NY Times business columnist Floyd Norris hits the nail on the head in his column today in which he observes that the rebound in the investment banking industry this year must be tempered with the plight of Daniel Bayly, the former head of global investment banking at Merrill Lynch. Mr. Bayly was one of five defendants convicted in the Justice Department’s questionable Enron-related prosecution known as the Nigerian Barge case. As Mr. Norris notes:

[T]he real man of the year on Wall Street – or at least the man whose plight is emblematic of the new Wall Street reality – will not be sharing in those bonuses. Instead, Daniel Bayly is awaiting sentencing in federal court in Houston, where he is likely to be ordered to spend a few years in prison for doing something that few on Wall Street would have seen as a crime.
Mr. Bayly, the former head of global investment banking at Merrill Lynch, was caught up in the Enron scandal. He signed off on a deal that Merrill did with Enron, in which Merrill “bought” the now-infamous Nigerian barges from Enron at the end of 1999, thereby allowing Enron to report phony profits. The government viewed the transaction as a disguised loan.
Mr. Bayly’s role in all this was not a large one. His approval was needed for Merrill to go ahead, and he seems to have been principally concerned that there were safeguards to ensure Merrill would get its money back.
The amount of money involved inflated Enron’s profits by only $12 million, just over 1 percent of the $893 million in profits Enron reported for the year. But it allowed the company to meet investor expectations.
The government persuaded the jury that Merrill officials understood the purpose of the transaction was to inflate Enron’s profits and that the accounting was phony. Mr. Bayly’s lawyers said he believed it was proper.

The result, notes Mr. Norris, is that prosecutors are now treating investment bankers as if they were bartenders:

To many on Wall Street, however, whether or not the client’s accounting was proper was a question of little importance, just as a Porsche dealer has no reason to worry that he will get in trouble if a customer chooses to drive faster than the speed limit.
The risk that bankers now confront is that they will be treated the same way bartenders are in some states, where the man who sold the drunk driver his final drink can be held liable for the damages that result.
It used to be that when a company went bankrupt as a result of fraud, the only deep pocket available belonged to the auditor. The collapse of Arthur Andersen after the Enron fraud served as a warning that that pocket might not be so deep, a fact that has been reinforced by the limited insurance now available to auditors.
The current reality is that investment and commercial bankers are the new deep pockets. They used to get high fees for devising transactions whose primary purpose was to mislead investors. Now they will be sued by the Securities and Exchange Commission and by private lawyers if there is any evidence the bankers knew the company’s accounting was suspicious. The Justice Department may even deem such an act to be a felony, and there is no assurance that it will not bring criminal charges against an investment bank as well as against its officials.

How does this new risk reality affect the market? Mr. Norris has a suggestion:

As the profits pour in from the rebound in investment banking fees, investors might hesitate in bidding up the industry’s shares. As Mr. Bayly’s conviction demonstrates, the risks of the investment banking business are much greater than they used to be.

Read the entire piece. And as you ponder the policy implications of the Justice Department’s prosecution of businessmen such as Mr. Bayly over merely questionable business transactions, take note of the fact that Mr. Bayly is currently facing a prison sentence that could be longer than that of true business criminal Martin Frankel.