Wall Street Will Walk

Louis Lanzano / AP Photo After two former Bear Stearns hedge-fund managers were acquitted of fraud charges last week, Charlie Gasparino says prosecutors are afraid to bring new cases. And that’s a good thing.

It usually doesn’t get much easier for the prosecution: a pair of millionaire fund managers working for the much-loathed investment bank Bear Stearns—the first firm to implode during the financial crisis—on trial for allegedly misleading investors in their quest to prop up a failing hedge fund. Emails showing Ralph Cioffi and Matthew Tannin, appeared far less optimistic about their funds’ prospects than they told investors, not to mention a blue-collar jury, just the type of people who hate Wall Street and its spin machine.

And yet, late last week, Cioffi and Tannin were found not guilty of all charges. Had they been convicted, not only would it have put both men in jail for up to 20 years, but it also would have opened the floodgates for prosecuting far bigger fish—Wall Street CEOs who touted their companies’ financial health despite mounting evidence that the whole financial system, awash in debt and leverage, was about to crash.

It’s a little too convenient for the government to come swooping in now and blame the greedy bastards on Wall Street for the financial collapse, when in fact the government was a player as well.

Well, Tannin and Cioffi are now free men, and according to friends, both men are awaiting what they believe should be a similar verdict from the Securities and Exchange Commission. (The SEC can file only “civil” charges but can make it nearly impossible for them to go back to work in the securities industry.) On Wall Street the smart money is that the SEC will walk away now or face a similar defeat in court.

The ramifications of the Cioffi-Tannin verdict are huge. Since last fall, the Justice Department, the SEC, and New York Attorney General Andrew Cuomo (or a combination of all three) have launched probes into the fall of Lehman Brothers; Bank of America’s messy purchase of Merrill Lynch; public disclosures made by top executives at Bear Stearns, Merrill, and Citigroup about their company’s financial health just before their collapse; and of course, the statements made by various former executives at AIG, including the head of its financial products group, Joseph Cassano, who publicly boasted about the health of firm’s insurance contracts on the risky securities that ultimately cause the insurance giant to implode with the rest.

These cases have been largely dormant, I am told by defense attorneys, as prosecutors and regulators were waiting to hear the Cioffi-Tannin verdict. The notion was to gauge public’s blood lust for Wall Street and see how a dozen average men and women took to the prosecution tactic of using emails to show how much Wall Street lies and misleads to make money.

What I am told by these attorneys (prosecutors tend not to say much, particularly when they’re losing) is that following this humiliating defeat, there’s now a better than even chance that most of these cases will remain on the back burner, and the mad rush to hold Wall Street accountable for the financial crisis will be put on hold indefinitely. Even the Cassano case, which once looked as rock solid as did the case against Cioffi and Tannin, is being seriously re-thought by prosecutors.

And that might be a good thing.

The actions of the Wall Street executives involved in these cases were of course serious. Investors lost huge amounts of money believing the Wall Street spin machine, and the crash cost taxpayers billions more for a controversial bailout of the entire financial system. There may well be fraud in some of these cases, but based on what I know and what I’ve been able to show in my book about the financial crisis, The Sellout, fraud in the legal sense—knowingly lying to the public about the true condition of their firms—wasn’t Wall Street’s real “crime.” To be sure, The Street suffered from a rapacious sense of entitlement, but mostly because the big firms were enabled so long by the government to engage in the business of risk.

In other words, Wall Street acted recklessly because it believed the worst could never happen—because the Fed or the Treasury wouldn’t allow it to happen. Throwing money at financial excess—as the Fed has done during previous meltdowns by slashing interest rates—worked well during the implosion of the hedge fund Long Term Capital Management back in 1998, so why wouldn’t it save the Cioffi-Tannin fund?

Besides, the Treasury helped bailout out Lehman during the 1998 LTCM fiasco and during the earlier Mexican peso crisis, so why wouldn’t Dick Fuld feel pretty confident about his firm’s future in 2008? And after those previous bailouts, guess what happened next: Lehman emerged as one of the most profitable firms on Wall Street while Fuld became among its most respected CEOs just before its demise.

Things like entitlement or irrational exuberance, last I checked, aren’t exactly crimes, even if there are a couple of emails showing that men like Cioffi and Tannin had questioned their irrationality. I think that the jury in the Cioffi-Tannin case came away with similar conclusions—even if most of the media believed these guys were guilty as charged. I read where one juror couldn’t believe that the prosecution tried to hang the financial collapse on two men whom any rational person would see as bit players in the fiasco. Other jurors said the emails that the prosecutors touted as ironclad evidence weren’t so ironclad after all; they didn’t exactly depict these guys as liars, but as men wrestling with their beliefs and then believing in the best possible outcome.

I bet if pressed, the jury would also admit it’s a little too convenient for the government to come swooping in now and blame the greedy bastards on Wall Street for the financial collapse, when in fact the government was a player as well. Where was the SEC, which was supposed to be looking at the Street’s capital standards? And where was the Fed, which can usually throw buckets of cold water on such risk taking? At least in the white-collar realm that I know about, prosecutors tend to make cases that the public wants. They feed off outrage and class warfare. It’s how the former New York Attorney General Eliot Spitzer made a name for himself and became New York State governor before his encounters with a prostitute placed him out of a job and now on the ethics lecture circuit. It’s how the current New York Attorney General Andrew Cuomo plans to become governor—or else why would he be wasting his time with an investigation against BofA CEO Ken Lewis that doesn’t save New York taxpayers a dime.

But average Americans—the ones who spend more time trying to earn a living than keeping up with Wall Street, the ones who populate our jury pools—seem to have developed a keener sense of right and wrong. They know it’s a little too easy to blame the financial crisis on the Ralph Cioffis and the Matthew Tannins of the world. The public even understands that there are many reasons besides fraud that people like Dick Fuld and Joseph Cassano might say everything is okay just before it isn’t.

Prosecutors may still want to punish people for this economic crisis, but real people know that won’t bring their money back.

Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.

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