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Friday, 08 February 2013 08:59

Abusive Practices That Shortchange Investors Continue at Bank of America, New Documents Allege

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT    bankNo Criminal Prosecutions of Wall Street

The Department of Justice is doing it again, going after another financial institution for cratering the US economy by trying to fine them, without holding anyone criminally responsible.  This time, according to a New York Times (NYT) editorial, it is Standard & Poors, who is blamed for giving inflated credit ratings to financial companies that were on extremely shaky footing leading up to the 2008 crash.

According to the NYT editorial board:

The financial crisis could never have happened without the credit-ratings agencies issuing stellar ratings on toxic mortgage securities that inflated the bubble. Before the Justice Department filed civil fraud charges this week against Standard & Poor’s, the nation’s largest credit-ratings agency, it seemed as if the entire ratings industry — which reaped record profits in the boom years — was going to escape, unrepentant and unpunished. That may now change.

But the underlying problem — a lack of proper regulation of the industry — remains unresolved. Nearly three years after the passage of the Dodd-Frank financial reform law, there is no sign that federal regulators are willing to propose, let alone finalize, tough rules to reform the agencies. Worse, regulators have repeatedly asserted legal positions that shield the agencies from investor lawsuits, despite questions of misrepresentation, negligence and fraud in the rating of mortgage investments.

Still, the suit against S.&P. and its parent, McGraw-Hill Companies, is a move toward accountability. It alleges that, from September 2004 through October 2007, S.&P. “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities, and that the agency falsely represented that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

What sets the case apart is that the government brought the case rather than water down a settlement to suit S.&P.’s demands. The government originally sought a penalty in excess of $1 billion and an admission to a least one count of fraud. When S.&P. balked, the government sued and now is seeking a $5 billion penalty. Too often, the government has accepted settlements with fines that are too small compared with the harm done and allowed the defendants to neither admit nor deny the charges.

As BuzzFlash at Truthout has pointed out again and again and again, the Department of Justice (DOJ), however, has not pursued any criminal charges (they prosecute using civil statutes) against Wall Street honchos, not a one.  And, as we have repeatedly noted, the fines that they levy are nothing more than a federal street tax on likely criminal activity on a multi-trillion dollar scale.

BuzzFlash at Truthout has lacerated the DOJ and regulatory agencies for treating financial firms as if they were the clients of the US executive branch – instead of these executive branch divisions serving interests of the American people.  In the past few weeks, we have offered commentaries, including: "When US Doesn't Prosecute Wall Street Fraudsters, Taxpayers Get the Blowback"; Consigliere Lanny Breuer, Head of the DOJ Criminal Division, Leaves Without Prosecuting One Made Man on Wall Street; "The Covington & Burling Trio Overseeing the Department of Justice Criminal Division: An Injustice"; and "Treasury Approved Bonuses and Raises for Wall Street Bankers Who Tanked Economy", among other BuzzFlash commentaries.

Now we learn that a law suit by investors who lost billions of dollars due to the deceptive practices of Bank of America's acquired subsidiary, Countryside Financial, claims that Bank of America is continuing "questionable practices" to this day. In a February 5, 2013, article the NYT writes that:

According to new documents filed in state Supreme Court in Manhattan late on Friday, questionable practices by the bank’s loan servicing unit have continued well after the Countrywide acquisition; they paint a picture of a bank that continued to put its own interests ahead of investors as it modified troubled mortgages.

The documents were submitted by three Federal Home Loan Banks, in Boston, Chicago and Indianapolis, and Triaxx, an investment vehicle that bought mortgage securities. They contend that a proposed $8.5 billion settlement that Bank of America struck in 2011 to resolve claims over Countrywide’s mortgage abuses is far too low and shortchanges thousands of ordinary investors….

Among the new details in the filing are those showing that Bank of America failed to buy back troubled mortgages in full once it had lowered the payments and principal on the loans — an apparent violation of its agreements with investors who bought the securities that held the mortgages….

The letter and the underlying analysis were filed in New York State Supreme Court where Justice Barbara R. Kapnick is overseeing the $8.5 billion settlement reached in June 2011 by Bank of America and a handful of Countrywide mortgage securities holders.

Bank of America denies the charges, but where is the DOJ in terms of investigating these rather serious legal issues?

As BuzzFlash noted in its commentary, "The New Untouchables Are Wall Street Executives, Despite Evidence Many Likely Criminally Violated Sarbanes-Oxley Act"

[In 2011, CBS's "60 Minutes" reported,]

In fact, according to a civil suit filed by the Securities and Exchange Commission, Countrywide's chief executive officer, Angelo Mozilo, knew as early as 2006 that a significant percentage of its subprime borrowers were engaged in mortgage fraud and that it hid this and other negative information about the quality of its loans from investors.

Mozilo, who admitted no wrongdoing, accepted a lifetime ban from ever serving as an officer or director of a publicly traded company, and agreed to pay a record $22 million fine, less than five percent of the compensation he received between 2000 and 2008.

Lanny Breuer, the head of the criminal division at the Justice Department was interviewed at the time by Kroft. Breuer claimed on air that the Los Angeles US Attorney had dived into potential prosecution of Countrywide, but Breuer admitted that the investigation was dropped.  When asked by Kroft if Breuer was aware that the chief Countrywide executive in charge of ferreting out fraud was fired for exposing it – as it continued unabated – Breuer pleaded ignorance about the details of the case. 

He also made an astounding assertion for the head of the criminal division of the DOJ. Breuer, who had claimed the LA feds had done an exhaustive job of looking into Countrywide, said that it was the duty of the compliance exec at Countrywide to come forward.  He was at a loss to explain why she wouldn't have been interviewed as part of a thorough inquiry.

That the Bank of America is allegedly still engaging in practices that conceal its self-serving actions and potentially denying investors a just settlement is the legacy of a Department of Justice and executive branch that have chosen, to this day, not to criminally prosecute a single top executive on Wall Street. 

The message from Washington to the financial titans in the "too big to fail" pantheon has been quite simple: you are on your honor to obey the law, but if you break it when it comes to financial conduct, we will not prosecute you personally.  We'll just make your firms pay a token fine, for which the shareholders will foot the bill.

This is the understanding under which Wall Street has operated during the past and present Obama administrations.  It enables and, in essence, encourages continued misconduct because those who engage in such actions face no criminal punishment nor even, in general, personal financial loss.

For this, the United States is plagued with a tolerance for lawlessness regarding economic activity among those who oversee the vast majority of the nation's financial lending and investment.

(Photo: 401(K)2013)