Two years after dangerous real estate gambles brought the global economy to its knees, Wall Street regulators are investigating whether nine major financial companies lied to ratings agencies or sold products they wanted to fail.
AFP- Wall Street regulators appear close to claiming their first scalp of the financial crisis, but experts predict economic concerns will force them to act otherwise.
In the two years since Wall Street's risky real estate bets pushed the global economy toward the abyss, US regulators have been unable to prove any illegality.
A high-profile attempt to prosecute two Bear Stearns traders for lying to investors spectacularly failed when the two were acquitted last November.
But on Thursday, some of the world's largest financial firms confirmed they were the subject of criminal and civil investigations linked to the sale of mortgage-backed securities.
In a system that grants authorities substantial leeway over which cases to prosecute, the probe is seen as a warning that they mean business.
What began as an investigation into a single Goldman Sachs deal appears to have spread to a near sector-wide probe striking at the heart of Wall Street's credibility.
A list of the firms targeted reads like a who's who of Wall Street: Goldman Sachs, JP Morgan, UBS, Citigroup are all included -- in all nine companies are implicated.
In two separate investigations, the Securities and Exchange Commission (SEC) and New York's ambitious attorney general, Andrew Cuomo, are looking at whether the banks sold products they wanted to fail, and whether they lied to ratings agencies to make it happen.
Yet a bloody legal battle is unlikely, according to John Coffee, a well-respected Columbia University professor who has advised both the SEC and the New York Stock Exchange.
"We are moving in the direction of a global settlement," he said, predicting authorities would shy away from criminal charges against any one firm in favor of sweeping fines, charges against individuals and regulatory reform.
"The conventional wisdom has long been that a financial services firm cannot survive a criminal prosecution."
After spending trillions to bail out Wall Street firms, Washington is unlikely to risk one failing now.
"The government does not want to pick on one firm and the industry really does not have the stomach for a fight," said Coffee.
Reasons for regulators' reluctance to press criminal charges and spark a Wall Street fight might be summed up in three words: "Drexel Burnham Lambert."
Once one of the largest investment banks in the United States, 152-year-old Drexel was pushed to its death in 1990 by charges of malpractice.
Accounting firm Arthur Andersen suffered a similar fate when it was found guilty of fraud in handling Enron's books.
In an industry that depends largely on trust, criminal charges have proven fatal.
A more likely scenario would be a repeat of the approach taken by former New York attorney general Eliot Spitzer, whose prosecution of securities analysts began with allegations against Merrill Lynch but ended in settlement.
"It is hard to see a lot of criminal charges coming out of this. I wouldn't rule it out entirely but I wouldn't expect the entire industry to be indicted on criminal charges," said Matthew Albrecht an analyst at Standard & Poor's Equity Research.
With financial reform now dominating the agenda in Washington, Albrecht said the impact of the investigations may be more keenly felt in the political than in the legal sphere.
"This is maybe fuel for new regulation, but maybe not criminal actions," he said.
"Unless you get criminal charges filed against one of these firms, or a really damaging investigation or claim against a specific firm, it will just weigh on the industry for a while."
Some banks, it seems, may still be too big to fail.
Date created : 2010-05-14