Why Corzine Won't Do Time

Will Jon Corzine, former U.S. senator, former New Jersey governor, former chairman of Goldman Sachs, end his high-profile career in the slam?

In a just world, perhaps he should. But don't bet the farm on it. Corzine's most recent gig, of course, was as head of MF Global Holdings, the firm that went bust when Corzine made some $6.3 billion in unfortunate wagers that European sovereign bonds were a bargain. He was buying when nearly everyone else was selling. (Does the man read the newspapers? What could he have been thinking?)

Nothing illegal about losing your shirt, of course. But MF Global apparently not only bet its own wad but threw over a billion dollars in segregated customer funds into the same transactions; hundreds of millions of money from customer accounts went missing. A lot of the money is still unaccounted for. You can imagine what his clients are saying the "MF" stands for.

Mixing customer money with the firm's own proprietary bets is illegal, big time.

Or is it?

The signature outcome of the current financial collapse, with its major willful frauds that cost innocent parties trillions of dollars, is that none of the biggest fish have been subjected to criminal prosecutions. Mostly, they get to plead no contest to civil charges without even admitting any wrongdoing, and pay fines that in the scheme of things are chump change.

Of course, if you are brazen enough and just make stuff up, you can still do time, like Bernie Madoff. But Madoff was a one-off. You can literally count on the fingers of one hand the number of major financial fraudsters responsible for the 2008 collapse who are behind bars.

Let's recall, the essence of the systematic fraud that crashed the economy was that America's bluest chip investment bankers created securities almost guaranteed to go bad, and then sold them to trusting customers as sound investments. If that's not criminal fraud, it should be.

But the Securities and Exchange Commission has been denuded of adequate personnel, and Wall Street lobbyists in the 1990s and 2000s succeeded in weakening relevant laws to raise the bar on what it took to prove deliberate fraud. The result: more and more slaps on the wrist, and hardly any criminal prosecutions.

Last week, the exquisitely surnamed U.S. District Judge Jed Rakoff indignantly threw out a proposed settlement by the SEC of a major case against Citigroup. In the sub-prime madness, Citi literally created a portfolio of more than a billion dollars in securities that it planned to bet against. Its sales force then peddled them to clients as good investments. But its lawyers took pains to include small print saying that Citi did not guarantee results, blah, blah, blah, no matter what its salespeople were saying.

The SEC concluded that it would be risky and time-consuming to pursue a criminal prosecution that it might lose on a technicality, and settled for a deal in which Citi paid a fine of $285 million, and admitted no wrongdoing.

Judge Rakoff described the settlement is "neither fair, nor adequate, nor in the public interest," and termed Citi a "recidivist." He was incensed that the SEC punished Citi's shareholders rather than the senior executives who cooked up the fraud. The pattern is that Citi breaks the law, promises that it won't do it again, and then is a repeat offender. This will obviously continue until one of its top executives does some hard time.

Which brings us back to Corzine and MF. Last week, in a hearing before the Senate Agriculture Committee (which has partial jurisdiction over regulation of derivatives), it came out that while it is illegal to use customer money to cover margin calls for the firm's own proprietary bets, some other maneuvers that improperly put customer money at risk may not be illegal.

For instance, futures brokers such as MF Global can use "repurchase" agreements to swap customer money for collateral. If the collateral turns out to be worthless, well, too bad for the customer. It is this kind of lawyerly technicality that could keep Corzine a free man.

Testifying at the hearing, Gary Gensler, chair of the Commodity Futures Trading Commission (CFTC), which regulates derivatives, said that such transactions need to be banned. Well, yes. But good luck getting Congress to make such maneuvers a criminal offense.

Oh, and the CFTC is not even MF Global's primary regulator. That would be the CME Group, formerly known as the Chicago Mercantile Exchange, a for-profit commodities exchange where MF Global made its trades. So we have one private company regulating another. You can just imagine how tough a regulator the CME Group is.

The fact is that all of these complex securities do not make the economy more efficient. They simply allow insiders to make highly lucrative bets putting other people's money at risk if they turn out to be wrong. And for all the self-congratulation after the Dodd-Frank Act was finally passed, Dodd-Frank does not touch Wall Street's deeper abuses or its toxic business model.

MF Global was "only" an $8-billion operation, so when it went bankrupt, it did not take down the entire financial system. But its activities were exactly the same kinds of highly leveraged gambling with ratios of 30 or even 50 to 1, beyond the reach of regulators or the comprehension of investors, that took down Lehman Brothers and the rest. Three years later, Wall Street can still play these kinds of games.

And this will continue until Bernie Madoff has lots of company.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.