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Home Publications Blogs Beat the Press NYT Says Fines Imposed on Banks After the Subprime Perps Left Make Justice Department a Tough Enforcer

NYT Says Fines Imposed on Banks After the Subprime Perps Left Make Justice Department a Tough Enforcer

Tuesday, 05 August 2014 04:35

Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud. It is the sort of thing that you can go to jail for, especially when it is done on a mass scale, as was the case in the financial crisis. Knowingly passing along fraudulent mortgages in mortgage backed securities is also fraud.

No important figure at any major bank was prosecuted for these activities by the Justice Department. As a result, virtually all of them benefited from their actions in the housing bubble years. They were better off as a result of having committed fraud than if they had obeyed the law. Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.

In spite of this reality, in an article on a Justice Department investigation of loan practice in the subprime auto loan market the NYT told readers:

"For the Justice Department, buffeted by criticism for not indicting a Wall Street executive, the mortgage investigations have helped polish the agency’s image as a tough enforcer as they have yielded a string of multibillion dollar penalties."

The article doesn't tell readers in whose mind the Justice Department's image has been polished. The recent settlements against banks can be seen as taking actions against a mob run company after the mob has sold it off, while all the mobsters continue to go free and live off the proceeds of their illegal dealings. That may seem tough to some people, but probably not anyone who has given the issue much attention.


Note: Typo corrected.

Comments (5)Add Comment
One more time ...
written by John Puma, August 05, 2014 5:23
The DoJ extracting a fine in lieu of prosecution, much less, conviction, is merely government collusion in the apparent, underlying crimes.

The only thing that has been polished is the legal turd known as the Justice Dept.

(A typo " ... in whose min(d)e the Justice Department's image ... "
Consumer Beware: Government Attempt to Control Crime Just Creates More Crime
written by Last Mover, August 05, 2014 6:42
Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.

Well yes, but this must be separated from the right wing dogma designed to directly contradict it:

"Economic theory tells us individuals will always succeed in manipulating government controls to benefit themselves, at the expense of those supposedly protected by the controls.

Therefore punishing lenders and servicers for issuing fraudulent mortgages never ends up protecting those who take out the mortgages. It just pushes the fraudsters further underground to continue what they're doing.

This is the typical result of do-gooder liberal regulation. It always backfires to make the problem worse because the bad guys never face the consequence of their actions. Instead they exploit government control itself to make the problem worse.

It's no different than making guns illegal in an area which obviously attracts bad guys with guns to come in and plunder and pillage the place - in this case with fraudulent mortgages."

Give it a rest Dean Baker. Don't encourage more bad guys to pile on with fraudulent mortages just because the first movers got away with it. Crime pays. Get over it.

Just let the free market work it out. There are always good last movers who will stand their ground and crowd out the bad last movers with legitimate mortgages. Over the long run this will create good first movers as well and permanently stamp out the stigma of fraudulent mortgages.

Thank you for your attention to this lame worn out sock puppet message from hit and run first movers who brought America to its economic knees.
written by skeptonomist, August 05, 2014 8:17
A system in which the only deterrent is possible prosecution of extremely powerful financiers is not going to work - it never has. The laws or the financial structure have to shut the door to "passing on mortgages" in this instance, if that was the problem. Mortaging worked just fine in the huge post-WW-II housing boom; the idea that bundling and other innovations are necessary is patent nonsense. Despite Krugman's crowing about the success of Dodd-Frank these things have not been changed, either in mortages or anywhere else (Dodd-Frank didn't provide a practicably means of prosecuting magnates either).
written by urban legend, August 05, 2014 4:26
This was plain old fraud, which has been against the law for, what, a thousand years? If you have a system of laws, you enforce the law, and most of all, even if you pursue only civil remedies, you take away any gains anyone got of violating the law. You don't sit there and analyze whether enforcing the law might have unintended consequences. And if individuals used the corporate structure to translate those gains into less liquid assets so they would be harder to reach, you don't limit your actions to the corporate entity which was, in the absence of its agents and as a legal fiction, incapable of committing the offense.

In 2003 through 2005, a number of state attorney general offices sought concurrence or permission from the Office of the Comptroller of the Currency to sue the national banks doing fraudulent lending practices on an equal footing with local banks. The biggest offenders were the national banks or mortgage originators anyway, but in any case it was hardly optimal to give some banks a pass while others faced liability for doing the same thing.

Normally, states are allowed under the principle of Federal pre-emption to do something more strictly than the Federal Government if it does not compromise the Federal regulatory scheme. The national banks, of course, didn't like the idea of being sued for fraud in different states, and the OCC expressed its apparent sympathy (or capture by) the national banks and construed Federal preeemption law aggressively to prevent actions by the states. So NINJA loans and the like, plus derivative instruments that bundled such loans, continued for several years.

What would have been the effect of headlines in the 2003 - 2005 period saying, "States sue Citi and Chase for fraudulent mortgage lending." Would the real estate bubble have deflated more gradually and spared us the sudden, massive economic decline we saw?

You don't make those decisions not to go after individuals, that is, unless they have the wherewithall to help you retain your office and, after you leave office, help fund and support the organization you expect to create afterwards. Then it is a very rational decision, at least if the good of the country and the rule of law are not your primary concern.
Selling indulgences is equivalent to enforcing laws.
written by Perplexed, August 07, 2014 6:52
"Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud."

While the press and economists worked hard to obfuscate the reality with all kinds of stories about "bubbles" and "newfangled derivatives" the reality is that what went on is nothing more than old fashioned counterfeit fraud. We needed no new laws to prosecute it, only the will to do so. How was it that those who took an oath to enforce the laws now became the ones who's role it was to bend the laws in order to "save the banking system?" Just when were they charged with that role instead of the one they took an oath to perform? Selling avoidance of the real consequences of enforcing the laws is little more than the practice of selling indulgences that was practiced by the Catholic Church prior to the reformation. Just what makes this stuff so hard to recognize? One would think we have never seen it before.

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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.