New York Times Asks Why So Few Have Been Prosecuted After Financial Crisis

The New York Times this week published an interesting article examining the government's response to the financial crisis and those who brought the economy to the brink. Of particular focus, the article examines how it is possible that the only person at Goldman Sachs sued by the Securities and Exchange Commission for selling mortgage-securities investments is a 28 year-old mid-level executive named Fabrice Tourre.

At the height of the housing boom, the 26th floor of Goldman Sachs’s former headquarters on Broad Street in Lower Manhattan was the nerve center of Goldman’s fast-growing mortgage trading business.

Hundreds of employees worked closely in teams, devising mortgage-based securities — billions of dollars’ worth — that were examined by lawyers, approved by management, then sold to investors like hedge funds, commercial banks and insurance companies.

At one trading desk sat Fabrice Tourre, a midlevel 28-year-old Frenchman who was little known not just outside Goldman but even inside the firm. That changed three years later, in 2010, when he achieved the dubious distinction of becoming the only individual at Goldman and across Wall Street sued by the Securities and Exchange Commission for helping to sell a mortgage-securities investment, in one of the hundreds of mortgage deals created during the bubble years.

How Mr. Tourre alone came to be the face of mortgage-securities fraud has raised questions among former prosecutors and Congressional officials about how aggressive and thorough the government’s investigations have been into Wall Street’s role in the mortgage crisis.

Across the industry, “it’s impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities,” said G. Oliver Koppell, a New York attorney general in the 1990s and now a New York City councilman.

In the fall of 2009, when Mr. Tourre learned that he had become a target of investigators for helping to sell a mortgage security called Abacus, he protested that he had not acted alone.

That fall, his lawyers drafted private responses to the S.E.C., maintaining that Mr. Tourre was part of a “collaborative effort” at Goldman, according to documents obtained by The New York Times. The lawyer added that the commission’s view of his role “would have Mr. Tourre engaged in a grand deception of practically everyone” involved in the mortgage deal.

Indeed, numerous other colleagues also worked on that mortgage security. And that deal was just one of nearly two dozen similar deals totaling $10.9 billion that Goldman devised from 2004 to 2007 — which in turn were similar to more than $100 billion of such securities deals created by other Wall Street firms during that period.

While Goldman paid $550 million last year to settle accusations that it had misled investors who bought the Abacus mortgage security, no other individuals at the bank have been named. Now, however, as criticism has grown about the lack of cases brought by regulators, the scope of the inquiries appears to be widening. The United States attorney general, Eric H. Holder Jr., has said publicly that his lawyers were reviewing possible charges against other Goldman officials in the wake of a Senate investigation that produced reams of documents detailing other questionable decisions that were made in the firm’s mortgage unit.

The Senate inquiry was one of several in the past three years. These investigations by Congressional leaders and bankruptcy trustees — into the likes of Washington Mutual, Lehman Brothers and the ratings agencies — were undertaken largely to understand what had gone wrong in the crisis, rather than for law enforcement. Yet they uncovered evidence that could be a road map for federal officials as they decide whether to bring civil and criminal cases.

One person who already has come under investigation is Jonathan M. Egol. A senior trader at Goldman who worked closely with Mr. Tourre, he had a negative view on the housing market early on, and took a lead role in creating mortgage securities like Abacus that enabled Goldman and certain clients to place bets that proved profitable when the housing market collapsed.

Last year the S.E.C. examined Mr. Egol’s role in the Abacus deal in its lawsuit, according to a report by the commission’s inspector general. But Mr. Egol, now a managing director at the bank, was not named in the case, in part because he was more discreet in his e-mails than Mr. Tourre was, so there was less evidence against him, according to a person with knowledge of the S.E.C.’s case.

Though Mr. Tourre was a more junior member of the Goldman team, the S.E.C. case against him was bolstered by colorful e-mails he wrote, calling mortgage securities like those he created monstrosities and joking that he sold them to “widows and orphans.”

The S.E.C. declined to comment about its focus on Goldman and Mr. Tourre, beyond pointing to a section in its complaint that said that Mr. Tourre had been “principally responsible” for the Abacus deal in the case.

A spokesman for Goldman, Lucas van Praag, did not dispute that Mr. Tourre had worked on the Abacus deal as part of a collaborative team. But he said that the bank had disagreed with many of the conclusions about its mortgage unit contained in the recent Senate report. Mr. Egol and his lawyer did not respond to inquiries for comment.

As the government continues to investigate the activities of Goldman and other banks, it is uncertain whether other individuals will be named. Neil M. Barofsky, who as the first inspector general of the Troubled Asset Relief Program, the federal bank bailout program, investigated whether banks had properly obtained and handled the money they received, said prosecutors should look as high up as possible.

“Obviously in any investigation that results in charges against a company,” he said, “you’d like to see the highest-ranking person responsible for the conduct at the company to be held accountable.”

The article also contains an interesting graphic showing that only two criminal prosecutions have been brought as a result of the financial crisis. In the first, two former executives at Bear Stearns were charged with misleading investors in two hedge funds about the quality of mortgage assets. The Bear Stearns defendants were found not guilty in November 2009. In the second, several former executives of a mortgage company and its banking partner were charged with fraud for issuing false mortgages to obtain money from government-related entities. Six of these defendants pleaded guilty.

Read the entire New York Times article here.