On February 1, 2012, the U.S. Government charged three former traders at Credit Suisse AG with artificially inflating the value of mortgage bonds as the housing market collapsed. The charges represent a rare criminal prosecution of Wall Street executives in connection with their conduct during the financial crisis. According to federal prosecutors, the traders, who are located in New York and London, cooked up the scheme in order to inflate their year-end bonuses. The charges come on the heels of President Obama’s recent pledge to increase investigations of banks and other financial organizations to explore their role in the financial meltdown.
Two of the traders already pled guilty to mismarking their positions in 2007 in order to avoid losses. They are both cooperating with the federal investigation. The third trader in question was their boss. The Securities and Exchange Commission is conducting its own civil action against the traders.
The over-valued securities in question were mortgage-backed securities, i.e. the securities that caused billions of dollars in losses throughout the world. During the housing market bubble, banks pooled mortgages, and offered many of them to questionable borrowers. These securities were packaged into collateralized debt obligations, and the banks then sold parts of these obligations to investors. During the four-year period from 2003 to 2007, i.e., when the bubble finally burst, Wall Street issued approximately $700 billion in these obligations.
When the subprime-mortgage crisis unfolded, banks found it increasingly harder to assign a market value to their holdings. Banks did not, however, want to mark down their holdings. Instead, in the instance of the Credit Suisse traders (according to federal prosecutors), they artificially increased the price of the bonds on their books to create fake profits. One of the traders who pled guilty admitted implementing a scheme whereby he obtained fake independent prices on several bonds that were almost identical to the ones recorded by the subject trader and his fellow conspirators. The resulting false profits generated hefty bonuses for the three traders.
Credit Suisse, which will not be charged in the case, has been cooperating with the Government’s investigation.
It looks like these charges are just the beginning. It appears likely that more criminal charges will be coming down the pike against bankers and traders in the near future.