A bizarre meme seems to have popped up recently regarding prosecuting banks for fraud and other crimes. What makes it weird is that its not exclusively coming from the usual collection of asshats and idealogues. Very little that tumbles out of the piehole of Megan McArdle suprises me — her record precedes her. But a few others have surprisingly been picking up on this theme. Even Roger Lowenstein had a Bloomberg column with the unfortunate headline No Jail for Economic Crisis May Mean No Crime. [Update: Original BW title was Wall Street: Not Guilty]
By that logic, O.J. didn’t kill Nicole Simpson and Ronald Goldman.
Thus, we are forced to interrupt our usual cheery blather for a little schooling about what the rule of law is, why it needs to be protected.
Let’s start by noting that there is a major conflict between Treasury/Justice Department and the banks, all of whom received major bailout dollars. You tend not to want to prosecute companies you just showered with 100s of billions in cash and now own a substantial stake in. This is yet another reason why Uncle Sam should not be in the bailout business: It prevents the DOJ from doing its job.
Next, lets note the difference between a high profile CEO perp walk and busting a minor bank criminal. While lots of people are calling for Angelo Mozilo’s head, I believe the more productive path to law enforcement is starting with the known law breakers and proceeding from there.
This is not a glamorous approach to law enforcement, It is a slow laborious grind. As I presented to the National Association of Attorneys General, there are 10 major areas of bank and mortgage fraud:
2. Mortgage Pools (Warranties & Reps)
3. Bad Securitization (Quality)
4. “Misplaced” Mortgage Notes
5. Force-Placed Insurance
6. Illegal “Pyramid” Servicing Fees
7. Document Fraud for Sale
8. False Affidavits, Perjury (Robo-Signing)
9. Foreclosure Mills, Process servers exacerbate problem
10. Active Servicemen losing homes while on tour of duty
Of this list, five issues are prosecution-ready, where individual states have jurisdiction. These include: 1) Force-Placed Insurance; 2) Illegal “Pyramid” Servicing Fees; 3) Fraud Documents for Sale; 4) False Affidavits, Perjury (Robo-Signing) and 5) Foreclosure Mills, Process servers.
There is an immense paper trial for the first two. The issue of Force-Placed Insurance represents such an egregious, embarrassing conflict of interest, that its hard to imagine any publicly traded bank is going to want to defend that in open court. Bring a few actions against the majors,get an agreement to permanently stop the practice, and a big fat fine, then move on to the next item on the list. Do the same for the illegal “Pyramid” Servicing Fees wrongfully charged by a few loan servicers.
As an aside, Lender Processing Services (LPS) is a monopoly, handling — or should I say mishandling? — more than 50% of all mortgages for the major banks. The Justice department should be doing an Anti-Trust prosecution, perhaps forcing a break up. Maybe some competition in this space will yield some competence as well.
Back to the our list: Fraud Documents for Sale and the Foreclosure Mills / illegal process servers can be pursued on a case by case basis. work with the foreclosure defense bar to track down many examples of egregious criminality here.
In my opinion, the area that is most ripe for criminal prosecution are the False Affidavits/Perjury aka Robo-Signing. Treat this more like a drug kingpin than a bank fraud crime. Bust the low level eejits who did this, granting immunity for cooperation. Find who ordered them to perform the fraud, and then their boss and so on. Somewhere in between the $8 per hour, former burger-flippers hired as robo-signers and the CEO is a mid-level bank executive who decided to systemically break the law. This is the person who turned what used to be a simple process of filing legal paperwork into a criminal enterprise. THAT motherfucker needs to go to jail.
Just because Angelo Mozilo is not in jail does not mean no crime was committed. Prosecutors need to focus on the low-level criminality within banks, and work their way up.
Do that, and we restore confidence in nor only our financial institutions, but our society and constitutional principles as well. Fail at that and Japan’s decade long recession looks more and more like our future.
Foreclosure Fraud Reveals Structural & Legal Crisis (October 5th, 2010)
Why Foreclosure Fraud Is So Dangerous to Property Rights (October 12th, 2010)
Time for Criminal Charges To Be Filed . . . (October 14th, 2010)
Why Is Due Process a Big Problem for Banks? (October 23rd, 2010)
Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis (NAAG presentation, April 2011)
Dodo Bird Bankers (May 9th, 2011)
No Jail for Economic Crisis May Mean No Crime
Bloomberg, May 12, 2011
Is Another Major Mortgage Investigation Really Necessary?
Forbes, May. 17 2011
Video: Taibbi vs. McArdle on Goldman
Rolling Stone, May 16, 2011