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Credit Suisse traders were just plain dumb
By Jonathan Weil
The guilty pleas last week by two former Credit Suisse Group traders, on charges of falsifying their company’s asset values, revive an age-old question: How dumb do you have to be to get criminally convicted for a fraud you committed while working at a bank deemed too big to fail?
It’s a shame the television series America’s Dumbest Criminals went off the air more than a decade ago, because the cases of Salmaan Siddiqui, 36, and David Higgs, 42, would have provided wonderful fodder as an example of high finance gone feloniously brain-dead. Lots of bankers probably committed the same acts during the crisis. And the majority who did will never be prosecuted, mainly because they weren’t so dense about the way they did it.Imagine this: You are a Wall Street trader during the summer of 2007, specialising in complex mortgage bonds that no human being can fully understand. What little you do grasp about these bonds is that if their values go down too much, your year-end bonus won’t be as high as you want.
You also realise that the bonds aren’t as valuable as they once were. Maybe you don’t know exactly how much they are worth. But you know grossly inflated prices when you see them. These are the values you want to show on your bank’s books. So you huddle with colleagues to cook up ways to make sure the numbers are much higher than they should be when you go to mark your trading book to market prices each day.
Normally, this might be a reliable Wall Street strategy for self-enrichment. The beauty of these assets is they are so illiquid and trade so infrequently, there is rarely a correct answer for their proper value. Even giant overstatements could prove difficult to challenge.
So to get nailed by the cops for mismarking these bonds, you would basically have to be caught blabbing on tape that you didn’t believe the values you were putting down for them. Discussing your conspiracy on company e-mails would increase your odds of getting caught. Nobody in his right mind would do these things. Siddiqui and Higgs did.
Then their employer turned them in. Never let it be said the Justice Department won’t act on a juicy tip about criminal activity at a huge bank, so long as the tipster is the bank itself.
Not that Credit Suisse’s actions look all that pure now. The bank first disclosed in February 2008 that it had discovered the overvaluations in its trading book. This came a week after Credit Suisse released preliminary results for the 2007 fourth quarter. Then in March 2008, the firm issued revised results, saying it had written down the bond values in its trading business by $2.65 billion (€2bn). The Securities and Exchange Commission, in a parallel civil lawsuit, said about $1.3bn of that amount was related to the defendants’ trading book.
What’s curious about Credit Suisse’s disclosure is that the bank said the writedowns were related to either the fourth quarter of 2007 or the first quarter of 2008.
Both the SEC and federal prosecutors said in their complaints last week that the defendants started mismarking Credit Suisse’s books in Aug 2007. The SEC said that in Sept 2007, as a result of the defendants’ price manipulations, “Credit Suisse’s books, records and accounts contained false and misleading information”.
So, not only does a trader at a too-big-to-fail bank have to be a total numbskull to get criminally convicted for fraudulently overvaluing his company’s most toxic assets. Chances are the bank itself has to turn him in. It has to deliver the feds an airtight case on a platter, leaving investigators no real choice but to follow up. Even then, it may take prosecutors four years to bring charges.
* Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.