Nearly two years after Washington rescued big banks with billions of taxpayer dollars, half a dozen government agencies are still trying, with mixed success, to peel back the layers of the collapse to determine who, if anyone, broke the rules.
The Securities and Exchange Commission, the Justice Department, the United States attorney’s office and more are examining how banks created, rated, sold and traded mortgage securities that turned out to be some of the worst investments ever devised.
Virtually all of the investigations, criminal as well as civil, are in their early stages, and investigators concede that their job is daunting. The S.E.C. has been examining major banks’ mortgage operations since last summer, but so far, it has filed a civil fraud claim against just one big player: Goldman Sachs . Goldman has vowed to fight.
But legal experts are already starting to handicap potential outcomes, not only for Goldman but for the broader industry as well. Many suggest that Wall Street banks may seek a global settlement akin to the 2002 agreement related to stock research. Indeed, Wall Street executives are already discussing among themselves what the broad contours of such a settlement might look like.
“I would be stunned if any of these cases go to trial,” said Frank Partnoy, a professor of law at the University of San Diego. “I think Wall Street needs to put this scandal behind it as quickly as possible and move on.”
As part of the 2002 settlement, 10 banks paid $1.4 billion total and pledged to change the way their analysts and investment bankers interacted to prevent conflicts of interest. This time, the price of any settlement would probably be higher and also come with a series of structural reforms.
David Boies, chairman of the law firm Boies, Schiller & Flexner, represented the government in its case against Microsoft and is now part of a federal challenge to California’s same-sex marriage ban. He said a settlement by banks might be painful but would ultimately be something Wall Street could live with. “The settlement may be bad for everyone, but not disastrous for anyone,” he said.
A settlement also would let the S.E.C. declare victory without having to bring a series of complex cases. The public, however, might never learn what really went wrong.
“The government doesn’t have the personnel to simultaneously prosecute several investment banks,” said John C. Coffee, a Columbia Law School professor.
The latest salvo came on Thursday from Andrew M. Cuomo, the New York attorney general. His office began an investigation into whether banks misled major ratings agencies to inflate the grades of subprime-linked investments.
Many Americans are probably already wondering why this has taken so long. The answer is that these cases are tricky, like the investments at the center of them.
But regulators also concede that they were reluctant to pursue banks aggressively until the financial industry stabilized. The S.E.C., for one, is now eager to prove that it is on its game after failing to spot the global Ponzi scheme orchestrated by Bernard L. Madoff, or head off the Wall Street excesses that nearly sank the entire economy.