If We Don't Punish Past Financial Crimes, Future Ones Are Inevitable

by David Callahan

Did you hear that one of the biggest banks in America just agreed to one of the biggest penalties ever for committing one of the biggest financial frauds in U.S. history? It happened just the other day and, no, chances are you didn't hear because the story was buried in the business section.

The bank is Bank of America. The penalty is $6.3 billion. And the crime is that BofA knowingly sold loads of bum mortgage securities to Freddie Mac and Fannie Mae -- securities packed with subprime mortgages taken out by lenders that couldn't really afford the loans and that later lost value when the housing market imploded. Bank of America and its former CEO, Kenneth Lewis, also settled a suit with New York State that it misled its shareholders when it acquired Merrill Lynch n 2008, leaving out the inconvenient truth that Merrill was saddled with huge liabilities.

These are brazen crimes. Remember, securities law is relatively simple when it comes to defining fraud: If I'm selling you stock shares or a bond, I need to tell you the truth about the underlying value of that offering. If I tell an investor that my company has a thousand clients, and that's why he should give me cash for an equity stake, but I know full well that my company only has a hundred clients, I have just committed a federal offense that can result in prison time. Likewise, if I have a bundle of mortgages that I know include a bunch of really shaky loans -- where due diligence was never done, and poor credit prospects were given loans -- than I have an obligation to tell you that, so my bundle can be priced fairly. I need to say: hey, these loans are really a mixed bag. If I don't say that, and I know the truth to be otherwise, I can be sent to prison. And for good reason: I've just cheated you out of a bunch of money. I've sold you something for top dollar that should have been heavily discounted, or not sold at all, based on information that I withheld from you.

Clear enough?

Okay, so now consider how Bank of America (and, even more so, its affiliated entity Countrywide) handled themselves in the housing boom. They made loans to nearly anyone with pulse during the go-go years, due diligence be damned, and passed that junk along to buyers of mortgage-backed securities. Executives knew that these securities were filled with dubious loans, but they withheld that information in peddling this stuff to investors. And it's not like the evidence of this deception is incredibly arcane and hard to fathom: In many cases, smoking guns have been found: like clear-cut emails of bank and mortgage people on the front lines of lending raising red flags about the quality of underwriting, warning the execs upstairs that bad loans were being made. And investigators and plaintiff lawyers have taken depositions revealing what executives at places like BofA knew and when they knew it.

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http://www.demos.org/blog/3/28/14/if-we-dont-punish-past-financial-crimes-future-ones-are-inevitable