I want to turn back to Phil Angelides’ op-ed in the New York Times this morning, because in addition to making the case for bank accountability as a deterrent to future crimes, he says that the relevant authorities have had smoking gun evidence in their hands for two years.
Meager resources have been applied to investigate the financial assault on our country, which wiped away trillions of dollars in household wealth and has resulted in 24 million people jobless or underemployed. The Financial Crisis Inquiry Commission, which Congress created to examine the full scope of the crisis, was given a budget of $9.8 million — roughly one-seventh of the budget of Oliver Stone’s “Wall Street: Money Never Sleeps.” The Senate Permanent Subcommittee on Investigations did its work on the financial crisis with only a dozen or so Congressional staff members.
Despite their limited budgets, both inquiries turned over rocks and exposed disturbing financial practices, and both entities referred potential violations of law to the Justice Department. The final reports from the two investigations were completed last year, but the resources that were needed to dig deep beneath those rocks — or the rocks turned over by private litigants or other investigatory efforts — weren’t mobilized. One example: The Financial Crisis Inquiry Commission’s report contains evidence about Clayton Holdings, a company hired by more than 20 major financial institutions to perform “due diligence” on mortgage loans those companies were buying, bundling and selling. Clayton sampled 2 to 3 percent of those mortgages and found a significant number of defective loans. Yet the other 97 percent were not sampled, and that fact and the information about loan defects were never disclosed to investors — “raising the question,” the report noted, “of whether the disclosures were materially misleading, in violation of securities laws.”
In numerous court cases, plaintiffs, including the Federal Housing Finance Agency, have cited this evidence to support their claims of fraud and misrepresentation. But, inexplicably, there is no indication that the Justice Department promptly convened a high-level investigation to thoroughly examine who knew what when at these banks. In contrast, after the savings-and-loan debacle of the late 1980s, more than 1,000 bank and thrift executives were convicted of felonies. But today the rate of federal prosecutions for financial fraud is less than half of what it was then.
And I would add that this financial crisis is several orders of magnitude larger than the S&L scandal.
Angelides is right on. The Clayton Holdings evidence cannot be spun away. They found major defects in the underwriting of mortgages inside MBS deals. The banks did not disclose these defects to their investors, and in fact used the defects to secure discounts on loan pools from originators. In other words, the banks had a financial incentive to obtain crappy loans from the originators with shoddy underwriting. That’s precisely what would make them more money on the deal. This set off the chain reaction that led to worse and worse loans and a larger and larger bubble (after all, you can really goose demand if you don’t care who gets the loans and everyone can suddenly qualify as a homeowner). The whole of the crisis can be seen with the Clayton Holdings data, and it happens to tell a story about massive and systematic securities fraud.
Yet the SEC is only now getting around to using such data to prosecute, right as the statute of limitations has almost run out.
Angelides adds some advice for the RMBS working group, the task force investigating some of these crimes. He says it needs far more resources than the 55 investigators Eric Holder has so far provided. He says that the scope needs to be broader and the cases focused on the greatest harm to borrowers (DoJ claims the scope is sufficiently broad). And he says that the working group “needs to be free from political meddling,” though he inexplicably says that could come from House Republicans, who have no formal role connected to the panel. This represents Angelides running partisan interference, as in the very next paragraph he criticizes the federal regulators for not referring any criminal activities to law enforcement (House Republicans don’t run the Federal Reserve or the Office of the Comptroller of the Currency). Angelides is right that the statute of limitations on some of these crimes should be extended by an act of Congress, though good luck getting that done this year.
The contrasts between this op-ed and Tim Geithner’s couldn’t be more acute. Geithner’s playing a partisan game about Dodd-Frank, a mere shadow play with little connection to the actual policy on the financial industry. Angelides is talking about what has happened, and what needs to happen.