News Journal: Why has no banker gone to jail?

Last week, for the first time, the Securities and Exchange Commission won a case against an individual banker for fraudulent behavior leading to the financial meltdown of 2008-09.

Hold the applause. The banker was a mid-level executive. It was a civil case; he will face other penalties but will not be going to jail. The U.S. government’s record remains intact. It has sent no one from Wall Street to jail for playing a role in the financial crisis.

The main reason Fabrice Touree was indicted by the SEC was he was dumb enough to write a string of very impolitic emails about a billion-dollar deal called Abacus he and his employer, Goldman Sachs, packaged and sold to investors in 2007. They convinced a major customer to invest in Abacus, a package of mortgage bonds of varying quality. One of the selling points was a well-known hedge fund would also be buying Abacus. In fact, the hedge fund was doing the opposite –buying derivatives that bet against the bonds in Abacus. What’s more, Goldman Sachs had allowed the hedge fund to “help” pick the bonds to be included in the Abacus package. The customer took a bath on Abacus, but, according to the Wall Street Journal, the hedge fund made $1 billion.

Lest you think this is unbelievable, as I did when I first heard it, Goldman Sachs was charged by the SEC at the same time as Touree and, rather than go to trial, agreed to pay a $550 million fine.

At exactly the same time he was persuading Goldman clients to buy into the deal, Mr. Touree was emailing friends what he actually felt about it. “I’ve managed to sell a few Abacus bonds to widows and orphans I met at the airport.” “The whole building is about to collapse anytime now.” “The only potential survivor, the Fabulous Fab.”

He wasn’t convicted because of his giggling emails. The jury decided there was sufficient other evidence he intended to defraud investors in Abacus. They also accepted the argument of Matthew Martens, the SEC’s lead lawyer. “He told us at the beginning that we would see this was all about Wall Street greed, and we did get to see that,” said juror Evelyn Linares.

“We didn’t think Mr. Touree alone was to blame,” said Beverly Rhett, another juror, who was quoted in the Wall Street Journal as questioning why some of his colleagues and bosses at Goldman Sachs weren’t on trial as well. “But we had to deal with what we were presented with, and that was Fabrice Touree.”

The New York Times summed up the reaction of observers, saying “Still, some critics have questioned why the agency chose to make Mr. Tourre –a midlevel employee who was 28 at the time of the mortgage deal –the face of the crisis. Not one executive at Lehman Brothers, which filed Wall Street’s biggest bankruptcy ever at the height of the crisis, was charged with wrongdoing.”

Exactly. The questions I have been asking for years remain. Why has not one of the bank executives who were running the show even been indicted? Why has no one gone to jail?

In his closing arguments Mr. Martens came up with at least one possible answer to those questions. Mr. Touree, he said, was living in “a Goldman Sachs land of make-believe,” where deceiving investors is not fraudulent.

We have allowed Wall Street banks to operate in that land of make-believe for years. Over and over again, they get away with slap-on-the-wrist money penalties, fines often so small they seem to be regarded as a cost of doing business.

Mary Jo White, the new chair of the SEC, announced it would no longer be agency policy to include in settlements the statement the bank in question “neither admits nor denies wrongdoing.” Goldman was allowed to do that in the Abacus settlement, and stopping the practice is a step in the right direction. But it doesn’t do anything to hold individual high-level executives responsible. I like the reaction of Jake Leon of Better Markets to the Fabrice Touree verdict:

“You would think the SEC convicted the Al Capone of Wall Street when all it did was scapegoat a single mid-level Goldman Sachs trader. The SEC must stop chasing minnows while letting the whales of Wall Street go free. That only rewards and incentivizes more crime.”

Ted Kaufman is a former U.S. Senator from Delaware.