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By William K. Black
Three Bloomberg reporters have done the Nation a service by ferreting out a scandal of moderate magnitude but emblematic importance. Dakin Campbell, Jody Shenn and Phil Mattingly broke the story on August 14, 2013 that Adam Glassner, recently described, but not named, in the Department of Justice’s (DOJ) fraud suit against Bank of America (B of A), and named as a defendant by Fannie Mae’s in its fraud suit against B of A and several officers, was hired by two companies (Ally and Fannie) bailed out by Treasury.
Here is DOJ’s key allegation about Glassner.
“23. The “BOA-Securities Managing Director” was a Managing Director at BOASecurities and a Senior Vice President of BOA-Bank who, at all times relevant to the allegations of this Complaint, was in charge of the Mortgage Finance Group at BOA-Securities – the group that had responsibility for underwriting the BOAMS 2008-A securitization – and the Investor Relations Group at BOA-Bank – the group that had responsibility for selecting the mortgages to be securitized and determining the price at which BOA-Bank would sell those mortgages. The BOA-Securities Managing Director ultimately had responsibility for structuring the BOAMS 2008-A securitization and preparing the Offering Documents. At all times relevant to the allegations in this Complaint, the BOA-Securities Managing Director also served as President and Chief Executive Officer of BOA-Mortgage. The BOA-Securities Managing Director’s annual bonus was largely dependent on Defendants continuing to profitably securitize mortgages originated by BOA-Bank. Thus, he had a strong financial motive to withhold negative information concerning the value of the Certificates from investors.”
Fannie Mae was the second of these corporate bailout recipients, purportedly run by the government, to hire Glassner. Fannie hired Glassner after it sued him. The suit was nominally brought by the Federal Housing Finance Administration (FHFA), the federal agency acting as conservator for Fannie, but Fannie is the real party in interest in the lawsuit.
This is significantly crazy on multiple levels. It is insane that DOJ has once again refused to prosecute elite bank officials it claims engaged intentionally in fraud in order to become wealthy (and did so). It is insane that DOJ refuses to even bring civil suits against such elite officials when DOJ believes that it establish the facts I have just laid out. We see the consequences of DOJ’s dereliction of duty. In addition to destroying the rule of law, DOJ fails to identify and hold accountable the elites it knew caused the fraud and became (and remain) wealthy through those frauds. This destroys general and specific deterrence, creates reverse role models that demonstrate to their peers that fraud pays (and it pays huge), and allows the banksters to stay in senior positions in the industry where they can cause further damage through frauds that make them even wealthier. In addition to the obvious reasons why it is insane for Fannie to hire an officer who Fannie alleges defrauded it, let me don my litigator hat and note that the defense attorneys would obviously argue to the judge that Fannie’s claims against Glassner cannot be supported by the facts or Fannie would have never have hired him.
The other obvious point is that, under neoclassical economic theory, no financial institution should be hiring Glassner. “Reputation” (as Greenspan claimed repeatedly in his stump speeches as Fed Chair) is supposed to destroy Glassner’s career if there is even the suspicion of misconduct well short of fraud. Reputation was Greenspan’s “Ace in the Hole” that trumped every problem (such as conflicts of interest). Greenspan assumed that CEOs’ financial interest in maintaining an unblemished reputation would invariably override any perverse incentives produced by modern executive compensation and the immense political power of the CEOs of the systemically dangerous institutions (SDIs). He claimed that free markets produce a “competition in reputation.”
The ongoing crisis has trashed scores of neoclassical nostrums. The Bloomberg reporters have provided a classic example of why the neoclassical claims about reputation are mythical. The Glassner saga, standing alone, shows that a banker’s horrific reputation can be a highly sought character flaw by other disgraced financial institutions. But the Bloomberg reporters did the Nation a second great service by providing the defenders of Glassner the chance to state the reasons that a reputation for avarice, alleged fraud, and failure made Glassner such a hot commodity that three major financial firms were eager to hire him – even one (Fannie) that was accusing him of defrauding the firm. The defense begins with the claim that almost everybody with mortgage “expertise” is “tainted.” “‘There aren’t that many people out there with expertise that don’t have a potentially tainted background,’ said Isaac Gradman….”
If that claim is true it should terrify the Nation. But Gradman is only getting started:
“It isn’t feasible to banish everyone with a link to 2008’s turmoil, Gradman said.
‘Considering that pretty much everyone that was involved in the mortgage business was wrapped up in the crisis in one way or another, it would be tough to blacklist them all and still have the personnel you need to run a successful business,’ he said.”
Note that Greenspan’s cheerful faith in a “competition in reputation” in which no one would hire a banker with less than a spotless reputation has morphed into a brutal act of McCarthyism that would “banish” and “blacklist” officers. Gradman tells us that Greenspan got it all wrong – hiring people that engaged in practices that DOJ and Fannie/FHFA allege were frauds causing hundreds of billions of dollars of losses is essential “to run a successful business” because so many of the officers involved in housing finance engaged in the same practices that DOJ, Fannie, and the FHFA believe are fraudulent. Basing decisions on reputation still makes sense to Gradman, but the relevant aspect of an officer’s reputation is neither integrity nor competence – it is “expertise” in making investments and sales in a pervasively fraudulent “markets” to originate, sell, and package mortgages and related derivatives. Anyone who suggests that it is insane for Fannie to hire a senior executive that it suing for leading a massive fraud against Fannie is simply naïve about modern finance practices. Fraud is the key skill.
It is worth noting that there was a real blacklist – by fraudulent lenders of honest appraisers.
“From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers…it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011: 18).
The appraisers lost income and sometimes their jobs because the fraudulent lenders blacklisted honest appraisers. The senior officers who controlled the fraudulent lenders grew wealthy through leading the twin mortgage fraud epidemics (appraisal fraud and “liar’s” loans) and through the fraudulent sale of those mortgages to entities like Fannie. The senior officers continue to be able to get employed in leadership roles even after they are identified by federal agencies as the leaders of massive frauds. We know where we can find over 11,000 honest leaders with expertise in residential housing and finance – the appraisers who signed the petition.
Gradman, having “defended” the hiring of Glassner based on the endemic levels fraud among financial firms in the origination and sale of mortgages, ends with an attack on the ethics of the government lawyers who sued Glassner and the DOJ lawyers who described Glassner as a leader in B of A’s frauds.
“The FHFA listed Glassner among four people who signed an amended document used to sell a 2006 mortgage bond.
‘Usually as a plaintiff you want to cast as wide a net as possible,’ Gradman said. ‘Naming individuals is a good way to keep pressure on the opposition.’”
Of course, the government attorneys have a “good faith” ethical obligation only to sue where their factual investigation establishes a legitimate basis for their allegations of wrongdoing, but Glassner implies that no litigator is likely to take that ethical obligation seriously. Under neoclassical economic theory reputation and “free markets” can only succeed if reputation is a fierce, relentless, ever vigilant, and prompt raptor that sweeps finance executives with even modest integrity flaws out of markets and leaves their bleached bones behind as a warning to any banker tempted to transgress the highest ethical standards. Reputation should not require lawsuits under neoclassical theory. The markets should have put what Gradman describes as an endemically unethical series of endeavors out of business before they ever became material.
Greenspan’s vision of reputation and his claim that his vision represented the historical reality of banking were fantasies, but at least his vision had aspects of logical coherence and valued integrity. The Bloomberg reporters have offered a wondrous example (Glassner) of how fanciful Greenspan’s vision of an industry of bankers whose integrity was kept spotless by the rigors of the “competition in reputation” was. But it is Gradman’s claim that so many bankers’ have a bad reputation because they displayed integrity failures akin to Glassner’s alleged failures that we must keep the officers with bad reputations in charge of our banks in order “to run a successful business” that deals the most telling blow to Greenspan’s fantasies. Gradman also offers the latest proof of our family rule that it is impossible to compete with unintentional self-parody.