Right after the financial crisis, an SEC lawyer fought a lonely struggle to get his agency to crackdown harder on Goldman bankers. He lost.
This story was co-published with The New Yorker. It is not subject to our Creative Commons license.
In the late summer of 2009, lawyers at the Securities and Exchange Commission were preparing to bring charges in what they expected would be their first big crackdown coming out of the financial crisis. The investigators had been looking into Goldman Sachs’ mortgage-securities business, and were preparing to take on the bank over a complex deal, known as Abacus, that it had arranged with a hedge fund. They believed that Goldman had committed securities violations in developing Abacus, and were ready to charge the firm.
James Kidney, a longtime SEC lawyer, was assigned to take the completed investigation and bring the case to trial. Right away, something…
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According to Fannie and Freddie’s prior regulator, OFHEO: “At year-end 2001, five counterparties accounted for almost 60 percent of the total notional amount of Fannie Mae’s OTC derivatives, and 58 percent of Freddie Mac’s.” The report also notes that “The market for OTC derivatives is highly concentrated among a small number of dealers, primarily brokerage firms and commercial banks that are counterparties for at least one side of virtually all contracts. The largest dealers include JPMorgan Chase, Citigroup…Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley Dean Witter.”
According to a current report from the Office of the Comptroller of the Currency, those same banks (minus Deutsche and Lehman) account for the vast majority of derivatives in the U.S.
Lehman Brothers filed for bankruptcy one week after the government placed Fannie and Freddie into conservatorship. Merrill Lynch was taken over by Bank of America the same week. If you’re looking for a potential list of names of Wall Street players that needed a quick bailout of Fannie and Freddie, the above list is an excellent start.
Matt Taibbi reported at Rolling Stone three days ago that the government has been fighting a pitched battle to keep 11,000 documents pertaining to Fannie and Freddie under seal in a court case. You can rest assured that some of those documents relate to Fannie and Freddie derivatives and counterparties. But that pile of 11,000 documents pales in comparison to the 25 million documents the Justice Department withheld from the public when it settled its case against Citigroup in 2014 for $7 billion. What the public got instead was a meaningless 9-page statement of facts. http://wallstreetonparade.com/2016/04/u-s-government-is-now-a-major-counterparty-to-wall-street-derivatives/