Shedding Light on DOJ’s Investigation into the Credit Swaps “Markit”

For those who are intimidated by the complexity of the esoteric $59 trillion credit default swaps market (CDS), let me explain in raw layman’s terms the likely nature and significance of the Department of Justice’s antitrust inquiry into Markit, a company owned by more than a dozen Wall powerhouses including Goldman Sachs and JP Morgan:  The DOJ wants to know whether Markit’s owners manipulated the company’s pricing data and index formulation to enrich themselves and screw their customers.  If the Obama Administration has the conviction and political temerity to investigate and prosecute the wrongdoing the DOJ suspects, it could forever change the “heads I win, tales you lose,” way the big Wall Street firms do business and could result in billions of dollars in fines and restitution, not to mention possible jail sentences.

Although no one has yet been accused of any wrongdoing, having cut my teeth at the Federal Trade Commission litigating antitrust cases (including the one that attacked “Big Oil’s” price-fixing scheme), I can say with considerable authority that the DOJ hasn’t opened this investigation merely on a hunch.   The potential for wrongdoing is enormous because Markit determines the critical month-end pricing that major financial institutions use to “mark” their CDS securities; Markit also compiles critical indexes and the company’s Wall Street owners could benefit greatly if they have input on how these indexes are compiled and weighed.

Even for those with unlimited charity in their hearts should find it difficult to give the big Wall Street firms the benefit of the doubt.  There are countless examples of these firms putting their interests ahead of their customers.  In 1996, NASDAQ market makers settled an antitrust case for more than $1 billion because they were artificially widening the spread on stock trades so they could pocket additional commissions.  Wall Street’s manipulation of the IPO market during the dot.com boom provides yet another example.  And let’s not forget Wall Street’s rigging of the auction rate securities market.

It’s one thing to launch an investigation, having the political will to see it through is another.  Wall Street’s influence in Washington is immeasurable and there is some disturbing evidence that Congress and the Fed serve at the pleasure of Goldman Sachs and not the other way around.  The financial consequences Markit’s owners could suffer is immense if wrongdoing can be found and proven.

Wall Street firms have long regarded regulators as mere gnats that can easily be swatted away.  If the DOJ aggressively investigates and pursues this investigation and holds the big Wall Street firms criminally and financially accountable for any wrongdoing, President Obama will have indeed made good on his pledge to achieve “Change We Can Believe In.”