Why Aren't These Wall Street Crooks in Jail?

Another Brick in the Wall:
Why Aren't These Wall Street Crooks in Jail? 
Ed Pawelec 


Imagine if you will that you are walking down the street flush with pay day cash when a mugger steals your wallet.  Several people witness this theft, and all are willing to testify on your behalf.  Unfortunately, the cop who apprehends our felon, rather than slap cuffs on him, suggests that he take the cash and the credit cards and pop into a nearby Tiffany's to see if there is anything the wife might like.  With a bagful of blue boxes in hand, the thief returns the cash empty wallet with maxed out credit cards to the cop.  Our protector then turns to us and hands us a newly minted financial burden with a shrug.

A seemingly ridiculous scenario, but one that has occurred repeatedly in the last decade.  Some thieves didn't get away.  Jeff Skilling, Dennis Kozloski, and Bernie Madoff, to name a few, are all doing time for their frauds.  While their crimes hurt a lot of people, none participated in the near collapse of the financial system we experienced just a few short years ago.  Those particular bandits have mostly escaped without prosecution and with a boat load of cash.

The following three crooks had an impact on your life, whether as a victim of deceptive lending practices, falling portfolio values, or by losing your job as a result of an economy that spiraled out of control when the methods they used to enrich themselves imploded ...

Angelo Mozilo

"Listen, suckers were throwing money at us from both sides, you think I would turn a blind eye to that?"

Remember how the whole mess started in sub-prime mortgages, a large chuck of which were originated at Countrywide Financial (now owned by Bank of America) under the leadership of Angelo Mozilo.  Mozilo co-founded Countrywide in 1969 along with the now defunct IndyMac Bank, both of which, for the most part, were standard mortgage originators until the housing bubble started inflating.

Mozilo and Countrywide did not create products like the option ARM, the 80-20 product, FlexPay, or any of the other dubious mortgage products that were developed in the early 2000s, but they swooped into the fray when it was clear that there was money to be made.  In fact, according to the Center for Public Integrity, Countrywide was the top subprime lender between 2005 and 2007, originating $97 billion in loans at the peak of the housing market.

From 2001-2006, Mozilo is estimated to have received total compensation of $470 million.  That includes $140 million in stock he sold prior to Countrywide's demise.  In fact, in a 2006 e-mail written just days after the massive sale, Mozilo is quoted as saying, "We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."

During the period that Mozilo disposed of chunks of his shares, Countrywide was engaged in an aggressive share buyback program.  How can a CEO possibly justify a share buyback while unceremoniously dumping the stock?

Publicly, while reducing guidance for 2006 in October of that year, Mozilo continued to tout the strength of Countrywide and cited expected improvement of results from refinancing activity, while downplaying the real risk to the balance sheet.

For not disclosing the full extent of the risks a declining housing market posed to Countrywide's portfolio, and for selling the stock while clearly in possession on material non-public information, Mozilo paid $67.5 million in fines, and the criminal investigation has been recently dropped.  Not only is that a paltry sum for a man purportedly worth as much as $600 million, but $45 million of that is being paid by Bank of America as part of its obligations in the takeover of Countrywide.

It simply makes your head spin.

Joe Cassano

"I can't hide myself very well, so how could I be hiding anything else?"

Cassano, former head of AIG Financial Products, is the man "credited" with the collapse of the insurance giant.  Cassano amassed large returns for his division and AIG by writing insurance on bond portfolios in the form of Credit Default Swaps (CDS)-- and that was fine, when he was winning.  He bragged about his large, unhedged positions, fought internal audits that valued the swaps far below Cassano's claims, and claimed that his products were so safe that investors would not lose as much as $1.

For a time the con was successful, but as the housing market began to crumble and the mortgages insured by Cassano's CDS began to default, write offs began to mount.  As late as December of 2007, Cassano still had AIG CEO Martin Sullivan convinced.  Sullivan commented at the time that the probability of the housing crisis causing losses at AIG were "close to zero," despite the fact that the company was witting off $1.1 billion as a result of CDS covering American mortgages.  Two months later, that number became $11.1 billion, and the death spiral began.

For the eight year period from 2000-2008, Cassano earned roughly $315 million, including a $35 million bonus received after the collapse of the insurance giant and the $182 billion tax payer funded bailout.  Despite clear evidence that he sought to conceal the massive problems in his division, no criminal charges have been filed.

How this cannot be considered fraud raises serious questions about the effectiveness of our legal system when it comes to financial crimes.

Dick Fuld


"If you look over here I will distract you from everything that is relevant."

Fuld headed Lehman Brothers from 1994 until its collapse in 2008, and received total compensation in excess of $500 million, although he claims it was only $310 million.  Under Fuld, Lehman engaged in some serious financial chicanery using what is known as "Repo 105".

Repos, or Repurchase agreements, are used throughout the financial sector as a means of balancing the books for short periods.  The Federal Reserve is active in the repo market, providing temporary funds collateralized by some securities (usually Treasuries) with an agreement that the receiver of the funds will repurchase the securities at a later date for a specified amount.  All part of normal business, and the process basically amounts to a secured loan.

The thing that Lehman discovered is that, if you over collateralize a loan, you can treat it as a sale of assets, not a loan, despite the fact that you are contractually bound to repurchase your collateral.  The name "Repo 105" stems from the loop hole that allowed Lehman to use $105 of collateral for $100 in cash.

So at quarter end, when the company's financials would come under scrutiny in coincidence with its earnings release, Lehman routinely "sold" assets under the repo agreement and used the proceeds to pay off some debt, thereby reducing leverage and "improving" its financial condition.  A few weeks after earnings, Lehman would releverage by borrowing to repurchase the assets.

Fuld claims that he had no knowledge of the Repo 105 transactions, despite the fact that in one quarter Lehman used the transactions to "remove" as much as $50 billion of assets and debt from its balance sheet.

Now I am not the CEO of a large securities firm, but if I were, and my numbers changed for a few days by $50 billion, I think I might notice.  So either Fuld is a complete idiot and should never have been doing anything more mentally strenuous than finger painting, or he is complicit in what amounts to fraudulent reporting.

As yet, no charges or penalties have been levied against Fuld.

Each of these three men -- and I use the term loosely, as they may indeed be something less than human -- was involved in one way or another in reaping ill-gotten gains at the expense of millions of people.  While it was a confluence of events originating from the housing crisis that led to the "Great Recession", the failures and/or bailouts of these firms clearly made the crisis worse, and we are still paying the price while they rest comfortably on their millions.

Additionally, Mozilo and Fuld plead that whatever actions they took were, to the best of their abilities, in the interest of their companies -- Cassano just doesn't care what anybody thinks.  Clearly, the end result was not in the best interest of shareholders or their companies.  Amazingly, there are some defenders of these thieves who suggest that, because they intended the best for their companies, they shouldn't be prosecuted.

Give me a break!

If I purposely attempt to hide risks, fudge disclosure of leverage, and generally manipulate the numbers, this is a crime, particularly when it jeopardizes the very structure of our capitalistic society in a way that Jeff Skilling or Bernie Ebbers could never achieve.

Until financial criminals are pursued and prosecuted with consistency like any other criminal, the incentives for malfeasance, theft, and general financial shenanigans will far outweigh the potential for punishment.  So while politcos in Washington shout and point fingers, they don't really accomplish anything, and it's only a matter of time before another financial felon is captured, patted on the back, and released to enjoy your money