(10 am. – promoted by ek hornbeck)
A lot of people who are hoping that once Obama gets re-elected that he will prosecute the criminals on Wall Street who currently blatantly flaunt the law.
I hate to shatter naive illusions, but if Obama was ever going to be serious about cracking down on white-collar crime and the rape of the working class he would have already started.
However, some of you might not be discouraged so easily. For those people I would like to point out that next Wednesday is the 5-year anniversary of the two major Bear Stearns hedge funds filing for bankruptcy. This immediately ended the housing bubble and triggered a credit crunch that eventually led to Lehman Brothers going under and the global economic crisis that is with us today.
So what has that got to do with prosecuting the criminals on Wall Street? Because the SEC has a 5 year statute of limitations for financial fraud.
Some courts have ruled that the Securities and Exchange Commission can only obtain civil penalties for fraud within five years of the activity taking place. More recently, the influential federal district court in Manhattan ruled that time runs out five years after the SEC discovers or should have discovered the alleged fraud.
Either way, the agency is pressing up against deadlines – at least in matters that arose early in the financial crisis, which erupted in mid-2007, legal experts said.
The SEC has cases in the pipeline, and much of the fraud continued to happen after the credit crunch started (much of it continues today), but traditionally the greatest fraud occurs before a bubble bursts, not after.
Thus many Wall Street criminals are going to get off scott free simply because they were able to run out the clock.
To give a perfect example, lets examine the Bear Stearns hedge funds.
Why was their bankruptcy so disruptive? The assets of the funds would have to be liquidated because of the bankruptcy filing.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks….
“Nobody wants to look at the truth right now because the truth is pretty ugly,” Castillo said. “Where people are willing to bid and where people have them marked are two different places.”
And that, in a nutshell, was the reason for the worldwide financial crisis – the mispricing of assets, mostly mortgage-backed securities, based on fictional financial models.
The reason for all this economic hardship wasn’t because the government taxed too much or spent too much.
It wasn’t because the Federal Reserve raised interest rates or contracted the money supply.
It wasn’t because the American consumer stopped spending.
It was because the financial system knowingly overpriced a major financial asset class, and then leveraged itself against that asset class in the vain hope that the Day of Reckoning never came.
How knowingly did they misprice those assets? About a month ago a private lawsuit against Morgan Stanley demonstrated to everyone how much.
For example, when the primary analyst at S.& P. notified Morgan Stanley that some of the Cheyne securities would most likely receive a BBB rating, not the A grade that the firm had wanted, the agency received a blistering e-mail from a Morgan Stanley executive. S.& P. subsequently raised the grade to A.
For example, in an e-mail before the deal was sold, S.& P.’s lead analyst wrote to a colleague: “I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody’s noted there was “no actual data backing the current model assumptions” for segments of the Cheyne deal.
That’s called fraud, and the victims were whatever 401k, IRA, and pension fund bought those overpriced securities.
In a few weeks the Bear Stearn fraudsters should be able to breath a sigh of relief. They will no longer have to worry about that dreaded slap on the wrist from the SEC.