Congratulations are in order to the Federal Housing Finance Agency, which has managed to bring a case to trial against Nomura Holdings and the Royal Bank of Scotland, two foreign banks with little U.S. reputational risk. This relatively obscure agency oversees Fannie Mae and Freddie Mac. Considering they have nowhere near the power of our federal regulators and prosecutors at our esteemed Department of Justice and the Securities and Exchange Commission, the victory is a strong step in the right direction.
A New York Times editorial (May 15, 2015) congratulated the government for its “big victory” against the two banks which had been deceiving investors about the mortgage securities they had been “peddling.” In no uncertain terms, a federal judge ruled that the “two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained “numerous errors and misrepresentation.”
“The magnitude of falsity, conservatively measured, is enormous,” Judge Denise L. Cote of Federal District Court in Manhattan wrote in a scathing 361-page decision. “The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she wrote, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”
The Wall Street Banks were involved in the same behavior as the two banks in question, yet were not prosecuted by the DOJ and the SEC. How did this relatively obscure agency prevail when the SEC and DOJ sit on their hands regarding the Wall Street banks’ same “magnitude of falsity?”
The DOJ and SEC are under obligation to enforce the law and punish and deter wrong doers. Their enforcement powers are immense. Yet they did not fulfill their legal function. Instead, they extracted fines, got settlements and slapped wrists holding no one really accountable. To date, the Wall Street banks have, by and large, not admitted any wrong doing and have argued they did not break the law when they packaged shoddy mortgages and sold them to investors in the lead up to the financial crash of 2008.
[tweetthis twitter_handles=”@RichardMBowen”]The DOJ and SEC are under obligation to enforce the law and punish and deter wrong doers.[/tweetthis]
Judge Cote is not the first to condemn the falsity of the whole mortgage bubble, but the decision may open the door to further and tougher actions which are long overdue. Two years ago, Federal Judge Jed Rakoff ripped the DOJ apart because of their failure to prosecute anyone. Rakoff stated that “it is only prosecutions that will act as a deterrent to future wrong doing.” He noted that during the last financial crisis, over 800 bankers went to jail, but no one of consequence has been prosecuted this round.
To date, there has been lots of finger pointing, and excuses. Was it negligence, imprudent, but innocent, failure to maintain adequate reserves for a rainy day? Or was it basically the result of fraudulent practices, of dubious mortgages portrayed as sound risks and repackaged into financial instruments, with fundamental weaknesses which were intentionally obscured?
This court decision opens the issue as to why the Department of Justice has not pursued charges against the big banks when overwhelming evidence of fraud for the same actions has been found against these two banks. It certainly has not been for lack of evidence. In fact there has been deliberate hiding of evidence.
Not a penny of most of the settlements has been paid to the investors who lost the money. The facts around each bank settlement were written such that they misled the public into believing they were admissions of guilt by the banks in question. They were not. The banks have yet to admit or deny guilt. Sadly because there are settlements, all evidence is now under seal and we cannot see how pervasive the fraud actually is.
In my opinion, the large bank settlements were merely extortion payments to the DOJ so evidence could be locked up to hide the egregious fraud committed on the American public. I’ve asked for a Congressional investigation into this and other coverups by the Financial Crisis Inquiry Commission.
I applaud this court decision. It may well change the dynamics of how this evolving story plays out.
[tweetthis twitter_handles=”@RichardMBowen”]Were large bank settlements merely extortion payments to the #DOJ? #fraud[/tweetthis]
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
