The Tale of Power versus the Patsies

I reproduce in full a comment by Eric Salzman, as he explains who ends up in jail, and who ends up with a slap on the wrist. Do you see a difference between these two groups other than power and being a member of the insiders' club?

On June 19, 2008 Ralph Cioffi and Matthew Tannin, formerly of Bear Stearns, were led out of their homes at 5 AM to be indicted for conspiracy and fraud regarding their management of two Bear Stearns Asset Management hedge funds. Later that day, in handcuffs, they were perp walked in front of just about every news service that had a camera. They face up to twenty years in prison. At the time Mark Mershon, head of the New York FBI office stated to reporters;

"This is not about mismanagement of a hedge fund. It is about premeditated lies to investors and lenders"

Hmm, "premeditated lies to investors and lenders". It's a good thing that this has been an isolated incident on Wall Street over the last two years, or has it?

Over the last few days, Merrill Lynch, Citigroup and UBS have, under pressure from both the New York and Massachusetts Attorney Generals offices, bought back billions of Auction Rate Securities ("ARS"), that they sold to retail investors, paid hundreds of millions in fines, and "neither admitted nor denied allegations of wrongdoing." Morgan Stanley yesterday, notified the NY AG office that they were willing to buy back $4.5 billion of ARS that they sold to retail investors. The NY AG told them essentially to "go get their shine-box, not enough." Ask yourself these two questions with regard to the entire ARS business and the firms that ran them;

Did these firms tell "premeditated lies" to investors?
Did these firms tell "premeditated lies" to issuers (substituting for "lenders")?
The answer to both these questions is a resounding yes. The NY and Massachusetts AG have dozens and dozens of emails from senior people at these firms directing their sales forces to move these securities to retail investors and represent them as cash-like with a little incremental yield. Meanwhile they knew beyond a shadow of a doubt that the liquidity of these securities was nil. They knew this because they were the ones conducting sham auctions for years to give the appearance of liquidity. The fact was, the banks running the auctions were routinely taking down 20-30% of the "auctions. Therefore, as their balance sheets crumbled, these banks knew with absolute certainty that they were going to cease "providing liquidity" resulting in a the end of the "auction process". The firms used their retail sales force, often without providing the sales force with the proper information which would have been something like this. "You are selling roach motels gentlemen. You can get in, but you can't get out! Now lets get out there and MOOOOVE these pigs!" The banks, after sticking retail with these bonds, left them twisting in the wind for six months, unable to get their money back. Additionally, in at least one case, the head of fixed income sales was SELLING HIS ARS while exhorting his sales force to move the paper retail.

With regard to the question "did these firms lie to issuers?" Hell yes! The banks approach to "Municipal Finance" was to use it as a shill to get "less than financially astute", state and local government officials into a fun house that picked them up by their feet, turned them upside-down, and shook every last nickle out of them. The ARS programs were like any other "boiler room" operation. They gave the false appearance of universal liquidity when it was not the case. I'm going to give the banks credit that none of them thought things could get so bad that they would be on the hook for the entire $300 billion market, but supporting years of auctions and giving the appearance that they were fail-proof, misled the issuers. The banks collected hundreds of millions of fees on these auctions and moved issuing municipalities into interest rate swaps that were mismarked by hundreds of millions (like the $120 million swap "fees" that Jefferson County Alabama paid). The banks created a nightmare basis trade where municipalities were paying ARS rates and receiving LIBOR. That didn't work out too well when the ARS rate went to 20% and LIBOR went to 2.75%.

My question is this; Why are these firms able to pay a fine, repurchase the ARS from retail, admit no wrong doing, and close the issue without a criminal investigation? The damage these banks caused to the municipal finances of this country were catastrophic. Surely at a minimum, this is equal to what Cioffi and Tannin did with regard to the BSAM fund investors. Why do they go to jail and no one from any of the offending banks get bracelets? Fraud is fraud right? Shouldn't everyone get treated equally? I'm not even going to get into to John Thain and his little $5.7 billion "oops" on his last 10Q. Talk about telling premeditated lies to investors and lenders!