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Home Publications Blogs Beat the Press Prosecuting Wall Street Fraud: Lessons for Joe Nocera

Prosecuting Wall Street Fraud: Lessons for Joe Nocera

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Monday, 28 February 2011 05:00

Joe Nocera used his column this weekend to comment on the fact that none of the Wall Street honchos who got rich pushing bad loans are being prosecuted. Nocera notes that Angelo Mozila, the former CEO of Countrywide, the huge subprime lender, still thinks that he did a great thing by getting moderate income people into homes. He concludes that this would have made it difficult to prosecute Mozila since "delusion is an iron-clad defense."

The issue of Mr. Mozila's beliefs about the good he was doing is beside the point in terms of bringing successful prosecution. The immediate issue is that Countrywide was issuing and selling large numbers of fraudulent mortgages. The fraud in these mortgages involved mortgage agents deliberately putting down false financial information about the borrowers (at their own initiative, not the borrower's) to allow them to qualify for loans for which they would not otherwise be eligible. These loans were then resold in the secondary market. This was a widespread practice at Countrywide and other subprime lenders.

A prosecutor would typically proceed by getting clear documentation about a large number of fraudulent mortgages being issued from a particular office. This would include depositions from the mortgage agents themselves as to whether they knew that they were putting down false information. Presumably some would answer "yes," especially if they were being offered a deal in exchange for cooperating. They would then be questioned as to whether their bosses knew that they were issuing fraudulent mortgages.

With enough low level people saying that issuing fraudulent mortgages was in fact a company policy, the prosecutor would then go after an office manager. The plan would be to threaten several office managers with long prison sentences for fraud, unless they talked about Countrywide's overall policy.

There are two possible stories. One is that the higher-ups somehow did not know what many outside observers knew about their own company (i.e. they were issuing fraudulent mortgages on a large scale) or that Mozila and other top executives were not idiots and in fact knew exactly what was taking place at their company. By threatening those lower down in the corporate hierarchy with long jail sentences, a prosecutor would be more likely to be in a position to put Mr. Mozila behind bars. This would be true whether or not he thought his fraud was ultimately a good thing because it promoted home ownership.

There would be a similar chain in connection with people like Richard Fuld, the CEO of Lehman and other top executives. The point would be to establish that these companies were securitizing fraudulent loans on a large scale. The people putting together the mortgage backed securities were either unbelievably negligent, by not knowing anything about the mortgages they were buying, or criminals who resold mortgages they knew to be fraudulent. Whether they thought this was a good thing is besides the point.

Comments (6)Add Comment
...
written by John Emerson, February 28, 2011 5:30
Prosecution made the academy awards:

http://www.eschatonblog.com/2011/02/morning-thread_28.html
Free Agents are Always Deliberate in Free Markets
written by izzatzo, February 28, 2011 6:06
The fraud in these mortgages involved mortgage agents deliberately putting down false financial information about the borrowers (at their own initiative, not the borrower's) to allow them to qualify for loans that for which they would not otherwise be eligible.


Of course it was deliberate. Any economist knows that in free markets, there is no principle-agent problem since agents always carry out the will of principles in full, especially when it comes to principals borrowed with nothing down.

Only socialists like Baker believe that government oversight is necessary to maintain working principle-agent relations in regard to sufficient information necessary to achieve transparency.

In fact, it was the very attempts by government to achieve this transparency that caused the fraud in the first place, which created incentives for sellers to go underground in a hyper-leveraged shadow banking market for the benefit of buyers.

Stupid liberals.
Transparency causes fraud, izzatzo?
written by Scott Dunn, February 28, 2011 7:00
Izzatzo says,

In fact, it was the very attempts by government to achieve this transparency that caused the fraud in the first place, which created incentives for sellers to go underground in a hyper-leveraged shadow banking market for the benefit of buyers.


Do you have a scientific, empirical study that proves this, Izzatzo? I doubt it. Seems like a logical statement with nothing to back it up. That would be "rhetoric", right?
Difficulty of Prosecution
written by Jeff Z, February 28, 2011 10:13
Maybe Izzatzo's cheek is bulging with a massive tongue.

A bigger issue may be the incompetence of the prosecution. Yves Smith makes this point in a 2/26 post on her blog www.nakedcapitalism.com. Here is the complete link.
http://www.nakedcapitalism.com/2011/02/nyts-joe-nocera-defends-failure-to-bring-wall-street-execs-to-justice.html
There are three main points. One, CEOs and similarly situated executives take all the credit for spectacular performance, and none of the blame for crappy performance or bankruptcy. Two, while it is difficult to prosecute financial fraud, it is certainly not impossible. Regulators have been systematically underfunded and so unable or unwilling to do the jobs they are appointed to do. Why would we accept such crappy performance in other areas of the economy? "We" should not, but some people rig the system to insure that this lack of oversight takes place. Three, while it may be costly, the damage to the wider economy is surely larger. As Both Dean Baker and Yves Smith point out, the idea would be to get the foot soldiers to turn states evidence against the top brass.

The conclusion is inescapable, it seems to me. From the link above, Yves Smith writes "So we are back to the same ugly fact set. The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error. It has embedded and emboldened a deeply corrupt plutocracy"
...
written by Pssst!Look..., February 28, 2011 10:17
Pssst, Scott, izzatzo writes satire.
Maybe they learned a lesson from Bernie?
written by J "Rolin" Stone, February 28, 2011 12:18
There was that one fella, Maddof who recently got a penthouse at a fed correctional dorm. Maybe that will be one lesson the other banking and wall street scum will learn when they purse their collective lips to the next financial bubble they attempt to blow-up...

Don't screw the rich! They do have some judicial influence.

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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.

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