The return of obvious graft

By Felix Salmon
November 18, 2011

It’s almost comforting to find a spate of financial scandals which involve simple, easy-to-understand illegal and unethical behavior, after all these years rummaging around in synthetic mezzanine collateralized debt obligations and the like. Three have particular salience right now:

  1. The Congressional insider-trading scandal. Spencer Bachus is the poster boy here: one minute he was getting highly confidential briefings from Hank Paulson and Ben Bernanke on the parlous state of the economy; the next he was loading up on contract options on Proshares Ultra-Short QQQ, a synthetic ETF designed to maximize profits when the stock market falls, and which is emphatically for day traders only.
  2. Olympus, which now seems to have channeled more than $2.5 billion to yakuza crime syndicates, including the country’s largest, the Yamaguchi Gumi.
  3. MF Global, which increasingly looks as though it stole money in customer accounts.

There are lots of different flavors of wrongdoing in the world of finance. At companies like Enron, it’s illegal and extremely complicated. With individuals like Bernie Madoff, the scheme can be large and complex, but at heart the idea is pretty simple. And at banks like Goldman Sachs and Citigroup, which are paying the SEC hundreds of millions of dollars to settle charges that they did bad things in the synthetic CDO market, there’s an ongoing debate about whether their actions were wrong or illegal at all, and a huge chunk of Wall Street continues to believe that they weren’t.

With these latest allegations, however, we’re moving back to the kind of obvious wrongdoing uncovered by Ferdinand Pecora in the early 1930s. The world of global finance has certainly become more sophisticated and complex since those days, but the easy and obvious graft never disappears.

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