Bank of America Corp was found liable for fraud on Wednesday on claims related to defective mortgages sold by its Countrywide unit, a major win for the U.S. government in one of the few big trials stemming from the financial crisis.
Following a four-week trial, a federal jury in Manhattan found the Charlotte, North Carolina bank liable on one civil fraud charge. Countrywide originated shoddy home loans in a process called "Hustle" and sold them to government mortgage giants Fannie Mae and Freddie Mac, the government said.
The four men and six women on the jury also found former Countrywide executive, Rebecca Mairone, liable on the one fraud charge facing her.
A decision on how much to penalize the bank would be left to U.S. District Judge Jed Rakoff. The U.S. Department of Justice has said it would ask Rakoff to award up to $848.2 million, the gross loss it said Fannie and Freddie suffered on the loans.
The civil case, which has been tried in a Federal District Court in Manhattan, follows close on the heels of JPMorgan’s tentative agreement to pay $13 billion in fines and payments to settle with various state and federal authorities for its own exposure to the mortgage mess. Experts believe $13 billion is more than half of the bank's yearly profit. All told, the bank reportedly has a $23 billion chest to cover its mounting legal costs.
While the suggested fine pales in comparison to the check that JPMorgan is expected to write, lawyers point out that that the eventual cost could far exceed what the government has asked for because the jury’s decision is likely to spur a torrent of class-action suits that could cost Bank of America many billions of dollars in settlement payments.
Bank of America bought Countrywide in July 2008. Two months later, the government took over Fannie and Freddie.
"The jury's decision concerned a single Countrywide program that lasted several months and ended before Bank of America's acquisition of the company," Bank of America spokesman Lawrence Grayson said. "We will evaluate our options for appeal."
Wednesday's verdict marked a major victory for the Justice Department, which has come under criticism for failing to hold banks and executives accountable for their roles in the events leading up to the financial crisis.
Countrywide, the mortgage originator that Bank of America bought in 2008, has been a morass of problems ever since the deal went through. While the bank bought Countrywide for $4 billion in 2008, analysts believe that to date it has already paid close to $50 billion in fines and settlements. In light of Wednesday’s decision, that figure is likely to continue to rise.
-------------------------------------------------------------
But some public interest groups continue to question why no top Wall Street executives have been charged criminally for the risky acts that triggered the crisis. The government also prefers to settle with big companies rather indict them, fearing that criminal charges could unnerve the broader economy.
Former DOJ Criminal Division chief Lanny Breuer (left) and Attorney General Eric Holder. (Image credit: Getty Images via @daylife)
FORBES
“You can’t scare me if you can’t jail me.”
If you were a senior bank executive, you might be tempted to at least entertain that thought. You would certainly be very aware that in the past four years, not one banker has gone to jail for anything that led to the great financial meltdown of 2008-2009.
There was little opposition in Congress back in 2009 to strengthening criminal enforcement of federal fraud laws regarding financial institutions, particularly in mortgage and security matters.... The Obama administration then established the Interagency Financial Fraud Enforcement Task Force. Attorney General Eric Holder said, “We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.”
[What happened afterwards was impressive:]
a) The six largest banks would pay $62.2 billion in fines to settle lawsuits in the past three years, led by Bank of America BAC -2.13%, Wells Fargo WFC -0.42% and JPMorgan Chase JPM -1.62%. (SNL Financial estimate)
b) It will take $24.7 billion to settle pending suits, most of them involving the mortgage junk sold to investors. (Compass Point estimate)
c) [BUT] Despite the fact that a+b=$86.9 billion, not one bank has ever had to admit to any wrongdoing.
d) Not one dollar of the $86.9 billion has been paid by any bank executive. Shareholders took all the hits.
There are quite a few good books that detail the abuses that led to the financial meltdown. Suffice it here to briefly quote Senator Carl Levin (D-MI) [above], Chairman of the Senate Permanent Subcommittee of Investigations, who said when the subcommittee released its final report on what happened, “The report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets. High risk lending, regulatory failures, inflated credit ratings, and Wall Street engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.” To make matters bipartisan, ranking Republican Senator Tom Coburn (R-OK) said “Blame for this mess lies everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and Members of Congress who failed to provide oversight.”
The committee referred its report to the Justice Department and Securities Exchange Committee for investigation. No prosecutions resulted.
Why? Why has no one been held responsible? There are many reasons, including the complexity of the cases and the lack of criminal referrals from the regulatory agencies. But perhaps the key reason is that those most responsible for indicting and prosecuting Wall Street executives seem to believe that, just as there are banks that are too big to fail, there are people who are too big to jail.
In a speech he gave last fall, the retiring head of the Criminal Division in the Department of Justice, Lanny Breuer, explained that position: “To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects.
“Sometimes–though, let me stress, not always–these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets is a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”
from left: Lloyd Blankfein of Goldman Sachs, James Dimon of J.P. Morgan Chase, Robert Kelly of Bank of New York Mellon, Kenneth Lewis of Bank of America, Ronald Logue of State Street, John Mack of Morgan Stanley, Vikram Pandit of Citigroup and John Stumpf of Wells Fargo. Reuters
....the argument seems to be that, if the president of a major bank were to be indicted for criminal behavior, his prosecution would endanger the bank itself and the jobs of all of its employees.
Really? I just don’t buy it. Scores of executives went to jail because the government prosecuted them after the Enron and Savings and Loan scandals. Those prosecutions certainly did no lasting damage to our economy.
“Justice for all” has always been a basic tenet of this country. Have we really gotten to the point where we are afraid to prosecute a Wall Street executive for stealing millions while we send some teenager who steals $20 from the corner store to prison?
The fact is, the behavior of some on Wall Street led directly to millions of Americans losing their jobs or their houses. We must do all we can to make sure this doesn’t happen again.
Criminal prosecutions are not just about punishing the guilty. They also send a message that we as a society will not allow similar misconduct in the future. That is why I totally agree with something Mr. Breuer said early in the speech I quote above: “The strongest deterrent against corporate crime is the prospect of prison time for individual employees.”
Nothing I have seen in the past four years leads me to believe that Wall Street as a whole learned much from the events of 2008-2009. ...The multimillion-dollar bonuses are back with a vengeance, and with them incentives to cut corners and, for some, to circumvent the law.
I only wish that Justice Department action matched Attorney General Holder’s words when he said, introducing his task force, “The mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening.”