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Investor Steinhardt asks who are the villains?

NEW YORK (Reuters) - A failure to prosecute the “villains” responsible for the financial crisis that brought the United States to its knees will leave the country without the moral compass needed to avert future crises, a Wall Street luminary said.

Pioneer hedge fund manager Michael Steinhardt is angry that the bailout of America is eroding the nation’s capitalist ethos while those whose deeds crippled the U.S. economy suffer scant opprobrium, their names still untarnished.

“Something really went wrong here. We’re about to enter a period where our budget deficit will dwarf anything we’ve seen before,” Steinhardt told the Reuters Investment Outlook Summit in New York.

“What we really needed a long time ago was a recognition that there were villains apace. The evils of the financial system should have been recognized long before this,” said Steinhardt, who no longer manages billions of dollars but whose counsel is sought on Wall Street and among select politicians.

While scornful of the financial executives who should have known better, he also belittled Washington for its lack of leadership and for not spelling out what the future beholds.

The current and former Federal Reserve chairmen have proved ill-prepared for the job, said Steinhardt, a former chairman of the Democratic Leadership Council, where he helped promote the career of Bill Clinton before he became president.

Of former Fed Chairman Alan Greenspan, often criticized for keeping interest rates so low that they sparked the housing bubble, Steinhardt said he may have been stupid for a long time, “but he wasn’t pernicious.”

Current Fed chief Ben Bernanke is little better.

“When you see what Bernanke said five, four months ago, it’s laughable,” he said. “So Bernanke is not a villain but was he prepared for what has happened here? Not in the slightest.”

Michael Steinhardt, legendary hedge fund manager, speaks at the Reuters Investment Summit in New York December 8, 2008. REUTERS/Brendan McDermid

Steinhardt, however, said Americans themselves must share the blame for running away from the debacle and for not questioning the enormous public debt the U.S. government is about to assume.

“If you cannot accept short-term pain, then you do all sorts of things to coat reality, to pretend, to fabricate, to lie. That is what has happened in American business in the last 10 years,” he said.

Steinhardt, who now dedicates his time to philanthropy, still hues to the almost impossible standards that made him a legend. His Steinhardt Partners hedge fund returned an annual 24.5 percent after fees over 28 years before he shut the fund in 1995.

Steinhardt is aware of scandal and reputation. His firm was stung by a federal investigation into allegations he and others, including Salomon Brothers, tried to corner the two-year U.S. Treasury market in the early 1990s.

Steinhardt denied any wrongdoing, and paid a fine and fees of more than $70 million to settle the case.

Steinhardt asked that if the government and Americans are unwilling to prosecute by law, what are the consequences of not being responsible and holding the culprits up for contempt?

“The question is, What’s going to come of this, if there are going to be no villains?” he said.

"Is Hank Greenberg a villain?" Steinhardt said, referring to the former chief executive of insurer American International Group AIG.N, recipient of a $152 billion federal bailout after it suffered massive losses mainly on complex securities tied to mortgages that had declined in value.

He rattled off other names: James “Jimmy” Cayne, former CEO and chairman of defunct investment bank Bear Stearns Cos, whose unsustainable leverage in two failed hedge funds sparked the crisis in summer 2007.

And Richard Fuld, ex CEO of failed investment bank Lehman Brothers Holdings Inc. LEHMQ.PK, whom Steinhardt said he saw last week in a restaurant "happy as a hero, blowing kisses."

Finally, he asked, referring to the senior counselor of Citigroup C.N and a former Treasury secretary under Clinton. "Is Bob Rubin a villain? Still at Citibank? Is he a villain? You can't name a villain? Is this a villain-less debacle?"

Although a friend of Clinton, Steinhardt knocked Barack Obama’s pick of ex-Clinton officials for key positions in his administration. The choices reveal a deep lack of substance on the president-elect’s part, he said.

“We have a new president who I find to be an absolute tabula rasa in terms of his knowledge of anything,” he said, referring to Obama as a blank slate.

“Pay attention to what Obama says and you will find he hardly ever says anything of consequence.”

Steinhardt also railed against Congress, where the quality of intellect “is not exactly awing.”

“It seems to me that the intellectual level that we are surrounded with both in government and in the industry is exceptionally low at the moment, it makes me angry.”

Editing by Leslie Adler