling mob led by our ever-vigilant Congress wants scalps- evildoers. Liddy said, “Talk to my lawyer.” Then, I’m sure, he went home and had a stiff double-Scotch on the rocks.

    If Congress sincerely wants to look at the issues here it could begin with something it can control, the huge campaign contributions made by interested parties to members of Congress.

  33. Yves Smith

    Warm, Dry,

    I am a bit at a loss as to seeing where you disagree. I said that the Congressional noisemaking was (in effect) a second best effort when real criminal investigations were called for. I have mentioned elsewhere that AIGFP was effectively unregulated (more in the context that it was an act of charity for the US to bail AIG out, it wasn’t the official charge of anyone).

    To say it was a regulatory failure is not accurate. The “failure” was in exempting CDS from regulation, which occurred when Brooksley Born tried to bring them under the umbrella of the CFTC but was blocked by Rubin and Summers.

    Regulatory failure is generally construed to mean “regulators asleep at the switch”. This was a failure of oversight. I am word parsing but I see them as different things.

  34. Yves Smith

    Warm, Dry, and Fed,

    I suggest you read the post again. I expressed a preference for criminal investigation and see Congressional action as a second best. But I also suggest you read up on the Pecora hearings. They were quite effective and salutary. But that wasn’t a one or two days before the cameras affair.

  35. Anonymous

    Here is are blatant example of establishment failing to see how informed the public is.

    If it came out that a lot of these shady financiers where getting a free pass by Homeland Security/CIA for funneling money to anti-Chavez and similar efforts, would it really be a stellar shock to most educated people? Anyone with a basic knowledge of Cold War history would just considered it CIA S.O.P. finally being widely exposed, rather than some incomprehensible bad-apples scenario. Honestly, anyone who has lived in a poor black neighborhood or bought an NWA record takes the CIA/crack story as unwritten truth.

    It was said in some earlier comments, and its true, the public's understanding of this mess is WAY ahead of Congress & AIG/Citi/etc's estimation. Govt & Wall St. players are still crafting plans w/ PR campaigns under the disastrous assumption that Americans get their information from the evening news.

  36. vlade

    I don’t know how it’s in US, but what I’m stunned with is that none of the UK companies is prosecuted. FSA principlne based regulation provides ample way to do so I believe, as some of the principles are “Financial prudence” and “care, skill and due dilligence”. I think a very nice case could be based that neither NR, RBS or HBOS followed these, as the only way that their business model could work was by throwing prudence and (proper) risk management out of the window.

    Of course, the main problem there (and answer to my opening rethorical question) is that prosecuting on these grounds would get the defendands to say “but all we did was use similar assumptions as Lord Chancellor did”. Which of course is not a real defense, but given that the then Lord Chancellor is now the PM, and the elections are comming next year, it probably would not be very palatable.

  37. russell1200

    Bankers Trust was so bad they even ripped off Enron when Enron was setting up derivatives operations. Bankers Trust is one of the few companies that make you actually feel sorry for Enron: for an extremely brief moment.

  38. fresno dan

    “…and Team Obama does not want to do anything that would jeopardize confidence in the financial system”
    I would give you partial credit. More accurately, we are a country dedicated to the proposition “of the FED, by the FED, and For the FED.” The FED believes that the failure of a major bank would cause quarks to disintegrate, and the universe to implode

  39. Anonymous

    “AIG is the “antidote de jour” to the duplicitous behavior of the prime brokers. Gotta defend Wall Street; let’s throw AIG under the bus”


    Let’s not get carried away here. AIG wasn’t thrown under a bus. AIG positioned itself under that bus.

    But the company that owes hundreds of billions in claims to Wall Street can’t die that easily.
    So the govt pulled them out from under that bus and will not let the suicide go ahead until those hundreds of billions are paid, at which point AIG will be encouraged to drop dead.

  40. ruetheday

    The problem is that the AIG CDS’ were a mechanism for the European banks to evade Euro regulations on capital adequacy. An American company helping European companies get around European law. This is the hot potato. If fully exposed, it would be quite embarrassing for politicians and regulators on both sides of the pond.

  41. Anonymous

    What’s the point of criminal investigations? Even when they uncover criminal activity they do nothing about it.

    The only name that emerged was that of Joseph Cassano. Joe was the top man who made $280 million in 8 years.

    Did you not know that he had a criminal record for fraudulent structured finance?


    I suggest you mug up on what happened at Lloyds of London in the 1990’s. It’s no coincidence that this is an insurance scandal, rather than a finance scandal.


  42. Gentlemutt

    Yves asked rhetorically, “Why, for instance, wasn’t there an effort to keep the crowd at LTCM from ever setting up a hedge fund again?”

    The LTCM boys were and still are deeply connected. And they could not be charged with fraud, monumental stupidity and arrogance not being explicit crimes (see Bush/Cheney/Rumsfeld). Therefore any restrictions that could have stopped Meriwether-Scholes-Merton would have hurt the burgeoning prime-brokerage business that was learning to really love hedge funds.

    No way Messrs. Rubin, Greenspan, and Summers were going to let a little blowup at LTCM wreck the business plans of their buddies just as Glass Steagall was about to be repealed.

    To prove the point, not even a little tax problem later on for Mr. Scholes and wifey could stop Scholes from opening a new hedge fund after leaving LTCM — why would the SEC allow a little misunderstanding about basic tax law gonna hinder licensing for someone who was awarded a Nobel prize in economics?

    Laws are for little people.

  43. stryx

    Late to the thread, but I wanted to point out something I found the other day:

    “The Working Group on Financial Markets was created by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan.

    The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 (“Black Monday”) to give recommendations for legislative and private sector solutions for “enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence” “


    Which is where I found this 1999 Treasury Report:
    Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management


  44. rd

    The entire reason that the AIG bonuses blew up was becasue it was just about the only concrete thing anybody can get their arms around. Keep in mind this news was coming out at the same time that news was coming out that it could be difficult to get at significant chunks of Ruth Madoff’s wealth. No wonder the average taxpayer feels like he has been mugged.

    If Obama wants to move on with his “agenda” then they will need to have some serious investigations with people going to jail. There is absolutely no way that all of this could have occurred without some serious violations of securities laws, Sarbanes-Oxley, perjury etc.

    It will be a major blunder if he doesn’t have the Feds and state AGs looking into many of the allegations with intent to prosecute. For the next few months he gets a free pass as the shenanigans would have occurred on Bush’s watch. In a while though, it is going to shift onto his plate, especially if there is new wrongdoing after Jan 20, 2009.

  45. MyLessThanPrimeBeef

    One question.

    We know we don’t want bailout money used as bonuses.

    What about if they used it for political campaign contribution? What if millions or perhaps hundres of millions of taxpayer subsidy were poured into the last election? ‘Hey, it’s not my money anyway. I will donate it to candidates who will further bail me out.’ Was there that kind of thinking going on last fall?

  46. Warm, Dry and Well Fed

    Re Yves’ response to my recent AIG post:

    On the regulatory failure vs. regulatory oversight issue… Yves’ position is: “Regulatory failure is generally construed to mean “regulators asleep at the switch”. This was a failure of oversight. I am word parsing but I see them as different things.” Point well taken; I meant failure of regulatory oversight. The AIG-London CDS products seem to have fallen between two traditional regulatory structures, one intended to oversee insurance companies and the other to oversee banks. U.K. insurance regulators focused on reserves and risk concentration issues while U.K. bank regulators focused on the soundness of U.K.- headquartered banks (thus the Iceland fiasco). The U.S. failure to regulate CDS obligations is important but the instruments were created and sold in London. Clearly the London authorities (and maybe New York authorities too) ignored the risk concentration issues. Was this an oversight or was it the intended consequence of a system designed to create lower interest rates for debt obligations and an opaque market which European banks could use to evade capital adequacy regulations? I don’t know and the regulatory gap issues should be investigated.

    But my primary disagreement with Yves’ post revolves around her perceptions that this is best characterized as the story of criminal wrongdoing by individuals (her post was entitled “Why We Need Criminal Investigations”). My lead sentence “I could not disagree with you more” was probably over-declarative, but I do see this as more likely a story of regulatory oversight breakdown than one of criminal conduct or intent by the young, the well-dressed and the greedy. By pushing the investigation down the criminal path we lose the possibility of determining the systemic causes. In other words, I don’t see this as a case of Madoff or even Mike Milken; it is more like a huge commercial airplane crash, and I’m less interested in hanging the pilot out to dry for his or her mistakes than I am in finding out why the part failed, why the pilot overcorrected, why the manufacturer used this design, why the FAA allowed this procedure… essentially I want to know “Why did this happen?”

  47. Anonymous

    Just a nitpick, but worth mentioning:

    There’s no such thing as summary judgment in criminal law.

    Of course this means the prosecutor has even more leverage.

  48. Yves Smith


    I think you missed my point on Bankers Trust. You don’t need much of a fact set to gin up a lawsuit. Given how many trades LTCM had on, one could allege books and records violations, perhaps fraud in the representations LTCM made to prime brokers, The point is not necessarily to win, but to get into discovery to see what dirt is there. And the second point is that anyone who created an LTCM scale mess would be raked over the coals afterwards.

    Warn, Dry and Well Fed,

    There is absolutely no way we will have the sort of investigation you want. Criminal investigations might lead to enough exposure of the regulatory holes to create more impetus for action on that front.

    And the other point is I have NO doubt there was accounting fraud under the laws as they stand now. Those laws apply even to otherwise unregulated entities. Accounting fraud is the prime weapon of control fraud, which is when executives and officers extract more from a business than it is worth. leaving it bankrupt. That is a part of what happened here, and a much bigger part of what went on at the big Wall Street firms. Unless someone starts taking names on clear, present violations, there is not point in even trying to take on bigger agenda.

  49. Anonymous

    The problem is that the AIG CDS’ were a mechanism for the European banks to evade Euro regulations on capital adequacy. An American company helping European companies get around European law ~ ruetheday

    Yes. Further, then Senate Finance Chairmen Phil Gramm was behind pushing the Commodity Futures Modernization Act thru in 2000, effectively guaranteeing the deregulation of all derivatives. Immediately upon leaving the Senate, he became a director and chief lobbyist for UBS, who is counterparty to AIG. Funny that.

  50. Gentlemutt

    Hello Yves. Merely a misunderstanding when I think we are agreed, no doubt my fault. Your point about Bankers being beat by P&G with less-than-airtight facts is understood. (But those BT folks sure were scummy, eh?) I agree wholeheartedly that "A serious investigation of LTCM, whether criminal…or Congressional hearings would have been salutary."

    Just tried to add a little color on why the LTCM miscreants walked away unscathed. LTCM had two recently-minted Nobel prize winners and a — no, THE — master of the bond universe. The regulators were Rubin, Greenspan, and Summers. And the repeal of Glass-Stegall was on the horizon. That is why the LTCM episode was swept under the rug. And the free pass that Scholes got on the tax avoidance was just further evidence of a lack of regulatory spine.

    No reason to let a minor spill ruin a good party that is just getting going…that is the point I was, in retrospect far too clumsily, trying to make.

    All the best.

  51. Yves Smith


    Sorry if I came on a bit strong. My general crankiness about the sordid state of affairs is showing.

    You are 100% right that the LTCM crowd would not be touched. Even though the Fed prodded Wall Street hard to rescue/wind down the firm, it pointedly stood aside afterwards and treated it as a within-the-family disciplinary matter.

  52. Steve J.

    It seems anything short of regulatory or legal moves that limit career options (read future earning power) is an insufficient disincentive to risky trader and investor behavior.

    It seems that fines and even jail time aren’t enough.

  53. Anonymous

    It’s simple really. As long as AIG is not bankrupt, it has to honor employment contracts.
    Should it be allowed to go bankrupt rhat will lead to a chain of bankruptcies notably Goldman Sachs.
    So if I was an employee I would know I have the world financial system by the balls. Rescind my contract and I become a whistle blower

  54. Anonymous

    Maybe some waterboarding will make him remember? Oh wait. Torture doesn’t give reliable information!

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