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Cheat Sheet on Bank Investigations and the Probes That Have Petered Out

As we and many others have noted, no top banking executives have been successfully prosecuted in connection with the financial crisis: not for making the bad loans that fed the mortgage machine, not for lying about the quality of the mortgages, and not for foreclosing improperly when homeowners struggled to make loan payments.

But there have been many investigations. Some are still pending, others seem to have fallen by the wayside. Here’s our overview of what the banks have been accused of doing at each stage of the mortgage machine.

Let us know in the comments section if we’ve left off any significant investigations that have died quiet deaths or are still ongoing.

The First Step in the Machine: Risky Lending and Underwriting

Regulatory action against the major lenders has been relatively rare. In one of the few cases, the FDIC filed a civil suit in March against three former executives at Washington Mutual for risky lending. The executives at the failed bank were accused of taking “extreme and historically unprecedented risks” in their lending practices in order to maximize their compensation. The executives have denied the charges. Federal authorities have been investigating the bank since it failed and was sold to JPMorgan Chase in 2008.

Earlier this year, the Justice Department ended its criminal investigation of Angelo Mozilo, the former CEO of Countrywide Financial, a major subprime lender. It did not bring charges. Mozilo had settled civil charges with the SEC for $67.5 million—though that was for insider trading, not bad lending.

And when the Justice Department did get a conviction of a mortgage company CEO in April, the executive, Lee Farkas of Taylor, Bean & Whitaker, was found guilty of bank fraud, wire fraud, securities fraud and conspiracy—offenses not specific to the company’s mortgage operations. It was nonetheless touted as “the most significant criminal prosecution to date rising out of the financial crisis.”

For the most part, banks struggling with allegations of bad lending have faced demands from investors to buy back troubled mortgages. The banks have at times resisted, attributing the losses to broader economic turmoil.

The relative lack of regulatory action was highlighted in a New York Times article by Gretchen Morgenson and Josh Rosner, which detailed the case of NovaStar Financial, a subprime lender that the SEC never took any action against. That’s despite a damning report from HUD, lawsuits from homeowners, cease-and-desist orders from state regulators and repeated tips from short-sellers. (The SEC declined to comment on its investigation.)

The government has recently shown signs of taking action when it comes to recouping its own losses. The Justice Department sued Deutsche Bank in early May, alleging that a unit within the German bank “recklessly” endorsed bad mortgage loans in order to get government guarantees that would 1) make the loans easier for the bank to resell to investors, and 2) put the government on the hook for losses.

The lawsuit alleges that Deutsche hid evidence that the loans were bad, costing the government millions in insurance payouts while the bank made profits off the resale. Deutsche told the Wall Street Journal that most of the allegations were about activity that occurred before the unit became a subsidiary of the bank.   

 Though the suit against the mortgage lender was believed to be the first of its kind, prosecutors have said that it probably wouldn’t be the last. Here’s the Journal:

It wouldn't be a "fantastical stretch to think we are looking at other financial institutions as well," Mr. Bharara said at a news conference, declining to be more specific.

Next Step: Scandals of Securitization

The Journal reported this week that state attorneys general in New York and California are stepping up investigations of a whole range of bank activities—from the origination of mortgage loans to the packaging of mortgage securities.

New York’s attorney general Eric Schneiderman also recently announced investigations into the packaging and selling of mortgage-backed securities by a number of big banks. Morgan Stanley, Goldman Sachs, Bank of America, Royal Bank of Scotland, UBS, JPMorgan and Deutsche Bank are said to be the subjects. Of course, there’s no guarantee that anything will come of these. Schneiderman’s predecessor—now New York Gov. Andrew Cuomo—also had been investigating whether several banks had lied to rating agencies about the quality of their mortgage securities, and no charges resulted from that investigation.

The Justice Department also declined to bring criminal charges against executives at AIG, the insurer that sold financial instruments that allowed major financial firms to place bets against the housing market—and sometimes, against the same financial products they sold to investors. As of last year, the SEC reportedly was still investigating.

In 2009, prosecutors lost the first major criminal case of the financial crisis when the jury acquitted two Bear Sterns hedge fund managers accused of securities fraud and lying to investors about their failing investments.

And Then Came Those Fancy, Complex Securities Called CDOs

We’ve documented a number of investigations into the big banks’ dealings of mortgage-backed securities known as collateralized debt obligations. The Securities and Exchange Commission of course settled a civil suit against Goldman Sachs last year for $550 million, though its related suit against Goldman trader Fabrice Tourre is ongoing.

As we noted earlier this month, Goldman Sachs disclosed in a regulatory filing that it had received subpoenas from regulators regarding the same deal as well as other CDO deals. And it’s not just regulators: The Journal reported on Friday that Goldman executives expect to receive subpoenas soon from U.S. prosecutors seeking more information.

We also reported late last year that the SEC has an investigation into a JPMorgan Chase deal called “Squared.” The agency formally warned two execs involved in the deal that it may take action against them, as Bloomberg reported in April. JPMorgan disclosed in a recent filing that it is in “advanced negotiations” with regulators but didn’t specify which deals were being scrutinized.

UBS, Deutsche, and Citigroup also were last year reported to have received civil subpoenas from the SEC as part of an investigation into CDO dealings. (See our cheat sheet from around that time.) The Journal also reported that Morgan Stanley and Goldman Sachs were under early-stage criminal scrutiny by the Justice Department.

Finding the Flaws in the Foreclosure Process

Charges against the banks could be coming for their foreclosure-related problems. Huffington Post reported last week that government audits of Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial accused the banks of engaging in fraud with government-guaranteed mortgages. There are few details about what are in the audits, but here’s how HuffPo explains the allegations:

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

The Department of Housing and Urban Development’s inspector general conducted the audits and has referred the findings to the Justice Department, which will have to decide whether to bring charges. (Bank of America and Wells Fargo declined to comment to Reuters at the time—the others weren’t available for comment.)

Both federal regulators and 50 state attorneys general also have been conducting investigations since news of “robo-signers” and flawed foreclosure practices by the nation’s biggest banks exploded into a full-blown scandal last fall.

There have been numerous reports  of divisions within the two coalitions of investigators. Among the federal agencies, the historically bank-friendly Office of the Comptroller of the Currency had pushed for more modest fines compared with the proposals favored by other federal agencies.

As we’re reported, federal regulators have issued “consent orders” that require banks to perform reviews of their own foreclosure actions and compensate borrowers for financial injuries. From our earlier reporting:

The reviews are expected to culminate late this year or early next year, when checks are scheduled to go out to victims. Regulatory sources told us that the total amount sent to eligible homeowners would likely be disclosed. Even before this phase, observers may get a hint of what's happening if, as expected, regulators levy financial penalties against the banks. The findings of the reviews will determine the size of those penalties, regulatory officials said.

The state attorneys general are also, along with Justice Department negotiators, trying to reach a settlement with the banks. There’s also dissent among their ranks: At least eight Republican attorneys general have voiced disagreement with any proposal that would require banks to cut borrowers’ mortgage debt. Virginia’s attorney general compared the debt writedowns to welfare.

Banks, meanwhile, have reportedly proposed paying $5 billion to settle the states’ foreclosure investigation. That’s a quarter of the $20 billion penalty that had been previously proposed.

More Flaws in the Fallout After Foreclosure

Other investigations and lawsuits against the banks have focused less on their dealings with homeowners and more on the fallout after foreclosure. For instance, the City of Los Angeles earlier this month filed a civil complaint against Deutsche Bank, alleging that the bank illegally evicted tenants and let foreclosed homes fall into disrepair and cause neighborhood blight. Deutsche, in this case, was the trustee for the investors who technically owned the loans. The city said that made Deutsche “contractually responsible” for maintenance and actions against tenants—but the bank said the city “filed this lawsuit against the wrong party.”

The L.A. Times notes that Deutsche and other banks have faced similar suits before and gotten off the hook:

In 2008, the city of Cleveland sued Deutsche Bank and other financial institutions alleging that subprime mortgage lending practices had resulted in widespread foreclosures and blight. A judge dismissed the suit.

M&I

Peter Anderson

May 24, 2011, 4:18 p.m.

From reading the news accounts of the credit debacle, it seems to me that the lobbying done by the large financial institutions to induce Moody’s and S&P to rate junk as triple A is one clear juncture where the high knowingly bar for criminal convictions can be met. At one point, while he was still AG, Cuomo was reported investigating, but then for an unexplained reason, the plug seems to have been pulled on it. Hopefully, this did not happen because the banks pushed back hard and drew the line in the sand daring any elected official to cross it for fear of political death.

This is an interesting article and proves that there are no willing players in government to move any investigation or prosecution forward.

This should be treated like the crime it is.

If you are the government and you are investigating a conspiracy type crime such as this one,  you start from the bottom and move up, step by step.

You arrest and threaten the peons that were paid big commissions to find suckers that wanted to re-fi their homes,  with jail time, they give up the mortgage brokers that paid them, the mortgage brokers give up the bank representives that took the bad paper, and the bank rep’s and their bosses eventually give up the Wall Street banksters that securitized the bad paper and sold it to other suckers through other brokers that made big money.

The key elements in this scam that made it work was AIG who insured the bad paper as though it was good paper and MERS that made it happen without without drawing attention to it, and in doing so ripped off the local deed recorders and the local tax base for billions creating part of the short fall we now have in tax revenue.

No real investigation has even been started and you have to ask yourself why.

All you read about is the FBI locking up foreclosure recuse crooks that are taking advantage of people trapped by the first band of criminals that are still running free.

This leads me back to my question of many months ago-

Why is Bernie Madoff in Jail?

Bernie’s ponzie scheme was a kindergarten exercise compared to Goldman-Sachs. Bernie beat up some small time investors, Goldman Sach and their copycat friends have destroyed the United States economy.

Where are you now Herbert Hoover? Eliot Ness, or someone, anyone.

Car 54, Police Academy 1,2,3,4 and Law and Order just aren’t doing the job!

Does anyone expect a government that’s owned by banks, corporations and Wall Street to treat them as the felons they are?

It is up to the people to empower ourselves as peace officers and arrest, try and punish all the treasonous thieves in government, corporations, Wall Street and banks.

And we know what that means…

But we have no other choice when our government is but a front man and violent guardian of thieves.

The more they get away with the more confident of their immunity and impunity they become as they escalate they criminality.

All of that is too obvious.

Its up to the people to wrest back and re-establish their Constitution…their Nation…

From The New World Order plutocrats who, at this moment, are consolodating their totalitarian police state OVER The United States of America.

There a catchy little rap on this topic. Google “bankster gangs juliet capulet” and click on the “completelybaked: Bankster Gangs—A Rap 4 Blankfein” blog link.

It sort of sums the whole mess up with some really incisive lyrics, and stunning charts and images.

Great story, Pro Publica. Thanks for telling it.

Ok so we’ve known for years the power is in the hands of the people - only most of the “people” are mean-spirited, blind sheep who expect continuing to elect the same thugs will produce different results. Washington should be swept clean - completely clean & people need to stop stop stop parroting party ignorance and vote their own minds and conscience. It is clear as day the majority of republicans want a country completely devoid of humanity and heaven for the rich, banks, corporations and themselves. Period. Anyone who cannot see that deserves to be unemployed and homeless.

Once again, great work guys. It’s always nice to have information put together like this in case there’s a story or connection that we’ve missed.

I don’t think that it is a coincidence that the most serious charges/prosecutions seem to come only against those no longer operating: Mozilo and Countrywide, WaMu, Bear Stearns, etc.

Perhaps the worst of this isn’t that the will to take action isn’t there but that if it was the complete inability to accumulate evidence and open investigations early on would have handcuffed the ability to do so. One of the more understated facts of this widespread fraud is the unwillingness of regulatory and investigatory bodies to treat it as such. 

Someone asked why Madoff was in jail. The short answer is along the lines of what Matt Taibi said: He ripped off rich people. The long answer is that the regulators (specifically the SEC) had to have someone else do the work for them and the case placed directly in their lap.

Having been in Banking and Finance for over 30 years, and in the real estate run up of the last 10 years, the root cause commence in the late 1990s when large Banks and Wall Street firms pushed to be a one stop shopping center of financial transactions for investors, depositors and commercial interests. This culminated with the Deregulation Act of 1999 brought to you by Sen. Phil Gramm, who had a highly vested interest in deregulation before and after he he got it passed at 2am the last day of the senate meeting before summer recess.
It gave the signal to Wall Street and Large Financial Banks that they will be To Big to Fail, and they can do what they like as no one in DC or Regulatory Bodies will oppose them in lieu of an expected Republican Administration in 2000.
The Results are in front of us now, and unlike the Pecora Hearings of the last Depression, where Senators empowered a prosecutor to investigate and subpoena wrong doers and send them to Jail, our legislators have been bought and paid for by these same special interests of unfettered Market Greed.
Much was learned in the 1930s and much has been learned in the last 4 years but unlike the 1930s, today’s Special Interests(Political Bands mentioned in the Declaration of Independence) have bought and paid for the Best Government they could hope for, unwilling and now thanks to laws unable to Act for the good of the majority.

I don’t have experience with specific elements of this story but as a local blog writer I have looked at the banks in Rochester, MN.

The issues noted in the story have not been examined at any time on a local basis.

Rochester does have a Wells Fargo. From anecdotes of homeowners its clear the issues in the story are going on here.Wells Fargo is the largest mortgage lender in the city.

Totally thye city has about 7 banks. One is already on the FDIC serious warning list.

At least four of the remainder have very low ratings on Bankrate.com.
My question is what does this mean for the community?

If only media outlets, including this one, would begin to use words that tell the truth.  Using conciliatory diction such as “misstep,” “risky,” “flawed,” and so on continues the illusion that this unprecedented mass crime against us is accidental.

There is nothing accidental or confusing about what is happening.

Until we use the correct words to represent this willful crime against humanity, we will continue to wallow in rhetorical inversion and semantic sociopathy.

A California teacher with a bankrobbed bankrobbing mortgage from Bank of NoAmerica.

” Lee Farkas of Taylor, Bean & Whitaker, was found guilty of bank fraud, wire fraud, securities fraud and conspiracy—offenses not specific to the company’s mortgage operations. It was nonetheless touted as “the most significant criminal prosecution to date rising out of the financial crisis.”’

Just tackling one of these-I honestly don’t know if propublica is so very misinformed or intentionally misleading….but Lee Farkas brought down not only his own company-Tayor Bean-the largest private mortgage company in the US-but his shenanigans affected numerous other companies, also bringing them to their knees. And to say banking fraud had nothing to do with what was done is…far from correct.

Maybe you don’t realize just how integral to the fraudulent system he was but seeing him in prison stripes makes me smile. A google image of Lee Farkas shows just that which he exchanged for the 3-piece suit..and the insider trading investigations lead right to all the big ones.

http://www.bloomberg.com/news/2011-01-12/insider-trading-cooperators-at-heart-of-government-prosecutions.html

william Darnell

Sep. 7, 2011, 10:08 a.m.

Be sure and pay close attention to the rhetoric coming out of the budding Presidential campaigns. You are already hearing the mealy mouthed angle of “going after the Banks will only injure the economic recovery.” Perry and Romney appear to be schills for the big Banks. Obama appointed the same type of thieves for his cabinet, so the problem crosses party lines. Lobbyists for big banking are already lurking. We have to pay closer attention to our elected officials and their track records. I had my own personal hell with bank of america, and was able to beat them at their own game but not without a stress filled 16 month war! I have written my State Atty. General with no meaningful reply. It needs to come from citizens!

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