Joe Nocera returns to the story of Charlie Engle today. Engle is a marathoner who participated in a liar loan during the housing bubble. The IRS – really one vindictive agent of the IRS – tracked him down, searched through his garbage, sent an undercover agent with a wire to get him to admit guilt, and coming up empty on any tax violations, prosecuted him for the liar loans. It turned out that the mortgage broker inflated his income on the loan document after the fact. But Charlie Engle, not the broker, was prosecuted, and sent to jail. He gets out this week, still burdened with a felony record and five years of probation.
Nocera makes a very provocative but accurate point about how the Justice Department has conducted itself during the aftermath of the financial crisis. It’s not just about avoiding any prosecutions for the top Wall Street executives whose fraud led to the crisis; it’s about making up for that through prosecutions of the bit players:
As I would later learn, Charlie Engle was no aberration. The current meme — argued most recently by Charles Ferguson, in his new book “Predator Nation” — is that not a single top executive at any of the firms that nearly brought down the financial system has spent so much as a day in jail. And that is true enough.
But what is also true, and which is every bit as corrosive to our belief in the rule of law, is that the Justice Department has instead taken after the smallest of small fry — and then trumpeted those prosecutions as proof of how tough it is on mortgage fraud. It is a shameful way for the government to act.
There’s no question about this. The FBI pointed out the epidemic of liar loans as far back as 2004. And yet the Charlie Engles of the world are more likely to be held accountable for that than the corporations who created the system, managed it, and fed it through the flow of capital to brokers to increase these kinds of loans, for the purposes of securitization.
Just this week, Abacus Federal Savings Bank, a tiny bank catering to the Chinese community in New York City, was charged with mortgage fraud, with 19 of its former employees put under arrest. The suit charges Abacus with selling loans to Fannie Mae with false information. However, “nearly all of the Abacus loans were still performing,” according to the indictment. This contrasts with the millions of loans that went bad when big banks engaged in the same exact scheme, selling securities based on loans without revealing their underlying status.
Also this week, the SEC admitted that they would rather go after smaller firms for paperwork violations than the JPMorgan Chases or Bank of Americas of the world for the systemic violations of securities laws.
In the last year or so I’ve heard from several attorneys who represent smaller clients who tell me they’re flabbergasted, watching the S.E.C. give the Chases, Goldmans, and Citigroups free ride after free ride while their pockmarked little clients at fledgling public companies get served the whole regulatory meal for minor disclosure violations – even cases that simply involve bad paperwork, where money isn’t even stolen. If you’re a little tech startup and there’s a $100,000 problem in your books, you can expect the full Princess Bride torture machine treatment, with multiple agents assigned to your case, serious criminal penalties, asset seizures, etc.
This serves several purposes. First of all, the subsequent legal wrangling allows the SEC to face far fewer white shoe law firms and big-money legal teams when they focus on the smaller companies. It allows them to elevate their successful prosecution rates. And it gives them the frequent talking points made by their top officials about how they have gone after financial fraud, armed with mounds of statistics. Every time you have an SEC official or any federal regulator in Congress, they boast of these hundreds of prosecutions, without revealing that a substantial number of them concern either penny ante theft or technical paperwork violations. It keeps Congress off their back while protecting the real perpetrators of fraud.
John Delaney of St. Augustine is bewildered, wondering why a mortgage company not his own changed the locks on his home without his knowledge.
John Delaney drove in from Chicago Wednesday night and went to open the door of his second home condo in St. Augustine. The key didn’t work. He got in through the back screen door, which fortunately in this case he had forgotten to lock.
“I discover there is this sticker here saying that the locks were changed at the request of my mortgage company, I couldn’t figure out why, I am current on my mortgage.”
It turns out that Chase had the wrong house. They illegally broke into a home, to which they have no association, and changed the locks. It’s bad enough that this conduct gets used on homeowners in the middle of a foreclosure, as we have seen. But this is simply an illegal break-in. This is only an extreme example of criminal activity on behalf of Wall Street banks. But a tiny firm which entered the wrong digit in the wrong ledger on their books get the brunt of federal regulatory scrutiny. Heck, we’re more likely to see arrests of activists trying to prevent illegal foreclosures than the originators of the illegal foreclosures themselves.
We have to separate this from partisan politics. Mitt Romney will present no better opportunities for homeowners; his top policy advisor made that perfectly clear this week by saying that Romney would not offer targeted relief to underwater borrowers. (Nocera does make the correct point, however, that the Bush Justice Department did successfully prosecute several CEOs after the corporate accounting scandals of the early part of the 2000s, including Jeffrey Skilling and Ken Lay at Enron, Bernie Ebbers at WorldCom and Dennis Kozlowski at Tyco, a record that far outshines the Obama Justice Department.)
The real point here is that we have, or rather are supposed to have, a law enforcement system in this country that makes assessments based not on how to best manage public relations, but on investigating and documenting violations of the law and holding the violators accountable, in equal proportion to the extent of the crimes. That’s what has been lost in our society today, over many years. A young black man in a poor neighborhood smoking a joint has far more to fear from the legal system than a bank executive authorizing the illegal bundling of bad loans into securities without disclosure to investors, or the forgery of foreclosure documents on such loans when they go into foreclosure and get forwarded on to state courts. That power imbalance defines our country and our institutions, in many respects, in the 21st century.