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Home Publications Blogs Beat the Press Locking Up the Banksters: It's Not Hard

Locking Up the Banksters: It's Not Hard

Sunday, 16 March 2014 16:47

Gretchen Morgenson had a column on a new report from the Inspector General of the Justice Department which found that prosecuting mortgage fraud was a low priority, contrary to claims by the Obama administration. Since there is so much confusion on the topic it is worth repeating again what the Justice Department would have done if law enforcement had been its concern.

It's not a question of simply locking up Jamie Dimon and Lloyd Blankfein and other top bankers, the point would be to build a case from the bottom up. This means going to mortgage agents at Countrywide, Ameriquest, and other major subprime issuers. Investigators would confront them with stacks of improperly documented mortgages and ask them why they put through mortgages with improper or even obviously false documentation.

Folks who took out a mortgage in years prior to bubble know the ordeal involved. You had to bring in your first grade teacher to vouch for your character. Everything had to be properly documented and was closely scrutinized. This was not the procedure that was followed in the bubble years. Justice Department investigators would ask the mortgage agents why they passed through mortgages without proper documentation.

Since this was a widespread practice and not the work of a few rogue agents, presumably office managers told these agents to get mortgages and that proper documentation did not matter. Faced with the risk of jail for committing fraud, it is likely that many agents would be prepared to testify that they were acting on instructions from their branch manager. The investigators would then confront their branch managers with the testimony from their employers and ask them what prompted them to tell employers to ignore standard procedures and pass through improperly documented mortgages. Again, faced the prospect of several years in jail, it is likely that many branch managers would be prepared to testify against their bosses at the corporate headquarters. (The Justice Department has pursued this sort of investigation in going after illegal campaign contributions to Washington Mayor Vincent Gray.)

The same practice would be followed at Goldman Sachs, Morgan Stanley, and the other investment banks that securitized the loans. The folks who were constructing the securities are all smart people who know what a good mortgage looks like. They surely knew that many of the mortgages they were throwing into the pools were not properly documented and almost certainly fraudulent. In these cases the Justice Department investigators would ask the Harvard MBAs whether they are really stupider than rocks.

At least some would admit to not being morons and acknowledge that they knowingly packaged fraudulent mortgages into securities. These bright young ambitious MBAs would then be offered the opportunity to stay out of jail if they told investigators why they thought it was a good idea to package fraudulent mortgages into mortgage backed securities.

Would this process have put Jamie Dimon, Lloyd Blankfein, Robert Rubin and the rest behind bars? Who knows, but we know with certainty that the Justice Department never started on this path so there was no way that the honchos could ever be held accountable for any crimes they did commit. This speaks volumes about the nature of justice in the United States today.

There is one other issue that is worth addressing here. Many commentators have argued that the honchos were foolish, not crooked. They really did believe that the house prices would just keep rising. In this case all the mortgages would end up being good mortgages. (If a bank forecloses on a fraudulent loan where the house has appreciated 20-30 percent, it is not likely to suffer a loss.) 

It is entirely possible that the top people at the banks really did believe that the bubble would keep inflating indefinitely, but it is also irrelevant. (The Enron boys may have believed they really had a good business model. That doesn't change the fact that they broke the law.) The issue at hand is whether they knowingly issued and passed along mortgages that were not documented properly. That is fraud and a criminal act. It doesn't change anything if they were also stupid.

Comments (17)Add Comment
written by Bart, March 16, 2014 6:34

"Look forward, not backward" was among the first of Obama's failures of will.
Great summary of the tides; explaining how, where, and why to start investigating.
written by jaaaaayceeeee, March 16, 2014 7:34

This is a great summary of how things SHOULD work, in a world with oversight, where you don't need to be an astrophysicist to govern.

It's also worth noting that, this time is different. The news media is not compteting to inform people on how we used to handle fraud (S&L's, Enron, etc.) compared to today, and why things are different. Voters should know.
It is impossible to justify the Exe Branch/judicial's failure w/ logic
written by Xelcho, March 16, 2014 7:47
Dean knows perfectly well why the DOJ/SEC or others did not investigate. By now all of us, even the cave dwellers, have seen Lanny Breuer's tripe. They did not investigate because their pay check depended(s) on them not doing it. Sure, it is kind of fun to do a gottcha on the DOJ peons but they can only do what the King's orders declare, so...

The tactics you describe are the most basic of criminal justice work, the strategy though is left unexposed, why?
Inexplicable as to why the Democrats don't use it...
written by Lee A. Arnold, March 16, 2014 8:17
If the Administration had a shred of intellectual integrity, it would combine this with the need for a midterm election boost for Dems across the board, and noisily announce that the country has had enough on the lack of quid pro quo, and is going after the banksters. Make the Repubs DEFEND Wall Street. Most people are still mighty angry about this.
written by LSTB, March 16, 2014 9:06
Anybody know what the statute of limitations for mortgage fraud is?

I'd hate to see these folks get away scot-free.
I'm unsure on this one
written by Dave, March 16, 2014 9:06
I believe the DOJ should have done its job and that the top of the administration told them not to. I also believe this advice came from Geithner. This was absolutely inexcusable.

However, the fact remains that prosecuting this would have been difficult. There are so many levels of plausible denyability between the foot soldiers and the enablers given the structure of this system.

Actually, I'm proven right because they didn't prosecute. It is hard to say what would have happened if Geithner and Obama had been in favor of prosecuting. I don't claim to understand the forces that determine Washington decisions. If Obama just feared market meltdown, I find it to be inexcusable. If there were other fears, we'll probably never know the full extent of them. I hope there was more to it than just a fear of market meltdown, because that could have been fixed and would have resulted in a much more robust US political system.

written by urban legend, March 16, 2014 9:40
What was inexcusable was the conflation by Holder and Breuer (on "60 Minutes" and "Frontline" respectively, as I recall) of the institutions that could be harmed by criminal prosecution (to the subsequent detriment of innocent employees and, arguably, society dependent on these too-big-to-fail institutions), with the officers who encouraged these practices. Prosecution of the officers as individuals more likely would have enhanced trust in the financial sector, not harmed it.
look at the early 2000s....dems were defending fraud, Low-rated comment [Show]
The lack of criminal prosecution = guided by politics and revolving doors
written by John Wright, March 16, 2014 10:30
I suspect the lack of criminal charges, and associated media excuses by the Obama administration is guided by politics and future lucrative job opportunities for Democrats and Republican politicians and staffers.

I'm old enough to remember the Gerald Ford "full, free and absolute" pardon of Nixon and my disgust with Ford.

But the serious people of the time banded together and announced the pardon was a good thing as Nixon had "suffered enough".

The population was not so happy with Ford and he wasn't re-elected.

And the Democrats eventually fell in line, as Ford got a "Profile in Courage" award handed to him by Ted Kennedy from the John F. Kennedy Presidential Library in 2001 for this "courageous" pardon.

Obama avoids any need for pardons with his actions.

One can see evidence of the corrupting influence of the "go for the gold" mentality of Congress as both Democrats and Republicans quietly gutted their April 4, 2012 Stock Act (Congressional Insider trading regulation), on April 15, 2013.

Obama dutifully signed both old and revised bills.


I wanted Obama to be another Roosevelt (either TR or FDR) in taking on the powerful financial and medical interests.

I'm certainly not alone in my disappointment.
low priority
written by andy, March 17, 2014 1:07
prosecuting your major campaign contributors can only be a low priority.
Thomas Ferguson dixit.
written by Kat, March 17, 2014 8:25
Many folks who lied about income, complicit with unscrupulous originators, did fine flipping houses from 1996 to 2006. Who should pay???? Very difficult.

No, it is not difficult. There is absolutely nothing complicated about this story. Nothing. I'll add that even if it were the case that the banks were duped by unscrupulous borrowers(and this is most definitely not the case), they should be out of business for sheer incompetence at the very least. It is their duty to ensure the quality of their loans.
written by Sukh Hayre, March 17, 2014 1:22
The credit/housing bubble/fraud served a purpose:

If allowed housing to be built that otherwise would not have been built, and it was the final benefit that America could squeeze out from the rest of the world before the end of US$ hegemony.

Without the bubble, the people that are now unemployed would have been unemployed 10 years earlier. Those who lost their homes, for the large part never would have owned the home without the bubble.

The bank CEOs did what they did because they were promised ahead of time that they would not serve jail time. And they would get to keep their "earned" income. This was a small price to pay for the huge benefit of getting as many houses built as were built.

Now, much of the wealth created during the bubble will be wiped out, and slowly clawed back from the rich through more progressive tax policies.

Other than those that lose only what the bubble gave them in the first place, the biggest losers will be those that are the most leveraged. The economy will not be worse off. It will appear so, but where the economy is and where we need to get it to are much bigger issues that must be dealt with. The reality is, the economy needs to adjust so that work and income are better shared because we have now passed the era where jobs could be created by just having people and governments go further and further into debt.

People will have to deleverage, and governments will have to spend more to create jobs, and to fund this, wealth will have to be clawed back from the 1%. As much as people may not want to hear it, entitlements will also have to be clawed back (or the cost of healthcare will have to be reduced by half).

The Real Deal
written by DEECEEE, March 17, 2014 5:10
Its is amazing to me that the many players of this game that spanned several years 2003-2008 have been able to keep their mouths shut for as long as they have,but its the big banks that behave as they are Untouchable that has got all the criminals in hot water.No not borrowers and yes there were some that did not play fair but it's those National Associations like Wells Fargo who lost their license to lend in Ca in 2003 because of fraudulent,deceptive and misleading business practices only to come on back that same year as a "National Association under jurisdiction of the fed and continue their criminal ways.Forging,fabricating,faking,and so many other ways to steal homes from people they never lent to,screwing homeowners,investors,and basically anyone who stands in their way.You think that was because their so freakin smart and made those so-called securitized trusts so complicated?All the silly made up names,and dba's, and such?Not a freakin chance.They were all in on the take from Mortgage brokers,Realestate agents,Title companies,Escrow companies,notary public's,on down the chai all backed by local and federal you know who and what unless they are also blind and dumb.Call it what it still is, they are still taking folks homes daily in every state using fabricated documents,forged signatures,creating deeds and notes that they dont have a forging and photoshopping whatever they need under what they like to call "Standard business practices".When are people going to mad enough to stop this fraud?These are all public docs that anyone can dig up.Peace
Wall Street's Used Car Salesman
written by farang, March 18, 2014 6:44
Basically, Chuckie Schumer raised Obama's 2008 war chest by assuring Wall Street that Obama was their boy. That financial regulation was a thing of the past. That crime DOES pay, and only Civil penalties would apply...if that, at @ 2% of the ill-gotten gains.

Basically, America elected a slick delivery Chicago used car salesman. I do not believe he was ever a "constitutional professor", anywhere, ever.

The country's present financial and social conditions reflects those facts.
Oh yeah, the link: Schumer selling Obama to Wall Street
written by farang, March 18, 2014 7:11
I looked at farang's link, not much there
written by John Wright, March 18, 2014 10:04
If Farang's the link to the Daily Caller is a good summary of campaign contributions sufficient to influence Obama's legislative gifts to the financial industry, then I am left with a "why did Obama sell out so cheap?" impression.

After all, these are campaign contributions, not money into Obama's pocket.

Here are some snippets from the link:

"at least 56 individuals have raised at least $8.9 million for his campaign," Massie Ritsch wrote in a Sept. 18, 2008 entry"

"By the end of Barack Obama's 2008 campaign, executives and others connected with Wall Street firms, such as Goldman Sachs, Bank of America, Citigroup, UBS AG, JPMorgan Chase, and Morgan Stanley, poured
nearly $15.8 million into his coffers."

"Goldman Sachs contributed slightly over $1 million
Obama's 2008 presidential campaign, compared with a little over $394,600 to the 2004 Bush campaign. Citigroup gave $736,771 Obama in 2008, compared with $320,820 to Bush in 2004. Executives and others connected with the Swiss bank UBS AG donated $539,424
to Obama's 2008 campaign, compared with $416,950 to Bush in 2004. And JP Morgan Chase gave Obama's campaign $808,799 in 2008, but did not show up among Bush's top donors in 2004, according to the Center for Responsive Politics."

"Wall Street's generosity to Obama didn't end with his 2008 campaign either. Wall Street donors contributed $4.8 million to underwrite Obama's inauguration, according to a Jan. 15, 2009 Reuters report."

"So far Wall Street has raised $7.2 million
in the current electoral cycle for President Obama"

And in contrasting the larger amounts given to Obama vs an earlier Bush election could be explained simply by "why pay for someone (Bush) you already own?".

The total amount of financial industry funds listed for Obama in the article is

$15.8 million
To continue on earlier post
written by John Wright, March 18, 2014 10:17
The sum of all the funds totals about 40 million in an election in which Obama raised $650 million.

This $40 million is a small side show of the extreme institutional problem the USA has with the financial industry with its favorable media propaganda, revolving door jobs for politicians and staffers, Fed TBTF policies and regulatory capture.

$40 million in campaign contributions didn't buy Obama, he was already sold, just like Bush/Romney.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.