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The Great Mortgage Debacle: No Actual Persons Involved?

Written by on Tuesday, 14 January 2014 9:55 am

It has almost become a routine announcement: some large financial institution has reached yet another settlement with a government agency prosecuting a case involving mortgage and securities fraud. Such settlements commonly involve multiple millions of dollars - very little of which can be expected to wind up in the hands of consumers who suffered real losses. Not only do the victims get little in the way of restitution, but also it is distressingly common that the actual perpetrators suffer no ill consequences as a result of their wrong-doing.

This issue is the topic of a much-discussed essay by a federal judge that appeared in a recent edition of the New York Review of Books. Jed Rakoff, a former federal prosecutor and now a federal judge in the Southern District of New York, has commented on what he sees as a distressing fact - that not a single high-level executive has been prosecuted in connection with the mortgage and mortgage-backed securities meltdown that brought about the late Great Recession.

Rakoff notes that previous recent financial crises have included the prosecution of individuals as well as companies and institutions. The names Michael Milken, Charles Keating, Jeffrey Skilling and Bernie Ebbers come to mind. But, with the possible exception of Anthony Mozilo's (Countrywide) settlement, what individuals have been called to account in connection with the activities that have led to settlements with Bank of America, Wells Fargo, JP Morgan Chase, Lehman Brothers, etc.?

Of course it is possible that no fraud is believed to have been committed, but that is certainly implausible. Rakoff writes, "I have seen nothing to indicate [Department of Justice] disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities."

Judge Rakoff is unimpressed with excuses that it could be very difficult to prove fraud in these cases. Moreover, he is particularly dismissive of one excuse for not prosecuting. The reason, "... the department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy.[my emphasis] Thus, Attorney General Eric Holder himself told Congress:

"It does become difficult for us to prosecute them when we are hit with indications that if you do prosecute - if you do bring criminal charges - it will have a negative impact on the national economy, perhaps even the world economy."

To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse - sometimes labeled the 'too big to jail' excuse - is disturbing, frankly, in what it says about the department's apparent disregard for equality under the law.

Rakoff, himself, speculates as to three reasons that there have not been such prosecutions.

Simply other priorities. He points out that, before 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after Sept. 11 many of those agents were shifted to other duties. By 2007, "... there were only 120 agents reviewing the more than 50,000 reports of mortgage fraud filed by the banks." Of course, as he points out, there are still SEC and Department of Justice agents who are assigned to this sort of work.

A "second, and less salutary, reason for not bringing such cases is the government's own involvement in the underlying circumstances that led to the financial crisis... It was the government, pretty much across the board, that acquiesced in the ever-greater tendency not to require meaningful documentation [for mortgages]... this would give a prosecutor pause in deciding whether to indict a CEO who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do."

The third factor is "both the most subtle and the most systemic of the three… It is the shift that has occurred... from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions." "[It] is part of an attempt to transform 'corporate cultures', so as to prevent future such crimes; and as a result, government policy has taken the form of 'deferred prosecution agreements'..." Under these agreements, the company agrees to "take prophylactic measures to prevent future wrongdoing."

Judge Rakoff is not impressed by this shift. "I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measure that are often little more than window-dressing."

He writes:

"Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility."

The judge has a point.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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1 comment

  • Comment Link Norm Werner Wednesday, 15 January 2014 11:00 am posted by Norm Werner

    There is a recurring cartoon theme in the Family Circus comic strip that gives ghostly body to the entity Nobody, who apparently does most of the mischievous things that occur around the house. "Nobody did it" is a common answer when the children are questions about how something got broke. Perhaps it is the mysterious Nobody running around in these companies who perpetrated the fraud. Certain, Nobody gets the blame.

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