Judge Jed Rakoff, a Federal District Judge in lower Manhattan today rejected the $33 million settlement between Bank of America and the SEC over $4 billion in bonuses paid to Merrill employees days before the Bank of America/Merrill merger closed.

In rejecting the settlment, Judge Rakoff stated that it "does not comport with the most elementary notions of justice and morality." In perhaps the most coherent summary of the chananigans that seem to happen on Wall Street, the judge stated:

"In other word, the parties were proposing that the management of Bank of America - having already hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill Lynch who had run that company nearly into bankruptcy - would now settle the consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.

I recommend that anyone who owns shares in a public company read the document. Unlike many legal decisions, this one is crystal clear and easy to digest. It shows just how murky corporate governance has become.

Here's another gem from Judge Rakoff's decision:

"Overall, indeed. the parties' submissions, when carefully read, leave the distinct impression that the proposed Consent Judgement was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarassing inquiry - all at the expense of the sole alleged victims, the shareholders."

The decision then asks why the S.E.C. didn't persue penalities agains the actual actors in the potential crime - Bank management or the lawyers who helped put together the proxy.

It also ruled that the fine "if looked at from the standpoint of the violation, is also inadequate, in that $33 million is a trivial penalty for a false statement that materially impacted a multi-billion-dollar-merger."

I applaud Judge Rakoff. If Bank of America management are guilty, then they should be personally penalized. If the facts exonerate them, then that's okay also. But to have the kind of decision proposed by the S.E.C. not only buries the truth, but it hurts shareholders, and encourages management to plunder shareholder wealth.

While Congress and the Executive Branch largely give Wall Street a pass, judges have been taking a much harder stand and not simply rubber-stamping decisions that benefit the potential perpetrators.

Still, it's clear any investor who relies on the S.E.C. to enforce fairness in the financial markets is deluding him or herself.

The full settlement can be read here:

Judge's Rejection of S.E.C.-Bank of America Settlement

Treasuries showed strength this week, with Treasury bond yields staying low despite continued supply via auctions. The Fed has signaled on many occasions that it expects rates to remain low for some time. This week it was the Fed Vice Chairman Donald Kohn who said that a “large and rapid rise” in short-term rates is unlikely because of slow or no worlwide economic growth and the lack of inflation. Indeed mortgage bond yields declined to their lowest levels in 3-months and mortgage rates are expected to follow these yields down.

Still with government borrowing expected to accleerate to fund the $1.85 trillion deficit, some analysts expect rates to rise as the supply of Treasuries overwhelms demand, forcing the government to raise the rate it offers to attract more buyers. That combined with some stirrings in the economy is the only hope at the moment that rates will rise in the medium-term.

So, far the data doesn't show any significant change in the current low-rate environment. As the chart below shows, long term 5-year CD rates seem to have largely stabilized with the average according to the BestCashCow rate table stabilizing in the 3.3% APY range. Rates on other products and terms though continue to drift lower. At this point, unless there is a significant uptick in inflation or economic growth, it's hard to see any change to this dynamic. While rates have pretty much stabilized, they have stabilized at a pretty low level. And at this point, if rates are going to move, it looks like they will still move gradually down.

There's no significant change to report in the spread between savings rates and 36-month CDs. The spread ticked up a bit but nothing that isn't within the normal range of the past few months. Notice that the spread between savings and 3-year CDs that we saw widen in the spring is still there, a sign that the economy is poised for expansion. One wonders who will blink first: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens?

Based on this data, it would seem that any rate increases won't come until sometime in 2010. I would stay short-term and wait. An improving economy and a glut of Treasury debt will eventually put some pressure on rates.

The spread between the average BestCashCow savings rates and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.