During the 2008 crisis, we know that even after being greedy and giving out these bad loans, the majority of the bankers did not suffer the legal consequences of the housing crash. There was only one banker who was jailed, and the big short movie also mentions him. The name of the banker was Karim Serageldin.
Why, after such a big global crisis caused by all these bankers, only one banker faced jail time?
Let’s find out.
Contents
The Only Banker
Kareem Serageldin worked at Credit Suisse, and he was the global head of structured credit. There were 70 employees under him who managed $50 billion in trading positions. Kareem’s main crime was to falsely inflate the prices of subprime bonds held by Credit Suisse to hide losses and meet performance targets. Kareem didn’t do this on his own; he had the other three members of his team help him with this fraud. The other members were David Higgs and the traders Faisal Siddiqui and Salman Siddiqui. Kareem was their boss at Credit Suisse.
Kareem’s objective in doing this fraud was to avoid losses and appear profitable to receive bonuses and promotions. This fraud gave Kareem Serageldin a cash bonus of more than $1.7 million and a stock award of more than $5.2 million.
What exactly was Kareem’s fraud?
In the second half of 2007, when people started defaulting on their loans, the housing market started to collapse. The index that showed the performance of the housing market was the ABX. When banks were selling these mortgage-backed securities, that primarily backed by home loans. They needed to mark the fair value of these bonds every day according to the ABX index movement on that day.
When the housing market started to collapse in late 2007, the ABX index started to decline. As the index value declined, these guys needed to accurately record the decline in the value of the bonds.
Credit Suisse at the time held a massive portfolio of $3.5 billion of triple-A-rated bonds in a trading book named ABN1. This trading book, ABN1, was managed by Kareem. But as the subprime market deteriorated more in the fall of 2007, Serageldin became increasingly concerned that the value of the ABN1 portfolio would show huge losses, if they marked the positions of the bonds according to the ABX index. So they chose not to mark those bonds correctly.
In late August 2007, Kareem and his team stopped accurately marking the fair value of their bonds and instead began to price the bonds in such a way that showed they were consistently making profits.
Before August 2007, an automated pricing service called Financial Times Interactive Data (FTID) set the daily fair values of the bonds in ABN1 trading books. The FTID prices during that time period were generally at or close to movement in the ABX index.
By the end of August 2007, the market had declined. The FTID system started showing a decline in the value of the triple-A-rated bonds. The automated FTID system was tracking the market correctly, reflecting a weakening market for these mortgage-backed securities.
Credit Suisse’s New Rules
At around the same time, senior Credit Suisse management implemented a new rule. Where the firm’s trading desks were required to produce real-time reports of profit and loss. Because of this new requirement of showing a real-time report of profit and loss, Kareem Serageldin was under intense pressure to show profit from his trading desk.
So at this point, Serageldin and David Higgs took on a hands-on role in monitoring profit and loss and the prices of the bonds in the ABN1 trading book. Kareem ordered Faisal Siddiqui and Salmaan Siddiqui to manually manage the prices of the bonds in the ABN1 trading book to achieve daily and month-end profit and loss goals.
Manually manipulating the prices
On August 29, 2007, the FTID system tracked prices and showed a loss of approximately $75 million. Salmaan Siddiqui manually entered prices in the book and increased the profit by $95 million.
In November and December 2007, as the markets declined further, the false pricing of the bonds by these guys not only continued but even accelerated. By the end of 2007, Kareem and his teammates had gathered enough market data revealing their bonds were highly overvalued. They knew that the housing market was going down but still kept their bond prices up.
Worried about the internal audit
While committing this fraud, they also worried that Credit Suisse’s Price Testing personnel would audit and discover the falsely overvalued prices of these triple-A-rated bonds. Despite knowing all this a few days after this, Kareem Serageldin approved his unit’s year-end profit and loss results without correcting the year-end mispricing.
During the investigation, they found that in January 2008, Kareem and his teammates were talking on the phone, and they admitted that the year-end prices on their Triple-A-rated bonds were too high. Kareem also handled other similar bonds with a smaller overall portfolio valuation. They marked these smaller bonds 20 points lower than the ABN1. So basically, Kareem manipulated the prices of the bonds with higher portfolio values, and he marked other bonds correctly with lower portfolio values.
Reporting inflated profit and correcting it
Because of this price manipulation, on February 12, 2008, Credit Suisse reported net income of $7.12 billion in the year 2007, with fourth quarter earnings of $1.16 billion. A few days later, senior management detected abnormally high prices on certain bonds managed by Kareem and his teammates, prompting Credit Suisse to report its fourth quarter results again on February 19, 2008.
They issued a press release stating that the results it had announced just one week earlier were incorrect, and it was in the process of quantifying the error. On March 20, 2008, Credit Suisse announced that the actual fair value reduction was about $2.65 billion. The bank revised its net income for the full year 2007 downward from $7.12 billion to $6.47 billion and for the fourth quarter of 2007 from $1.16 billion to $471 million.
The main reason for this revision and lowering the income was the ABN1 trading book. Kareem managed this AB1 book. It recognized a write-down of approximately $1.3 billion, approximately half of the fair value reduction of $2.65 billion announced on March 20, 2008. This is what Kareem Serageldin did.
Investigation of Kareem
His investigation started in late 2012. In 2013, Serageldin was extradited from the UK to the USA to face the trial. In the trial, Kareem Serageldin pleaded guilty. He got 30 months of jail time and a $250,000 fine. Credit Suisse also took back his stock reward of $5.2 million.
Financial punishment
In addition to the jail time, he also faced financial repercussions. He had to pay $25.6 million in compensation to Credit Suisse. About $20 million of which he had earned by working at Credit Suisse till the year 2007.
He also faced regulatory action. The U.S. Securities and Exchange Commission filed a lawsuit against him, which he settled in January 2014 by paying over $1 million. After this, the authorities effectively barred him from working in the securities industry.
Conclusion
This is how only one banker was jailed for the 2008 crisis. The crisis was so huge that it was unfair that only one banker faced legal consequences. No other bankers were punished for knowingly bundling bad loans into MBS products.
None of the rating agency employees faced any consequences for falsely rating these MBS products. All this was blamed on this one person, and the business went on as usual. Anyway, check out this playlist on our YouTube channel to learn more about the 2008 crisis and the big short movie.
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