Five years on from the financial crisis, with the statute of limitations looming for prosecuting many of the misdeeds that sparked the worst economic collapse in generations, the Securities and Exchange Commission (SEC) appears to be throwing in the towel on a key category of industry wrongdoing. The SEC is giving up on a longstanding investigation of a hedge fund called Magnetar Capital and preparing to drop its broader efforts against hedge funds that profited from the crisis, sources tell the Wall Street Journal.
Magnetar bought up tens of billions of dollars in financial products tied to housing prices and then took “short” positions — investments that would pay off if prices fell and the risky housing-backed products the firm had bought suffered — that ultimately let the firm profit on the subprime collapse. SEC investigators have spent over a year looking at one particular deal among 30 such schemes Magnetar entered into, hoping to demonstrate the firm had broken rules in what it told the investors who bought the assets the hedge fund believed would soon go bad. “But senior SEC officials have concluded there isn’t sufficient evidence,” the Journal reports, and “the decision on Magnetar means the government is almost certain to conclude its crisis-related enforcement efforts without charging any of the hedge funds” that made billions from the housing collapse.
Meanwhile, the agency got the Swiss bank UBS to agree to a $50 million settlement earlier on Tuesday in a separate case. The settlement, which the New York Times’ Dealbook blog described as “a rounding error” for the firm, did not require UBS to admit or deny its guilt.
The dropped investigations and no-fault settlement fit an unpleasant pattern for SEC enforcement efforts since the crisis, which have been marked by settlements that don’t require financial actors to admit to violations and that impose fines that pale in comparison to industry profits. New SEC director Mary Jo White has pledged to review the use of “neither admit nor deny” language in settlements, but analysts doubt that the change will be widespread enough to have an impact on industry behavior. The few court cases regulators have brought against individual financial industry players have not gone very well either.
The SEC says it has achieved a total of $2.73 billion in penalties, returns of wrongful profits, and “other monetary relief” related to the financial crisis. In the context of the total damage caused by that crisis, however, the SEC’s winnings look puny. A recent report from Federal Reserve researchers in Dallas found the financial crisis cost at least $6 trillion and possibly as much as $14 trillion.
Evaluating the qualitative impact of SEC enforcement on financial industry behavior is harder, but a recent non-scientific survey on Wall Street ethics found a large portion of respondents willing to break the law for profit and even larger portions who feared blowing the whistle on wrongdoing would bring retribution. The survey, which was conducted by a law firm that represents SEC whistleblowers, labeled the industry’s ethics problems “a ticking economic time bomb.”