Yes, the SEC was colluding with banks on CDO prosecutions

By Felix Salmon
April 9, 2014
asked whether the SEC was colluding with banks on CDO prosecutions. And now, thanks to an American Lawyer Freedom of Information Request, we have the answer: yes, they were.

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Back in 2011, I asked whether the SEC was colluding with banks on CDO prosecutions. And now, thanks to an American Lawyer Freedom of Information Request, we have the answer: yes, they were.

This comes as little surprise: it beggared belief, after all, that every bank would end up being prosecuted for one and only one CDO. But now we have chapter and verse: the key precedent, it seems, was the first one, Goldman Sachs.

The SEC filed its case against Goldman and Tourre on April 16, 2010. Three days later Goldman reached out with a $500 million settlement offer, according to an email that Reisner sent Khuzami. Although that proposal was close to the final payment, it took another three months to announce a settlement. As Khuzami described to Kotz, Goldman wanted a global settlement that resolved not just the Abacus investigation but the SEC’s probes into roughly a dozen other Goldman CDOs.

Khuzami didn’t want to give Goldman that public victory. When the SEC and Goldman announced on July 16, 2010, that the investment bank would settle the Abac­us case for $550 million, the SEC said in a press release that the settlement “does not settle any other past, current or future SEC investigations against the firm.”

Khuzami was determined that Goldman’s payment only be linked to ABACUS. “This was not a $550 million settlement for 11 cases,” Khuzami told Kotz. “We may tell Goldman that we are concluding our investigations in these other matters without recommending charges, but that doesn’t mean we’re settling them. And that was an important point for us, because we didn’t want them out there saying, you know, they settled 12 CDO investigations for an average of $30 million each, and, you know, didn’t [Goldman] get a great deal.”

Yet in its statement on the Abacus settlement at the time, Goldman said that the SEC had concluded a review of other CDOs and did not anticipate recommending claims for now.

It’s quite impressive how quickly and accurately Goldman nailed the amount of money that it would have to pay the SEC to settle the case: when it took three months to come to the $550 million settlement, I for one assumed that Goldman had to be dragged kicking and screaming to that point. In fact, however, Goldman was happy to offer half a billion dollars right off the bat. The tough part of the negotiation was not over the Abacus fine — it was over the question of whether the SEC, with the Abacus prosecution successfully under its belt, would then go after Goldman for a dozen other deals which were functionally equivalent.

The answer was a clear no: Goldman might be equally culpable for 11 other deals, but the SEC quietly assured Goldman — but not the public at large — that none of those deals would result in any charges.

And with the Goldman deal now public knowledge, we can assume that the same nod-and-a-wink deal was struck with all the other one-and-only-one CDO bank prosecutions: Citigroup, JP Morgan, Merrill Lynch (which evidently included Bank of America), Mizuho Securities, Wachovia, Wells Fargo, UBS. Add them all up, and I wouldn’t be surprised if there are 100 unprosecuted CDO deals out there, all of whom had victims just as deserving as the ones who got paid out on the prosecuted deals. Basically, there’s a CDO lottery, and, thanks to the way in which the SEC cozied up to the big banks, the average CDO investor has a very small chance of having won it.

As Khuzami says, if you look at them on a per-CDO basis, the big headline numbers suddenly become much more modest and affordable for Wall Street banks. So there’s a real scandal here: firstly, the SEC was not being fully honest with the public about the deals it was cutting. Secondly, the SEC failed to stand up for CDO investors it should have fought for. Thirdly, the SEC tried to make it look as though it was levying massive fines for single deals, when really the settlements were omnibus deals covering some unknown quantity of CDOs.

Now that this information is public, the SEC should apologize to all of us for its behavior, and promise not to collude with Wall Street again. If it doesn’t, that’s a clear sign that Wall Street’s most salient watchdog is still as captured as ever.

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Comments
15 comments so far

What about the colluding on the Ginnie Mae MBS were lenders are approving bad FHA & VA loans while falsifying documents in order to obtain FHA & VA insurance, and to recoup monies for the investors there are forgeries produced to foreclose, submit fraudulent insurance claims to the FHA & VA who have been tricked into purchasing properties that the lenders/servicer don’t own, yet the investors get to keep the illegal funds?

What the reasoning for the lack of the SEC jumping into the Justice Dept settlement? It because there is greater damage that just $614 million to the Federal Government as they don’t deal with the resale of these properties and the fact that the Federal Government has purchase Stolen Goods at the foreclosure sales.

You got these securities that don’t actual have any underlying collateral, and the New York are catching onto the fact that the entity claiming ownership of the loan in courts cannot provide evident that they own the loans.

These Securities are owned by the investors and there is not reversing the blank endorsed Notes that placed the loans into the MBS.

Posted by CharlesReed | Report as abusive

Tip of the iceburg, as long as Wall Street owns the US Senate, the most corrupt organisation on the planet, nothing will change ..

Posted by Woltmann | Report as abusive

The root of the problem is that Wall Street has more $$$ than the SEC does and therefore can afford to hire more and better lawyers.

Therefore the SEC has to go into every negotiation knowing that it will have to settle for whatever the Wall Street banks are willing to offer. It has almost no chance should the dispute actually end up in court.

Posted by mfw13 | Report as abusive

‘Now that this information is public, the SEC should apologize to all of us for its behavior, and promise not to collude with Wall Street again.’

I hope that was sarcasm. If it wasn’t, the author is incredibly naive.

Posted by wbonesteel | Report as abusive

Khuzami comes off looking rather bad–again. Let’s hope he is hauled before Congress and forced to explain himself under oath. There is a very strong suggestion here that Khuzami was spending much more time thinking through the PR angles–both for the SEC and for his present Wall Street banking clients (he now defends them as a $5 million per year partner at Kirkland)–than thinking about pursuing justice on behalf of all investors, which is all an SEC Director of Enforcement is supposed to be thinking about. Innocent until proven guilty, blah blah blah, but this guy really seems to stink to high heaven.

Lest anyone forget, this is a man who came to the SEC straight from Deutsche Bank, one of the worst of the CDO creators out there. Each Deutsche CDO deal required legal sign-off from Khuzami’s office. Therefore, the more Khuzami would have pursued CDO prosecutions at the SEC, the more he would have implicated himself. And for anyone that remembers Lehman’s Repo 105 fraud, it was Deutsche Bank that was one of the few banks willing to lend the money to Lehman necessary for the fraud to take place–with Khuzami’s office giving the legal okay to do it. Which might explain why the SEC let Lehman off the hook.

Posted by OliverBudde | Report as abusive

Of course if you look at the information that Goldman disclosed in the Abacus deal (see Foote, et al, http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1153411) then you can see that the investors had all the information available they needed on the CDO. So really the prosecution was not about justice but about politics to get a conviction. This was a nuisance settlement.

Posted by bwickes | Report as abusive

No it was a whitewash settlement, we’ll admit to a little petty larceny as long as the rules don’t change, and who controls the SEC and hence the rules? None other than the US Senate ..

Posted by Woltmann | Report as abusive

*Now that this information is public, the SEC should apologize to all of us for its behavior, and promise not to collude with Wall Street again.*

Promise… that’s a good one, but they do need to bring up charges on all of the rest of those issues. Yes?

I mean – they have not been settled..

Posted by Overcast451 | Report as abusive

“The SEC filed its case against Goldman and Tourre on April 16, 2010.”

The Tourre case went to trial and is still not over four years later. Any penalty is still to be assessed and a further appeal is possible after any penalty is assessed. Getting $550 million up front might have seemed a better option than a series of court cases that they might have won possibly generating more money at a later date.

Posted by walstir | Report as abusive

Good day to watch the Quants of Wall Street documentary which by the way was done about 2 months before the flash crash..these former Wall Street Quants were right on with their warnings…it’s the best video I have found where even the layman can understand the processes of how this takes place with math models, the basics..don’t change the portfolio, change the math as the #1 quant in world Paul Wilmott says…it helps understand this article a bit better with some background explanations. I keep it in the footer of my blog along with 3 others that are good and at layman level to watch.

http://ducknetweb.blogspot.hk/2012/09/qu ants-alchemists-of-wall-street-video.htm l

Posted by TheMedicalQuack | Report as abusive

“the SEC failed to stand up for CDO investors it should have fought for” … “the SEC quietly assured Goldman — but not the public at large — that none of those {other} deals would result in any charges.”

When the justice system prosecutes burglars, it is fighting for people who usually cannot fight for themselves because they lack the resources. The counter parties in the Abacus CDO were easily capable of suing each other if they believed that they were the victims of criminal actions. Why haven’t they sued on their own? Especially on those other deals where the SEC is not proceeding? How much of the $550 million SEC settlement money when to which counter parties that were judged to be victims?

Posted by walstir | Report as abusive

“the SEC failed to stand up for CDO investors it should have fought for” … “the SEC quietly assured Goldman — but not the public at large — that none of those {other} deals would result in any charges.”

When the justice system prosecutes burglars, it is fighting for people who usually cannot fight for themselves because they lack the resources. The counter parties in the Abacus CDO were easily capable of suing each other if they believed that they were the victims of criminal actions. Why haven’t they sued on their own? Especially on those other deals where the SEC is not proceeding? How much of the $550 million SEC settlement money when to which counter parties that were judged to be victims?

Posted by walstir | Report as abusive

@walstir wrote:

The counter parties in the Abacus CDO were easily capable of suing each other if they believed that they were the victims of criminal actions. Why haven’t they sued on their own?

Anyone want to tackle the question on why MBS investors failed(?) to file suit?

Posted by Laster | Report as abusive

It’s not who you know; it’s how well you know them…and how big the bribe is.

Posted by anotherfakename | Report as abusive

Nothing new here. The SEC is controlled by politicians who receive millions of dollars from Wall Street firms to make sure regulations and enforcement favor Wall Street and not investors. And, SEC attorneys will eventually work for Wall Street firms for five times the money they are paid by the SEC. This is collusion at a high level. The solution is in Washington, but apathetic investors/voters have let politicians make collusion a way of doing business. They stay in power and retire with millions of dollars. Only the American public can fix this. But, they are not motivated to fix it – Americans rarely react until problems are out of control. The political problem may get their attention when they cannot afford to retire and are looking for someone to blame. Start with the senators from your state.

Posted by PaladinRegistry | Report as abusive
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