The man behind the curtain is working hard, I'll tell you. The spectacle out front, full of blaring headlines and prosecutors hype, tells us: we got those bad guys. Really? Nonsense.
We've all read about this:
Federal prosecutors in Manhattan accused Raj Rajaratnam, the chief of the Galleon Group, of being at the center of a network that traded stocks on illegal tips from 2003 to March 2009. He was found guilty of all 14 counts of securities fraud and conspiracy.
Mr. Rajaratnam, a billionaire investor who once ran one of the world’s largest hedge funds, is the most prominent figure convicted in the government’s crackdown on insider trading on Wall Street.
But, honestly, this guy--and the rest of the insider traders who have been around for many, many years--are not the core cause of what ails us. And, more important, they should not be spending time in jail alone.
To me, the enormous fireworks around the passing of information between miscreants on Wall Street is a tiny sidelight to the greater crime that has been committed--a crime our government barely wants to touch.
Here is something to consider:
But the conversations between him and his network were being secretly recorded by federal agents beginning in 2008. Prosecutors received approval from a judge to place a wiretap on Mr. Rajaratnam’s phone after a government informant taped calls with Mr. Rajaratnam exchanging secret business information.
Wiretaps. Secret recording authorized by a judge at the request of prosecutors.
Where were the wiretaps on the whole coterie of Wall Street and banking executives and traders who knew they were trading very risky financial instruments? Where were the wiretaps to build cases of RICO or financial fraud or securities violations? Where were the wiretaps on the bank executives who played fast and loose with the pension funds of money of hard-working regular people? People knew. People were warned.
Nobody wants to touch the Robert Rubins of the world who led us off the cliff. Rubin, the Financial Crisis Inquiry Commission showed, knew about what was unfolding--he was warned by underlings. And he, then, played dumb--"I didn't know" was his defense. Liar.
The Financial Crisis Inquiry Commission concluded:
Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. In many respects, this reflected a mental change in these institutions, particularly the large investment banks and bank holding companies, which focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.
And:
You will read, among other things, about AIG senior management’s ignorance of the terms and risks of the company’s billion derivatives exposure to mortgage-related securities; Fannie Mae’s quest for bigger market share, profits, and bonuses, which led it to ramp up its exposure to risky loans and securities as the housing market was peaking; and the costly surprise when Merrill Lynch’s top management realized that the company held billion in “super-senior” and supposedly “super-safe” mortgage-related securities that resulted in billions of dollars in losses.
And:
And the leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through “window dressing” of financial reports available to the investing public.[emphasis added]
And:
Unfortunately—as has been the case in past speculative booms and busts—we witnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis. This was not universal, but these breaches stretched from the ground level to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public in the financial system.
The truth is that Raj Rajaratnam's conviction is just a tiny sideshow. I can't get all excited about the jailing of one insider. The real criminals are getting away--and the next financial crisis is down the road.