U.S. Government: Prosecutors Take the Lead

In early September, the U.S. President’s popularity was just of 44%, according to Gallup. To find a President in a similar – or worse – situation on the first September of his second term, we should look at George W. Bush in 2005 and Richard Nixon in 1973. The main cause of the fall in Obama’s popularity has been, precisely, the economy, although it has not given signs of deterioration in the summer. But, in general, the President’s approval has fallen in all areas.

For now, those who are taking the lead are prosecutors. The Justice Department is using techniques that had usually been the domain of criminal investigations to pursue crimes on Wall Street. These practices include recording telephone conversations, the use of protected witnesses and filing criminal charges for a wide range of reasons: from advice to customers about how to evade taxes in Switzerland to the arrest of the Spanish directors of JP Morgan Alberto Martín-Artajo by alleged hiding of evidence in the famous case of the London whale.

With the help of prosecutors, Obama can achieve much more than with the Congress. The same as with a reinforced SEC, which is hardening the fines to the financial institutions and is preparing an offensive in an area of high symbolic content: the admission of guilt by the sanctioned companies. Until now, when a company was fined by the SEC, it didn’t need to admit to have broken the rules. It is mostly a symbolic distinction, but may also have practical consequences, given that the company, bank or fund has to admit its misconduct or crime.
JP Morgan is, for now, the Justice Department’s most obvious target. The so-called ‘London whale’ is a dream case for a prosecutor, but we should not forget that the world’s largest bank has already been historically fined for having manipulated energy prices, and it is being forced by the Federal Reserve to sell its commodities trading division. Regulators believe that this department has been coordinating with the commodities trading department in the financial markets to manipulate the prices.

But the main target is not JP Morgan, but SAC, the hedge fund giant of Steve Cohen. Several of its directors have been taken to trial for alleged abuse of privileged information, and even Mr. Cohen could be charged. For now, SAC is still operating, but the filing of a criminal lawsuit against the entity has provoked a stampede of investors. Although the final outcome of the legal process is uncertain, one thing is clear: this hedge funds’ flagship is almost over. Ed Butowski, SAC capital’s last great investor, has withdrawn his money, and Mr. Cohen has admitted in private that the hedge fund is finished and that, from now on, it will only be a family office to manage his assets.