Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Tuesday, December 06, 2011

Why Hasn't the Government Gone After Mortgage Fraud?

One of the most important questions to arise out of Washington over the past three years, and one that Democrats and defenders of the administration often dance around, is why big financial institutions haven’t been punished for their role in the mortgage crisis: for pushing bad loans beforehand and for engaging in shady foreclosure practices afterward. There has not been a single prosecution of a high-ranking executive nor Wall Street firm for playing a part in the meltdown.

Much of the analysis about the administration’s response to the global financial crisis focuses on the Dodd-Frank reforms, but that was a process in which the administration didn’t have total control—the legislation was subject to massive lobbying campaigns and horse-trading between members of Congress.

But the administration could have acted unilaterally to punish the big financial firms who helped create the crisis and push people out of their homes afterwards—and in large part, it hasn’t. We’ve noted before the pressure that the administration is placing on New York Attorney General Eric Schneiderman to join a wide-ranging settlement with major banks over dubious foreclosure practices—one that would ask the banks to pay the meager sum of $20 billion to homeowners and investors, while granting them immunity from further prosecution. (Schneiderman has not yet relented).

On 60 Minutes last night, Steve Kroft had an outstanding two-part piece that questioned why the Department of Justice has not pursued cases against big banks for pushing bad mortgages onto people in the run-up to the crisis, and lying to investors about the strength of those loans.

Lest the Department of Justice claim that it is doing its best and that there isn’t overwhelming proof of wrongdoing—which is actually just what Lanny Breuer, head of the Department’s criminal division, said during the piece last night—Kroft presented some awful damning evidence.

First he spoke with Eileen Foster, a senior executive at Countrywide Financial, the largest mortgage lender in the country. Foster was in charge of monitoring fraud at Countrywide—and found a whole ton of it:

Kroft: How much fraud was there at Countrywide?
Foster: From what I saw, the types of things I saw, it was—it appeared systemic. It, it wasn't just one individual or two or three individuals, it was branches of individuals, it was regions of individuals.
Kroft: What you seem to be saying was it was just a way of doing business?
Foster: Yes.

In 2007, Foster sent a team to the Boston area to search several branch offices of Countrywide's subprime division—the division that lent to borrowers with poor credit. The investigators rummaged through the office's recycling bins and found evidence that Countrywide loan officers were forging and manipulating borrowers' income and asset statements to help them get loans they weren't qualified for and couldn't afford.

Foster: All of the—the recycle bins, whenever we looked through those they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the—you know, the creation thrown—thrown in the recycle bin.
Kroft: And the incentive for the people at Countrywide to do that was what?
Foster: The loan officers received bonuses, commissions. They were compensated regardless of the quality of the loan. There's no incentive for quality. The incentive was to fund the loan. And that's—that's gonna drive that type of behavior.
Kroft: They were committing a crime?
Foster: Yes.

After Foster's investigation, Countrywide closed six of its eight branches in the Boston region and forty-four out of sixty employees were fired or quit.

Kroft: Do you think that this was just the Boston office?
Foster: No. No, I know it wasn't just the Boston office. What was going on in Boston was also going on in Chicago, and Miami, and Detroit, and Las Vegas and, you know—Phoenix and in all of the big markets all over Florida.

As she began to raise flags, Foster says higher-ups began short-circuiting her office to conceal evidence of even more fraud. She was eventually fired after a merger with Bank of America—and after she asked to speak with federal regulators.

But nobody from the federal government ever came to talk to Foster—even though she was the highest executive in charge of monitoring fraud at Countrywide. She never appeared before a grand jury, nor was she even interviewed by federal investigators.

Countrywide CEO Angelo Mozillo later settled a civil suit brought by the Securities in Exchange Commission, in which he agreed never to head a publicly traded company again, and paid a $22 million fine—less than 5 percent of the compensation he received between 2000 and 2008. Shortly thereafter, federal prosecutors dropped a case against Countrywide and Mozillo.

Kroft then told the story of a former Citigroup executive, Richard Bowen. He was a senior vice president and chief underwriter in the consumer lending division of Citigroup. It was his job to make sure the mortgages Citigroup was buying from Countrywide and other firms were sound and, well, not fraudulent. He found that 60 percent of them were—and let everybody know about it.

Kroft: Were you surprised at the 60 percent figure?
Bowen: Yes. I was absolutely blown away. This—this cannot be happening. But it was.
Kroft: And you thought that it was important that the people above you in management knew this?
Bowen: Yes. I did.
Kroft: You told people.
Bowen: I did everything I could, from the way—in the way of e-mail, weekly reports, meetings, presentations, individual conversations, yes.

Bowen became increasingly desperate to alert higher-ups at the bank: Citigroup was exposed to massive losses in the mortgage division, and it was also putting itself in legal jeopardy by not informing investors about the weakness of these mortgage-backed securities. Finally, Bowen sent a strongly worded missive to Robert Rubin, chairman of Citigroup’s executive committee, and then-CEO Charles Prince detailing the problems.

The very next day, Prince signed a Sarbanes Oxley certification that did not acknowledge any problems with the bank’s mortgage finances. And the very same day, Bowen was relieved of many of his day-to-day duties.

This appears to be a clear violation of the Sarbanes-Oxley Act, which requires CEOs and CFOs to be honest with investors and the public about the health of their institutions and the products it sells. A similarly obvious violation occurred at Citigroup three months later, when the office of the comptroller of the currency sent a letter to Citigroup questioning the bank’s mortgage securities valuations and internal controls. Yet eight days later current CEO Vikram Pandit signed a Sarbanes-Oxley letter saying everything at Citigroup was fine.

Kroft pressed Breuer, the Justice official, about why the Department wasn’t interested in talking to Bowen either—despite the face he testified publicly to the Financial Crisis Inquiry Commission about what he knew. Breuer basically dodged the questions:

Lanny Breuer: When you talk about Sarbanes Oxley we have to know that you intended—had the specific intent to make a false statement.
Kroft: They knew there was a problem. Not only had they been told that there was a problem by one of their chief underwriters, that the loans that they were buying were not what they claimed, and that the federal government, that the comptroller of the currency didn't think their internal controls were adequate either.
Breuer: If a company is intentionally misrepresenting on its financial statements what it understands to be the financial condition of its company and makes very real representations that are false, we want to know about it. And we're gonna prosecute it.
Kroft: Do you have cases now that you think that will result in prosecution against major Wall Street banks?
Breuer: We have investigations going on. I won't predict how they're gonna turn out.

If past history is any guide, the investigations will turn out to be largely harmless to big financial institutions. Why?

Origin
Source: the Nation 

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