Might NY’s Schneiderman probe lead to prosecutions on Wall Street?

I don’t know that I put much stock in it, but Matt Taibbi seems to think that we may actually see real prosecutions on Wall Street. Here’s a clip from his new piece for Rolling Stone on the newly launched investigation of Morgan Stanley, Bank of America, and Goldman Sachs by New York State Attorney General Eric Schneiderman:

…This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons. For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era. Again, the business model during this time was a giant bait-and-switch scam. Sleazy lenders like Countrywide and New Century first created huge masses of bad loans, committing every conceivable kind of fraud to get people into loans (from doctoring income statements with white-out to phonying FICO scores to engineering fake appraisals). They then moved the bad loans quickly to the big banks, which pooled them and chopped them up (this is the “securitization” process), sprinkled hocus-pocus math on them, and them sold them to suckers around the world as AAA-rated securities.

The questions Schneiderman will seek to answer are these: did the banks securitize loans they knew were fraudulent, throwing the rotten mortgages into the stew before serving them to customers? Did they also commit insurance fraud by duping the bond insurers (known as “monoline” insurers) into thinking the mortgages were not as risky as they really were? And did they participate in the fraud scheme on a more basic level by lending huge amounts of money to the Countrywides of the world, knowing that they in turn would immediately use that money to create the bad loans? In other words, did the banks finance the fraud in addition to brokering it?

The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free. There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done. The expectation for some time has been that the banks would eventually have to pay a significant, but eminently survivable, settlement for abuses during the bubble era. Although the Miller probe was focused on practices like robo-signing and other such documentation abuses, it could theoretically have covered securitization as well.

But if the AGs were to sign off on a friendly global settlement for mortgage abuses prematurely, it would be like a DA offering a millionaire murderer a 2-year plea bargain before the cops even had a chance to interview all the eyewitnesses. It would be a blatantly political arrangement. Such a desire to get some kind of deal done and sweep the mortgage mess under the rug once and for all seems almost universal among high-ranking politicians, and particularly in the Obama administration, which has acted throughout like it wants more than anything to simply get all of this over with and put in the past.

Schneiderman’s investigation throws a monkey wrench into all of this. The banks cannot enter into a settlement with 49 states. They need all 50 at the table. But if Schneiderman breaks ranks and goes off on an end-run investigation that plunges right into the rotten core of the fraud era, then the whole pipe dream of an easy settlement vanishes in an instant. This is particularly true since Schneiderman is the most important AG, being from the state of New York, where most of the crime was probably committed…

Politiker NY had the following to say:

…Schneiderman’s investigation is being heralded on the left as meaningful intervention by a regulator who is going after an industry that brought the country to the brink of disaster and got, in return, a taxpayer bailout. Politically, it’s a continuation of the tradition of making the New York attorney general a key watchdog of Wall Street — something first started by Eliot Spitzer…

Speaking of Spitzer, he’s quoted today as saying, “I bet there will be bombshells awaiting us.” I hope he’s right. I hope Schneiderman does what Attorney General Eric Holder has proven unwilling to do, and blows the roof off the whole damned thing.

Personally, I find it hard to imagine that these guys will get anything but a slap on the wrist and a fine, but it gives me hope that Taibbi, Spitzer and company at least see the possibility of something more.