Congressman Brad Miller will not become the staff director of the celebrated working group investigating securities fraud by the big banks, according to a source close to the process. Miller was on progressives’ wish list to run the RMBS working group, which is co-chaired by Eric Schneiderman as well as members of the Department of Justice, a US Attorney’s Office and the SEC. The source said that the working group preferred an “experienced prosecutor” rather than a lawmaker for the position.

The leadership of the working group is central, not only in symbolic terms, but in practical ones. A leader will have to navigate the tricky politics around the issues in order to put forward a credible investigation into banks’ securitization practices in the mortgage market. They will need a working knowledge of the different avenues available to them in litigation, with all the relevant statutes. They will need creativity, and most of all, the will to succeed in protecting those who have been defrauded rather than protecting the banks.

Miller set up well for this task. In addition to being on the front lines of the mortgage mess in Congress, and aware of the political players involved, Miller had the legal chops. He graduated from Columbia Law and worked on civil litigation for 20 years. Miller also has sustained credibility in progressive circles due to his work in the House Financial Services Committee. He isn’t running for re-election because of the redistricting plan in North Carolina, and he would have had the ability to devote himself to holding the banks accountable, a long-professed wish. In a recent letter to Eric Holder, Miller said, referring to the need for prosecutions of violations of the Servicemembers Civil Relief Act, “The continued failure to pursue criminal charges in the face of flagrant violations of the criminal law is destroying Americans’ faith in their government and democracy.”

But that will continue unabated, as Miller has been passed over for this crucial role. The credibility of the RMBS working group is at stake. As I wrote when it was announced, anyone reasonably looking at this collection of investigators would have cause to question the seriousness of the investigation:

You have Lanny Breuer, last seen telling 60 Minutes every excuse in the book to justify the lack of prosecutions out of the Justice Department. He’s the co-chair of the panel who will “get tough” on the banks. Breuer was also a partner at the white shoe law firm Covington & Burling, which actually provided the legal underpinning to create MERS. Reuters was out just last week questioning whether Breuer should recuse himself from all financial fraud-related investigations; now he’s co-chairing one of the major ones!

You have Robert Khuzami, who has turned enforcement into such a pathetic joke at the SEC that a judge stopped the no-fault settlements they were throwing at the banks left and right. Khuzami was also a former general counsel at Deutsche Bank, one of the leading trustees in securitization, precisely the area where this investigation would be aimed. John Walsh is unfamiliar to me (though he comes with decent credentials), and I know two things about Tony West: his previous experience has little to do with financial fraud, and he’s the brother-in-law of California AG Kamala Harris [...]

Indeed, since the working group was announced a month ago, a few subpoenas have been filed and no staff announcements made. Ryan Grim and Loren Berlin described a filtering process being done now, “to figure out what we have in the various areas, what are the various statutes of limitations, what are potential obstacles and upsides and downsides of pursuing a particular avenue.” The working group appears to be relying on the states to initiate investigative areas of inquiry, and then provide resources, rather than the other way around. Schneiderman’s office did not return a response on a query as to when the working group would find a staff director.

The SEC, prodded by the outcry for bank accountability, has finally begun to warn the banks that they face potential litigation for the illegal origination and packaging of mortgage-backed securities, but bringing these cases in 2012 means that the 5-year statute of limitations has run out for all but the very last MBS deals. About the only thing federal regulators seem interested in prosecuting are insider trading cases.

There are other possibilities out there, like a criminologist like Bill Black or an investigator like the former Inspector General for TARP, Neil Barofsky. But while things can obviously change, there is little reason to believe right now that this working group will be materially different than the other toothless financial fraud investigations at the federal level over the past three years.