The Fed’s secret Doomsday Book

Geithner Grilled

Geithner Intercedes to Give Wall Street Under the Table $25B Bailout

A 25 Billion Dollar Secret: The NY Fed, Goldman & The AIG Cover-Up
How The FRBNY's President Tim Geithner And Chairman Stephen Friedman Demanded Par For Goldman Sachs And The Rest Of Wall Street And Then Tried To Cover It All Up...

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Why did the Federal Reserve Bank of New York (FRBNY), whose Chairman was Stephen Friedman (a Goldman Sachs board member who resigned from the New York Fed earlier this year when it was revealed that he had made $5 million by purchasing shares in GS with the knowledge that AIG would be paying counterparties at par and that Goldman would be getting a $13 billion windfall -- when no one else had this information) and whose President was none other than current Treasury Secretary Tim Geithner, why did this New York Fed choose to pay AIG's counterparties 100 cents on the dollar when AIG itself had been negotiating for steep haircuts with claimants, AND why did they then pressure AIG executives to keep quiet about the decision even discouraging AIG from disclosing the 'par-payments' to its shareholders in required SEC filings?

We'll leave the decision itself (which was fraudulent, borderline criminal, and the reasoning given - a complete joke), for another post and focus on the cover-up.  Certainly it riled up Congressman Darrell Issa who fired off an angry letter last Friday to AIG management and the New York Fed, demanding the following from both:

1. Emails, phone logs and meeting notes of the following people: Timothy Geithner, Stephen Friedman, Tom Baxter, and Sarah Dahlgren; 
2. Term sheets, including drafts, relating to AIG’s payments to its CDS counterparties;
3. Emails, phone logs and meeting notes referring or relating to public disclosure of AIG’s payments to its CDS counterparties including disclosure to the SEC.

Issa continues in his letter:

It is also disturbing that, at the time this secret deal was made, FRBNY Chairman Stephen Friedman, a member of the board of Goldman Sachs, purchased more than 50,000 shares of Goldman Sachs before knowledge of the FRBNY’s bailout of Goldman Sachs and other AIG counterparties became public knowledge.  According to news reports, this transaction has earned Mr. Friedman over $5 million in profit.

Finally, according to one AIG executive quoted in news reports, the FRBNY may have attempted to manage public disclosure of its decision to pay AIG’s counterparties at par by pressuring the company not to file pertinent documents with the U.S. Securities and Exchange Commission (“SEC”):

They’d tell us that they don’t think that this or that should be disclosed.  They’d say, “Don’t you think your counterparties will be concerned?”  It was much more about protecting the Fed.

These allegations raise serious questions about the transparency, accountability and wisdom of the FRBNY’s actions. The American people have a right to know the full details behind the FRBNY’s decision to stop negotiations with AIG’s counterparties and pay them billions of dollars of taxpayer money.

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DB here.  It's not difficult to understand what happened, and it most certainly was not a coincidental result of independent decisions made during the heat of the crisis.  We've actually known it was the Fed for awhile.  Ever since House testimony from AIG CEO Ed Liddy confirming that "The Fed made us do it."  The problem at the time was that we didn't know which Fed.

Now we know: Geithner and Friedman interceded on behalf of Goldman and Wall Street (Merrill received $6.2 billion, Societe General - a whopping $16.5 billion) to deliver a stealth bailout, one that wouldn't need Congressional approval, and even better wouldn't require the counterparties to pay any of it back NOR would it require that they issue shares, warrants or any other instrument to AIG (taxpayers) in return for more than $32 billion in free money.

As example, Lehman counterparties got 11 cents.  AIG creditors in bankruptcy court might have gotten 25 cents, if they were lucky given the state of the asset markets at the time.  AIG itself was negotiating for 50 cents, but your friend and steward of your currency, Treasury Secretary Turbo-Tax, and his boss Stephen Friedman thought 100 would be the best number for everyone involved, leading to a windfall for AIG counterparties of at least $16 billion.  In real terms, anything over 25 cents was a gift and thus the real giveaway was somewhere in the range of $25 billion, notwithstanding the author's calculations.  And if that weren't enough, then Geithner and Friedman succeeded in covering up their secret for 9 months, until Bloomberg through dogged effort and FOIA determination finally got the scoop.  Read the following passage from Bloomberg carefully:

Part of a sentence in the document was crossed out.  It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet.  After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar.  The content of its deliberations has never been made public.

Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.  “It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”

The deliberations of the New York Fed are not made public. In this case, even the identities of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.  Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.

The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.

William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action.  “I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.  “They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”

‘An Outrage’

Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.  Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.  

Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.   “It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”

Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.

Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.  “We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”

In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”

Read the rest of the article HERE

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So even Fed voting member and counterparty-negotiation apologist, William Poole decries the secrecy.  And he was likely not aware of the par-payment cover-up since Friedman and Geithner kept it all within the New York Fed family.

In any other time, a sitting Treasury Secretary who interceded on behalf of Wall Street to screw taxpayers out of tens of billions, would not be sitting long.  But Democrats control both the House and Senate, so there are no investiagtions (Issa's letter aside).  Traditional media is content not to rock the boat for President Banks Obama lest they be shunned by their peers, and ultimately, 99% of TV and print journalists don't understand the issues well enough to complain with any conviciton, especially against the merry backdrop of the Dow rising and their deflated 401ks beginning to show life.

It's the exact same set of circumstances that allowed Paulson to cram TARP down our throats last fall; Congressional members and the journalists who cover them are too ill-informed about finance to have confidence in taking a critical position against the rampant fear-mongering that ultimately got the bill passed (see this Kanjorski clip).

They fall prey to fear and weakly submit to duplicitous hyperbole (Paulson threatening martial law and blood in the streets), when they should instead be consulting with the objective, critical voices who foresaw the crisis and were prepared with alternative solutions when it finally came (Stiglitz said instead of TARP, create new banks).

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure

Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Submitted by Tyler Durden on 09/24/2011

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

First Federal Reserve Audit Reveals Trillions in Secret Bailouts

Sunday, August 28, 2011 by Inter Press Service

by Matthew Cardinale 

 

The first-ever audit of the U.S. Federal Reserve has revealed 16 trillion dollars in secret bank bailouts and has raised more questions about the quasi-private agency’s opaque operations.
 
 "This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else," U.S. Senator Bernie Sanders, an Independent from Vermont, said in a statement.

The majority of loans were issues by the Federal Reserve Bank of New York (FRBNY).

"From late 2007 through mid-2010, Reserve Banks provided more than a trillion dollars… in emergency loans to the financial sector to address strains in credit markets and to avert failures of individual institutions believed to be a threat to the stability of the financial system," the audit report states.

"The scale and nature of this assistance amounted to an unprecedented expansion of the Federal Reserve System’s traditional role as lender-of-last-resort to depository institutions," according to the report.

The report notes that all the short-term, emergency loans were repaid, or are expected to be repaid.

The emergency loans included eight broad-based programs, and also provided assistance for certain individual financial institutions. The Fed provided loans to JP Morgan Chase bank to acquire Bear Stearns, a failed investment firm; provided loans to keep American International Group (AIG), a multinational insurance corporation, afloat; extended lending commitments to Bank of America and Citigroup; and purchased risky mortgage-backed securities to get them off private banks’ books.

Overall, the greatest borrowing was done by a small number of institutions. Over the three years, Citigroup borrowed a total of 2.5 trillion dollars, Morgan Stanley borrowed two trillion; Merrill Lynch, which was acquired by Bank of America, borrowed 1.9 trillion; and Bank of America borrowed 1.3 trillion.

Banks based in counties other than the U.S. also received money from the Fed, including Barclays of the United Kingdom, the Royal Bank of Scotland Group (UK), Deutsche Bank (Germany), UBS (Switzerland), Credit Suisse Group (Switzerland), Bank of Scotland (UK), BNP Paribas (France), Dexia (Belgium), Dresdner Bank (Germany), and Societe General (France).

"No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the President," Sanders wrote.
In recent days, ‘Bloomberg News’ obtained 29,346 pages of documentation from the Federal Reserve about some of these secret loans, after months of fighting in court for access to the records under the Freedom of Information Act.

Some of the financial institutions secretly receiving loans were meanwhile claiming in their public reports to have ample cash reserves, Bloomberg noted.

The Federal Reserve has neither explained how they legally justified several of the emergency loans, nor how they decided to provide assistance to certain firms but not others.

"The main problem is the lack of Congressional oversight, and the way the Fed seemed to pick winners who would be protected at any cost," Randall Wray, professor of economics at University of Missouri- Kansas City, told IPS.

"If such lending is not illegal, it should be. Our nation really did go through a liquidity crisis - a run on the short-term liabilities of financial institutions. There is only one way to stop a run: lend reserves without limit to all qualifying institutions. The Fed bumbled around before it finally sort of did that," Wray said.

"But then it turned to phase two, which was to try to resolve problems of insolvency by increasing Uncle Sam’s stake in the banksters’ fiasco. That never should have been done. You close down fraudsters, period. The Fed and FDIC (Federal Deposit Insurance Commission) should have gone into the biggest banks immediately, replaced all top management, and should have started to resolve them," Wray said.

Renewed questions about the Federal Reserve have inspired some young activists to organize grassroots protests across the U.S.

"Since its creation by the U.S. Government in 1913, the Federal Reserve has created so much new money out of thin air that it has destroyed 95 percent of the dollar’s value," Joseph Brown, a college student and one of the organizers of a recent protest of the Federal Reserve Bank of Atlanta, said.

"This hidden inflation tax benefits Wall Street and the government, but hurts the poor and those living on fixed incomes, such as senior citizens, the most," Brown said.

The U.S. Government Accountability Office (GAO) audit itself was the result of at least two years of grassroots lobbying. IPS reported in June 2009 a wide bi-partisan coalition of Members of Congress had co-sponsored legislation to audit the Federal Reserve.

The audit was ordered as an amendment by Sanders as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act - a major banking overhaul passed by President Barack Obama and the U.S. Congress in 2010.

"I think this (the first ever GAO audit) was a good start to uncovering what the Fed did so that we can begin to determine whether similar actions should ever be permitted again," Wray wrote, adding, "my preliminary answer is a resounding no."

The GAO also found existing Federal Reserve policies do not prevent significant conflicts of interest. For example, "the FRBNY’s existing restrictions on its employees’ financial interests did not specifically prohibit investments in certain non-bank institutions that received emergency assistance," the report stated.

The GAO report noted on Sep. 19, 2008, William Dudley, who is now the President of the FRBNY, was granted a waiver to let him keep investments in AIG and General Electric, while at the same time the Federal Reserve granted bailout funds to the same two companies.
"No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed," Sanders said.
The GAO is currently working on a more detailed report regarding Federal Reserve conflicts of interest, which is due on Oct. 18, 2011.

Goldman Should Give Back $2.9 Billion to Taxpayers

Wednesday, February 16, 2011 by McClatchy Newspapers
by Gregg Gordon
WASHINGTON — Irked that Goldman Sachs appears to have reaped a $2.9 billion taxpayer-aided windfall on an investment of a mere $20 million, some experts and watchdogs say the Wall Street giant should return the money to the U.S. Treasury.

"This wasn't rocket science, what was going on," said Michael Greenberger, a University of Maryland law professor who specializes in complex securities. "Anybody who understood this market knew that there was the potential for Goldman to later unwind proprietary trades. But the Obama administration and the Fed simply never inquired." "It's a very simple call to make," said Sylvain Raynes, a frequent Goldman critic who's an expert in the kinds of deals in which the investment bank landed an apparent jackpot. "They should never have been given this money, and they should give it back."

The assessment by the Financial Crisis Inquiry Commission also exposed a potentially huge regulatory omission in the rescue of the insurance giant American International Group, which was the conduit for more than $90 billion in tax dollars to U.S. and European banks.

It's now clear that the Federal Reserve Bank of New York, which quarterbacked the hurried, $182 billion bailout of AIG to avoid a meltdown of global financial markets, did little to guard against windfalls for major banks and investment banks.

The financial crisis panel's final report late last month found that Goldman's $2.9 billion payout came on "proprietary" trades — investments in which the firm used its own money rather than the more typical deals completed on behalf of clients.

The panel, inquiring into a McClatchy report last June, said that Goldman got $1.9 billion of the payoff after the taxpayer bailout of AIG began.

Critics say that in the rush to save AIG and avert systemic collapse of the financial markets, regulators treated Goldman like everyone else. But Goldman was different.

While most banks that got billions of dollars from AIG simply relayed the money to clients they'd insured against losses, Goldman got to collect a more than 100-fold return on a number of securities that soured, because none of its clients was involved.

The prospect of a repayment by Goldman — the firm that drew the most outrage over Wall Street's role in the financial crisis — would be welcome news now as President Barack Obama has been forced to propose huge cuts in federal programs as a way of dealing with a $1.6 trillion budget deficit for fiscal 2012.

Steve Ellis, of the government waste watchdog Taxpayers for Common Sense, said that "It's up to the federal government to demand accountability and transparency" regarding Goldman's payout.

"We can't afford to shell out cash without asking hard questions and demanding that the very same actors that got the economy into this mess take some of the burden on themselves," he said.

Congress could try to impose a tax on banks' profits from the bailout or adopt some other legislation to "claw back" the money, but it would be difficult because Goldman received it unconditionally, said Michael Greenberger, a University of Maryland law professor who specializes in complex securities. The New York Fed attached no strings to the money and let AIG decide how much Goldman would get.

Goldman, which paid a whopping $31.6 billion in employee bonuses in the past two years, denies that the trades in question were proprietary, signaling that it has no plans to send more money back to Washington.

In 2009, Goldman was quick to repay a $10 billion loan from a Treasury Department program to bail out banks. Last summer, the firm paid an additional $550 million to settle a related civil fraud suit filed by the Securities and Exchange Commission.

Goldman spokesman Michael DuVally rejected the characterization of the AIG payment as a windfall.

"We used the money we received from AIG to meet our obligations to clients with whom we hedged on the other side of these trades," he said.

Joseph Mason, a finance professor at Louisiana State University-Baton Rouge who has advised federal banking regulatory agencies, said that most large banks manage their risks with so many contrary trades that assertions they profited from a particular deal "can be obviated very quickly."

The issue, however, goes to the heart of the controversy over whether any of the megabanks that helped cause the crisis got sweetheart deals as part of the bailout.

"In the heat of the moment, the Treasury and the Fed weren't worried about who was participating in the housing bubble . . . or their level of involvement" when they shelled out money, Mason said.

"You run up the market, you cause a nationwide crisis and you're given money to continue. That sounds to me like an incentive to go out and do it again."

The New York Fed said in a statement that the bailout protected Americans, as well as AIG's policyholders and trading partners "from the catastrophic consequences of AIG's disorderly failure during the worst financial crisis in generations, (and) allowed AIG to meet its contractual obligations without discrimination." A New York Fed spokesman declined to comment on whether taxpayers backstopped any other proprietary trades

Greenberger, however, sharply criticized the handling of the AIG bailout, naming Federal Reserve Chairman Ben Bernanke; Treasury Secretary Timothy Geithner, the former New York Fed president; and Larry Summers, until recently Obama's chief economic adviser.

"This wasn't rocket science, what was going on," said Greenberger, who was a senior staffer at the Commodity Futures Trading Commission during the Clinton administration. "Anybody who understood this market knew that there was the potential for Goldman to later unwind proprietary trades. But the Obama administration and the Fed simply never inquired.

"They had all the power at that point. Goldman needed that money. They were on their knees, and that was the point at which hard bargaining should have been taking place."

However, Greenberger said he worries less about recovering taxpayer money than about preventing a future financial meltdown, because the banking industry is lobbying fiercely against rules implementing recent congressional overhauls by improving market transparency and limiting risk-taking.

AIG's big debts to Wall Street emanated from the decision of its highflying London-based Financial Products unit to write insurance-like protection for major banks and investment banks on some $78 billion in offshore securities, most backed by subprime or similarly dicey home loans. In many cases, the banks had written identical insurance protection for the buyers of the securities.

When the housing crash sank the securities' value, AIG was sent reeling toward bankruptcy by a chorus of banks demanding payment of tens of billions of dollars under the terms of the contracts, known as credit-default swaps.

Geithner, Treasury secretary Henry Paulson and Ben Bernanke elected to save AIG from bankruptcy, partly to keep banks afloat. As part of the rescue, the New York Fed directed AIG to cover the full face value of $62 billion of most of its swap contracts with Goldman and other U.S. and European banks.

Goldman, which collected $14 billion of those funds, said it merely forwarded the money to investors for whom it had written the same protection.

But the inquiry panel concluded that Goldman cashed in on another $5 billion in more exotic bets on so-called synthetic securities that weren't back-to-back trades. With AIG Financial Products unworried about a housing downturn, Goldman paid 0.1 percent of the securities' face value, or about $5 million annually, to bet in 2005 and 2006 on the default of a set of securities that neither party owned.

DuVally, the Goldman spokesman, said that the deals "were client-related, not proprietary transactions," emphasizing that, "The idea that we received a . . . windfall is wrong."

DuVally declined to detail the hedges — bets in the opposite direction — and wouldn't say whether Goldman had anything close to $2.9 billion at stake.

Another $1 billion in Goldman-AIG trades had yet to be unwound as of July.

It's still unclear whether other banks also collected windfalls for proprietary bets.

The French colossus Societe Generale, investment bank Merrill Lynch (now owned by Bank of America) and Germany's Deutsche Bank collected a combined $22 billion from AIG as part of the 2008 settlements. Deutsche Bank also insured billions of dollars in securities backed by commercial real-estate loans.

Spokesmen for AIG and all three banks declined to comment.

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.

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.

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."

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.

Invasion of the Home Snatchers

CEO Salaries vs. Company Profits

By Focus Editors

America is still picking up the pieces of the worst financial disaster in decades, and the bulk of the damage struck in the financial market. In a time where you might think banks would be keeping their money internal to repair and rebuild their organizations, we have instead gaped in horror as some of these same executives receive multimillion dollar bonuses year after year. In fact, a study performed by the Associated Press in 2008 found that $1.6 billion of total government bail out money (money provided to fledgling organizations intended to keep them from total collapse) went straight to various executives pockets. Today we explore where some of that morally-questionable money went.

Ken Lewis of Bank Of America
The Huffington Post reports that Bank Of America received $25 billion in bail out money in 2008, and an additional $20 billion in 2009 to cover the loss they took when they acquired Merrill Lynch. This massive infusion of government money came only one year before Ken Lewis stepped down from the office of CEO with $83 million in compensation packages. The bank was more eager than some other bailed out companies to pay back its debts to the government, and succeeded in doing so late last year. But thePost makes clear that this was not out of any moral or ethical dedication to their duty, but mostly so that their executives would not be hindered by government pay restrictions imposed on bailed out companies.

Vikram Pandit of Citigroup

In 2008, the same year that Citigroup accepted a $45 billion government bailout, MarketWatch reports that former CEO Vikram Pandit took home a benefits package worth $38.2 million. This package consisted mostly of stocks and options, combined with a $958,333 annual salary. Interestingly enough, Pandit declined the opportunity to be considered for huge bonuses, and committed to working for $1.00 in base pay until the company was back to profitability. Additionally, the CEO reimbursed Citigroup over $170,000 for personal use of the company aircraft.

Martin Sullivan of AIG
CNBC reported that Martin Sullivan retired from the collapsing offices of AIG, but not before pocketing a $47 million stock and benefits package. Only a few months later AIG was approved for $85 billion in government bailout funds. Slate.com reports that this king's ransom was raised from selling off federal securities, bringing the fed down below $200 billion in reserves.

Being the world's largest insurance company, the US government saved AIG to avoid the disastrous outcome on the financial market that would have occurred if the company collapsed. If AIG was allowed to go under, NPR reports that it would have resulted in $185 billion worth of damage to the world financial market, a blow that would have resulted in "substantially higher borrowing costs, reduced household wealth, and a materially weaker economic performance."

Richard Wagoner of General Motors

According to the New York Times, former General Motors CEO Richard Wagoner received a $14.4 million dollar "goodbye" package in 2008. That same year, the US government appropriated $50 billion in bailout money to save the auto manufacturer from tanking. CommonCause.org reports that the majority of this money came from pension and stock benefits, along with a $1.55 million salary.

Daniel Akerson was brought in as Wagoner's replacement, and has gone on record saying that he took the job because he believes in the government's decision to save General Motors. "[The bailout] was absolutely the right decision for this company, for this region, for the manufacturing base of the United Sates," Akerson told the Washington Post. "I wouldn't have agreed to go on the board...if I hadn't agreed with that decision."

Frederick Waddell of Northern Trust
Northern Trust received one of the smallest government bailout appropriations of 2008, totaling just $1.6 billion. This is why it was so shocking to see CEO Frederick Waddell recieve a compensation package of over $6 million that same year. As reported By CommonCause.org, this money came mostly in the form of stock, options, and salary. Under Waddell's leadership, Northern Trust succeeded in paying the off the government bail out in full in under a year. In 2009, the institution issued a press release proudly announcing this accomplishment, and that same year Forbes reported that Waddell's compensation has nearly doubled, increasing to $11.89 million. The raise was no doubt justified by his quick action in repaying the debt.

Lloyd Blankfein of Goldman Sachs

Lloyd Blankfein, CEO of the recently indicted Goldman Sachs, reportedly took home over $70 million in 2008 alone. That same year, Goldman Sachs was bailed out to the tune of $10 billion, leading many to question the rationale behind Blankfein's massive compensation. The Huffington Post claims that that this compensation makes over $125 million over the past 10 years.

In 2009, the company was brought up on charges of sub prime mortgage fraud by the Securities and Exchange Commission, who claimed that the organization deliberately marketed bad loans in a deceptive manner. The Post reports that Blankfein settled with the SEC in July to the tune of $550 million.

Jamie Dimon of JPMorgan Chase

In what feels like a total slap in the face, JPMorgan Chase CEO Jamie Dimon somehow found the budget room to snag a $28 million bonus package in late 2007 despite JPMorgan Chase being in such poor financial shape that they needed a $25 billion government bail out a mere year later. As if this wasn't bad enough, CNN reports that 2009 brought about another round of bonuses for Dimon, this time in the amount of $16 million.

BusinessWeek announced that President Obama was having dinner with Jamie Dimon to dinner to discuss financial reform at the White House. Since the meeting, no official reports have been released disclosing what was discussed.

Illegal Scams That Should Put Wall St. Bankers Behind Bars

From laundering drug money to gouging you on overdrafts, here are five scams where Wall Street ran afoul of the law.
By Zach Carter, AlterNet
Posted on September 21, 2010

Unchecked greed and financial insanity on Wall Street crashed our economy. Much of that insanity was legal -- bankers lobbied hard for weak regulations, and got what they paid for. But much of that craziness was outright illegal, and in recent months, a number of shocking scams have come to light that could result in huge fines for banks or even put bankers behind bars. Though Wall Street has yet to see serious prosecutions for the current calamity, prosecutions are not at all uncommon after financial crises -- more than 1,000 bankers went to prison after the savings and loan debacle alone.

From laundering drug money to scamming you on overdrafts, here are five recent Wall Street scandals that have "illegal" written all over them. The SEC is attempting to settle civil fraud charges it has filed in many of these cases, but in finance, the only difference between civil fraud and criminal fraud is the burden of proof. If the Justice Department wanted to go after many of these crooked dealers, it could.

1) Wachovia Launders $380 Billion in Drug Money

The financial crisis is full of complex schemes and indecipherable acronyms, but the most astonishing alleged fraud of the entire mess is pretty straightforward: Wachovia allowed Mexican drug cartels to launder $380 billion of drug money through its bank, repeatedly looking the other way and ignoring internal whistleblowers who alerted them to the problem.

This was a clear violation of federal law, but Wachovia appears to be getting away with it. The Justice Department is not seeking an indictment against the company, out of fears that it could destabilize financial markets. Instead, it's reached a "deferred prosecution agreement" -- effectively a settlement -- in which the bank agrees to pay $160 million and promise to never, ever launder drug money again.

Pretty light penalty for, you know, laundering drug money. The fine amounts to about one-half of one-hundredth of a percent of the drug money that DOJ says passed through the bank. Outside the too-big-to-fail world, getting caught laundering billions of dollars in drug money doesn't just earn you hefty fines, it plants you in jail.

And Wachovia wasn't alone. According to the U.N., laundering drug money was common during the darkest days of the financial crisis, as faltering banks sought to get their hands on any money they could find -- regardless of where it came from.

2) Chamber of Commerce Launders AIG's Lobbying Cash

Money laundering has been very profitable for Wall Street, and not just drug money. The U.S. Chamber of Commerce is a lobbying front-group for a lot of powerful corporations, and some of its most aggressive members are Wall Street titans. A watchdog group has filed a complaint with the Internal Revenue Service accusing the Chamber and notorious AIG kingpin Maurice "Hank" Greenberg of tax fraud. Greenberg was ousted from AIG in 2005 amid a massive accounting scandal, but not before helping to establish the insurance giant's ridiculous credit default swap wing, which would destroy the company only a few years later.

Greenberg and the Chamber are accused of abusing a charity in order to hide millions of dollars in lobbying expenditures by AIG. In 2003, a foundation handled by Greenberg gave $5 million to the charitable wing of the Chamber of Commerce. The Chamber operates a charity called the National Chamber Foundation. The next year, Greenberg's foundation gave another $10 million to the Chamber's charity. In 2003 and 2004, 80 percent of the National Chamber Foundation's budget was coming from Greenberg and AIG. The charity's main function was to serve as a front for AIG lobbying.

Guess what? According to U.S. Chamber Watch, that money was turned over to the Chamber's lobbying arm. At the time, the Chamber was raising tons of money to help reelect President George W. Bush, and AIG was trying to weaken accounting fraud laws. It's illegal for a tax-exempt charity to funnel money to political operations. If the allegations are true, the Chamber's charity would be shut down.

3) The $40 Billion Subprime Lie From Citibank and Robert Rubin

As the subprime mortgage market was falling apart in 2007, Citibank was trying to calm investor fears about a total meltdown -- just like every other big Wall Street bank. Its chief tactic was to highlight that it had "only" $13 billion in subprime mortgage holdings, repeatedly touting the figure publicly.

The statement was true, if you ignored another $40 billion in subprime exposure that the firm held. Lying to shareholders is a major no-no in Corporate America -- it's considered securities fraud, and people can go to jail for it. The SEC is attempting to settle with Citi, but isn't recommending criminal prosecutions or even charging individuals with formal wrongdoing. Instead, the SEC wants to fine Citi shareholders $75 million -- a total slap in the face to basic conceptions of fairness, not to mention American taxpayers. See, if Citi execs did what the SEC says they did, then they were hurting their own shareholders. As punishment, the SEC wants to impose a fine on those same shareholders, the very parties who were wronged.

What's more, the U.S. government took a stake in Citi as part of its epic bailout of the poorly managed financial behemoth. Taxpayers are being asked to help foot the bill for wrongs committed by the executives we bailed out. Thanks a lot, SEC.

The SEC has filed documents indicating that both Citi CEO Chuck Prince and board member Robert Rubin knew about the inaccurate statements, but isn't filing charges against them. The stiffest penalty the SEC wants to impose on a Citi executive under the settlement is a $100,000 fine against Citi CFO Gary Crittenden. Crittenden took home $19.4 million in 2007 alone. I'll bet he's really sweating the rounding error on his bonus.

Fortunately, a federal judge has so far refused to sign off on the SEC's settlement, calling it far too weak given the seriousness of the allegations. The SEC shouldn't just be seeking huge fines against executives, it should be working with prosecutors on criminal cases.

4) Merrill Lynch: Inventing Fake Demand For Subprime Junk

This beauty of a scandal was uncovered by two investigative journalists at ProPublica. Like much of what happened on Wall Street over the past decade, it's complicated, clever and totally corrupt.

During the boom years of the housing bubble, Merrill Lynch was top producer of fancy financial products called "Collateralized Debt Obligations," or CDOs. Thousands of mortgages were packaged together and sliced up into securities called mortgage-backed securities, or MBS. Those MBS, in turn, were cobbled together to create a CDO -- creating a byzantine product that former Merrill CEO John Thain now acknowledges was simply too complex to value -- even supercomputers couldn't figure the damn things out.

But creating gimmick securities and selling them to investors wasn't the scam that caught ProPublica's attention: shady as it was, just about everybody on Wall Street did that. When Merrill sold its CDOs to investors, it divided the big mess into different tiers, known as "tranches," reflecting different levels of risk. The riskiest tranche of the CDO fetched the highest price, because it was the most likely to default, while the "safest" tranche fetched the lowest price. But as investors began to worry about the subprime craze in 2006, they stopped ponying up for the risky bits.

But this lack of demand was no problem for Merrill. When it couldn't offload the tranche from one of these garbage CDOs, it just created a new CDO, and used the new security to buy up the unwanted junk from the old one. The result was a catastrophic daisy chain, in which Merrill was able to keep producing new CDOs by inventing fake demand -- all while subjecting itself to dangerous levels of risk. By 2007, a full 42 of the bank's 92 CDOs included pieces of other CDOs it had previously sold -- 46 percent.

Often, two newly created CDOs would simply swap assets with each other. ProPublica says a full $107 billion worth of CDOs were created and traded assets within days.

Merrill wasn't the only bank to engage in this behavior. According to ProPublica, Goldman Sachs, Citigroup and Swiss scandal-magnet UBS all did so as well. But Merrill was the leader, packaging the most CDOs and the most CDOs with gimmicked demand. These practices had a significant effect on the real economy -- they kept mortgage prices inflated and kept the subprime machine moving, allowing the housing bubble to grow larger and more devastating. The SEC is investigating the practice for evidence of fraud.

5) Wells Fargo Overdraft Theft

Ever wonder how you managed to rack up such high overdraft fees? Well, there's a decent chance you didn't. U.S. banks scored an astonishing $38 billion in overdraft revenues in 2009 -- pretty impressive for an industry whose total combined profit was just $12.5 billion that same year. For years, banks have been rearranging the order of their customers' checking transactions, hoping to push account balances down to zero faster so they can charge more fees.

Say you've got $80 in your checking account, and need to pay some bills and run a couple of errands. You spend $30 on gas and another $20 on your water bill. Later, you head to the grocery store and spend $81 -- oops! -- on groceries. Any reasonable person would believe that the last transaction put you over the edge and earned you an overdraft fee, but megabanks aren't reasonable people. Instead, the bank automatically processes your $81 purchase ahead of your previous charges. As a result, you do not get hit with one overdraft fee for your groceries, you get hit with three, because your costliest purchase was processed before the others -- even though you made the cheaper purchases first.

Now, there's no reason why banks can't, say, notify you about your overdrafts before approving them. In the example above, you could have put the tomatoes back on the shelf and saved yourself $39. But reordering transactions is beyond the pale -- if bankers did this with their stock options, it'd be called "backdating" and it could land them in a federal penitentiary.

A judge in California has now said that this practice violated state law, and has ordered Wells Fargo bank to return hundreds of millions of dollars in such ill-gotten gains to its California customers. But Wells Fargo wasn't alone -- every major U.S. bank had overdraft programs that worked the same way Wells Fargo's did.