THEY WONT GET AWAY WITH IT, WILL THEY? 1st Quarter 2010

There has been a lot of chatter about accountability in the wake of the financial crisis. President Obama signed the Fraud Enforcement and Recovery Act in May of 2009, which created the Financial Crisis Inquiry Commission to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Not to be confused with the SIGTAP, which we reported on in the last issue, this ten member bi-partisan Commission was appointed by Congress on July 15, 2009. The Chair, Phil Angelides, and Vice Chair, Bill Thomas, were selected jointly by the House and Senate Majority and Minority Leadership.

The FCIC is charged with conducting a comprehensive examination of 22 specific areas of inquiry related to the financial crisis. Included, were fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector and accounting practices, including, mark-to- market and fair value rules, and treatment of off-balance sheet vehicles. What the commission will find in these two areas alone should be enough to cause dramatic financial reform. This however remains to be seen. One of the ways in which the truth will remain obfuscated is in the fine details of the commissions’ area of jurisdiction. It has been called upon to examine the causes of major financial institutions which failed, or were likely to have failed, had they not received exceptional government assistance. Hence the argument by Goldman Sachs and others that they did not NEED a bailout and as such are not subject to this examination. The popular wisdom is that the inquiry will focus on failed firms. Hence, Bear Stearns and Lehman Brothers will bear the brunt of the criticism. I believe a full understanding of this crisis will be incomplete without a look at the other institutions. The Commission is authorized to hold hearings, issue subpoenas and refer to the Justice department, l any person who may have violated U.S. law during the financial crisis. The Commission will issue a complete report to the American people by December 15, 2010.

Lawyers have not waited for the commission to do its work. Private investors have already filed 392 class-action lawsuits seeking damages of $1.4 trillion. Failed and currently operating financial companies have been the defendants in over half of these cases. The Justice Department has brought 500 mortgage fraud related charges and has 2700 investigations pending. The Securities Enforcement Commission has brought 664 enforcement actions and ordered banks to disgorge more $2 billion in ill gotten gains. The list of offenders reads like the tombstone of the bank bailout plan: Citigroup, Bank of America, JPMorgan Chase, Countrywide, Merrill Lynch, Union Bank of Switzerland. The SEC has already announced sweetheart settlements with six large broker-dealer firms for allegedly misrepresenting to their customers the risks associated with auction rate securities. As fast as the Federal agencies settle outstanding charges, the States have also gotten into the game. The Colorado Attorney General obtained criminal convictions against the ringleader of a multimillion dollar mortgage fraud operation involving nearly three-dozen real estate transactions. The ringleader and others fraudulently obtained $10.9 million in mortgages to buy 34 properties in Denver and surrounding counties. The Iowa Attorney General took the lead in a global settlement with Countrywide on behalf of 400,000 borrowers.
Since its creation in September 2007, Miami-Dade County Mayor Alvarez’s Mortgage Fraud Task Force has made more than 150 arrests. The task force is made up of local, state and federal law enforcement officials. The Massachusetts Attorney General and Goldman Sachs reached settlement regarding actions taken by Goldman in the sub prime lending market Goldman agreed to provide approximately $50 million in relief to homeowners and pay an additional $10 million to the state.

The California Attorney General announced a landmark $1.4 billion settlement with three Wells Fargo affiliates to pay back investors, charities and small businesses that purchased auction-rate securities based on misleading advice. The New Jersey Attorney General announced that they obtained $148 million in recoveries and judgments on behalf of the state in 2009 through debt recovery, consumer fraud, environmental and other litigation. 

The Pennsylvania Attorney General announced the filing of a consumer protection lawsuit against nine individuals who allegedly were involved in a wide-reaching mortgage and investment “Ponzi” scheme that collapsed in the fall of 2007, resulting in nearly $40 million in losses for more than 700 consumers throughout central and eastern Pennsylvania. The Ohio Attorney General sued national rating agencies for false and misleading ratings. The lawsuit against Standard & Poor’s, Moody’s and Fitch, three national agencies responsible for providing accurate credit ratings of investments, charged the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage- backed securities in exchange for lucrative fees from securities issuers.  The Missouri Attorney General went after mortgage fraud targeting those facing foreclosure or other financial woes. Operation Stealing litigation. Home targets individuals and businesses that defrauded consumers through refinancing, advance fee and foreclosure consulting scams. The North Carolina Attorney General stopped a foreclosure rescue operation from collecting any money from consumers for foreclosure assistance or loan modifications.

Scammers would entice struggling homeowners with false promises of lower mortgage payments and then do little or nothing to help them. The Alabama Attorney General recently ann ounced $4.9 million in refunds to 8,907 Alabama consumers from Ameriquest Mortgage Company and its related companies. This payment was part of a $325 million national settlement of a predatory lending lawsuit against the company. All of this information is from the preliminary reports of the FCIC. However, early in April the committee will begin taking testimony from prominent players in the field. Regardless of these actions, which in my view are mere attempts to settle these charges before the full weight of their actions are revealed, there will be no lasting effects as a result of these investigations. Fines will be paid, scapegoats will be flogged, but nothing meaningful will change.