Why the S.E.C. Didn’t Hit Goldman Sachs Harder

New Yorker:

While the S.E.C., as well as federal prosecutors, eventually wrenched billions of dollars from the big banks, a vexing question remains: Why did no top bankers go to prison? Some have pointed out that statutes weren’t strong enough in some areas and resources were scarce, and while there is truth in those arguments, subtler reasons were also at play. During a year spent researching for a book on this subject, I’ve come across case after case in which regulators were reluctant to use the laws and resources available to them. Members of the public don’t have a full sense of the issue, because they rarely get to see how such decisions are made inside government agencies.

Kidney was on the inside at a crucial moment. Now retired after decades of service to the S.E.C., Kidney recently provided me with a cache of internal documents and e-mails about the Abacus investigation. The agency holds the case up as a success, and in some ways it was: Goldman had to pay a five-hundred-and-fifty-million-dollar fine, and a low-ranking trader was found liable for violating securities laws. But the documents provided by Kidney show that S.E.C. officials considered and rejected a much broader case against Goldman and John Paulson & Company.

Kidney has criticized the S.E.C. publicly in the past, and the agency’s handling of the Abacus case has been previously described, most thoroughly in a piece by Susan Beck, in The American Lawyer, but the documents provided by Kidney offer new details about how the S.E.C. handled its case against Goldman. The S.E.C. declined to comment on the e-mails or the Abacus investigation, citing its policies not to comment on individual probes. In a recent interview with me, Muoio stood by the agency’s investigation and its case. “Results matter,” he said. “It was a clear win against a company and culpable individual. We put it to a jury and won.”

Kidney, for his part, came to believe that the big banks had “captured” his agency—that is, that the S.E.C., which is charged with keeping financial institutions in line, had become overly cautious to the point of cowardice.