A disturbing pattern seems to be forming in Washington: Evidence of financial wrongdoing leads to settlements with large banking institutions, but with no apparent move to indict the individuals responsible. AIG agreed to the largest settlements in history, yet despite seemingly compelling evidence the Justice Department decided not to prosecute anyone. Now Goldman Sachs has agreed to a settlement that amounts to little more than chump change compared to the bonuses it paid last year. People should be asking: Where are the indictments?
The SEC appeared to engaged in a little Wall Street-style overselling last week when its Director of Enforcement said that "half a billion dollars ($500 million) is the largest penalty ever assessed against a financial services firm in the history of the SEC." Actually, AIG paid the SEC considerably more - $800 billion - as part of a $1.6 billion total settlement. AIG also settled a class action suit in the State of Ohio last week for $725 million. Yet, despite what appears to be smoking-gun-like evidence, the Justice Department quietly let it be known there would be no indictments in that case. Now the DoJ has reportedly received a referral for a criminal investigation of Goldman from the SEC. How aggressively will that case be pursued?
We've written at length about the representations AIG made to its investors as it slowly learned the extent of its financial risk. This time we'll focus on one day's public statements by AIG, for December 5, 2007, and where the evidence pointed.
Securities fraud is committed when someone at a publicly-traded corporation lies to investors, or when they fail to disclose something which they know and which would give investors a different and more accurate understanding of the company's worth. The Financial Crisis Inquiry Commission investigated statements made in SEC documents and at an AIG Investor Day Conference webcast on December 5, compared them with information that came to light later, and found some startling evidence.
During the December 5 presentation Joe Cassano, the head of AIG Financial Products, said that the company had run a "model" set of calculations which showed estimated additional losses of $1.5 billion. Yet documents released by AIG in February of 2008,only two months later, showed that the same model projected additional losses that brought the total to $5.9 billion. That's four times greater than the figures that Cassano gave (and which the company provided in an SEC filing the same day.)
As we've discussed earlier (and Yves Smith has addressed at length), one of the main reasons Cassano and others escaped indictment appears to be because their auditor signed off on the numbers they used. Yet the auditor, PriceWaterhouseCoopers, stated on February 11 that information had been withheld from senior executives (and therefore presumably from them.) Their butt-covering statement reads as follows: "During, and in large part as a result of our audit, it was later determined that the $1.5 billion estimate used was net of structural benefits of $700 million and a negative basis adjustment of $3.6 billion which was, apparently, not known by ERM (Enterprise Risk Management) and senior management until early February 2008."
It sounds like PWC is taking credit for uncovering some concealed information. Who concealed it?
AIG's stock lost more than 11% of its value when the real numbers got out. That's a significant material loss to investors. The Securities Act of 1934 states that it's unlawful "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
Here are some of the things Cassano said on December 5, 2007: "... I want you to walk away with this as an estimate, and my best estimate ..." "We believe this is a 'money-good' portfolio." "Each and every one of our transactions ... passes through the same careful process (with) the approval of the AIG Head Office Enterprise Risk ... There is not one dollar of this business that has not gone through that double review check ... We see the ... approximately $1.5 billion as a mark someone might make us pay to take on these liabilities in this aberrant market ... these losses will come back and these are 'money-good' transactions that we have."
Despite these statements and the evidence uncovered by the FCIC, Cassano's lawyers announced in June they had been informed that no criminal charges would be filed. The Justice Department, it was reported, "declined comment." Only a court of law can determine whether a crime has been committed, and we aren't suggesting otherwise. Cassano told the FCIC that senior AIG executives knew of the additional $4-billion-plus in potential losses immediately, and FCIC documents (including typed notes of a senior executive meeting on November 29, 2007) seem to back him up. Who knew what, when? Did any one person "omit to state material facts"? Did a number of them? We can't know without the kind of scrutiny that comes with an indictment.
What we do know is that on December 5, 2007 AIG filed an SEC document, and its executives made statements, which seriously understated the losses facing the company. There have been more than $2 billion in settlements since then, and those losses contributed to a worldwide economic collapse. Here's one possible explanation for the Justice Department's inaction: The Administration doesn't want Wall Street executives living under the shadow of possible future indictments. But that threat is exactly what's needed to prevent the abuses and misdeeds of the past from being repeated.
As for Goldman, it acknowledged in its settlement that its marketing materials "contained incomplete information" and that it was a "mistake" to say the investment portfolio it was selling "was 'selected by' ACA Management" (it was actually selected by a group known to be betting against its success.) In other words, Goldman admitted misleading its clients, as its PowerPoint presentation seemed to demonstrate. But what's to be gained by these large corporate settlements if there are no indictments against the individuals whose misdeeds led to those settlements? After all, the total Goldman settlement is only 5% of its 2009 employee bonuses, as the entertainingly-named GoldmanSachs666 points out. Will we see any individuals face the consequences of their actions, or will we only see Goldman-style settlements that leave bankers with an incentive to keep on cheating?
Here are some more questions: What's the status of the Goldman Sachs investigation? Are other criminal probes under way? Let's hope that the Department of Justice doesn't keep "declining to comment," or declining to act on its responsibility to protect the public from criminal behavior in high places. The state of Ohio took firm action and got results last week, as has the state of New York in the past. But the Justice Department must pave the way. It must follow the evidence, wherever it leads. The public should demand no less.
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
He can be reached at "firstname.lastname@example.org."
Website: Eskow and Associates