Is America trying?

Editors of Bloomberg have written a clearly worded editorial on the so-called heavy fines being imposed on the Bank of America. It is worth reading in full. Hence, reproduced below. Source link.

Bank of America’s Penalty Misses the Point

30 AUG 6, 2014 5:57 PM EDT

By The Editors

The U.S. Justice Department just got Bank of America Corp. to pay about $16 billion to settle charges of selling defective mortgages to investors.

The size of the penalty is impressive, and it comes on top of Justice’s other recent big-bank fines, including JPMorgan Chase & Co.’s $13 billion and Citigroup Inc.’s $7 billion. All told, Bank of America will have forfeited about $70 billlion to end legal actions over mortgage lending, much of it stemming from its 2008 purchase of Countrywide Financial Corp.

In one way, Wall Street has paid dearly for the misdeeds that led the global economy to crash in 2008. But has the cause of justice been well served? That’s debatable.

None of the settlements holds individuals to account. Shareholders and insurers are covering the bills — and the penalties include mortgage buybacks, refinancings and the like that may never reach actual victims. The banks haven’t been made to plead guilty to crimes. Because the settlements were worked out in secret with no judicial oversight, the lessons for future bankers are murky, making the deterrent effect doubtful. Such settlements also hold little legal sway over other judges.

Did it have to be this way? Consider a less-noticed civil-fraud case that just concluded.

In October, a jury found Countrywide and a senior mortgage banker, Rebecca Mairone, liable for fraud for having sold thousands of bad loans to Fannie Mae and Freddie Mac. Last week, U.S. District Judge Jed Rakoff ordered Bank of America to pay $1.3 billion in that matter. The sum was relatively modest; more striking was the judge’s commentary. Rakoff said the Countrywide loan-approval program was “the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

This case is the only one in which a large bank has had to defend its conduct in the housing boom, and it challenges the idea that bringing fraud prosecutions in this area is a hopeless endeavor. Apparently juries can cope with financial complexity after all. An assistant U.S. attorney explained what went on at Countrywide without needing to dwell on the arcana of collateralized mortgage obligations.

Testimony revealed, for example, that as the housing boom was ebbing, Countrywide substituted software for human judgment to process mortgage applications on a fast track. Loans were approved in as little as 10 days, versus the normal 60, in a program called “high-speed swim lane.” The bankers abbreviated that to HSSL — and pronounced it “hustle.” The program lasted only nine months yet managed to write almost 30,000 subprime mortgages, which Fannie Mae and Freddie Mac bought for about $5 billion. Defect rates on stated-income loans (in which the borrower’s income isn’t verified) reached 70 percent.

Other reasons, aside from complexity, have been advanced to justify the lack of prosecutions. One is that the U.S. government was itself involved because of its housing policies. The trial showed it was Countrywide, not a U.S. official, who told loan officers not to screen out risky borrowers and to fill their quota of applications before going home at night. It was Countrywide that rewarded bankers with the speediest approval rates, no matter how poorly underwritten their loans.

The idea that well-shielded executives can’t be implicated also got debunked. Testimony emerged that Mairone silenced and penalized bankers who complained about the quality of hustle loans. Rakoff is requiring Mairone to personally pay her $1 million penalty. Perhaps most important, the case suggests that midlevel employees could have been persuaded to give evidence against their seniors, enabling prosecutors to move up the chain.

Countrywide bankers complained bitterly to Mairone in March 2008 when Chief Executive Officer Angelo Mozilo testified to Congress that the bank was carefully screening all its applicants to minimize defaults. Mozilo never faced trial. A criminal investigation was quietly dropped in 2011, and he avoided a civil trial when he agreed to pay $67.5 million, only a third of which came out of his own pocket, in settlement.

The jurors in last year’s trial sent out a note during deliberations asking why more senior Countrywide executives weren’t being sued with Mairone. Many American taxpayers, homeowners and investors cannot be blamed for wondering the same thing.

It is worth watching the questioning of the Fed Chairperson Ms. Janet Yellen by Ms. Elizabeth Warren on the ‘living will’ of US banks (ht: Zerohedge and Naked Capitalism)

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7 thoughts on “Is America trying?

  1. I like John Kay and Haldane and have followed them for years now. Dr Reddy – I have read bits and pieces and like his approach. I have not read Posner at all.

    Admati makes some sensible points. But I don’t agree with much of what she writes at least all that I have read about in the FT. She comes across a bit too bitter and speaks about things like compliance of which I am sure she has little experience. I would think that we are much better off sticking to institutions like the BIS for reform in banking for now.

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  2. Well it is all fine to find people liable and hold them to whatever standards they have to be held. In fact if they have committed crimes, they must be in jail.

    But as someone who does buy / approve secondary loans and bonds for a living inside a financial institution, I don’t understand how Fannie and Freddie can buy these with due diligence! And retail loans are so much easier.

    I really don’t understand what people keep arguing and writing about on GFC. It is such a vast disjointed canvas. I also don’t understand fines and penalties and would want things to go to trial. My guess is that regulators are coercing institutions to do what they want and not go to court. And me thinks many of these “crimes” won’t stack up.

    I don’t have a hard copy due to space issues, but a frequent dipping into of Kindleberger’s book on my kindle keeps me grounded.

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    1. The point really is about financialisation which is evident in many dimensions. Both cognitive and regulatory capture are part of financialisation. It is not just us, bloggers, who are bleating about it. People in the know – Andrew Haldane, John Kay, Anat Admati, Dr. Reddy, Eric Posner (Univ. of Chicago!), Eugene Fama have written at several points in time in the last five years about various aspects of financialisation including the socialisation of losses and privatisation of gains. From the point of social and economic stability, financialisation has to reverse. It shows no signs of happening, if the leaked (Wikileaks) document on TISA (‘Trade in Services Agreement’ draft) is any indication. Indeed, it is still seeking to entrench itself. That is not good news for the economy and for the world. It is self-evident. Regulators are as guilty of letting ‘financialisation’ of the American economy (by design) and of the global economy (by extension) continue as the Regulated are.

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  3. I am actually amazed that Bloomberg wrote such an oped, and they are absolutely right. Surely, if the government’s hand are tied, then the blame must lie in the fact that the previous rescue was not just botched (no rescue is perfect) but that not one banker went to prison. Are we to believe there was not one evidence of criminal wrongdoing? Utter disregard for any sense of fairness or justice is bound to erode faith in the system and make the general populace resistant to future unconditional bailout.

    At the very least there should have been a high profile commission, such as the Pecora Commission of 1933, with public hearing and naming and shaming. Instead, we had a concerted movement to to “honor” AIG bonuses as contract sanctity even as rescinding guaranteed pensions to auto workers, discredit “deadbeat borrowers,” supposed government role in pushing shaky mortgages, etc.

    The worm is turning at last if even the Bloomberg can pen such an oped. It is amazing that it took so long.

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  4. Now the US Govt and its mis-guided administration have set the tone. Next time a big bank careens over, God forbid, they will stand on the pulpit and admonish the “fraudsters” while the rest of the banks and counter-parties scurry away from the stricken large bank and lead to exactly the same situation that happened post-Lehman.

    But now, the Govt.’s hands are tied 🙂 and there will be law suits preventing any rescue and the blow out will happen.

    Just you wait!

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    1. If that is the way the end-game is going to happen, then we cannot stop it. The end-game can come in many ways. You sketched out one possibility here.

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