AUGUST 8, 2013
THE JUSTICE DEPARTMENT’S “WAR” ON WALL STREET: STILL NO CRIMINAL CHARGES
It took them a while, but the Feds are finally going after some of the country’s biggest banks for alleged wrongdoing during the great housing and credit bubble. In the past few days, the Department of Justice has sued Bank of America for willfully understating the risks attached to hundreds of millions of mortgage-backed securities it sold in 2007, and J. P. Morgan Chase has revealed that two different U.S. attorneys’ offices, one in California and one in Philadelphia, are investigating whether it broke securities laws and duped investors with some of the mortgage deals it put together.
But while the new cases are significant and likely to go on for some time, they don’t answer the question of whether anybody on Wall Street will ever end up in court, or face the possibility of prison time, on criminal charges arising from the mortgage mess. My take: there is no need for anyone on Wall Street to lose much sleep, and that includes Brian Moynihan, the chief executive of Bank of America, and Jamie Dimon, the head of J. P. Morgan. About the worst that is likely to happen is that the two big banks will be forced to pay some hefty fines, which, with both making billions of dollars of profit in the latest quarter, they can easily afford.
For years now, critics have accused the Justice Department of going easy on the bankers, whose actions during the housing and credit bubble helped bring about the U.S.’s deepest recession since the nineteen-thirties. The D.O.J.’s response has always been that it didn’t have enough evidence to prove criminal intent on the part of traders, investment bankers, and senior executives at big Wall Street firms, and that, without such evidence, it would likely lose in court if it went ahead with criminal cases.
Despite a recent change of leadership in the Justice Department’s financial-fraud task force, this still appears to be the agency’s position. The new case against Bank of Americais a civil one, of the sort that usually gets settled without any admission of wrongdoing. And, according to the Times, the criminal investigation of J. P. Morgan, which is centered on alleged wrongdoing by mortgage bankers at Washington Mutual, acquired by J. P. Morgan in 2008, is reportedly in its early stages. It could well end up going nowhere. (The U.S. attorney’s office that is conducting the criminal inquiry is also running a civil investigation that seems to have made more progress.)
The lawsuit against Bank of America accuses the bank of cobbling together into securities home loans that didn’t adhere to the company’s own underwriting standards, failing to do proper due diligence into the quality of these loans, and misleading investors about the risks attached to the financial products that the loans were used to create. In unveiling the suit, Attorney General Eric Holder portrayed it as evidence of the Obama Administration’s determination to crack down on Wall Street. “As this action proves, President Obama’s Financial Fraud Enforcement Task Force will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential-mortgage-backed securities market,” Holder said. “As we proceed with this case, and pursue a range of additional investigations, we will continue to use every tool, resource, and appropriate authority to ensure stability, accountability, and—above all—justice for those who have been victimized.”
Of course, the big banks, and particularly their mortgage divisions, have been under siege for some time. In 2010 and 2011, Goldman Sachs and Citigroup agreed to pay fines and settle mortgage-related cases brought by the Securities and Exchange Commission. Last October, Eric Schneiderman, New York State’s Attorney General, sued J. P. Morgan for the actions of mortgage bankers at Bear Stearns, which Morgan took over in March, 2008. Also last year, the U.S. Attorney for the Southern District of New York sued Bank of America over fraud against Fannie Mae and Freddie Mac carried out by the mortgage giant Countrywide Financial, which Bank of America acquired in 2008.
What is significant about the new Bank of America case is the direct involvement of the Justice Department, and the fact that it involves actions by employees at the bank itself, rather than at Countrywide. The lawsuit arose out of an investigation by an interagency working group set up last year that is dedicated to rooting out wrongdoing in the market for residential-mortgage-backed securities (known as R.M.B.S.), and which, in turn, comes under the ambit of the Financial Fraud Enforcement Task Force, which dates back to 2009. “This is the R.M.B.S. Working Group’s most recent legal enforcement targeting misconduct in the R.M.B.S. market, but it will not be our last,” Associate Attorney General Tony West said in a statement. “Combating financial fraud is a top priority for the Department of Justice. By filing this lawsuit today, we reaffirm an important principle—that everyone must play by the same set of rules, and no institution is too big or too powerful to escape appropriate enforcement.”
That’s all very laudatory, and the members of the working group, which is chaired by officials from the Justice Department and the S.E.C., and by the attorneys general of New York and Colorado, deserve credit for sticking to their task. But what about holding individuals accountable? A “Frontline” documentary earlier this year, called “The Untouchables,” suggested that in some instances lower level prosecutors had favored bringing criminal charges against individual Wall Street bankers, but top officials, led by Lanny Breuer, the head of the Justice Department’s criminal division, ultimately decided that the cases that had been put together weren’t strong enough. “With respect to Wall Street cases, we looked at those as hard as we looked at any others, and when a case could be brought, we did,” Breuer told “Frontline”’s Martin Smith. “But when we cannot prove beyond a reasonable doubt that there was criminal intent, then we have a constitutional duty not to bring those cases.”
Without looking at the evidence, which is, of course, impossible, it’s hard to judge whether Breuer’s decision-making was sound. But it’s surely fair to infer that many current and former Wall Street bankers were sad to see him resign from the Justice Department earlier this year and return to private practice at Covington & Burling. His old job is currently being filled by Mythili Raman, a longtime lawyer at the Department who previously served as Breuer’s chief of staff and No. 2. So far, Raman seems to be sticking with her former boss’s cautious stance. That could still change, of course. But the statute of limitations in criminal cases of securities fraud is only five years, which means it’s already passed in some cases related to mortgage securitizations carried out at the height of the boom.
And that’s another reasons why folks on Wall Street are still sleeping soundly.
Photograph: Frontline
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