By William K. Black.
The author of the most brilliantly comedic statement ever written about the crisis is Landon Thomas, Jr. He does not bury the lead. Everything worth reading is in the first sentence, and it should trigger belly laughs nationwide.
“Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.”
“The government,” as a statement of fact so indisputable that it requires neither citation nor reasoning, has been engaged in an “aggressive effort to hold banks accountable for their role in the housing crisis.” Yes, we have not seen such an aggressive effort since Captain Renault told Rick in the movie Casablanca that he was “shocked” to discover that there was gambling going on (just before being handed his gambling “winnings” which were really a bribe).
There are four clues in the sentence I quoted that indicate that the author knows he’s putting us on, but they are subtle. First, the case was a civil case. “The government’s” “aggressive effort to hold banks accountable” has produced – zero convictions of the elite Wall Street officers and banks whose frauds drove the crisis. Thomas, of course, knows this and his use of the word “aggressive” mocks the Department of Justice (DOJ) propaganda. The jurors found that BoA (through its officers) committed an orgy of fraud in order to enrich those officers. That is a criminal act. Prosecutors who are far from “aggressive” prosecute elite frauds criminally because they know it is essential to deter fraud and safeguard our financial system. The DOJ refused to prosecute the frauds led by senior BoA officers. The journalist’s riff is so funny because he portrays DOJ’s refusal to prosecute frauds led by elite BoA officers as “aggressive.” Show the NYT article to friends you have who are Brits and who claim that Americans are incapable of irony. The article’s lead sentence refutes that claim for all time.
The twin loan origination fraud epidemics (liar’s loans and appraisal fraud) and the epidemic of fraudulent sales of the fraudulently originated mortgages to the secondary market would each – separately – constitute the most destructive frauds in history. These three epidemics of accounting control fraud by loan originators hyper-inflated the real estate bubble and drove our financial crisis and the Great Recession. By way of contrast, the S&L debacle was less than 1/70 the magnitude of fraud and losses than the current crisis, yet we obtained over 1,000 felony convictions in cases DOJ designated as “major.” If DOJ is “aggressive” in this crisis what word would be necessary to describe our approach?
Second, notice that only one of Bank of America’s (BoA) former officers, Rebecca Mairone, is being held “accountable” for the frauds they committed that made them wealthy. DOJ gives the word “aggressive” new meaning! To add to the humor, JPMorgan has hired Mairone despite her disastrous leadership at Countrywide.
Third, for what exactly was DOJ “aggressively” holding BoA “accountable?” BoA “sold defective mortgages.” That phrase is one part euphemism and one part bizarrely incomplete. BoA first originated fraudulent mortgages and then sold fraudulent mortgages through fraudulent “reps and warranties” to the secondary market. It is passing strange that the lead sentence of an article that is archly portrayed as a triumphal report on “aggressive” “accountability” cannot bring itself to use the “f” word. But the incomplete nature of the sentence and the government’s “aggressive” non-prosecution of the elite banks and bank officers that led the frauds is revealed as soon as one asks why BoA and its officers were committing tens of thousands of frauds by making false reps and warranties about the loans they were selling to the secondary market.
The answer, of course, is that BoA had fraudulent originated tens of thousands of loans. Because there is no “fraud exorcist,” a fraudulent loan remains a fraudulent loan and infects every step in mortgage chain: loan origination, the sale to the secondary market, and the creation of mortgage products (MBS and CDOs). Any competent investigation therefore would look at the process on an integrated basis. The DOJ, however, has no task force, and no lawsuits or prosecutions, against the twin loan origination fraud epidemics. The task force DOJ created looks only at fraudulent sales of the fraudulently originated mortgages – and ignores the origination fraud. Because “only” about 85% of the fraudulently originated loans were sold through fraudulent reps and warranties to the secondary market, the twin loan origination fraud epidemics represent the most destructive frauds in world history. (One does not have to make fraudulent reps and warranties about loans that were not fraudulently originated.)
I’m not sure whether the DOJ consciously deciding not to investigate, bring civil suits, or prosecute the most destructive frauds in history represents “aggressive” or “accountable” to the DOJ. We do know, however, the fantasy that caused DOJ to give these control frauds a free pass.
Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.
“They” refers to the CEO. “Themselves” refers to the bank. “They” are not “defrauding themselves.” The lender’s CEO makes far more money, and obtains what George Akerlof and Paul Romer aptly termed a “sure thing” in their famous 1993 article – “Looting: The Economic Underworld of Bankruptcy for Profit.” By deliberately making enormous numbers of bad loans at a premium yield the bank’s CEO created three “sure things.” The bank was guaranteed to report record income in the near term, the senior officers were guaranteed to be made promptly wealthy by modern executive compensation, and the bank would eventually suffer severe losses. It is not simply Nobel Laureate economists like Akerlof who figured this out, published the results, and prosecuted the elite S&L frauds. Criminologists, S&L regulators, FBI agents, and prosecutors all understood the fraud “recipe” for a lender.
While DOJ and the FBI have forgotten the recipe, bankers have not. As Jamie Dimon explained in his March 30, 2012 letter to JPMorgan’s shareholders: “Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.”
More precisely, “poorly underwritten loans” represent fraudulently reported “income” (and resultant massive bonuses to the officers) “today” and losses whose “losses” are, fraudulently, not recognized for accounting purposes until “tomorrow.” No honest mortgage lender would extort appraisers to inflate appraisals or make endemically fraudulent liar’s loans. By 2006, over two million fraudulent liar’s loans were made annually – and DOJ is giving the officers who grew wealthy through fraudulent originating those loans a pass. Remember, it was the fraudulent origination of the loans that hyper-inflated the real estate bubble, drove the financial crisis, and caused the Great Recession. The fraudulent sale of the fraudulently originated mortgages primarily redistributed the losses. It is a dangerous mistake to assume that the secondary market is essential to create an accounting control fraud epidemic. Secondary market sales were not critical to the epidemic of fraud that drove the S&L debacle, the Enron-era frauds, or the frauds in Iceland and Ireland.
Fourth, notice the return to euphemism, incompleteness, and ambiguity in the final clause of the lead sentence: “the government” is “aggressively” holding the “banks” (not their senior officers who directed the frauds and were made wealthy by the frauds) “accountable” for what exactly? The NYT reporter, tongue firmly in his cheek, tells us that DOJ is holding the banks accountable for “their role in the housing crisis.” And what “role” might that be? And why is it a “role” “in” the crisis as if they were some minor actor with a walk-on role in the three most destructive epidemics of elite fraud in history? How about their role in “causing” the crisis?
Please ask yourself, and then if you have time research the question, why haven’t Attorney General Holder and Presidents Bush and Obama ever told us what the banks, and more importantly their controlling officers, caused the crisis, that they (the officers) did so to enrich themselves at the expense of the shareholders, the borrowers, and the Nation, and that their actions were fraudulent. Whenever Holder and Obama talk about the role of the banks (they ignore the role of the controlling officers) “in the crisis” they minimize any criminality. They can barely bring themselves to use the “f” word even as a possibility.
Lest you think that they are only making the weakest (it’s harder to be weaker than zero) prosecutorial response to the fraud epidemics and are being tough on the civil side recall that only a handful of elite bankers who led the frauds that drove the crisis have been sued by DOJ. None of them have had their bonuses “clawed back.” None of them, even in the handful of cases settled with elite defendants like Countrywide’s former CEO, has left the elite bankers who caused the crisis non-wealthy. We can hope that Mairone will be the first exception to this rule. In every one of the handful of civil or administrative cases brought by DOJ, the banking regulators, and the SEC against the elite “Wall Street” officers who grew wealthy by directing the frauds that caused the crisis that has been settled the results are clear – control fraud is a “sure thing” that makes the controlling officers wealthy even in the rare cases that the government brings a civil or administrative action. The game being played out in all the corporate settlements, like the JPMorgan deal, is that the controlling officers, even when they grew wealthy by looting the shareholders, use corporate funds to cut deals that protect them from being prosecuted or having to return their fraudulent proceeds. We all know who pays for this – the shareholders. Only a comic genius would have the mastery of irony necessary to call the ability of elite bankers to become wealthy through fraud with immunity “accountability.”
No one should believe that bringing successful civil or criminal actions against BoA or senior officers is easy. The AUSAs who won the case deserve our heartfelt congratulations.
The DOJ’s non-response to the fraud epidemics that caused the financial crisis, however, is scandalous. The secondary market for nonprime loans collapsed in mid-2007 – over six years ago. The bulk of the mortgage origination frauds and fraudulent secondary market sales occurred at least eight years ago. DOJ has allowed the normal statute of limitations to expire without prosecuting a single elite Wall Street officer who led the frauds that caused the crisis. It can only bring fraud cases now involving FDIC-insured institutions pursuant to the FIRREA provisions for longer statute of limitations we obtained from Congress in 1989. The BoA case involves loans made and sold after the collapse of the secondary market for nonprime loans. Even with the longer 10 year statute of limitations provided by FIRREA it becomes harder to prosecute older cases because witnesses die, memories fade, and documents disappear. I hope that DOJ will have some tactical successes, but it is has waited far too long and ensured that our criminal justice response to the frauds that drove the crisis will be such a humiliating strategic defeat that it will encourage future control fraud epidemics. The self-congratulations that DOJ press flacks regularly issue to attempt to con journalists and the public into believing that DOJ is aggressively holding elite bankers accountable for their frauds make “Baghdad Bob” seem credible by comparison.