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

From risky lending to flawed foreclosures, banks have been accused of missteps at every stage of the mortgage machine. Here's a closer look at who's been investigated for what.

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.

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