Finally, a judge stands up to Wall Street

The headline is the news. The elements of the back-story are all too familiar by now. The crime, repeated far too many times, looks like this:
■ Wall Street bank creates made-to-fail derivative product.

■ Bank sells this product as known-good to its large second-tier customers (foreign banks, your pension fund). Volume is key to commissions.

■ Bank buys highly leveraged bets against its own product and stashes those bets in its own account.

■ Optional: Bank clues its first-tier customers to join the sure-thing bet it just made.

■ Product fails (i.e., performs according to spec); bank makes hundreds of millions; consumers and taxpayers clean up the mess.

That's all there is to it. Five quick steps to Easy Money.

Where's the SEC? you ask. If you answered, "Captured, complicit or impotent," there's a Federal judge who might agree with you.

Matt Taibbi on what this judge is up to:

Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.

This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

John Paulson, if you rmember, was the guy who made an estimated $2.3 billion in 2009 — because that is  just how much harder he works than the rest of us. (For all that, he only made fourth on the list; the top guy nearly doubled that number.)

Back to this year's perp, Taibbi tells us that "Citi made a $160 million profit, while its customers lost $700 million." That's $860 million in damage, if my math is right. (After all, if Citi lied to its customers, what story was it peddling to its counterparties?)

And the SEC's settlement request was tiny — just $285 million, less by almost half than in the much less egregious (but still arguably criminal) Abacus case linked above. No wonder the judge rejected it. (Nice. A wise judge; an honest judge; a Daniel come to judgement — for a change.)

The article is a good find; it's up to Taibbi's standards for both clarity and research.

He closes by looking at the corrupt legal and financial landscape that calls itself Wall Street and asks, "Are people with backbones really that rare?" Must not be a Penn State fan; I think they could answer that.