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Why is Preet Bharara, the 'scourge of Wall Street', taking a friendly tone towards mortgage bankers?

ocregister.com | October 13, 2014

By David Dayen

Here’s something you don’t expect to hear from a man who made his reputation by jailing bankers and becoming the “scourge of Wall Street”: ask him if fraud existed during the mortgage crisis and his answer is “the evidence is not there.”

The words come from Preet Bharara, the US attorney for the southern district of New York, who prosecuted more Wall Streeters for insider trading than anyone who came before him. Worth magazine this week named Bharara at the top of its “100 Most Powerful People in Finance”. Bharara seems to like his high profile, and appears to be gunning for an even bigger one: he suggested that the new US attorney general of the United States should share all of the priorities of Bharara’s own office.

In boasting about his record of putting white-collar criminals in jail, Bharara repeated a common – but outdated – Obama Administration line, that the mortgage crisis was not fuelled by fraud.

“This is by reputation and track record the most aggressive office in white-collar crime in the country ever,” Bharara modestly told Worth, “and if we’re not bringing a certain kind of case, it’s because the evidence is not there. Pure and simple”.

He added that critics pointing out his selective Wall Street targets merely “want to behead the heads of all these financial institutions”, without understanding how cases against them would not stand up in court.

This statement is, to say the least, a stretch.

For Bharara’s goals, however, it make sense. If he wants to start building a case that he should be attorney general in this administration, there’s no better way than to advertise himself as someone who doesn’t have too much prosecutorial ambition. This is an administration that, with Eric Holder at the helm of the Justice Department, hasn’t prosecuted these crimes in the last six years. Bharara would benefit from the idea that he would not rock the boat too greatly. It certainly would soothe some of the decision-makers in the White House, and their deep-pocketed friends on Wall Street.

Bharara’s reputation, incidentally, is unearned. He’s successfully prosecuted a lot of cases against big hedge fund managers and investors over insider trading, racking up 87 out of 88 wins. However, you can make the argument that insider trading shouldn’t be criminalized at all, and at any rate, it played no role in the crisis that wrecked the economy.

Bharara even admits the marginal nature of these cases in the Worth interview, asserting, “The Wall Street stuff is important, but nobody ever died in an insider trading case.”

But Bharara, who learned self-aggrandizement at the feet of the master, Chuck Schumer, knows well that putting rich Wall Street types in jail in the age of Occupy would garner flattering attention.

Unfortunately, the harsh effects of the mortgage crisis are not as arguable as insider trading. The incidents of Wall Street fraud around mortgage securities and foreclosures caused massive suffering and pain, and have even been linked to a spike in suicide rates. But Bharara’s record on financial crisis-related abuses mirrors current attorney general Eric Holder’s sorry effort, as do his arguments that industry behavior, while possibly unethical, would be impossible to prosecute.

Almost all the mortgage-backed securities created during the housing bubble, for example, are governed by New York State trust law. That’s Bharara’s legal jurisdiction, and he should have done something about it.

Millions of fabricated, forged and backdated mortgage documents, many still coming in, have been submitted to offices and state courts, by financial companies who failed to properly establish ownership over mortgage loans and could not prove standing to foreclose.

An aggressive prosecutor could have found a lot to work with. Submitting those dubious documents could be a violation of law, with physical evidence – and with that in hand, it should not have been hard for law enforcement to go to the signers of the documents, and work their way up the chain of command to whoever authorized and directed the conduct. Hint: they work on Wall Street.

The government understands law enforcement 101: just as in organized crime, prosecutors try to flip white collar crime’s lower-level grunts to try to get to the bosses above. They’ve belatedly started to do it with traders in the foreign exchange market-rigging scandal. But they never tried with the core mortgage frauds that drove the crisis; officials swiftly moved past investigations and right into settlement negotiations.

Then there are more creative options. The Sarbanes-Oxley law, put in place after the Enron/WorldCom/Tyco accounting scandals of 2001-02 – for which many executives went to jail, by the way – included a requirement for CEO certifications.

Every financial statement a corporation files with the Securities and Exchange Commission must come with a signed statement from the CEO, attesting that he or she has maintained and tested controls to ensure the company hasn’t taken large risks without disclosing them to investors.

These certifications get made annually, and knowing or wilful falsehoods on them can carry prison terms of up to 20 years. You could describe the entire financial crisis by saying that big banks took large risks without disclosing them to investors. Those multibillion-dollar write-downs didn’t come out of nowhere. Every bank CEO could therefore be legally responsible for failing to disclose improper risk management and a lack of control at their companies. Financial writer Yves Smith has explained this in detail before.

Instead, Bharara makes excuses.

Bharara justifies the inability to prosecute these cases because the CEO may have done “a really good job of getting a law firm to give them a legal opinion that blesses [their actions]”.

What about if the lawyers are wrong? I was unaware that lawyers had complete immunity for aiding and abetting financial crimes. Bharara essentially acknowledges the pervasiveness of the fraud by commenting on how routinely banks try to game their legal exposure. Indeed, avoiding the wrath of the lawyers is how you rise to the top of the industry.

Prosecutors keep saying bank executives were “stupid and greedy and negligent”, but not guilty of crimes, to excuse themselves for their conduct. In reality, the prosecutors lent their ears to banks and failed to advocate for the public.

Bharara knows that an aggressive prosecutor willing to root out fraud would have enormous power to create real accountability and a deterrent for the future.

Indeed, in discussing insider trading, Bharara acknowledges to Worth that his actions have made investors think twice about swapping non-public information. “We heard speculation that it may not be worth it to be separated from your family for periods of years,” he said. Precisely.

It’s particularly amusing for Bharara, who in a speech last year spoke of a “culture of corruption” on Wall Street, tell Worth about some financial institutions “where every week you’re arresting someone”, a few paragraphs after making excuses for why nobody was arrested. Like his counterparts in law enforcement, Bharara wants the public to remain ignorant of the truth, so he can keep his moniker as the sheriff of Wall Street. Bharara really lets his slip show when talking about his personal finances.

After angrily denouncing charges that law enforcement officials beg off cases against bank executives “because that would hurt their career prospects”, Bharara is asked about his own $140,000 a year salary, and whether he would like to earn more.

“I’m OK for now,” Bharara says. “But eventually, I have a family and I want to make sure I provide very well for them.”

That’s a striking statement. We should view this as Bharara’s signal of future employment availability to any high-paying sector – particularly one that can spot a team player.

 

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