Former Traders at Credit Suisse Are Among The First Few To Be Charged With Bond Fraud, But Where's The Rest of Them?

Federal prosecutors filed criminal charges against three former Credit Suisse traders on Wednesday, accusing them of unjustifiably inflating the value of mortgage securities. The apparent incentive of the traders in New York and London was to increase their year-end bonuses from the bank. Two of the Credit Suisse traders pleaded guilty and both are cooperating with the investigation. Their boss, an American citizen who headed the group that traded mortgage-backed securities, is still in London. His lawyer spoke on his behalf, ensuring the public that his client is fully cooperating with the ongoing investigation. While appearing in Court on Wednesday, Mr. Higgs, 42, and Mr. Siddiqui, 36, both said that they participated in the fraud under the orders of Mr. Serageldin, their boss.

“The stunning scale of the illegal mis-marking in this case was surpassed only by the greed of the senior bankers behind the scheme,” said Robert Khuzami, the head of enforcement at the SEC.

This case is among the government’s first criminal prosecutions involving a bank’s valuation of C.D.O.’s, or collateralized debt obligations, which are essentially composed of bundles of mortgage bonds. These securities contributed heavily to the housing bubble and its collapse, which brought about the financial crisis of 2008.

The Justice Department has been attacked with major criticism for not bringing enough criminal cases directly connected to companies at the center of the financial crisis. The charges have come just about a week after the President pledged in his State of the Union address intensify investigations involving financial firms. According to President Obama, the new task force shall "hold accountable those who break the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”

The losses tied to the pricing mismatches were a major embarrassment for Credit Suisse, which performed better than most of its rivals during the credit crisis. The firm, which has been cooperating with the authorities during the investigation, will not be charged in the case.

Taking into the account the very low number of criminal prosecutions involving a bank's valuation of mortgage bonds since the crisis, it's clear that enough justice hasn't been served. Is the government prosecuting enough people related to misconduct during the financial crisis? Clearly not, but don't forget that complex financial fraud cases, like this painstaking 4-year-old Credit Suisse investigation, take time to build. They are also extremely difficult to prove. Who/what is to blame for the slow progress?

Mr. Bharara, the federal prosecutor whose office brought the case, has become a leading figure in the government’s effort to combat financial fraud. Responding to a reporter's question, he said, “The number of prosecutions is not a function of resources, effort, commitment, or courage...It is a function of the laws...”

-MEHYAR AFKARI