Why the SEC won’t hunt big dogs

Jesse Eisinger writes: After years of lengthy investigations into collateralized debt obligations, the mortgage securities at the heart of the financial crisis, the S.E.C. has brought civil actions against only two small-time bankers. But compared with the Justice Department, the S.E.C. is the second coming of Eliot Ness. No major investment banker has been brought up on criminal charges stemming from the financial crisis.

To understand why that is so pathetic and — worse — corrupting, we need to briefly review what went on in C.D.O.’s in the years before the crisis. By 2006, legions of Wall Street bankers had turned C.D.O.’s into vehicles for their own personal enrichment, at the expense of their customers.

These bankers brought in savvy (and cynical) investors to buy pieces of the deals that they could not sell. These investors bet against the deals. Worse, they skewed the deals by exercising influence over what securities went into the C.D.O.’s, and they pushed for the worst possible stuff to be included.

The investment banks did not disclose any of this to the investors on the other side of the deals, or if they did, they slipped a vague, legalistic disclosure sentence into the middle of hundreds of pages of dense documentation. In the case brought last week, Citigroup was selling the deal, called Class V Funding III, while its own traders were filling it up with garbage and betting against it.

By the S.E.C.’s own investigations of and settlements with Goldman Sachs, JPMorgan Chase and Citigroup, and by reporting like my ProPublica work with Jake Bernstein and early stories by The Wall Street Journal, we know that these breaches were anything but isolated. This was the Wall Street business model. (Goldman, JPMorgan and Citigroup were all able to settle without admitting or denying anything, which, of course, is part of the problem.)

Neither the Citigroup settlement nor any of the others come close to matching the profits and bonuses that these banks generated in making these deals. And low-level bankers did not, and could not, act alone. They were not rogues, hiding things from their bosses.

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