World’s Dumbest Traders Were at Credit Suisse: Jonathan Weil
The guilty pleas last week by two former Credit Suisse Group (CS) traders, on charges of falsifying their company’s asset values, revive an age-old question: How dumb do you have to be to get criminally convicted for a fraud you committed while working at a bank deemed too big to fail?
It’s a shame the television series “America’s Dumbest Criminals” went off the air more than a decade ago, because the cases of Salmaan Siddiqui, 36, and David Higgs, 42, would have provided wonderful fodder as an example of high finance gone feloniously brain-dead. Sure, their stories might not have the same mainstream appeal as, say, the video of a gun-wielding robber at a convenience store who wore a see-through plastic bag over his head as a disguise.
Still, their forays into illegality were so painfully dimwitted they deserve to be celebrated, if only to distract us from a more unnerving aspect of their story: In all probability, lots of other bankers committed the exact same kinds of acts during the financial crisis. And the vast majority of those who did will never be prosecuted, mainly because they weren’t so dense about the way they did it.
Imagine this: You are a Wall Street trader during the summer of 2007, specializing in complex mortgage bonds that no human being is capable of fully understanding. What little you do grasp about these bonds is that if their values go down too much, your year-end bonus won’t be as high as you want it to be.
Now You See
You also realize the bonds aren’t as valuable as they once were, because the market is collapsing. Maybe you don’t know exactly how much they are worth. But you certainly know grossly inflated prices when you see them. These are the values you want to show on your bank’s books. So you huddle constantly with some of your closest colleagues to cook up ways to make sure the numbers are much higher than they should be when you go to mark your trading book to market prices each day.
Normally, this might be a reliable Wall Street strategy for self-enrichment. The beauty of these assets is they are so illiquid and trade so infrequently, there is rarely a correct answer for their proper value. Judgment and subjectivity rule the day. Even giant overstatements could prove difficult for auditors to challenge. This is why it’s almost unheard of for anyone to face criminal charges for intentionally overvaluing assets like these.
So to get nailed by the cops for mismarking these bonds, you would basically have to be caught blabbing on tape that you didn’t believe the values you were putting down for them, during telephone calls that you knew your employer was recording. Discussing the innermost secrets of your conspiracy on company e-mails would increase your odds of getting caught, too. Nobody in his right mind would do things like that. However, these two guys, Siddiqui and Higgs, did.
Then, in a highly irregular development, their employer turned them in. Never let it be said the Justice Department won’t act on a juicy tip about criminal activity at a huge bank, so long as the tipster is the bank itself, of course. A third former Credit Suisse trader, Kareem Serageldin, 38, also was charged; his attorney has said he denies wrongdoing.
Not that Credit Suisse’s actions look all that pure now. The bank first disclosed in February 2008 that it had discovered the overvaluations in its trading book. This came a week after Credit Suisse released preliminary results for the 2007 fourth quarter. Then in March 2008, the company issued revised results, saying it had written down the bond values in its trading business by $2.65 billion. The Securities and Exchange Commission, in a parallel civil lawsuit, said about $1.3 billion of that amount was related to the defendants’ trading book.
Looking back, what’s curious about Credit Suisse’s disclosure is that the bank said all the writedowns were related to either the fourth quarter of 2007 or the first quarter of 2008. In other words, going by what the bank said then, there supposedly was nothing wrong with the numbers on the financial statements that Credit Suisse filed for the third quarter of 2007, which is when the government says the fraud began.
Both the SEC and federal prosecutors said in their complaints last week that the defendants started mismarking Credit Suisse’s books in August 2007, during the third quarter. The SEC said that in September 2007, as a result of the defendants’ price manipulations, “Credit Suisse’s books, records and accounts contained false and misleading information.” Presumably, the amounts involved by then weren’t immaterial. Otherwise, why would the SEC mention this?
There is no explanation in the government’s court papers for why Credit Suisse didn’t restate any earlier numbers. A Credit Suisse spokeswoman, Victoria Harmon, declined to comment, as did an SEC spokesman,John Nester.
So, back to the original question: Not only does a trader at a too-big-to-fail bank have to be a total numbskull to get criminally convicted for fraudulently overvaluing his company’s most toxic assets. Chances are the bank itself has to turn him in. It has to deliver the feds an airtight case on a platter, leaving investigators no real choice but to follow up. Even then, it may take prosecutors four years to bring charges.
Too bad this story doesn’t come with video.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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