7 of the Nastiest Scams, Rip-Offs and Tricks From Wall Street Crooks

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Citibank made a lot of money from these bets  because they knew where the toxic assets were,  because they put them there , on purpose, in order to bet against them. CitiBank created these CDO toxic assets in a way that was designed to fail, and sold them to customers as solid investments, and then made bets that these assets were worthless. When the designed-to-fail assets failed, CitiBank made money, the customers were wiped out. 

The Securities and Exchange Comission (SEC) offered to “settle” this case with CitiBank, accepting a cash fine in exchange for dropping any prosecution or even making CitiBank admit wrongdoing.  But promsingly this was rejected by the judge.  DailyKos:  Judge Rakoff stands up to SEC and Citigroup , 

Today, Judge Rakoff added to his legacy of independence  by rejecting the SEC's efforts to settle with Citigroup for $285M  over mortgage-backed securities fraud allegations.  

… Under the law, Judge Rakoff was obligated to determine whether this settlement was "fair, reasonable, and in the public interest"; the SEC argued that no, the public interest didn't actually matter—and, if it did, the SEC itself could assess what the public needed. No no no, said the Judge.  

Goldman Sachs also received a earlier settlement-without-prosecution for operating a similar scheme.  Washington Post:  Goldman Sachs to pay record settlement in fraud suit, change business practices , 

Goldman Sachs agreed Thursday to pay $550 million to settle a fraud suit brought by the Securities and Exchange Commission that accused the storied Wall Street bank of selling a subprime-mortgage investment that was secretly designed to fail. 

The crux of the case alleges that Paulson & Co., a hedge fund, was looking for a way to bet on a drop in the housing market and that it asked Goldman to help create a financial product that would allow such a wager. Paulson, led by hedge fund manager John Paulson, essentially bought insurance against the investment -- much like taking out an insurance policy on a person who secretly has a potentially deadly disease. … 

The investment ultimately lost virtually all its value, costing investors $1 billion. 

Word is these schemes were not uncommon.  Ney getting that an investment is going to blow up if you’re the one who put the bomb in it and set the timer in the first place.

4. An “Epidemic” Of Mortgage Fraud

For years regulators were warned about “an epidemic” of mortgage fraud, but looked the other way. For example, a CNN news story is from 2004, years before the financial collapse,  FBI warns of mortgage fraud 'epidemic' , warned,

Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis." 

… The FBI has dispatched undercover teams across the country in an urgent investigation into dealings by suspect mortgage brokers, appraisers, short-term investors, and loan officers, Swecker, flanked by FBI executives and Justice Department prosecutors, revealed.

The Bush administration’s reaction was  to pull FBI agents off of white collar crime like mortgage fraud , reducing the numer of agents looking at banking fraud from 1,000 during the S&L Crisis investigation down to around 100. 

5. Ratings Agencies Gave AAA to CDOs

Subprime and just fraudulent mortgages were getting bundled up into complex bonds and sold by the big Wall Street banks to investors looking for higher yields than they could get from other investments.  (They didn’t even bother to make sure they had proper documentation proving who had signed the loans, and who should receive the payments. More on this later.)