“My gut tells me these things don’t get investigated”


04.07.09 cohan3William D. Cohan knows Wall Street. The former North Carolina newspaper reporter spent 17 years working at white shoe firms like JP Morgan and Lazard Freres before becoming an author. The New York Times called his first book, The Last Tycoons: The Secret History of Lazard Freres & Co., “epic,” and his newest tome, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street is already garnering praise for its “riveting” account of the collapse of Bear Stearns.

Cohan spoke with The Crime Report's Julia Dahl about the fine line between risk and racket in the financial sector.

The Crime Report: Do you see what happened at Bear Stearns or Lehman Brothers as financial crime or just risk taking?

William Cohan: There are people who feel that to knowingly manufacture and sell these toxic securities around the globe, while at the same time getting these huge compensation packages, is tantamount to criminal behavior.

When I worked on Wall Street, by and large I found that most people are just doing what they're rewarded to do. If you're rewarded to manufacture and sell mortgage-backed securities, that's what you're going to do. At the higher level, Jimmy Cayne [former Bear Stearns CEO], who I quote in the book, said he wasn't smart enough, he wasn't good enough to know what was going on in the fixed income division in the risks that the firm was taking.

TCR: Do you buy that?

Cohan: I believe that he believes it. But I can't imagine how that could be true. On the one hand, he was a broker, he wasn't ever an expert in these things. On the other hand, he certainly was an expert in how much he was getting paid year after year, and the fact that he was worth more than $1 billion in his own stock, the only Wall Street CEO who was. So, for him not to be knowledgeable about what was going on at the firm, how the firm was making money and the risks it was taking, is…a sin of omission that is sort of hard to defend. And if that was the case, why wouldn't the board of directors have someone in there who does understand the risks the firm was taking?

TCR: Is that negligent, not having someone at the helm that understands?

Cohan: It's negligent. Whether it's gross negligence, whether it's criminal, I don't think our justice system is set up to investigate things like that.

TCR: Do you think that in the wake of all this the justice system might try to set itself up to more adequately investigate and prosecute these matters?

Cohan: My gut tells me things like this do not get investigated, that they're too complex, that tying it back and winning a conviction — which is really what it's all about, right? — it's too hard to track.

TCR: Doesn't it seem like a cop out to just say they're too complex, we're not even going to try?

Cohan: I think they think they're trying. You've got the indictments of Matthew Tannin and Ralph Cioffi [Bear Stearns hedge fund managers], and you've got the three grand juries investigating the Lehman guys. But then all of a sudden comes Madoff, Stanford and these other guys that you have to investigate, where there's real fraud, real losses. [Cases like those are] indictable and convictable and you can win guilty pleas.

Trying to go after [former Bear Stearns co-President] Warren Spector because he failed to properly supervise what the hedge funds were doing, and he built up this fixed income manufacturing business that had all this risk in it, [will be very difficult] unless there are emails that say, “I'm taking this absurd risk, but I don't give a shit because I'm making a lot of money” – and Warren Spector is way too smart to write an email like that.

On the other hand…if I had access to the emails and the documentary evidence and I was a prosecutor, I would try to do it. For a lot of these prosecutors it's a revolving door, and they want to be in private practice. What's the best plum for a prosecutor? It's to get a job at one of these Wall Street law firms, or being general counsel to a Wall Street firm,

TCR: So going after Wall Street doesn't exactly help a prosecutor's career path.

Cohan: That's correct.

Use The Crime Report to find information and resources on white collar crime. Click here to read what Cohan and other panelists had to say at the McCormick Foundation/John Jay Conference on Financial Crimes.

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