By 2006, Goldman Sachs traders knew that the investments packed with subprime home mortgages they had been selling at big profits for the last few years were more dangerous than they were letting on.
Internally, they characterized these offerings as "junk," "dogs," "big old lemons" and "monstrosities." Nevertheless, the bank congratulated itself for successfully offloading the mortgage bonds onto others. The head of the bank's mortgage department extolled its success in reducing its subprime inventory, writing that his team had "‘worked their tails off to make some lemonade from some big old lemons.”
These findings, included in the report released by the Financial Crisis Inquiry Commission nearly two years ago, helped inform at least one major regulatory enforcement action against the bank: a $550 million settlement with the Securities and Exchange Commission for misleading investors about the risks of a product known as Abacus.
For a while, it seemed that a string of similar enforcement actions involving other mortgage investment products, whose eventual collapse in value brought down the housing market and very nearly the American economy, were imminent.
Not anymore.
On Thursday, Goldman Sachs announced in a regulatory filing that the SEC had dropped its investigation into a $1.3 billion mortgage bond known as Fremont Home Loan Trust 2006-E, even though it indicated earlier this year that charges were likely.
Later in the day, the Department of Justice said it was ending its own Goldman investigation, launched after a congressional investigation chaired by senators Carl Levin (D-Mich.) and Tom Coburn (R-Okla.) issued a report that found Goldman Sachs sold investments "in ways that created conflicts of interest with the firm’s clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients.”
"The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time," the Justice Department said in a statement late on Thursday.
Reuters reported that David Wells, a spokesman for Goldman Sachs, said in an email, "We are pleased that this matter is behind us."
The SEC did not immediately respond to a request for comment.
For industry critics, the decisions to drop the investigations are the latest indication that the federal government's law enforcement response to the greatest financial catastrophe since the Great Depression will end with a whimper.
"I'm shocked but not surprised," said Simon Johnson, a former chief economist at the International Monetary Fund, and a Huffington Post contributor. "It reflects a pattern of failing to hold these large institutions accountable. To not even try sends a double signal, that there are different standards for us and for Wall Street."
Johnson said he still holds out some hope for a grand settlement that would provide some financial compensation for the homeowners most damaged by the inflated pricing that came as a result of the bubble built by Wall Street.
Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, and a frequent critic of the Obama administration's handling of the financial crisis, said in an email that the announcements are "a stark reminder that no individual or institution has been held meaningfully accountable for their role in the financial crisis."
"Without such accountability, the unending parade of megabank scandals will inevitably continue," Barofsky said.
Of the two federal agencies, the record of the Department of Justice in pursuing financial crisis cases is the thinnest.
So far, the Justice Department has brought just one case, which ended when a federal jury in 2009 acquitted two Bear Stearns hedge fund managers accused of lying to investors about the soundness of the securities they were selling.
After that, the Justice Department decided not to pursue cases against two men whose actions most Wall Street observers agree brought on the crisis: Angelo Mozilo, the former head of the defunct mortgage giant Countrywide and Joseph Cassano, who ran the financial products division at AIG.
The SEC's track record has been a bit better, at least in terms of dollar recoveries. The regulator won about $2 billion in penalties since 2008 in financial crisis-related cases, including a record $67.5 million from Mozillo. The agency has been dogged, though, by complaints -- including from federal judge Jed Rakoff -- that its penalties are too small, doesn't target individuals and doesn't require defendants to admit guilt as part of settlement agreements.
In May, the SEC dropped its probe of Lehman Brothers, even though an independent examiner appointed by the bankruptcy court of the defunct bank concluded that there were "actionable claims" against senior Lehman officers for using an accounting tool known as Repo 105 to book billions of dollars in phony sales to disguise the true extent of the bank's financial woes.
Financial cases of any stripe, especially those that involve complex transactions involving structured finance products, are difficult to prove, said Arthur Wilmarth, a banking law professor at George Washington University. Even so, he said, he believes the SEC could have brought additional cases against Goldman Sachs that involved conduct similar to the Abacus deal. The agency could prevail in civil penalty actions by showing that Goldman "intentionally or recklessly misled investors," he said.
That, in essence, is the argument made by another regulator -- the Federal Housing Finance Agency -- which filed a lawsuit against Goldman over the Fremont investment and other offerings last year. Goldman bankers knew that Fremont, a subprime lender, was selling it mortgages certain to fail, the suit alleges.
"[Goldman] knew of the originators’ abandonment of applicable underwriting guidelines and of the true nature of the mortgage loans it was securitizing," the lawsuit claims.
The decision to drop the Goldman Sachs investigation also comes on the heels of a disappointing loss for the SEC in one of the very few trials involving a Wall Street executive accused of misleading investors about a mortgage product.
A few weeks ago, a federal jury acquitted Brian Stoker, a mid-level Citigroup executive, of wrongdoing over his role in selling a $1 billion mortgage bond. In an unusual move, however, the jury included a note with its verdict urging the agency not to give up.
“This verdict should not deter the SEC from continuing to investigate the financial industry, review current regulations and modify existing regulations as necessary,” said the statement, which was read aloud by Judge Jed Rakoff.