Five years ago at this time, the Financial Crisis Inquiry Commission (FCIC) presented the President and Congress with its final report on what caused the 2008 financial meltdown that devastated our economy and millions of American families. The report concluded that the financial crisis was avoidable and was caused by widespread failures of regulation, reckless risk taking on Wall Street, and a systematic breakdown in ethics and accountability.
The FCIC’s report included evidence of industry wide fraud and corruption in the mortgage markets, from loan origination to Wall Street’s bundling and sale of mortgage securities to investors. One study obtained by the Commission placed the losses resulting from fraud on mortgage loans made between 2005 and 2007 alone at $112 billion. The FCIC referred evidence of potential violations of law to the Department of Justice (DOJ) for further investigation and, if warranted, prosecution.
Five years later, DOJ has yet to hold a single senior Wall Street executive accountable. The unwillingness of DOJ under Attorney General Eric Holder to pursue misconduct by high ranking individuals will stand as a seminal failure of his tenure — undermining efforts to deter future wrongdoing and rightly breeding anger and cynicism about the fairness of our legal system.
The decision to give a pass to the Wall Street executives who drove the pervasively corrupt mortgage machine is particularly disconcerting when considered alongside of DOJ’s vigorous prosecution of more than 2,700 individuals at the local level — mortgage brokers, appraisers, borrowers — who were just small cogs in that machine.
But this need not be DOJ’s legacy when it comes to investigating and prosecuting the wrongdoing that led to financial and economic catastrophe.
Under Attorney General Loretta Lynch, DOJ has signaled a change in direction by adopting new policies that wisely seek accountability for wrongdoing from individuals, not inanimate corporate entities. Many have assumed that these policies came too late to affect illegal behavior committed in the run-up to the financial crisis. In fact, because of the 10-year statute of limitations for financial fraud affecting banks and other types of financial institutions, there is still time to investigate and prosecute crimes committed in 2006 and 2007 — the final period of wild excess before the mortgage market collapsed. But time is quickly running out.
Accordingly, I have sent a letter to Attorney General Lynch urging DOJ to immediately re-open the investigation into individual misconduct related to the packaging and sale of mortgage securities — and do so before the statute of limitations on such misconduct expires. How DOJ proceeds over the next 18 months will speak volumes about its commitment to its new policies and to seeing that justice is served.
DOJ already has in its hands the roadmap to systematic impropriety on Wall Street. In 2010, the FCIC made public documents obtained from Clayton Holdings that clearly show, in black and white and in charts, how Wall Street bankers misled investors around the globe about the mortgage securities they were peddling.
Clayton was hired by more than 20 major financial institutions, including Wall Street giants JP Morgan, Goldman Sachs, Morgan Stanley, and Citigroup, to perform “due diligence” on mortgages loans that those firms were buying, packaging, and selling to investors. Clayton examined a small sample (2 to 3 percent) of those mortgages to determine whether or not they complied with the lender’s stated standards or the standards set by the firms buying the loans.
According to the Clayton “trending reports”, Clayton reviewed over 900,000 mortgages from January 2006 to June 2007 and found that nearly one in three of the loans sampled unequivocally failed to meet the standards, which by 2006 were already abysmally low. Nonetheless, 39% of these failed loans were included in the mortgage pools sold to investors. Despite the high failure rates in the loans sampled, the other 97% of the loans being purchased and then bundled and sold were never reviewed. That fact and the information about the presence of defective loans were never disclosed to investors. Indeed, many prospectuses provided by the banks to investors affirmatively misrepresented the quality of the loans contained in the pools sold to investors. As the FCIC noted five years ago, this conduct raised “the question of whether the disclosures were materially misleading, in violation of the securities laws.”
Citing this evidence, the Federal Housing Finance Agency and DOJ have obtained more than $36 billion in fines from 18 major financial institutions, including banks like JP Morgan and Bank of America.
However, stunningly, not one individual has been indicted or charged civilly for the conduct that resulted in these massive fines. If the banks engaged in such egregious misconduct so as to warrant tens of billions of dollars in fines, then certainly bankers were involved. DOJ must now conduct a thorough inquiry up the chain of command at each of the big banks to determine who specifically was responsible for the conduct that DOJ itself has said “sowed the seeds of the financial meltdown.”
The conduct evidenced in the Clayton “trending reports” of January 2006 to June 2007 is still within the 10-year statute of limitations and still subject to prosecution. If DOJ moves swiftly in accordance with its new policies, the American people could finally get what they deserve — a full, fair and thorough investigation and a last chance for justice.
Phil Angelides, former State Treasurer of California, was Chairman of the Financial Crisis Inquiry Commission, which conducted the nation’s official inquiry into the financial crisis.