Credit Suisse Bond Trader Prosecutions Don't Even Aim for the Heart of the Crisis

Four years is a long time.

Four years is long enough to get a high-school education, for humans to go from helpless infants to walking, back-talking people. Four years ago, Barack Obama was not yet even the Democratic nominee for president. Today he's running for reelection, and his Justice Department is expected to bring criminal charges against some former Credit Suisse traders for fraud they allegedly committed four years ago.

We can hope this is the only the beginning of an aggressive new campaign to root out the malfeasance that helped bring down the financial system, but for now it feels like too little, four years too late.

The traders are going to be accused of overinflating the value of securities packed with mortgages in order to pad their own bonuses, according to reports by Reuters, The Wall Street Journal and others. Two are expected to plead guilty, according to the WSJ, and one, named David Higgs, has already surrendered to the FBI and pled guilty.

Your first thought might be: Hooray! Criminal charges, and maybe convictions, finally, related to the valuation of mortgage-backed securities, ground zero of the financial crisis. The only other criminal case brought against people connected with a major Wall Street firm having to do with mortgages resulted in acquittal for two former Bear Stearns hedge fund managers.

Unfortunately, this appears once again to be a case of rounding up the usual suspects, "rogue" traders, to take the fall for the rest of Wall Street.

The particulars of the case, as described by various news reports (the case hasn't been filed yet) sound peripheral to the problems that dragged the financial system down.

These traders are not, as far as we know, accused of stuffing bad mortgages, handpicked by hedge funds that were betting against them, into opaque derivatives and then selling them to unsuspecting investors. That happened routinely on Wall Street, directly contributing to the financial crisis. Big banks including Goldman Sachs and JPMorgan have already settled civil charges related to those practices, admitting no wrongdoing and paying fines they were able to dig out of their couch cushions.

No, these traders are apparently being accused of another, far more straightforward and routine sin: hiding the true value of their investments and getting caught red-handed when the music abruptly stopped. Rogue trading of this sort is a classic of the genre and far more widespread than it seems. As MarketWatch's David Weidner wrote recently, a rogue trader who turns a profit is called a "managing director."

This sounds like a relatively easy case for the DOJ to put together, but that of course raises the question of why it took four years to bring it. It was public knowledge four years ago that Credit Suisse had fired a bunch of traders and taken a big write-down, citing these alleged shenanigans.

It could be that prosecutors were spooked by the acquittals in the Bear Stearns case. Jurors decided that the hedge fund managers had simply made some bad investments and considered emails presented as evidence of fraud to be nothing more than 'dark night of the soul' anxiety about everything going horribly wrong.

It could also be that fraud cases involving CDOs of MBS -- alphabet-soup derivatives of derivatives -- are even harder to prosecute. If everybody else in the world was having difficulty correctly pricing such illiquid, opaque Frankenstein's monsters, how could you possibly expect Joe Trader to do so?

These prosecutions could produce some viscerally satisfying images of people being led away in handcuffs. Everybody loves a good village-square pelting every now and then. But they do not get near enough to the real heart of the financial crisis. Without that, this feels like little more than election-year tree-shaking after four years of relative inaction.