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Attorney General Eric Holder's Bank Prosecution Legacy

usatoday.com | October 13, 2014

By Darrell Delamaide

WASHINGTON — Is lying on a mortgage application fraud when lenders aren't interested in the truth?

This may sound like an abstract philosophical question similar to trees falling in the forest with no one around to hear, but it was in fact a novel legal tactic that got four defendants in California acquitted of mortgage fraud.

A jury of their peers bought the defense argument that the real fraud was being perpetrated by executives at the lending institutions.

"In the Sacramento case, the jury essentially found that the truth or falsity of the documentation the borrowers provided was immaterial," the Los Angeles Times reported, "the lenders would have made the loans anyway."

The case turned on the expert testimony of William Black, a law professor and tireless critic of the banks, who told the jury that the lenders involved wanted so-called "liar loans" to acquire mortgages rapidly so they could sell them off at a profit. They specifically instructed loan officers not to verify stated income — an invitation for applicants to inflate the figure.

Black, who is affiliated with the University of Missouri-Kansas City, was involved as a regulator in investigating and prosecuting the widespread fraud and corruption in the savings and loan crisis in the late 1980s.

"The saying in the savings and loan debacle is you never wanted to be the guy that was chasing mice while lions roamed the campsite," Black said on the Bill Moyers show last weekend. "So the mice are these alleged tiny frauds type of thing, where they ignore the lions, who are the CEOs of the banks and such."

The acquittal in the California case in August came just ahead of the announcement last month that Attorney General Eric Holder would step down as soon as a successor can be confirmed.

"He will leave behind a mixed scorecard," Moyers said. "A for civil rights, C for civil liberties and F for failing to prosecute the banking executives who brought about the financial calamity of 2008."

The complete failure of the Justice Department to prosecute a single bank executive while levying billions of dollars of fines with individual banks for fraud and other felonies continues to draw criticism from journalists, legal experts and lawmakers.

Not so coincidentally, a story in the New York Times this week said that the Justice Department, still headed by Holder, may indeed prosecute individual traders in connection with its investigation of fixing the foreign exchange markets.

"The charges will most likely focus on traders and their bosses rather than chief executives," the Times dryly reported, citing anonymous lawyers. "As a result, critics of the Justice Department might view the cases as little more than an exercise in public relations."

Eventual fines and guilty pleas for the banks over currency trading would come on top of billions in fines already levied against many of these same big banks — JPMorgan Chase, Citigroup, Deutsche Bank, Barclays and UBS are named in the latest Times story — for fixing the benchmark LIBOR rate.

These fines — in addition to settlements for fraud in mortgage securities, in illegal foreclosures and robo-signings, bid rigging in municipal bonds and a host of other infractions in recent years — make it hard to see these banks as anything other than rogue institutions who are willing to systematically violate the law.

Somebody is responsible for that.

Black, who likes to point out that regulators in the S&L crisis made many thousands of criminal referrals that resulted in more than a thousand successful prosecutions, makes no secret of his scorn of the current tactics of the regulators and the Justice Department.

"Apparently modern financial regulators are vastly more sophisticated than we were as financial regulators 25 years ago" Black told Moyers. "Because we had never figured out that the key to financial stability was leaving felons in charge of the largest financial institutions in the world."

Black has argued since the onset of the financial crisis in 2009 that prosecution of individuals will not, as former Treasury secretary Timothy Geithner maintained, destabilize the financial system.

The prosecutions in the S&L crisis, he told Moyers, "greatly enhanced financial stability instead of the other way around."

The guilty executives were no longer a danger to the financial system because they had criminal records. This is not the case in the wake of the recent crisis and heightens the risk of a new crisis.

"If you want to create the next crisis and make it vastly worse," Black said, "leave the people in charge who led the frauds in the senior ranks at the banks in charge of those banks. So now they have all the postgraduate education in how to run a fraud. And they learned that there are no consequences other than good consequences."

Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones News Service, Barron's, Institutional Investor and Bloomberg News, among others.

 

Back to October 2014 Archive

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