Another Bad News Day for Financial Investors

Another day, another bank gets let off the hook for crisis-era financial sleight of hand.

The news that The Securities and Exchange Commission and the Justice Department have ended separate investigations of Goldman Sachs (NYSE: GS  ) without charging anyone in the Fremont Home Loan Trust investment deal should surprise no one. Not one bank CEO or other top employee has yet been found guilty of anything untoward, at least from a legal standpoint. There just never seems to be enough evidence to finally slap the shackles on any of the architects of the financial meltdown.

JPMorgan Chase and Wells Fargo are also being scrutinized
Of course, investors are suing Goldman and other big banks right and left, and the bank may still face civil penalties from a pile of lawsuits brought by shareholders and investors. Although Goldman has tried to get at least two of these claims dismissed, judges have ruled that the suits on most charges may proceed. The plaintiffs claim either that Goldman's stock value suffered because of conflicts in selling investments like the infamous Abacus vehicle, or, that as investors, they were directly injured by Goldman's lack of transparency about insuring such instruments against failure with credit default swaps.

Goldman was, however, able to have dismissed its alleged failure to disclose its Wells notice from the SEC, which notifies the recipient of the possibility of the levying of civil charges in the near future. Both JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) also received notices earlier this year and are being targeted for the same type of behavior. The latter two cases are still pending.

The double win is a triumph for Goldman, particularly as the clock starts running out for the government to file on deals that took place in 2006-2007, the height of the creative banking years. Two years ago, the bank paid the SEC a record $550 million fine to settle charges regarding conflicts of interest with the Abacus sale; one of Goldman's former employees still faces SEC charges stemming from that deal.

Why couldn't the government make its case?
There seems to be a pattern of inability by the government to make charges of this nature stick. Just last week, a jury failed to uphold charges brought by the SEC against a Citigroup (NYSE: C  ) executive accused of illegal behavior in regard to a $1 billion mortgage-backed synthetic derivative sale in 2007 -- in large part because the jury thought the defendant was being scapegoated for Citi's bad behavior.

Similarly, there seemed to be plenty of evidence that the Fremont Home Loan Trust vehicle was a bad investment deal, and that Goldman knew it. A Fortune article published last spring notes that the product was dominated by subprime mortgage loans, many of which were stated income loans, requiring no documentation on the part of the borrower. Those mortgages were bundled into products sold to investors.

While it's true that Goldman did represent some of the risky nature of the investment, it allegedly left out or misrepresented key details that investors would have needed to figure out just how dangerous the loan portfolio was. And it was dangerous. Nearly one-third of the no-doc loans in the portfolio went bad by the end of the first year.

Lessons learned?
What does this mean for JPMorgan and Wells Fargo? Some observers opine that, since these two firms are still being scrutinized, the likelihood that fraud charges will be brought against them is higher, since Goldman has been cleared. I would disagree; if no substantial evidence could be drummed up in the case of FHLT, with all of its shady goings-on, then why would things be different for JPMorgan and Wells?

The SEC has investigated a little over 100 cases of this type since the crisis -- not very many when you consider the scope of the problem, and that Goldman alone was the underwriter for almost 100 of these securities deals in just the past six months of 2006. The banks have been amazingly good at covering up their tracks, and it makes me wonder whether investors will do any better in court than the government has in its investigations.

With time running out on the government's ability to bring charges, it doesn't look as if these banks will be forced to pay dearly for their destructive antics. Yet others have been able to turn the tables, with good results. Iceland has made a rapid recovery from its more severe financial crisis, and it has indicted 200 of its own miscreants. Perhaps we should get a copy of Iceland's playbook before it's too late.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, Citigroup, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Goldman Sachs and Wells Fargo and formerly recommended JPMorgan Chase. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2012, at 10:10 PM, Oldfool103 wrote:

    Iceland went bankrupt and only honored Icelandic debt and it worked. Maybe this works for the European countries, as well. Just walk away and $&@% the investors. (They made enormous profits in the run up to the melt down.) If the governments are not starving their people in the streets, I will certainly visit Italy and Greece and Spain. If torturing the poor is the only response you can come up with, I will keep my money in my pocket.

  • Report this Comment On August 14, 2012, at 7:06 AM, Rusty56 wrote:

    Amanda, why is every article you write on the banks negative and why is it none of your articles makes any real sense??

  • Report this Comment On August 14, 2012, at 5:29 PM, PhotoPhool wrote:

    I thought Amanda's article "Bank of America Is Going (More) Mobile" from last week was nicely positive. Both made sense to me.

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