Bailed Out or Posting Bail?

September 30th, 2008 by Phil Mattera

While we wait to see whether the revolt against the Big Bailout survives, we can take some comfort in reports that numerous financial institutions are being investigated by the FBI and other law enforcement agencies for possible criminal violations in the practices that led the country to the current crisis.

The latest parties to find themselves on the hot seat are Fannie Mae and Freddie Mac, which yesterday revealed that they had received subpoenas from a federal grand jury in New York. According to a tally by Business Week, more than two dozen companies with roles in the financial mess have been investigated in the past year. It is heartening to think that more formerly high-flying Wall Streeters will be subjected to perp walks outside federal courthouses, as happened to two Bear Stearns hedge fund managers back in June (photo).

If the feds are aggressive about these investigations, we may learn that the corruption in the financial sector goes far beyond floating some overly risky securities.

Take the case of Wachovia, whose banking operations were just forced into the arms of Citigroup after its customers began to lose faith in the North Carolina institution. Wachovia’s problems were not just its portfolio of faltering mortgage-backed securities. Over the past year, it has been embroiled in a series of extraordinary scandals.

* In April 2008 Wachovia, accused by federal regulators of failing to take action against fraudulent telemarketers it knew were using its facilities to steal millions of dollars from unsuspecting victims, agreed to pay a fine of $10 million, contribute $9 million to consumer education programs and make up to $125 million in restitution to victims.

* That same month, the Wall Street Journal reported that Wachovia was being investigated as part of a federal investigation of Mexican and Colombian money-transfer companies believed to be involved in the money laundering for drug traffickers.

* In July there was a report on the Dow Jones Newswire that the Brazilian unit of Wachovia Securities (not part of the sales to Citigroup) was being investigated for aiding wealthy individuals commit tax evasion.

* In August Wachovia, following the lead of several other big financial institutions, agreed to buy back near $9 billion in auction-rate securities from investors who charged that they were misled into purchasing the volatile instruments.

And all this is apart from the Wachovia Securities broker in Ohio who, apparently on his own initiative, bilked millions of dollars from customers through fraudulent stock and real estate transactions. He was sentenced to four years in prison and ordered to pay more than $9 million in restitution.

Wachovia may be particularly unlucky that its alleged transgressions got discovered, but there is no reason to believe it is an isolated miscreant. Many of us have long suspected that fraud and corruption are rampant in the financial world. The pressures of the current crisis may finally expose the true extent of the rot.

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