Are the Prosecutions Real or Just PR for an Election Year?


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Private Litigants Still Doing the Heavy Lifting that Government Should be Doing


PRESIDENT OBAMA told the nation last week that he was convening a task force to investigate the abusive practices in the mortgage industry that led to our economic woes. Both lending and the practice of bundling loans into securities will come under scrutiny, he said, adding: “This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”

Some greeted this new task force — its unwieldy name is the Residential Mortgage-Backed Securities Working Group — with skepticism. It is an election year, after all, and many might wonder if this is just a public-relations response to the outrage against the institutions and executives that almost wrecked the economy.

If this task force nailed some big names, and soon, it would help to allay deep suspicions that the authorities have given powerful people and institutions a pass during this awful episode.

Such bars typically last five years, but some are permanent. The S.E.C.’s settlement with Angelo Mozilo, 73, former head of Countrywide Financial, barred him from acting as a director or officer of a public company for the rest of his life.

Some cases on the list are still being litigated. Those that have been settled have generated $1.97 billion in penalties, disgorgement and other monetary relief, according to the S.E.C. Harmed investors have received $355 million of that.

Drilling into the details, though, indicates that little of this money was paid by individuals. The payments came from companies, or more precisely, their shareholders.

Talk about making the wrong people pay.

Only one of the cases seems to involve a clawback of executive compensation. It’s the 2009 case against three former top executives of New Century Financial, a quintessential Wild West lender. Together, the three paid $1.5 million when settling charges of making false and misleading statements about the company’s soundness as it imploded.

If this is justice, it’s certainly not rough. Brad Morrice, the company’s former chief executive, returned just $542,000 to regulators; he took home at least $2.9 million in incentive pay in the two years before New Century collapsed.

It seems obvious that until executives are forced to dig deep into their own pockets to pay penalties in these matters, they will be tempted to take as many risks as possible to generate fat paychecks. Then they will move on to the next opportunity.

The S.E.C. is clearly proud of its financial crisis cases. But comparing its tally with the mountainous evidence produced in private lawsuits shows how much more work there is to be done.

Consider the most recent complaint filed by the Assured Guaranty Corporation, an insurer of mortgage securities, against Bear Stearns, the defunct brokerage firm; EMC, Bear’s mortgage origination and servicing unit; and JPMorgan Chase, which bought Bear in March 2008.

Filed in November, the complaint shows what kinds of revealing material can be dug up by determined investigators.

The complaint contends that Bear Stearns knew it was stuffing its mortgage-backed securities with crummy loans. It cites an e-mail written by a former EMC analyst in the unit that dealt with these instruments. “I have been toying with the idea of writing a book about our experiences,” the analyst wrote. “Think of all of the crap that went on and how nobody outside of the company would believe us … the fact that data was constantly changing and we sold loans without the data being correct — wouldn’t investors who bought the MBS’s want to know that?”

Indeed they would.

Discovery in the case also identifies top executives who oversaw the mortgage machine that felled Bear Stearns. Thomas F. Marano, senior managing director and designated principal of the mortgage- and asset-backed securities department, was “well aware of the amount of risk that was being taken on in terms of acquiring assets and … the activities with respect to securitization,” the complaint said, citing a Bear Stearns executive’s deposition.

The complaint also contends that John Mongelluzzo, the Bear Stearns vice president for due diligence, misled investigators for the Financial Crisis Inquiry Commission when he described the extensive vetting the company did when it bundled mortgages.

Mr. Mongelluzzo told the commission that Bear Steams tested “all of the due diligence firms and their contract underwriters, and if they couldn’t pass the underwriting test, they weren’t permitted to work on our transactions,” the complaint said. He also told the investigators that the company “instituted a process where we went out and audited the individual diligence firms to see what their processes were and what they were doing internally as well.”

But in a subsequent deposition, Mr. Mongelluzzo conceded that Bear had not started to test its underwriters until February 2007, well after the mortgage market had begun crumbling, and that it didn’t begin its audit program of due diligence vendors until April 2007.

Mr. Marano is now chairman and chief executive of Residential Capital, the mortgage unit of Ally Financial. Mr. Mongelluzzo is an executive there as well. Both declined to comment.

It is to be expected that investigators for private law firms will turn up loads of ammunition to help them in their court battles. But in the past, law enforcement was similarly aggressive in its own pursuits.

Now, the balance seems to have shifted, with private litigants doing more legal heavy lifting than those who serve the public.

Perhaps the new working group will right this imbalance. But its members don’t have a lot of time, with the election coming. Private litigants have drawn a pretty clear road map for the places that this new group might go. Its leaders should welcome the assistance, given that the clock is ticking.

12 Responses

  1. William Black on the Special Task Force:

  2. Anything less than the naming of a Special Prosecutor taints this Foreclosuregate Special Taskforce from the outset. The President has the power to so name. Why did he choose not to? Thus, the findings of this special investigation, not yet found, are already suspect.

    Are the People to believe that the Investigators all got up one morning and decided to ‘turn-on-a-dime’ to pursue the exact opposite of what they were pursuing the day before? How did they cleanse themselves of the convictions: “immoral, but not illegal,” and ” ___ sides with the banks.”

    One can only ask “Why now?” unless they are asking “Where HAVE they been?”

    There is some more nefarious strategy happening in this turnabout. This is far beyond a mere ‘flip-flop,’ that cutesy, so vogue, expression for double-speak, or talking out of both sides of your mouth at the same time. One thing is certain: this President sincerely wants this ‘page turned’ post haste. He seems now, all too willing to surrender quality of the investigation for haste.

    The value in designating these men (Schneiderman excluded) as Special Investigators provides each with automatic clemency. Were there a Special Prosecutor named- THESE men would be shooting craps (pun intended) with what might be unearthed. (Control Fraud. Kleptocracy.)

    With a Special Prosecutor, the People, who have lost, or are about to lose their homes, would hear each of these men answer the mantra question of preceding-gate(s): WHAT did you know, and WHEN did you know it? (Shades of Daniel Ellsberg, Watergate, Dirty tricks, the missing 18 minutes, the Committee to re-elect the President.)

    But this is not about the People. This is all about clemency for All the President’s Men and re-election in place of impeachment (odd extremes, no?) of this President. Is this the 1st time uncurtailed torment/bullying of the People through government inaction, has been used as a re-election strategy?

    The People’s special investigators stood up, and out, to support them when their government refused to protect their rights. Bold individuals named Smith, Taibbi, Szymoniak, Field, Ratigan, Black, Morgenson, Moore, Levin, Levitin, Kaptur, Cummings, Spitzer…some 1%ers, some 99%ers stood their ground out of commitment that this Nation be preserved, that this Nation HAVE a future.

    Why now, Mr. President? Where HAVE you been?

  3. As far as Obama is concerned, he is campaigning. Campaigning is all he knows how to do. He has appointed the worse administration in history. Who will be on the committee? Same types in his cabinet?

    Eric Holder at Justice: Worked for Covington and Burling that represented MERS. Holder brought all his law firm buddies into DOJ. Holder has been for a year enmeshed in “Fast and Furious” an ATF operation that ended up suppling Mexican drug cartels with AK-47’s. He appears to uninterested in complying with the demands of a congressional investigation.

    I wonder if Goldman Sachs has a derivative contract for betting on the outcome?

  4. Abby in CA — is 100% right.

    Your constitutional rights are being stolen. Get moving.

  5. @Abby in CA

    “Michigan AG asked to not sign onto the DOJ Foreclosure Settlement!!”

    Every AG in America and every county recorder in America should receive a copy of that letter from at that County Register of Deeds. (At least one or two counties in America are awake). My county is asleep at the switch and if you say something like illegal foreclosures they will say (not the top guy but lower down) “that’s a matter of opinion” and that’s in a non judicial county where I don’t there has ever been an “opinion” in favor of homeowners who rarely bring up any title or foreclosure issues.

  6. Michigan AG asked to not sign onto the DOJ Foreclosure Settlement!!
    Breaking News. Read the reasons why folks.

  7. Election Year PR … That could never happen … and raising money for the prosecutors bos would never buy you a pass from prosecution on the paltry theft of $1,200,000,000.00


    According the Barack Obama’s 2012 campaign website, Jon Corzine of Hoboken, New Jersey raised at least $500,000 for the president’s reelection effort. Here’s the listing:

  8. @ Davet, thanks for that. I needed it. Can you comment?



  10. problem reaction solution all coming from the den of vipers………..well that sounds like just us to me………….woops I meant Justice……….it is call the Department of Just Us………….Hagilian dielecti ………….wow while your at at it repeal all of the bogus law and bring bacl Glass Steigal Act…………..and use the liquidation of the bonds of the bankers to reinburse the people who were wronged………….the other myth is that there are homeowners………… have pelged all of your property to the govenment for a future insurance policy call ………Social Security………………under the law of future interests…………….and one need to get back and occupy your estate……………..that is right folks your estate………………….no one else’s…………..nough said

  11. Due diligence?






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