JEFFREY BROWN: And finally tonight, the government penalizes another major Wall Street investment bank for fraud in the lead-up to the financial crisis.
Judy Woodruff has the story.
JUDY WOODRUFF: It's just the second major settlement of the crisis that is tied to one of the largest investment banks on Wall Street.
The SEC announced today that JPMorgan Chase has agreed to pay $153 million to settle charges of misleading investors as the housing market was collapsing. The firm neither admitted nor denied wrongdoing. But the government accused the investment bank of steering investors toward mortgage securities that another one of its clients, a hedge fund called Magnetar, was betting against in a big way, to the tune of hundreds of millions of dollars.
To help fill us in on the settlement and the back story, we turn to Jesse Eisinger of the investigative journalism organization ProPublica. He and reporter Jake Bernstein won a Pulitzer Prize for their coverage of questionable Wall Street practices.
Jesse Eisinger, thank you for being with us.
Jesse Eisinger, ProPublica: Thanks for having me, Judy.
JUDY WOODRUFF: So, tell us, what is it that the SEC is saying exactly that JPMorgan Chase did? What -- what was illegal about it?
JESSE EISINGER: Well, these were a collection of deals that were designed to fail.
And in this specific deal, what happened was a hedge fund bought a little piece of the deal to enable JPMorgan to go out and sell a $1.1 billion mortgage-backed security deal called a CDO, which stands for collateralized debt obligations. And they went around the world and sold this, but they didn't tell the customers that they were selling these securities to that in fact this hedge fund had a much bigger bet against the CDO, and, in fact, helped select assets, put stuff into the deal that would otherwise -- that would go bad, that made the deal kind of rotten.
And JPMorgan didn't tell anybody this when they were selling it.
JUDY WOODRUFF: And that's illegal, presumably.
JESSE EISINGER: That's misleading.
That -- the SEC determined that that was a material aspect of the deal that needed to be disclosed, that this hedge fund had an active roll in selecting the assets that went into this CDO.
JUDY WOODRUFF: And we should say this hedge fund, which you have looked into, had been busy working with a number of other investment firms as well, Magnetar.
JESSE EISINGER: Yes.
Jake Bernstein and I found that they had done about 28 deals in 2006 and 2007, with multiple investment banks worth at least $40 billion, all similarly structured. And they worked with all the investment banks, Merrill Lynch, Citibank, to structure these deals.
And many of them had exactly the same type of scenario, where they would buy a little bit of the deal in order to allow the investment bank to create this much larger deal and go out and sell it around the world to investors, but Magnetar secretly, and undisclosed to anybody, was actually betting against the deal.
And many of the investment bankers and other people involved in the deal, in managing the deal, knew about Magnetar's secret bets, but the investors did not.
JUDY WOODRUFF: So, how is JPMorgan Chase and these other firms that, as you say, are reportedly being investigated, how are -- how do they defend what they did?
JESSE EISINGER: Well, the investment banks don't really -- they haven't really defended what they did. What they essentially say is this was in the past. Many of these people are gone. We have wound up the business.
And Magnetar says that they never selected the assets and they never made any misleading disclosures to anybody. And that's true. Magnetar was never on any of the prospectuses or any of the marketing materials for these deals, because that was just the investment bank making the representations and the manager of the deal making the representations.
Magnetar was never making any representations to anybody, so they couldn't mislead anybody.
JUDY WOODRUFF: And JPMorgan, just to be clear, as we said, not admitting guilt. And they say -- they claim they have lost $900 million in all of this.
Is that right?
JESSE EISINGER: Right. Yes.
Now, this is a typical settlement for the SEC. The SEC almost never gets anybody to admit guilt in these things. But they're not allowed to deny it either. And they settle. And JPMorgan actually was the biggest victim of their own deal, in this kind of ironic twist.
And it happened over and over in these kind of CDOs, where, actually, the investment banks took the top most slice of these kind of mortgage deals, which was -- they thought was -- either they thought it was very safe, or they thought that they could make a lot of money in the short term on it based on the fees that they got from the deal, and maybe sort of deal with it later.
They kind of bought -- drank their own Kool-Aid, even though they saw -- some of the bankers saw Magnetar betting against it. And, in fact, what really happened here was individual bankers within these organizations kind of took their own institutions down or caused their own institutions to take losses. They were operating for themselves, and not the institutions at large.
JUDY WOODRUFF: So, Jesse Eisinger, in the -- put this in the bigger context here. In the scheme of everything that has happened since the financial collapse, how significant is a settlement, is the allegations here in the settlement? Because we know the SEC went after Goldman Sachs, now JPMorgan Chase. What does this add up to?
JESSE EISINGER: Right.
Well, it adds up to fractions of bonuses that these bankers made and these banks made in profits in 2007, too. You know, so, this is chump change for Wall Street. And, in fact, Wall Street top executives have not been held accountable to any significant degree for any of their actions or their banks' actions in the lead-up to the financial crisis, when often they misled their own clients.
So, I think people may be frustrated. Now, the SEC is working very hard, and these cases are extremely difficult to prove. And they have got a lot of detail. And it's damning detail in their complaint about this particular deal. And so, on the one hand, this is a big victory for the SEC, as well as the $550 million settlement with Goldman about a similarly structured deal.
JUDY WOODRUFF: Right.
JESSE EISINGER: But, on the other hand, I think that there's an enormous amount of frustration on Main Street about the lack of accountability on Wall Street generally.
JUDY WOODRUFF: Does -- is the SEC saying why they haven't gone after the -- or named top executives involved in this sort of thing?
JESSE EISINGER: I think it differs from case to case. With people like Lehman Brothers' Dick Fuld or Merrill Lynch's Stan O'Neal, they may not have known exactly what was going on, or the specifics of what they knew at the time wasn't -- didn't rise to the levels of securities fraud.
I think what they say generally is that these cases are extremely hard to prove, that the markets were confusing, that it wasn't clear that things were collapsing, when, in fact, in hindsight, we know that they were collapsing. Those kind of things have complicated the picture.
But the reality, which our project showed, was that the crisis hit Wall Street in early 2007, a year-and-a-half before Main Street knew that there was a financial crisis, and bankers on Wall Street knew about the problems and did things that were questionable to keep it going, keep their own bonuses going, and stave off the crisis, and made it worse.
JUDY WOODRUFF: Jesse Eisinger with ProPublica, thanks very much.
JESSE EISINGER: Thanks so much for having me.