Are Bank Executives In Trouble?
You know what’s amazing?
It’s been almost three years since the peak of the 2008 Financial Crisis… and no banking executives have served any time in jail. Not one. And it doesn’t seem like any real punishment is forthcoming.
Keep in mind, these guys are a big part of why the US saw the worst recession since the Great Depression.
It was the big banks who sold billions of dollars of derivative instruments they didn’t understand. The so called financial engineers on Wall Street cooked up impossible-to-comprehend products, and their bosses signed off on them without question.
Or worse, they knew how risky these investments were and lied to their clients about them.
So, bank executives are either incompetent or frauds…
Nice to see what an Ivy League degree gets you. Now all I have to do is get a finance degree from Princeton – and I can get paid millions of dollars to be a professional criminal!
Yet somehow, not one of these geniuses has been punished. And many of them still have their jobs… and are richer than ever.
Check out this quote from the fantastic (and Oscar winning) documentary Inside Job. The speaker is Andrew Sheng, Chief Adviser to the China Banking Regulatory Committee.
“Why should a financial engineer be paid four times to 100 times more than a real engineer? A real engineer build(s) bridges. A financial engineer build(s) dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it…”
So why are the banks getting away with it?
Basically, it’s because they have tons of money. That means they have huge teams of lawyers for defense. And don’t forget, their money helps get politicians elected.
But here’s the thing…
There might finally be a crack in Wall Street’s armor.
Just this month, two investors won a major case against Citigroup (C). We’re not talking small potatoes either… They were awarded a whopping $54 million in damages.
The case came about after Citigroup put these two clients in a supposedly safe, leveraged municipal bond strategy. This “ideal investment for safe money” (as Citigroup called it) used 8 to 10 times leverage to generate higher returns.
But the only thing this strategy generated was huge fees for the bank itself. The strategy lost 50-75% of its value during the financial crisis. Yeah… real safe.
The two clients were clearly ticked off about the performance of their “conservative” investment. So they sued… and won.
Here’s why this is a huge deal…
Similar cases are starting to be decided in favor of individual investors – but none as big as this one. $54 million is a big chunk of change.
And more importantly, it means Wall Street banks aren’t invulnerable.
In fact, the normal Wall Street defenses didn’t hold up this time around. Usually, banks can blame external factors for losses. Or, they can claim that the risks of the investment are laid out in the prospectus –and investors should understand what they’re getting in to.
Not this time though.
To put it simply, Citigroup’s risk assessment was just too far from reality. There was no way they were getting the benefit of the doubt in this case.
Make no mistake – this decision has the potential to change everything.
Because of the results of this case, other investors might follow suit. Wall Street isn’t above justice. And it could open up all the big banks to all sorts of liability.
We may never see a bank exec behind bars for their role in the 2008 crisis. But that doesn’t mean their pocketbooks won’t take a serious hit. The flood gates may just be opening up. And I wouldn’t want to be on the other side as the lawsuits start piling up.
Category: Stocks
