This week the Justice Department announced a civil lawsuit against the credit rating agency Standard & Poor’s after a lengthy investigation. The suit alleges that the agency issued faulty credit ratings for securities tied to the “toxic assets” of mortgages and other financial instruments. The Justice Department claims that S&P’s purposely engaged in fraud by diluting their rating standards in order to generate business and accommodate long-standing clients.
The suit is being brought under a law passed in 1989 after the savings and loan crisis. The statutes in the Financial Institutions Reform, Recovery, and Enforcement Act make it easier to prosecute fraud cases against financial institutions. Since the case is civil it only requires the plaintiffs to show by a preponderance of evidence that S&P engaged in fraudulent activity such as giving subprime mortgages inflated credit ratings during the financial crisis. For example, the company rated numerous mortgage-backed securities highly, only to downgrade those same the securities quickly, leading to massive defaults in the final few months of 2007.
Then there is the usual array of inappropriate e-mails and text messages. One riffs on the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” Another e-mail from an analyst in response to a question about how his new job was going reads: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”
The complaint also included numerous emails from executives at the agency that Justice Department officials claim are proof that they knowingly inflated credit ratings and engaged in misconduct by deceiving investors. However, critics see a weakness in their case as other credit ratings agencies have not been sued, and since many of their ratings were the same as S&P’s, it is unclear whether executives will be able to say that they followed the lead of other third-party agencies such as Fitch and Moody’s. Given the industry-wide pattern of misinformation and risky behavior, the Justice Department’s suit is an important step in rectifying the egregious abuses of executives and companies in the financial world.
The news this week for Bank of American keeps getting worse. Today the Justice Department announced it was filing a lawsuit against the bank. The suit alleges that Countrywide Financial, formerly the country’s largest private mortgage lender, generated thousands of fraudulent mortgage loans and then sold them to Fannie Mae and Freddie Mac, the government institutions that underwrites mortgages for millions of American homeowners. The suit further alleges that the practice of streamlining and generating those fake and risky mortgages continued even after Bank of America purchased Countrywide in 2008.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” said Preet Bharara, the United States attorney in Manhattan.
Those transactions became the tipping point of the “subprime” mortgage disaster that led to the Great Recession and the bankruptcy of some of the nation’s largest financial institutions including Countrywide and Lehman Brothers. The Justice Department is seeking $1 billion in damages for the actions of the bank for selling these knowingly “toxic” assets to the Fannie and Freddie, which then became insolvent and required taxpayers bailouts under the TARP program. The financial problems of these two housing lenders also led to thousands of foreclosures on the homes of American families.
The Countrywide case is a new addition to several other lawsuits being pursued by the government against Wall Street firm and financial institutions. For example, last year the Federal Housing Finance Agency sued 17 banks over losses sustained by Fannie Mae and Freddie Mac, and is relentlessly calling on firms like Bank of America to repurchase billions of dollars in the bad loans they fraudulently sold to the government-controlled housing lenders.
Bank of American did not have an immediate comment. The news will be disappointing to its shareholders as it comes in the same week the bank announced that its profits had declined by 95 percent in the third quarter. The new the lawsuit represents yet another obstacle to the financial solvency and longevity of the country’s second largest bank.
The Department of Justice announced it will not bring civil or criminal charges against investment bank Goldman Sachs, despite its probable violations of various banking and securities laws that precipitated the financial collapse of 2008. In a statement it released yesterday, investigators said they “ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time.”
On the same day Goldman Sachs also revealed that the Securities and Exchange Commission was ending its investigation into a $1.3 billion subprime mortgage deal without bringing charges.
Given the close ties between Goldman Sachs and the government, the timing of these announcements raises red flags about the adequacy of banking and financial regulations and signals a lack of political will to hold large banks accountable for creating our present economic mess.
These announcements are surely disappointments to millions of mortgage holders, consumers, and taxpayers who are shouldering the costs of Goldman Sachs and other large banks’ complicated and ill-conceived banking practices. Although the Justice Department and SEC claim there is insufficient evidence to prosecute, these announcements in no way exonerate the large investment bank from its share of responsibility in creating and sustaining America’s largest financial disaster since the Great Depression.
Despite election year rhetoric pinning America’s economic problems on President Obama’s shoulder the real problem appears to be lax Congressional oversight, impotent laws, and regulatory agencies with cozy ties to their friends in the banking industry. Without the political will in Congress to write stronger laws to regulate this industry, mortgage holders, consumers and taxpayers alike are unlikely to see any substantial relief from the financial and political corruption that is rife in this country.