It's becoming depressingly familiar: Bankers joke openly in emails about a toxic investment they're creating. Bankers sell said toxic investment to clients while betting against it. Everybody loses money, nobody goes to jail. Rinse, repeat, crash the economy.
The latest round of emails was produced in a lawsuit by a Chinese bank suing Morgan Stanley over a $500 million subprime-mortgage collateralized debt obligation the bank created and marketed as "Stack 2006-1." ProPublica's Jesse Eisinger writes that documents in the case show Morgan Stanley bankers had very different ideas about what it should be called.
Those names, according to internal emails from early 2007 unearthed in the case, included "Shitbag," "Nuclear Holocaust," "Subprime Meltdown" and "Mike Tyson's Punchout."
The bankers were clearly kidding. They floated some nice names, too, before settling on "Stack." More troubling is what the rest of the documents show, according to Eisinger: Morgan Stanley was stacking its shitbags of subprime garbage high while knowing full well that the whole thing was sure to topple and make a huge mess:
People across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers.
So why aren't any of these people in jail? For one thing, they have a fairly sturdy defense. Morgan Stanley says the Chinese bank and other investors were big boys in the big leagues and should have known what they were buying. The bank says it warned investors in offering documents that they might bet against the CDOs they were creating. And Morgan Stanley also points out that it owned a chunk of Stack and lost money on it. It also lost money when it got caught holding too many subprime shitbags when the crisis erupted.
U.S. officials have been spooked enough by these defenses to stay far, far away from criminal charges in any of these cases, as a "Frontline" documentary Tuesday night showed again in depressing detail.
In order to prove that these bankers committed fraud, prosecutors would have to prove criminal intent. Apparently the many documents that have turned up already -- in this case and in the case of the Goldman Sachs ABACUS CDO and the various lawsuits against Bear Stearns for creating CDOs its bankers described in emails as "dog" and "shit breather" and "sack of shit" -- are not enough to prove criminal intent.
But at the same time, as Frontline reporter Martin Smith noted in an online chat today, many of the whistleblowers Frontline contacted had not been approached by the government for years, suggesting it was not exactly eager to bring charges.
So for now we will have to be satisfied with the pile of civil lawsuits mounting against the banks, which occasionally turn up email troves like this Chinese bank's suit did. We can hope that some shred of this evidence will be enough to send somebody to jail, because the civil fines and settlements are hardly the cost of doing business for these banks -- they are certainly not a deterrent against future malfeasance. If they were, then bank shares would not have soared last year, beating every other industry in the market.
But we probably shouldn't hold our breath. Except when we get close to these shitbags.