Investor. Any references to securities are not recommendations or solicitations to buy or sell anything. I may have positions in securities mentioned.
Monday, March 28, 2011
Sunday, March 27, 2011
Social Media Investrments
Buffett cautions social-networking investors
by Steven Musil
by Steven Musil
Warren Buffett is warning investors to be careful about which social networks they friend with their investment dollars.
Buffett, the chief executive of the Berkshire Hathaway investment empire, warned investors Friday at a conference in New Delhi to be wary of social networks such as Facebook and Twitter--a sector that has recently generated great interest and anticipation on Wall Street.
"Most of them will be overpriced," Buffett said, according to a Bloomberg report. "It's extremely difficult to value social-networking-site companies."
"Some will be huge winners, which will make up for the rest," he said, without specifying which companies he expects to be winners and which will be losers.
Buffett isn't alone in his dire warnings of another bubble in the offing. IAC founder and former entertainment mogul Barry Diller recently called the multibillion-dollar valuations of social-networking companies with high user engagement but unproven long-term revenue "mathematically insane."
Investor buzz for hot Silicon Valley companies that aren't yet publicly traded--like Facebook, Twitter, and Zynga--has hit a fever pitch and reportedly captured the attention of the U.S. Securities and Exchange Commission. The commission is reportedly interested in companies that offer exchanges for privately traded stock and along the way offer a peek at the hypothetical valuations of these otherwise tight-lipped companies.
Facebook, with an estimated value of $50 billion, is expected to be one of those players testing the IPO waters this year. With a user base of 500 million, the social-networking giant is estimated to be recording revenue in excess of $1 billion on the back of its Social Ads program.
Of course, Facebook is still a private company and is under no obligation to reveal its financial details. However, should Facebook hit the threshold of 500 individual shareholders, it will be required to either start trading publicly or at least begin disclosing its financial information, according to rules set by the U.S. Securities and Exchange Commission.
Twitter, another social-networking company rumored to be looking at a public offering later this year, will generate about $150 million in advertising revenue this year, up from the $45 million it made last year, according to market research firm eMarketer predictions. The microblogging site recently completed a $200 million funding round that gave the company a $3.7 billion valuation.
Two-year-old daily deals site Groupon, which reportedly turned down a $6 billion buyout offer from Google late last year in favor of a hoped-for $25 billion IPO, is estimated to be bringing in $103 million in revenue. LivingSocial, which thinks it could overtake Groupon this year, recently sealed a $175 million investment from Amazon that gave it a $1 billion valuation.
Read more: http://news.cnet.com/8301-1023_3-20047649-93.html#ixzz1HrpCRVGG
Buffett, the chief executive of the Berkshire Hathaway investment empire, warned investors Friday at a conference in New Delhi to be wary of social networks such as Facebook and Twitter--a sector that has recently generated great interest and anticipation on Wall Street.
"Most of them will be overpriced," Buffett said, according to a Bloomberg report. "It's extremely difficult to value social-networking-site companies."
"Some will be huge winners, which will make up for the rest," he said, without specifying which companies he expects to be winners and which will be losers.
Buffett isn't alone in his dire warnings of another bubble in the offing. IAC founder and former entertainment mogul Barry Diller recently called the multibillion-dollar valuations of social-networking companies with high user engagement but unproven long-term revenue "mathematically insane."
Investor buzz for hot Silicon Valley companies that aren't yet publicly traded--like Facebook, Twitter, and Zynga--has hit a fever pitch and reportedly captured the attention of the U.S. Securities and Exchange Commission. The commission is reportedly interested in companies that offer exchanges for privately traded stock and along the way offer a peek at the hypothetical valuations of these otherwise tight-lipped companies.
Facebook, with an estimated value of $50 billion, is expected to be one of those players testing the IPO waters this year. With a user base of 500 million, the social-networking giant is estimated to be recording revenue in excess of $1 billion on the back of its Social Ads program.
Of course, Facebook is still a private company and is under no obligation to reveal its financial details. However, should Facebook hit the threshold of 500 individual shareholders, it will be required to either start trading publicly or at least begin disclosing its financial information, according to rules set by the U.S. Securities and Exchange Commission.
Twitter, another social-networking company rumored to be looking at a public offering later this year, will generate about $150 million in advertising revenue this year, up from the $45 million it made last year, according to market research firm eMarketer predictions. The microblogging site recently completed a $200 million funding round that gave the company a $3.7 billion valuation.
Two-year-old daily deals site Groupon, which reportedly turned down a $6 billion buyout offer from Google late last year in favor of a hoped-for $25 billion IPO, is estimated to be bringing in $103 million in revenue. LivingSocial, which thinks it could overtake Groupon this year, recently sealed a $175 million investment from Amazon that gave it a $1 billion valuation.
Read more: http://news.cnet.com/8301-1023_3-20047649-93.html#ixzz1HrpCRVGG
Tuesday, March 15, 2011
Joe Eszterhas - On Screenwriting
Complete program at: http://fora.tv/fora/showthread.php?t=368
Screenwriter and author Joe Eszterhas discusses the writing process, and offers some advice for aspiring screenwriters.
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Joe Eszterhas, best-selling author and legendary bad-boy screenwriter discusses his new book "The Devil's Guide to Hollywood: the Screenwriter as God!."
Mike Ovitz told him his Wilshire Blvd. "foot soldiers" would hunt him down. He's antagonized almost everyone at the top in Tinseltown. And now, Joe Eszterhas tells everything he knows - in brief, quotable bursts - about the business, the history of Hollywood, and how to write screenplays that make millions. Idiosyncratic, gruff and as shaggy as Eszterhas himself, "The Devil's Guide to Hollywood" makes a character/leitmotif of Eszterhas' fellow Hungarian Zsa Zsa Gabor ("Money is like a sixth sense that makes it possible for you to fully enjoy the other five."), and makes the case that Marilyn Monroe was the sharpest tack in Hollywood ("Hollywood is a place where they'll pay you a thousand dollars for a kiss and fifty cents for your soul. I know, because I turned down the first offer often enough and held out for the fifty cents."). Refreshing, dirty, tough, there's no book like it. - Books Inc.
Joe Eszterhas has written fifteen films which have made more than a billion dollars at the box office. Among them are Basic Instinct, Jagged Edge, Flashdance, Showgirls, Betrayed, Music Box and F.I.S.T. He is the author of the recent New York Times bestsellers American Rhapsody and Hollywood Animal. In 1975, his second book, Charlie Simpson's Apocalypse, was nominated for the National Book Award. He was a senior editor at Rolling Stone from 1971 to 1975.
Sunday, March 13, 2011
Bubbles isn't just a Stripper!
By Christine Benz| 3-3-2011 8:49 AM
Three Ingredients of Market Bubbles
Innovation, speculation, and delusion have come together in bubble after bubble, says Financial Analysts Journal editor Rodney Sullivan.
Christine Benz: Hi. I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Ibbotson Conference. And today I sat down with Rodney Sullivan. He is the editor of the Financial Analysts Journal. And he talked today about financial bubbles, what the commonalities are, and what investors can do to protect themselves against them.
So, Rodney you believe there are some commonalities that exist in every bubble environment. What are some of those features of a bubble?
Rodney Sullivan: Well, bubbles have been around since capital markets first evolved some 400 years ago. And I found that the same three ingredients persist through all of these bubbles throughout the time.
Now, of course, when bubbles are viewed from on high, these three factors exist, but when viewed from on low, they are a bit different. But I think it's important to look at the common features that persist throughout history.
And they are that following three things: some new innovation that sometimes leads people to believe that they can put risk in a cage. That is, we've contained risks, we know how to manage it now.
Benz: So, thinking back to the most recent bubble, what's an example of how people were thinking they had risk under control?
Sullivan: The so-call three letter monsters that ate the economy, right, the CDOs and the like, were some of the new innovations that led people to believe that they could contain risk, when in fact, we were increasing risk. So, that's a great example of new innovations and how those innovations can be misconstrued or misperceived or not well understood.
The second is speculative leverage. And speculative leverage is what I call herding on steroids. And by the way, sometime these new instruments allow us to undertake speculative leverage. And credit default swaps and the like, are examples of instruments that allow us to take speculative leverage.
But speculative leverage is a Hyman Minsky idea, and it's the idea that people invest in a particular asset only to sell it at a later date at a higher price, not to receive the dividend stream from that asset. And when you are doing that, that's speculative...
Benz: ...The greater fool theory...
Sullivan: The greater fool theory, and then when you are doing that with leverage it really becomes problematic.
And then the last element is what's called collective delusion, it comes from Kindleberger. So it's the idea that something new has come about, or some new idea has come about, that we all are excited about. The Internet bubble is the perfect example of that. And Dutch Holland in the early 1600s, it was all about tulips, and tulips were actually very new to Dutch Holland in the early 1600s and were all the rage. And if you read Kindleberger, you'll make some connections, I think, between Dutch Holland and the 1600s, and the U.S. in the late 1990s.
Benz: So, how about during the most recent bubble--what was the example of the new idea that got everyone engaged and led to the bubble?
Sullivan: The new idea was that housing prices would go up, always and forever. That there was no downside to owning residential real estate. Then, when combined with some of the speculative leverage opportunities that existed at the time, leveraging up mortgages, and combining that with some of the other elements that allowed us to believe that we can put that risk in a cage, all combined.
So, it’s a confluence of these three factors, it's not any one that matters, and I think that’s the important thing for understanding these three factors is that, they are not independent, they are all intertwined in a way that leads to bubbles.
And I would also argue that these three ingredients are here with us today. They’ve been with us, of course, for the last 400 years, but they are not going away. And so, if they are not going away, what do we do about it? And what we do, I believe, is, we evolve our tools, framework for understanding and managing risk.
And we financial economists haven’t really been very good at this. And part of my thesis is that we need to get better at it and begin to build what I call a risk management dash board--that is, in the same way that when you drive a car or an airplane, you have a dash board that gives you some guidance, some gauges, that help you understand what’s going on around you. In the same way, we need such tools to help us better manage our portfolio.
Benz: So, another thing you’ve talked about is, we need to better manage our own emotions and our own behavioral biases. Let’s talk about some of the key behavioral traps that can lead to some of these bubbles forming and lead to investors being especially susceptible to them?
Sullivan: Well, there are a host of behavioral biases that can trip us up and lead us to make mistakes in our thinking and judgments and decision making. And a great example, comes from the game of golf. There was an article recently published, where the author of the article surveyed amateur male golfers, and he asked them, how far do you hit your golf ball off the tee? And we all know where this is going, amateur male golfers suggested they hit their golf balls much, much further than they actually do. And it’s a great example of overconfidence bias.
And in golf, at least for amateur male golfers, it's not such a big deal to be overconfident in how far you’re going to hit your golf ball. But in financial markets, it leads to overconfidence and risk-taking behavior that we wouldn’t ordinarily take. And it dovetails back into this speculative leverage and collective delusion that I was mentioning earlier.
When we believe that we have things under control, when we believe that we understand outcomes when we truly don’t--because in financial markets, as we know, anything can happen, but when we believe that we have it under control, that we have risk managed and contained, then it leads us to excessive risk-taking, which, of course, can lead to bad outcomes.
Benz: So, in terms of checking yourself against that overconfidence and your investing, what are some ways to do that?
Sullivan: Well, I think the first step is, simply to recognize that we humans have these biases. It doesn’t just apply to financial markets. It applies, as I mentioned, to game of golf, and it applies to other areas as well.
So, I think the first thing is to recognize that we have these biases baked into our DNA, if you will. And once we recognize it, then we need to be on the lookout for how these biases are maybe leading us to make mistakes.
And another example might be, look for things that falsify your beliefs, rather than confirm your beliefs. So one thing you can do actively is, we humans tend to look for things that confirm our beliefs. So, if we believe stocks are going to rise, then we look for other arguments, other folks that are arguing that same side of the debate, if you will, and then we say to ourselves, "wow--I must be right."
What we should be doing is, we should be looking for things that falsify our beliefs. And in that way we can check ourselves and challenge ourselves to thinking a different way and bring some of those thoughts into our decision-making process.
Benz: Okay. Well, thank you, Rodney. Thanks for sharing those insights.
Sullivan: Thank you so much for having me.
So, Rodney you believe there are some commonalities that exist in every bubble environment. What are some of those features of a bubble?
Rodney Sullivan: Well, bubbles have been around since capital markets first evolved some 400 years ago. And I found that the same three ingredients persist through all of these bubbles throughout the time.
Now, of course, when bubbles are viewed from on high, these three factors exist, but when viewed from on low, they are a bit different. But I think it's important to look at the common features that persist throughout history.
And they are that following three things: some new innovation that sometimes leads people to believe that they can put risk in a cage. That is, we've contained risks, we know how to manage it now.
Benz: So, thinking back to the most recent bubble, what's an example of how people were thinking they had risk under control?
Sullivan: The so-call three letter monsters that ate the economy, right, the CDOs and the like, were some of the new innovations that led people to believe that they could contain risk, when in fact, we were increasing risk. So, that's a great example of new innovations and how those innovations can be misconstrued or misperceived or not well understood.
The second is speculative leverage. And speculative leverage is what I call herding on steroids. And by the way, sometime these new instruments allow us to undertake speculative leverage. And credit default swaps and the like, are examples of instruments that allow us to take speculative leverage.
But speculative leverage is a Hyman Minsky idea, and it's the idea that people invest in a particular asset only to sell it at a later date at a higher price, not to receive the dividend stream from that asset. And when you are doing that, that's speculative...
Benz: ...The greater fool theory...
Sullivan: The greater fool theory, and then when you are doing that with leverage it really becomes problematic.
And then the last element is what's called collective delusion, it comes from Kindleberger. So it's the idea that something new has come about, or some new idea has come about, that we all are excited about. The Internet bubble is the perfect example of that. And Dutch Holland in the early 1600s, it was all about tulips, and tulips were actually very new to Dutch Holland in the early 1600s and were all the rage. And if you read Kindleberger, you'll make some connections, I think, between Dutch Holland and the 1600s, and the U.S. in the late 1990s.
Benz: So, how about during the most recent bubble--what was the example of the new idea that got everyone engaged and led to the bubble?
Sullivan: The new idea was that housing prices would go up, always and forever. That there was no downside to owning residential real estate. Then, when combined with some of the speculative leverage opportunities that existed at the time, leveraging up mortgages, and combining that with some of the other elements that allowed us to believe that we can put that risk in a cage, all combined.
So, it’s a confluence of these three factors, it's not any one that matters, and I think that’s the important thing for understanding these three factors is that, they are not independent, they are all intertwined in a way that leads to bubbles.
And I would also argue that these three ingredients are here with us today. They’ve been with us, of course, for the last 400 years, but they are not going away. And so, if they are not going away, what do we do about it? And what we do, I believe, is, we evolve our tools, framework for understanding and managing risk.
And we financial economists haven’t really been very good at this. And part of my thesis is that we need to get better at it and begin to build what I call a risk management dash board--that is, in the same way that when you drive a car or an airplane, you have a dash board that gives you some guidance, some gauges, that help you understand what’s going on around you. In the same way, we need such tools to help us better manage our portfolio.
Benz: So, another thing you’ve talked about is, we need to better manage our own emotions and our own behavioral biases. Let’s talk about some of the key behavioral traps that can lead to some of these bubbles forming and lead to investors being especially susceptible to them?
Sullivan: Well, there are a host of behavioral biases that can trip us up and lead us to make mistakes in our thinking and judgments and decision making. And a great example, comes from the game of golf. There was an article recently published, where the author of the article surveyed amateur male golfers, and he asked them, how far do you hit your golf ball off the tee? And we all know where this is going, amateur male golfers suggested they hit their golf balls much, much further than they actually do. And it’s a great example of overconfidence bias.
And in golf, at least for amateur male golfers, it's not such a big deal to be overconfident in how far you’re going to hit your golf ball. But in financial markets, it leads to overconfidence and risk-taking behavior that we wouldn’t ordinarily take. And it dovetails back into this speculative leverage and collective delusion that I was mentioning earlier.
When we believe that we have things under control, when we believe that we understand outcomes when we truly don’t--because in financial markets, as we know, anything can happen, but when we believe that we have it under control, that we have risk managed and contained, then it leads us to excessive risk-taking, which, of course, can lead to bad outcomes.
Benz: So, in terms of checking yourself against that overconfidence and your investing, what are some ways to do that?
Sullivan: Well, I think the first step is, simply to recognize that we humans have these biases. It doesn’t just apply to financial markets. It applies, as I mentioned, to game of golf, and it applies to other areas as well.
So, I think the first thing is to recognize that we have these biases baked into our DNA, if you will. And once we recognize it, then we need to be on the lookout for how these biases are maybe leading us to make mistakes.
And another example might be, look for things that falsify your beliefs, rather than confirm your beliefs. So one thing you can do actively is, we humans tend to look for things that confirm our beliefs. So, if we believe stocks are going to rise, then we look for other arguments, other folks that are arguing that same side of the debate, if you will, and then we say to ourselves, "wow--I must be right."
What we should be doing is, we should be looking for things that falsify our beliefs. And in that way we can check ourselves and challenge ourselves to thinking a different way and bring some of those thoughts into our decision-making process.
Benz: Okay. Well, thank you, Rodney. Thanks for sharing those insights.
Sullivan: Thank you so much for having me.
Saturday, March 12, 2011
All Article by Matt
Why Isn't Wall Street in Jail?
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to
prosecute them
By Matt Taibbi
FEBRUARY 16, 2011
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate
investigator laughed as he polished off his beer.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell,
you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody
goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major
bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished
millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's
wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological
celebrity con artist, whose victims happened to be other rich and famous people.
This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on
newsstands and will appear in the online archive February 18.
The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and
cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked,
fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even
the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP
Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in
elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America
lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the
born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate
chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured
investors they would not lose even "one dollar" just months before his unit imploded, to the $263
million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to
disclose. Yet not one of them has faced time behind bars.
Invasion of the Home Snatchers
Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn
the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that
involve the firms paying pathetically small fines without even being required to admit wrongdoing. To
add insult to injury, the people who actually committed the crimes almost never pay the fines
themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of
justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the
Southern District of New York, "it's management buying its way off cheap, from the pockets of their
victims."
Taibblog: Commentary on politics and the economy by Matt Taibbi
To understand the significance of this, one has to think carefully about the efficacy of fines as a
punishment for a defendant pool that includes the richest people on earth — people who simply get their
companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further
wrongdoing that the state is missing by not introducing this particular class of people to the
experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month
term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's
all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked
up.
Just ask the people who tried to do the right thing.
Wall Street's Naked Swindle
Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of
public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of
banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal
Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity
Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New
York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and
investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC
watches for violations like insider trading, and also deals with so-called "disclosure violations" —
i.e., making sure that all the financial information that publicly traded companies are required to make
public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice,
when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since
the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases
referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York.
Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has
been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's
director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial
crime-fighting requires a high degree of financial expertise — and since the typical
drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO
from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100
number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair:
Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works
the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown
Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes
to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually
evolved into a highly effective mechanism for protecting financial criminals. This institutional reality
has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or
which party's in power. To understand how the machinery functions, you have to start back at least a
decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by
a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking
pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises
a profound and difficult question about the very nature of our society: whether we have created a class
of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are.
The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this
nonjailable class, expert not at administering punishment and justice, but at finding and removing
criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a
former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is
broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a
law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and
phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases
was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against
the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But
instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it
later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls.
"Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the
time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown
financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency
knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide
losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap
— widely regarded as one of the biggest assholes in the history of American finance — was a fine of
$500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from
ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the
time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with
one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the
most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he
questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of
Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was
asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One
day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of
shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from
the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there
were some days when he was trying to buy three times as many shares as were being traded that day." A
few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped
Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan
Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the
tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops"
to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among
the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for
sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his
notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he
called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that
netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started
buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move
that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his
boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't
likely to fly, explaining that Mack had "powerful political connections." (The investment banker had
been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary
Clinton in 2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire
Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former
top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain
of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the
SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators,
the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather
than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New
York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall
Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course
of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former
top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head
to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's
boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director
of enforcement.
Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked
from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately
dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a
seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC
eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg.
(It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the
agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took
place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had
expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would
later conclude. "At worse, the picture is colored with overtones of a possible cover-up."
Episodes like this help explain why so many Wall Street executives felt emboldened to push the
regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and
insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for
their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings
by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had
overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year,
AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to
its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden
of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to
prosecute those most responsible for the catastrophe — even though they had insiders from the two firms
whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply
evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick
Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a
Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was
using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's
compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off.
"We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady
practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to
disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically
like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'"
Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors,
Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart
indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print
essentially stated that the chart did not contain the real number — which, it failed to mention, was
actually $263 million more than the chart indicated. "They fucked around even more than they did
before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would
later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history
of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an
automated e-response.
"They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each
time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the
weight of its reckless bets on the subprime market and went into its final death spiral, Budde became
seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall
Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a
company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC,
right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want
to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the
SEC with copies of all his memos. He never heard from the agency again.
"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done
something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight
Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned.
When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than
$480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about
how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the
government's priorities, the Justice Department is proceeding full force with a prosecution of retired
baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At
least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami
of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to
conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more
than a year after the use of the Repo 105s came to light, there have still been no indictments in the
affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the
Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a
case where there's such overwhelming evidence — and where the company is already dead, meaning it can't
dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing
to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the
green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of
justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the
nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products
subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage
derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God
couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the
agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might
as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had
an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St.
Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already
made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's
largest insurance company, and trigger the largest government bailout of a single company in U.S.
history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG
to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he
joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant
at the parent company, which was only just finding out about the time bomb Cassano had set. After St.
Denis finished a conference call with the executive, Cassano suddenly burst into the room and began
screaming at him for talking to the New York office. He then announced that St. Denis had been
"deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio —
thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the
last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the
firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls"
happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner
like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when
AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the
payments — an indication that something was seriously wrong at AIG. "When I found out about the
collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."
After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He
got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had
held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that
it had posted $2 billion to Goldman Sachs following the collateral calls.
"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that
AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been
there. I knew they'd posted collateral."
A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government
Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the
government, which was preparing a criminal case against Cassano. But the case never went to court. Last
May, the Justice Department confirmed that it would not file charges against executives at AIGFP.
Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry
Commission. It was his first public appearance since the crash. He has not had to pay back a single cent
out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on
subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the
enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in
retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he
said.
"They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every
one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated
off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught
defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice
"Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal"
transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at
the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the
time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part
of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33
million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled
the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike
criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street
settlements almost never require the banks to make any factual disclosures, effectively burying the
stories forever. "All this is done at the expense not only of the shareholders, but also of the truth,"
says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's
Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled
with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden
and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping
$180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat
against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a
pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of
$1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us
to make money — ever" just three days before assuring investors that "there's no basis for thinking this
is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't
taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he
knows the answer.
Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at
the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's
leading lawyers who represent Wall Street, as well as some of the government's top cops from both the
SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial
combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a
cocktail party between friends and colleagues who from month to month and year to year are constantly
switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows
during a series of speeches and panel discussions, away from the rabble. "They were chummier in that
environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators
he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass
through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't
see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack —
maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm
that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former
U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director
of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a
partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern
District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been
recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had
served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at
Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired
by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the
pivotal fraud case against Rite Aid.
"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single
person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a
dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law
firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda
Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really
going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like
John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief
accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to
know about the level of chumminess and mutual admiration that exists between these supposed adversaries
of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal
from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added,
"You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me
if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I
also want to take a moment to applaud the entire staff of the SEC for the really amazing things they
have done over the past year," he said. "They've done a real service to the country, to the financial
community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when
Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had
recently unveiled, in which executives are being offered incentives to report fraud they have witnessed
or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to
know if their Wall Street clients are going to be charged by the Justice Department before deciding
whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there
is criminal interest in the case — so that defense counsel can have as much information as possible in
deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director
was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be
able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as
a way out of jail time. Khuzami was basically outlining a four-step system for banks and their
executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a
fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to
pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets
a pass from the Justice Department."
When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement
talking out loud about helping corporate defendants "get answers" regarding the status of their criminal
cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very
surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good
thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a
letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even
bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the
individual ask which criminal authorities they should contact," the manual reads, "staff should decline
to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice
Department deny there is anything improper in their new policy of cooperation. "We collaborate with the
SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny
Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically
small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff
to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen.
Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent
defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter,
which appears to have come from an SEC investigator on the case, prompted the inspector general to
launch an investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends
that virtually guarantees a collegial approach to the policing of high finance. Even before the
corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street
requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away
the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go
to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for
the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's
compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent
rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts.
Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum
it in government service for a year or two. Many of those appointments are inevitably hand-picked by
lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign
contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along
with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign
contributor. He put a Citigroup executive in charge of his economic transition team, and he just named
an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff.
"The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says
Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that?
Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past
few years, the administration has allocated massive amounts of federal resources to catching wrongdoers
— of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since
2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony
prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived
to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in
jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense
only because the politics are so obvious. You want to win elections, you bang on the jailable class. You
build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing
a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison
is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say
they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it,
officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them
pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them
profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year.
What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see
the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than
common robberies. They're crimes of intellectual choice, made by people who are already rich and who
have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever
we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy.
They're attacking the very definition of property — which, after all, depends in part on a legal system
that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional
— when the state simply gives up on the notion of justice — this whole American Dream thing recedes even
further from reality.
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to
prosecute them
By Matt Taibbi
FEBRUARY 16, 2011
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate
investigator laughed as he polished off his beer.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell,
you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody
goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major
bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished
millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's
wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological
celebrity con artist, whose victims happened to be other rich and famous people.
This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on
newsstands and will appear in the online archive February 18.
The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and
cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked,
fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even
the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP
Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in
elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America
lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the
born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate
chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured
investors they would not lose even "one dollar" just months before his unit imploded, to the $263
million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to
disclose. Yet not one of them has faced time behind bars.
Invasion of the Home Snatchers
Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn
the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that
involve the firms paying pathetically small fines without even being required to admit wrongdoing. To
add insult to injury, the people who actually committed the crimes almost never pay the fines
themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of
justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the
Southern District of New York, "it's management buying its way off cheap, from the pockets of their
victims."
Taibblog: Commentary on politics and the economy by Matt Taibbi
To understand the significance of this, one has to think carefully about the efficacy of fines as a
punishment for a defendant pool that includes the richest people on earth — people who simply get their
companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further
wrongdoing that the state is missing by not introducing this particular class of people to the
experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month
term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's
all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked
up.
Just ask the people who tried to do the right thing.
Wall Street's Naked Swindle
Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of
public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of
banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal
Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity
Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New
York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and
investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC
watches for violations like insider trading, and also deals with so-called "disclosure violations" —
i.e., making sure that all the financial information that publicly traded companies are required to make
public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice,
when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since
the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases
referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York.
Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has
been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's
director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial
crime-fighting requires a high degree of financial expertise — and since the typical
drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO
from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100
number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair:
Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works
the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown
Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes
to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually
evolved into a highly effective mechanism for protecting financial criminals. This institutional reality
has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or
which party's in power. To understand how the machinery functions, you have to start back at least a
decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by
a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking
pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises
a profound and difficult question about the very nature of our society: whether we have created a class
of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are.
The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this
nonjailable class, expert not at administering punishment and justice, but at finding and removing
criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a
former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is
broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a
law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and
phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases
was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against
the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But
instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it
later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls.
"Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the
time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown
financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency
knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide
losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap
— widely regarded as one of the biggest assholes in the history of American finance — was a fine of
$500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from
ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the
time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with
one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the
most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he
questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of
Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was
asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One
day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of
shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from
the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there
were some days when he was trying to buy three times as many shares as were being traded that day." A
few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped
Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan
Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the
tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops"
to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among
the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for
sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his
notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he
called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that
netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started
buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move
that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his
boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't
likely to fly, explaining that Mack had "powerful political connections." (The investment banker had
been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary
Clinton in 2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire
Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former
top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain
of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the
SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators,
the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather
than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New
York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall
Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course
of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former
top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head
to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's
boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director
of enforcement.
Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked
from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately
dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a
seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC
eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg.
(It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the
agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took
place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had
expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would
later conclude. "At worse, the picture is colored with overtones of a possible cover-up."
Episodes like this help explain why so many Wall Street executives felt emboldened to push the
regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and
insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for
their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings
by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had
overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year,
AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to
its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden
of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to
prosecute those most responsible for the catastrophe — even though they had insiders from the two firms
whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply
evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick
Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a
Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was
using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's
compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off.
"We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady
practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to
disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically
like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'"
Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors,
Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart
indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print
essentially stated that the chart did not contain the real number — which, it failed to mention, was
actually $263 million more than the chart indicated. "They fucked around even more than they did
before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would
later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history
of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an
automated e-response.
"They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each
time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the
weight of its reckless bets on the subprime market and went into its final death spiral, Budde became
seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall
Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a
company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC,
right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want
to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the
SEC with copies of all his memos. He never heard from the agency again.
"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done
something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight
Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned.
When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than
$480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about
how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the
government's priorities, the Justice Department is proceeding full force with a prosecution of retired
baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At
least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami
of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to
conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more
than a year after the use of the Repo 105s came to light, there have still been no indictments in the
affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the
Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a
case where there's such overwhelming evidence — and where the company is already dead, meaning it can't
dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing
to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the
green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of
justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the
nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products
subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage
derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God
couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the
agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might
as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had
an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St.
Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already
made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's
largest insurance company, and trigger the largest government bailout of a single company in U.S.
history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG
to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he
joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant
at the parent company, which was only just finding out about the time bomb Cassano had set. After St.
Denis finished a conference call with the executive, Cassano suddenly burst into the room and began
screaming at him for talking to the New York office. He then announced that St. Denis had been
"deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio —
thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the
last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the
firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls"
happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner
like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when
AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the
payments — an indication that something was seriously wrong at AIG. "When I found out about the
collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."
After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He
got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had
held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that
it had posted $2 billion to Goldman Sachs following the collateral calls.
"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that
AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been
there. I knew they'd posted collateral."
A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government
Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the
government, which was preparing a criminal case against Cassano. But the case never went to court. Last
May, the Justice Department confirmed that it would not file charges against executives at AIGFP.
Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry
Commission. It was his first public appearance since the crash. He has not had to pay back a single cent
out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on
subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the
enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in
retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he
said.
"They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every
one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated
off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught
defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice
"Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal"
transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at
the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the
time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part
of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33
million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled
the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike
criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street
settlements almost never require the banks to make any factual disclosures, effectively burying the
stories forever. "All this is done at the expense not only of the shareholders, but also of the truth,"
says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's
Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled
with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden
and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping
$180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat
against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a
pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of
$1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us
to make money — ever" just three days before assuring investors that "there's no basis for thinking this
is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't
taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he
knows the answer.
Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at
the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's
leading lawyers who represent Wall Street, as well as some of the government's top cops from both the
SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial
combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a
cocktail party between friends and colleagues who from month to month and year to year are constantly
switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows
during a series of speeches and panel discussions, away from the rabble. "They were chummier in that
environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators
he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass
through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't
see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack —
maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm
that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former
U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director
of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a
partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern
District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been
recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had
served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at
Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired
by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the
pivotal fraud case against Rite Aid.
"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single
person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a
dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law
firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda
Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really
going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like
John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief
accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to
know about the level of chumminess and mutual admiration that exists between these supposed adversaries
of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal
from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added,
"You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me
if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I
also want to take a moment to applaud the entire staff of the SEC for the really amazing things they
have done over the past year," he said. "They've done a real service to the country, to the financial
community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when
Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had
recently unveiled, in which executives are being offered incentives to report fraud they have witnessed
or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to
know if their Wall Street clients are going to be charged by the Justice Department before deciding
whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there
is criminal interest in the case — so that defense counsel can have as much information as possible in
deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director
was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be
able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as
a way out of jail time. Khuzami was basically outlining a four-step system for banks and their
executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a
fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to
pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets
a pass from the Justice Department."
When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement
talking out loud about helping corporate defendants "get answers" regarding the status of their criminal
cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very
surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good
thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a
letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even
bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the
individual ask which criminal authorities they should contact," the manual reads, "staff should decline
to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice
Department deny there is anything improper in their new policy of cooperation. "We collaborate with the
SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny
Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically
small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff
to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen.
Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent
defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter,
which appears to have come from an SEC investigator on the case, prompted the inspector general to
launch an investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends
that virtually guarantees a collegial approach to the policing of high finance. Even before the
corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street
requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away
the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go
to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for
the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's
compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent
rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts.
Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum
it in government service for a year or two. Many of those appointments are inevitably hand-picked by
lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign
contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along
with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign
contributor. He put a Citigroup executive in charge of his economic transition team, and he just named
an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff.
"The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says
Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that?
Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past
few years, the administration has allocated massive amounts of federal resources to catching wrongdoers
— of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since
2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony
prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived
to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in
jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense
only because the politics are so obvious. You want to win elections, you bang on the jailable class. You
build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing
a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison
is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say
they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it,
officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them
pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them
profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year.
What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see
the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than
common robberies. They're crimes of intellectual choice, made by people who are already rich and who
have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever
we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy.
They're attacking the very definition of property — which, after all, depends in part on a legal system
that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional
— when the state simply gives up on the notion of justice — this whole American Dream thing recedes even
further from reality.
Tuesday, March 1, 2011
$1.5 million Fraud conviction
Notwithstanding his fraud conviction, and thanks to excessively aggressive marketing strategies and a scientific and almost industrial approach to the production of promotions, Stansberry & Ass. is by now the largest publisher of financial newsletters and trading services in the world. Certainly an admirable achievement.
Due to its enormous profitability, Stansberry & Ass. has not only set the direction of marketing in many publishing companies (less inventive organizations will copy or imitate approaches and strategies within less than three months,) but re-oriented business practices and ethics in crucial segments of the industry since at least 2005.
Although Mr. Stansberry takes pride in “grading” the performance of his editors each year, the results (not the individual spreadsheets) are made available only to paid-up customers. Of course, actual performance of a hotly touted service is of much greater interest to prospective buyers.
Hence, we’re mildly amused at Mr. Stansberry’s posturing in the S$A Digest of Jan. 31, 2009: “It has been my observation – after 13 years in the financial newsletter business – most publishers will resort to any and all kinds of subterfuge, fraud, or misdirection to avoid producing an honest and complete track record. There are all kinds of ways to make a bad track record look good. But most publishers take the simple path, the one of least resistance: They just never publish any track record at all.”
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