Corporate leaders getting free legal pass on cleaning up financial crisis

From today’s New York Times Editorial Observer by Teresa Tritch:

In recent years, it has become increasingly clear that no prominent banker would be prosecuted for fraud in the run-up to the financial crisis. In the current issue of The New York Review of Books, Judge Jed Rakoff of the Federal District Court in Manhattan asks why.

The comforting answer — that no fraud was committed — is possible, but implausible. “While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies,” he wrote, “I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities.”

So why no high-level prosecutions? According to Judge Rakoff, evidence of fraud without prosecution of fraud indicates prosecutorial weaknesses.

This is not the first time Judge Rakoff has weighed in on the prosecutorial response to the financial crisis. In 2011, he rejected a settlement between Citigroup and the Securities and Exchange Commission because it did not require the bank to admit wrongdoing.

His insights on financial-crisis cases also apply to cases that have emerged since then, like JPMorgan Chase’s settlement with the government this week over the bank’s role in Bernard Madoff’s Ponzi scheme.

Under the deal, JPMorgan Chase, which served as Mr. Madoff’s primary bank for more than two decades, must pay a $1.7 billion penalty, essentially for turning a blind eye to Mr. Madoff’s fraud. It must also take steps to improve its anti-money-laundering controls. And it had to acknowledge, among other facts, that shortly before the fraud was revealed, the bank withdrew nearly $300 million of its money from Madoff-related funds.

By adhering to the settlement terms, the bank will avoid criminal indictment on two felony violations of the Bank Secrecy Act. No individuals were named or charged.

And that is the problem. Until relatively recently, it was rare for corporations to face criminal charges without the simultaneous prosecution of managers or executives. That changed over the past three decades, as prosecutors shifted their focus away from individuals and toward corporations, as if fault resides not in executives, but in corporate culture.

Read the entire article here.

Despite huge losses banks continue subprime mortgage securities fraud

There is an interesting article in today’s New York Times business blog about the reverberation of subprime mortgage securities that are still being peddled by banks and financial institutions. Below is an excerpt of the article, which tracks GSAMP Trust 2007 NC1, a subprime mortgage securities bond that has enriched various Goldman Sachs executives despite the fact that 3/4 of mortgages that bond covers are in default.

A subprime deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.

He is not the only one feeling the pain of a subprime transaction six years on.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.

Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

This is the story of one of those bonds, GSAMP Trust 2007 NC1.

Read the entire story here.

S&P profits get bounce from inflating the ratings of bank investments

Here is an example of why American democracy and, by extension, the economy is irrational in real terms. Banks and financial institutions such as investment ratings agencies like Standard and Poor’s created a climate of perverse economic incentives in which they benefited from engaging in risky market transactions that led to the Great Recession. The numbers discussed in this story about how profitable S&P has become by providing (possibly) inflated ratings for investments that banks have undertaken are proof of two things:

1. We did not learn some important lessons from the Great Recession.

2. If we did learn those lessons, this knowledge has not translated into practice.

Why do we continue to allow banks and financial institutions to engage in such brazenly risky and short-sighted market behavior focused solely on profit maximization? Do we believe this kind of activity leads to innovation, job creation, and that “all boats will lift with the rising of the tide”? Doesn’t the Great Recession falsify this idealization that increased wealth means a better life for everyone?

The last recession was precipitated by the same large actors. Trillions were lost in assets. Millions lost their jobs. Why are we allowing this to happen again? Why do we tolerate a democratic process that permits the privatization of profit and the socialization of risk? Ask these questions, and read more about President Obama’s and Congress’s single biggest failure to address the problem of inequality in this country.—It’s the economy, stupid! We need to change it.

Read the story here.

Justice Department sues S&P over fraud in rating mortgage securities

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.

Justice Department to sue BofA over alleged Countrywide mortgage fraud

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.