Sure. Lets start with an easy example. Why didnt any Directors at Goldman Sachs serve prison time for knowingly bundling Synthetic CDOs with bad CDS that they internally know were garbage? They sold these to pension funds, and other public entities. There were documented losses. There are documented emails with full internal discussion on how bad these investments were.
Selling bad assets isn’t illegal. I worked for a startup. After seeing how the sausage was made I knew they were a bad company. When they IPO’ed I sold all shares as soon as the lockup hit. They have yet to exceed the price I sold at. Should I be in jail for selling what I knew was a crappy, over-valued company?
(Mind you I had no MNPI as I hadn’t worked there for 6 years.)
> Should I be in jail for selling what I knew was a crappy, over-valued company?
If your job was to sell these things to people as a professional service, and you set things up so that a supposedly impartial ratings agency would give a high rating to something you know is shit? Absolutely. It’s not the same thing though is it?
Their counterparties are all sophisticated institutional investors and these things are generally traded on a buyer-beware basis. Sure there may have been some actual wrongdoing that went unpunished, but the nature of these transactions is that the cases are likely be civil rather than criminal.
The real reason for the lack of convictions is that there just weren't many cases of big bad wall street bankers defrauding ordinary people. That's typically what results in criminal convictions because 1) the law is far more protective of unsophisticated individuals than of institutional investors and 2) prosecutors have a much easier time winning cases and also benefitting politically from pursuing cases with relatable victims. And the reason why people wanted bankers to go to jail is because they thought wall street bankers did bad things to ordinary people. In reality though, the best cases against Wall Street folks are ones where the victims are also institutional investors (which is often included within the broader definition of Wall Street). The traders at Goldman Sachs outsmarting the traders at AIG just doesn't make for a particularly good fraud case, the same way Enron defrauding individual investors including their employees. And from the public's perspective, they are all part of the same class of people. And where ordinary people were directly involved, they were the ones defrauding lenders (and by extension, Wall Street and so on) by lying on their loan applications.
You are right that ordinary people were not defrauded directly, but pension funds are basically ordinary people's money. There just happened to be a middleman (the pension fund admin.)
Because they are market makers. They routinely trade low credit quality instruments that they wouldn't buy and hold in large volumes. The fact that they don't have the credit appetite to hold that position doesn't mean they can't make a market for it.
It's like if you were telling your car salesman that if he doesn't own a couple of Toyota Yaris himself, you wouldn't trust him to buy a Toyota Yaris from his dealership. He's a dealer, what he thinks of the car personally isn't the question.
The message that was drilled into people during the financial crisis was: punishing people for these actions would stifle innovation and risk taking in the financial services, which could threaten US financial hegemony.
There is a pretty clear line between innovation, risk taking, and fraud. Intent can be shown based on firms' internal positions and emails (e.g., Goldman Sachs was internally short these products and make a lot of money both by selling the bad products, and then again on their bet against the products.: https://www.nytimes.com/2009/12/24/business/24trading.html)
Internally it was a joke they were selling this garbage:
QUOTE: "
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
https://www.ft.com/content/4798ae22-f552-11e2-b4f8-00144feab...
Former Goldman Sachs trader Fabrice Tourre said he “deeply” regretted an email in which he joked about selling subprime mortgage bonds “to widows and orphans” following a grilling from lawyers for the US Securities and Exchange Commission."
It's fraud to materially misrepresent a security [1].
EDIT: In Goldman's case (from the URL citation):
Goldman Sachs - SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. (4/16/10)
Goldman Settled Charges - Firm agreed to pay record penalty in $550 million settlement and reform its business practices. (7/15/10)
Fabrice Tourre (mentioned above) Found Liable - A jury found former Goldman Sachs Vice President Fabrice Tourre liable for fraud relating to his role in a synthetic collateralized debt obligation tied to subprime residential mortgages. (8/1/13)
A U.S. judge ordered former Goldman Sachs Group Inc trader Fabrice Tourre to pay more than $825,000 after a jury found him liable for defrauding investors in a subprime mortgage product that failed during the financial crisis.
That "low level fall guy" made $1.7 million in 2007. Unless if there was evidence that the higher ups at Goldman knew that Tourre was defrauding investors, but chose to ignore that evidence, I don't see how they can convicted of a crime.
There are buy side and sell side. And the financial world and regulation make them more like two separate entity. When the world simply known them as one called GS.
(documented with emails.) Note there was a civil case (https://www.theguardian.com/business/2013/aug/01/fabulous-fa...) and a low-level fall-guy in his 20s, and conveniently French, did face civil charges.
Note, non-connected, poor people go to jail for $500 thefts. Lets be honest about what happened here.