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posted: 11/2/2011 5:00 AM

Selling smoke on Wall Street

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As a mere youth, I bought a used car in New York to drive to California to be with the woman of my dreams. Inexplicably, she decided to rush back to New York and so I promptly took the car back to the dealer. He made a shockingly low offer. The car had been in an accident, he explained. The chassis was bent. I was flabbergasted. I had just bought the car from him. If the chassis was bent, it was bent when I bought it. The salesman offered me a take-it-or-leave-it shrug. He probably now works on Wall Street.

That the morality of the used car lot has been adopted by Wall Street is now abundantly clear. Citigroup recently settled a civil complaint in which it was accused of selling mortgage-related investments that it knew were dogs. It was so certain that the investments were the financial equivalent of my used car that it bet against them -- heads I win, tails you lose -- and even selected the investments themselves, choosing from a cupboard of total garbage. An investment in the Brooklyn Bridge would have been safer.

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These investments are known as collateralized debt obligations (CDOs), and they consisted of the sort of mortgage securities that nearly sunk the American financial system. According to federal regulators, they were sold with the full knowledge that they were careening toward worthlessness and that, by deduction, their buyers were patsies. The bank made substantial profits on them. But when the Securities and Exchange Commission decided to act, it got Citigroup to pony up a mere $285 million fine that, to presumed chuckles, will doubtlessly be taken out of petty cash. The bank last quarter reported a profit of $3.8 billion.

Mirth must have turned to guffaws when Citigroup read on. It did not even have to admit guilt -- "without admitting or denying" is the language the SEC used -- and no single executive was held culpable. The CDOs, apparently, were contrived by no one and sold by no one. There's a Nobel Prize in something (maybe alchemy) for anyone who can explain how that happened.

The Citigroup settlement is being reviewed by a perplexed U.S. District Court Judge Jed S. Rakoff. Among other things, he wants to know why he should authorize a settlement "in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing." This is a marvelous question that goes to the heart of the matter. The settlement is itself a CDO, a legal version of a black hole in which next to nothing is disclosed. Why no guilt? Why no guilty persons? Why such a non-punishing punishment? The SEC will have to tell it to the judge.

I do not want to be excessively harsh on dear Citigroup. It was not the only one selling smoke. Goldman Sachs and JPMorgan did something similar. In the words of Jesse Eisinger of the online journalistic group ProPublica, "This was the Wall Street business model." And it was a model permitted and encouraged from the top, by people who became filthy rich from filthy practices and now take umbrage when President Barack Obama calls out their industry for approbation. They should first spend a year in community service and then, if they still feel slighted, denounce Obama.

As for Obama's government, it has been too gentle with these miscreants. Why a single major banker has not been cuffed and frog-marched to some Financial District Guantanamo is unclear. Why their firms have gotten off with modest fines and non-confession confessions is not clear, either. That, in itself, is a crime.

Somebody has to break this culture. In this sense, Wall Street is no different from the New York Police Department, where it apparently has been customary to fix traffic tickets for friends, family and -- almost certainly -- the odd person with some cash. When 16 of the alleged ticket-fixers were arraigned last week, hundreds of off-duty cops came to cheer them, denounce the DA and manhandle reporters. Their union took a firm position in defending this behavior. An appalled city awaits firm action by the mayor and police commissioner.

An appalled nation awaits a similar response to what went on in the financial sector. What we would like to see is some version of a public hanging, the appropriate reaction to the breathtaking fleecing of investors. In the end, those investors got their money back. That's more than we can say about our lost faith in justice.

Richard Cohen's email address is cohenr@washpost.com.

$PHOTOCREDIT_ON$ 2011, Washington Post Writers Group $PHOTOCREDIT_OFF$

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