News reports are emerging that when the financial collapse was about to happen in the summer of 2008, Treasury Secretary Henry Paulson gave inside information on what the government was planning to do to a small group of insider investors who were in a position to take advantage of the news. Even they were shocked that he was telling them this.

He delivered that information to a group of men capable of profiting from any disclosure.

Around the conference room table were a dozen or so hedge-fund managers and other Wall Street executives — at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

Thanks to the Freedom of Information Act, we are now learning how the Federal Reserve secretly committed even more money to the big banks (to the tune of $7.77 trillion!) than was publicly reported, all while hiding it from the public and Congress. (To get a sense of how large this is, remember that the entire GDP of the US is about $14 trillion.) This enabled the banks to make $13 billion in profits all the while successfully lobbying against government regulations to control the reckless behavior that resulted in the crash in the first place. “The six biggest U.S. banks [JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley], which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank.”

Glenn Greenwald writes about how the Fed refused to reveal the names of the banks even when it was thought that the amount loaned was ‘only’ $1.2 trillion.

In particular, watch this 5-minute video of Alan Grayson from early 2009 grilling the Vice Chair of the Federal Reserve, Donald Kohn, as Grayson demanded to know how much the Fed loaned and to which institutions, while Kohn refused to provide that information (absurdly claiming that such transparency would prevent banks from wanting to borrow in the future: in light of the disclosures today, does anyone believe banks will no longer borrow from the Fed?).

I have the feeling that the true amount the Fed committed may be even greater than the $7.77 trillion. The veil of secrecy under which the Fed has been allowed to act needs to be stripped away.

Meanwhile Matt Taibbi reports on how US District Court Judge Jed Rakoff has finally put a stop to the long-standing practice of the Securities and Exchange Commission (SEC), which is the government agency that is supposed to monitor and regulate the financial industry, arranging sweetheart deals with the institutions that it is supposedly overseeing. How it works is that when a firm is found to have committed some violation of the law, the SEC and the firm arrange a plea deal in which the company does not accept wrongdoing, pays a fine that is often much less than the amount of fraud they committed, and the information of what they did is not revealed. The SEC and the firm then get the deal approved by a judge. As Taibbi says:

Imagine if normal criminal defendants were treated this way. Say a prosecutor and street criminal come into a judge’s chamber and explain they’ve cooked up a deal, that the criminal doesn’t have to admit to anything or plead to any crime, but has to spend 18 months in house arrest nonetheless.

What sane judge would sign off on a deal like that without knowing exactly what the facts are? Did the criminal shoot up a nightclub and paralyze someone, or did he just sell a dimebag on the street? Is 18 months a tough sentence or a slap on the wrist? And how is it legally possible for someone to deserve an 18-month sentence without being guilty of anything?

Such deals are logical and legal absurdities, but judges have been signing off on settlements like this with Wall Street defendants for years.

But Judge Rakoff has said that this kind of thing must stop.

Rakoff’s 15-page final ruling read like a political document, serving not just as a rejection of this one deal but as a broad and unequivocal indictment of the regulatory system as a whole. He particularly targeted the SEC’s longstanding practice of greenlighting relatively minor fines and financial settlements alongside de facto waivers of civil liability for the guilty – banks commit fraud and pay small fines, but in the end the SEC allows them to walk away without admitting to criminal wrongdoing.

This practice is a legal absurdity for several reasons. By accepting hundred-million-dollar fines without a full public venting of the facts, the SEC is leveling seemingly significant punishments without telling the public what the defendant is being punished for. This has essentially created a parallel or secret criminal justice system, in which both crime and punishment are adjudicated behind closed doors.

But this is just one judge. The SEC and the crooked firms have the option of ‘judge shopping’, taking their case before judges whom they think will be sympathetic to such deals. Until more judges take this stand, the government and Wall Street’s collusion in ripping off the public will continue.