Bill Black on Financial Fraud Investigations
Theresa Riley of BillMoyers.com checked in with banking fraud expert Bill Black for his take on the ongoing investigation into the U.S. financial crisis. February 6 was the deadline for the multistate foreclosure settlement between state attorneys general and the major banks. If the purported $25 billion deal goes through, it will provide some relief to those who have experienced foreclosure (or are in danger of it) and require banks to overhaul their foreclosure practices.
Theresa Riley: Last week there were many rumors about the types of fraud that will be covered in the multistate foreclosure settlement. Initially there were reports that it would be limited to robo-signing abuses — and then there were reports to the contrary. What is expected to be included in the settlement?
William Black: The newest (pro-release) rumors are that the current draft of the settlement includes some releases for mortgage origination fraud and secondary market fraud, but that those releases are limited. We are not told how limited.
Riley: If the deal goes through as reported, what could this mean for future criminal investigations and reforms?
Black: The leaks about the proposed deal occurred in conjunction with President Obama’s State of the Union Address and a series of press releases and conferences by Attorney General Holder about a newly created “working group.” That working group is intended to investigate secondary market fraud. There is no comprehensive investigation of the over $1 trillion in mortgage origination fraud. There are no prosecutions of any of the elite bank officers who led, and became wealthy from, the epidemic of mortgage origination fraud. The State AGs do not have the resources to investigate even two of the largest fraudulent lenders.
The major development this past week is that New York Attorney General Schneiderman filed suit, alleging that the Mortgage Electronic Registration System (MERS) is aiding foreclosure fraud and ruining America’s public recordation system for real estate, which conservative economists praised as one of the key reasons America became so prosperous. MERS is enormous and it is fundamentally flawed and dangerous, so this could be a tremendously useful action.
Riley: Speaking of Schneiderman, what’s your view of President Obama’s SOTU announcement of a new Financial Crimes Unit (the Residential Mortgage-Backed Securities (RMBS) Working Group) co-chaired by him?
Black: If Schneiderman had been named Attorney General of the United States, we would know that the administration really intended to hold accountable the frauds that drove the crisis. Instead, the top two Justice Department officials that are supposed to be prosecuting the elite frauds have consistently failed to even investigate the frauds, have denied the existence of material fraud, and came from the same law firm that represented many of the big, fraudulent banks and was critical to the creation of the notorious Mortgage Electronic Registration System (MERS) that contributed to the foreclosure fraud.
AG Schneiderman was appointed to the working group because he has broad credibility as a real prosecutor. His refusal to support the earlier drafts of the robo-signing deal (which was so bad that I described it as the formal surrender of the U.S. to crony capitalism) led the State AGs to kick him out of the settlement discussions.
Schneiderman is only one of the co-chairs of the new working group. The others are federal prosecutors or officials who were the strongest proponents of the cynical deal that would have de facto immunized the elite criminals from civil and even criminal sanctions. The working group is set up so that Schneiderman can give the group credibility while being marginalized. He can be outvoted in any matter in which he proposes vigorous prosecutions.
Riley: It sounds like you don’t think this new working group is going to get the job done. Last week, Schneiderman said that he thinks he has the resources (particularly the IRS and the Consumer Protection Unit) and the political will to pursue the investigation in a meaningful way. Why do you disagree?
Black: First, the “investigation” will not investigate what was by far the largest and most destructive fraud — control frauds — the origination of millions of fraudulent loans. Second, the working group’s resources to investigate secondary market fraud are ludicrously inadequate.
Let me provide specifics on scale.
The total staffing of the working group (once completed in several months) is 55. At peak, there were roughly 1000 investigators (and hundreds of prosecutors) assigned to the S&L prosecutions 20 years ago. The current crisis caused losses far exceeding the S&L debacle and involves frauds that are massively greater than the frauds that drove the S&L debacle.
But the issue of resources is not where the discussion needs to begin. The keys are information, expertise, understanding of control fraud, and prioritization of investigations and prosecutions. Absent criminal referrals from the financial regulators and whistleblowers, absent dozens of banking regulators being “detailed” to serve with the FBI as their internal experts, absent training of the investigators and prosecutors on how to detect and prosecute control frauds (the Justice Department uses the mortgage lending industry’s “definition” of mortgage fraud — and, surprise, it defines the lenders and their CEOs who made millions of fraudulent liar’s loans as the good guys/victims of mortgage fraud rather than the perpetrators), and absent the immediate reversal of the current system of making smaller mortgage frauds our top criminal justice priority — absent all of these things there can be episodic prosecutorial successes, but continued systemic failure is certain.
We will know that there is a real commitment to prosecuting the elite frauds when the Justice Department takes these essential, foundational steps — and the Department quadruples the number of FBI agents assigned to investigate mortgage fraud.
Riley: What would you like to see happen?
Black: We have descended too fully into the cesspool of crony capitalism when our most elite banks can commit what SEC investigations find to be fraud and still claim in filings to the SEC that they have “a strong record of compliance with securities laws” — and the SEC buys such a preposterous claim hook, line, sinker, rod, reel, and the canoe they paddled into the swamp.
Where are the “soft on crime” conservatives when you need them? This is the perfect story for Republicans to use in attacking President Obama’s policies. Why are they so silent?
I want the elite criminals who ran the control frauds to be prosecuted and imprisoned if found guilty. Under President Bush, the Justice Department’s prosecution of financial frauds was pathetic. Even though financial fraud reached unprecedented levels, the Bush administration prosecuted fewer than one-half as many financial frauds as during the S&L debacle. The bad news is that the Obama administration has proven even more disgraceful failures in holding elite criminals accountable than did the Bush administration. The Obama administration has convicted a few bankers from non-elite banks and it may eventually convict a token elite banker, but it will continue to fail systemically to hold elite bankers accountable for their frauds.