Tom Friedman Has Learned About Fraud On Wall Street

This article by Tom Friedman tells a story about Wall Street that is about two years late. This story is about Citibank putting together a security made up of bad CDO's and selling it to investors. Since Citigroup knew that the security was worthless, it shorted the security and made a nice profit when it became worthless soon after it was issued. There have been lots of stories like this over the last few years. Friedman is a little late on this subject but its good that he is now writing about it. He has a much large audience than Rolling Stone or Mother Jones.

The story would have been better if Friedman had tried to learn more about why Citigroup got away with a fine, and none of those involved were punished for committing a multimillion dollar crime. The answer, of course, is that the SEC filed a civil complaint. Its almost impossible to win a criminal complaint on a fraud charge because the law requires proof that the perpetrators intended to commit fraud. Its difficult to prove criminal intent in a court of law. Despite widespread fraud, similar to this story about Citigroup, the bankers who were involved in these kinds of transactions have not faced criminal charges. In this case Citigroup paid a fine that was about twice the profit that it made on the deal. That is not much of deterrent for this kind of behavior.

The other part of the story that is seldom told is the effect of fraud on the victims. Pension funds, university endowments and many European banks were sold toxic assets like those described in this article. Some of these losses were insured by AIG who sold credit default insurance to investors. When AIG was unable to make good on the insurance, taxpayers made good on the insurance loss of around $175 billion.