by Matt Taibbi
For instance, court filings showed that Bank of America—a Covington & Burling client, remember—had teamed up with the unscrupulous, now-defunct mortgage lender Countrywide to sell more than a billion dollars’ worth of questionable loans to Fannie and Freddie. They had done so through a special mortgage loan program that, unbelievably, was named “Hustle” in internal bank documents. Under “Hustle,” Bank of America intentionally removed underwriters and compliance officers from the loan origination process, explicitly aiming to make sure that loans “moved forward, never backward.”
Then there was Washington Mutual, which became part of JPMorgan Chase—another Covington & Burling client—after a taxpayer-subsidized shotgun merger in 2009. Once the sixth-largest bank in America, WaMu was selling $29 billion worth of subprime loans every year during the height of the crisis. After its collapse, investigators from the Senate’s Permanent Subcommittee on Investigations uncovered evidence that the bank had conducted its own internal investigations into the mortgage markets as early as the mid-2000s, and had found fraud in as many as 83 percent of the loans produced by some of its own regional offices. Yet the bank did not alert regulators, did nothing to stop the fraud, and continued to sell billions in subprime for years.
Then there was Wells Fargo, yet another Covington & Burling client, which between 2002 and 2010 certified at least 6,320 home loans for federal backing, despite the fact that the bank itself, in its own internal assessments, had found that these loans were “seriously deficient.”
Citigroup, another client of Holder’s old firm, had done essentially the same thing, having “defrauded, falsified information or misled federal government entities” by falsely certifying thousands of loans for federal backing during the crisis years. It eventually paid $158 million in civil fines for this behavior, but nobody was ever charged or indicted for the crime.
Between 2005 and 2007, Goldman Sachs underwrote more than $11 billion of mortgages backed by the federal government and sold billions more in mortgage-backed products. When the bank’s senior managers saw, in late 2007, that the great masses of mortgage products they were producing were toxic and destined to blow up to catastrophic effect, the bank not only didn’t alert regulators but accelerated its efforts to sell off its dangerous products to hedge funds, other banks, and other unsuspecting customers as quickly as possible. “Let’s be aggressive distributing things,” said CFO David Viniar. “Are we doing enough to sell off cats and dogs?” countered CEO Lloyd Blankfein, referring to the loser mortgages on the bank’s books.
Not just banks but everybody in the entire factory process was involved. When a longtime financial executive named Michael Winston joined Countrywide in the mid-2000s, he was startled one day to see a license plate belonging to one of the booming mortgage company’s top executives that read “FUND ’EM.” When Winston asked the executive what the plate meant, he was told that Countrywide’s policy was to give loans to everyone.
“But what if the person has no job?” Winston asked.
“Fund ’em,” the Countrywide executive laughed.
At the ratings agencies like Moody’s and Fitch and Standard & Poor’s, which performed the critical-to-the-fraud function of overrating the toxic mortgage securities, high-ranking executives openly discussed in emails the corrupt corporate strategy of giving phony ratings in exchange for cash from the big banks. “Lord help our fucking scam,” wrote one executive from Standard & Poor’s. In another, one of the company’s top analysts complained that the firm’s model for rating mortgages was no more accurate than “flipping a coin.”
The basic scheme—mass-producing and mismarking mortgages—was exacerbated by other major industrywide ethical failures. Many of these same firms, in their desperation to cut every conceivable cost en route to the creation of mortgages, knowingly engaged in mass perjury by creating whole departments of entry-level cubicle slaves devoted to “robo-signing”—read: inventing—chains of title and other key documents. In other cases, they hired outside companies to do the dirty work for them.
In just one single locale, the clerk’s office in Essex County, Massachusetts, thirteen hundred different mortgage documents, including chains of title, were discovered to have been signed by a “Linda Green,” although the signatures were written in twenty-two different styles. “Linda Green” worked for a company called DocX, which at the height of the boom was processing about half of all the foreclosure documents in the United States.
Similar piles of documents signed by corporate phantoms with names like “Crystal Moore” and “Bryan Bly” and “Jeffrey Stephan” were found by the hundreds and thousands in virtually every county courthouse in America.
Many of the same banks also engaged in mass tax evasion by unilaterally bypassing untold millions in local county registration fees, using instead a private electronic registry system called MERS that had been created by Wall Street—Countrywide founder Mozilo was the “inspiration” for the system’s creation—specifically as a means to avoid paying legally mandated fees to local county clerks’ offices for paper registrations. (“SAVE MONEY. REDUCE PAPERWORK,” read a MERS brochure.) In the late 1990s, companies like Chase, Bank of America, Fannie, and Freddie had gone searching around for a legal opinion that would justify the creation of this electronic registry system.
The firm that ended up writing that opinion was, you guessed it, Covington & Burling. In 2004 the same firm reaffirmed the supposed legality of this tax-evasion-enabling registry system in yet another opinion letter, again on behalf of the great banks and mortgage companies that benefited directly from the shortcuts this system provided.
At the height of the crisis, this bank-created MERS system was in charge of maintaining the records for 67 million mortgages—and the entire company was staffed by just forty-five people.
Years later, as Holder and Breuer manned the two top jobs at Justice, and twenty-two other attorneys from the firm sat in key positions at the department, the nation experienced an unprecedented paperwork crisis in its court system, as literally millions of foreclosures were pushed into court by banks brandishing perjured and/or fraudulent paperwork. Many of the phony docs were MERS mortgages. The register of deeds in just one city, Salem, Massachusetts, sent Holder the paperwork for 31,897 fraudulent foreclosure documents and asked for a criminal investigation, because of the “pattern of fraud” they demonstrated.
Holder passed.
Most all of the companies involved with the mortgage fraud had one last thing in common: none of them reported any of their bad behavior to the government. “Wall Street’s entire argument before the crisis had been that if crime happens, if fraud happens, we’ll report it, that the markets would want to report it, purely out of self-preservation,” says Spitzer. “But that’s exactly what they didn’t do.”
Junk mortgages pushed through the courts using phony documents and sold off onto the markets using phony ratings, all as a matter of policy: almost every major player on Wall Street was involved, and many of these companies had left behind mountains of documentary records detailing their offenses. State and federal prosecutors all over the country, as well as federal investigators from Senate committees and special task forces like the Financial Crisis Inquiry Commission, found themselves awash in evidence.
Evidence of what, though? Lawyers on all sides of the issue to this day debate just exactly what kinds of criminal charges might have been filed against either companies or individuals for the offenses that caused the mortgage crisis. One can make arguments for charges of simple fraud (“A million cases a year” is how former banking regulator William Black famously estimated the level of criminal fraud during the bubble years), larceny, falsifying records, accounting fraud, embezzlement, tax evasion, and a number of other crimes. One former prosecutor I spoke to joked that he could have rolled any of a hundred different robo-signers all the way up to the CEO level. Others insist that the mortgage scandal was precisely the kind of difficult-to-prosecute, highly organized sca
m that the Racketeer Influenced and Corrupt Organizations (or RICO) laws were designed for.
In fact, there was one mortgage fraud case in which federal prosecutors did employ the RICO laws—but in an awesomely telling detail, the main target was a black street gangster named Darnell “D-Bell” Bell, who later pleaded guilty to ripping off banks and mortgage lenders by buying homes with no money down using straw buyers.
So the only time RICO was used to fight mortgage fraud was when the criminal was a black gang member and the victims were banks. (Ironically, nobody thought to wonder how it was possible for a Lincoln Park gang member to buy 222 houses with no money down. Heading into that particular rabbit hole would have led to the larger crime, but nobody did.)
At the national level, at the systemic level, government response was virtually nonexistent. The federal government pushed exactly one single criminal prosecution against individuals at a major bank for crimes related to the financial crisis, a fraud case involving two testosterone-jacked Bear Stearns hedge funders who had told investors in their subprime-laden fund that they were “comfortable with where they are” just days after one of them privately confided to his wife that “the subprime market is toast.” That fund later imploded, helping cause the collapse of Bear Stearns, which in turn helped trigger the financial crisis. Despite a seeming abundance of damning emails and text messages, a jury acquitted, and the Justice Department never stepped to the plate again.
Why? From time to time, secondhand accounts leaked out that suggested that the absence of such prosecutions was part of a conscious strategy not just in the Justice Department but throughout the Obama administration. A book by Ron Suskind called Confidence Men, published two years into Obama’s presidency, quoted then–treasury secretary Tim Geithner as saying that exposing the fraud would create financial panics. “The confidence in the system is so fragile still,” he reportedly said. “… A disclosure of a fraud … could result in a run, just like Lehman.”
A year or so later The New York Times’s star finance writer, Gretchen Morgenson, ran a piece suggesting that Geithner had in 2008 warned off then–New York attorney general Andrew Cuomo from pursuing “hard-charging” prosecutions. “[Geithner’s] worry,” according to Morgenson’s sources, “sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.”
But as the years passed and the markets settled, the notion that the economy was too fragile to handle a prosecution began to seem increasingly absurd. Surely there was someone, some company or other that had helped cause the crisis, that could be targeted to send a message.
The question was, which one would you start with? Which offending megabank, lender, or ratings agency offered the best chance to score a high-profile symbolic prosecution? Who would be first on the dock?
The federal government never really stepped up to the plate. The job was left to the states, and even they could come up with only one target.
That target, it turned out, was Abacus Federal Savings Bank. There were a million ironies in the choice of this particular institution, but one of the most striking was that the case grew out of an incident that the bank itself had reported to the authorities. On December 11, 2009, Vera Sung, the forty-three-year-old daughter of the bank’s founder and a former New York City prosecutor, was on the sixth floor of the Abacus offices. The tall, angular, attractive Chinese-American woman was out of the prosecuting game now and in private practice. On that day, she was representing her family business—Abacus—in a simple real estate closing. The deal involved a Chinese woman who had taken out a loan to buy a house in Brooklyn.
This Brooklyn deal had seemed routine, but at the end of the process, during the filling out of the so-called HUD-1 form summarizing all the closing charges, the borrower’s lawyer hit her with an unusual question.
“The lawyer started telling me that the client was asking about the extra checks she’d written,” Vera recalls.
The “extra checks” turned out to have been written at the behest of the loan officer in charge, Qibin “Ken” Yu, and seemed to be some kind of payment for fudging the income verification portion of the loan application. Mortified, Vera huddled up with her sister, Jill Sung, the general counsel for the bank. Both women realized right away that the “extra checks” were problematic, and they shut down the closing.
After the incident, the two women say they played everything by the book. Abacus hired a pair of fraud consultants, including a former prosecutor named Ann Vitale and a company called the Mercadien Group, to conduct external investigations of the firm. They also in short order contacted two key federal agencies, the Office of Thrift Supervision (a primary banking regulator that has since been wrapped into the Office of the Comptroller of the Currency) and Fannie Mae. Abacus had to tell Fannie Mae because the giant government-sponsored mortgage company was a primary purchaser of the mortgage loans Abacus created.
Both agencies investigated, and about a year after Vera first discovered the “extra checks” problem, in February 2011 to be exact, the OTS issued a lengthy order demanding that the bank overhaul its loan practices. Among other things, the regulator demanded that some other employees, who appeared to have been involved with Yu-like activities, be fired. A few others left on their own. Some of these individual employees, like Yu, became embroiled in local criminal investigations, which seemed entirely appropriate, even to the Sungs.
But as far as the company itself went, the OTS didn’t recommend a fine. And though the federal regulator had the power to force the Sung family to sell the business, or demand wholesale changes to the executive management of Abacus Federal Savings, it did neither. The system seemed to work the way Wall Street and the financial community is always telling us things can work: companies self-report their ethical issues, then work together with regulators to correct problems while preserving viable, job-creating businesses going forward.
But it didn’t work out that way. While the Sungs were trying to clean up their mess, the original loan applicant, furious that she had not gotten her financing for the Brooklyn home and had lost her deposit, had reported the whole incident to the local police precinct in Chinatown.
That simple local police report became the genesis of Vance’s investigation into Abacus. Thus despite the existence of a nationwide epidemic of fraud and white-collar crime that could have and should have been investigated by powerful federal regulators like the OCC, the OTS, the Federal Reserve, the SEC, the CFTC, and other bodies, the first and only prosecution of a bank to take place in America came out of a simple report filed in a common city police station.
Why Abacus? Why not, say, JPMorgan Chase? Jamie Dimon’s megabank was caught up in dozens of scandals during the same period covered by the Abacus investigation—everything from money laundering to energy price manipulation to mismanaging customer funds to robo-signing to antitrust violations to charging excess overdraft fees to hiding billions of dollars of losses in the infamous “London Whale” episode, in which the bank hid the fact that one of its lunatic traders in Europe had nearly destroyed the firm by doubling and tripling down on exotic bets on corporate credit.
All told, in just the three years since Vera Sung stumbled into Ken Yu’s real estate closing, Chase—again, a Covington & Burling client—had paid out more than $16 billion in regulatory settlements. The $16 billion represented an incredible 12 percent of its net revenue during that time period. This was before a $13 billion settlement in the fall of 2013, a deal that ate up about half of the bank’s net for that year.
Yet throughout all this time, neither the bank nor any of its high-ranking employees were ever once criminally indicted. No Chase employee in any of those cases ever felt handcuffs on his wrists. In fact, Chase was not even forced to admit wrongdoing in most of these settlements.
This seemed to be Collateral Consequences in action, but no one could say for sure.
It was easier to be sure once Abacus was indicted. Two seemingly small details
in the case are what seem to confirm the thesis.
First, Abacus was never offered a deferred prosecution agreement by the state. Vance’s office took a hard line, apparently not willing to accept anything less than a plea to actual criminal charges. The reader is asked to remember this detail as he or she goes forward through the numerous tales of nonprosecution or deferred prosecution agreements that are yet to come in this book.
The second fact is that at the very moment Vance was marching his defendants into court on the day of the indictment, the FDIC and the OCC were in the Abacus offices, preparing to take action if the negative publicity resulted in a run on the bank.
“They were worried about a run,” says Thomas Sung. “They knew something could happen.”
This is significant because it says something about the government’s willingness to conduct a prosecution that it knew might result in a bank failure, job losses, and/or other “collateral” damage.
Both state and federal authorities apparently had no problem taking that risk with little, politically unconnected Abacus.
A defender of the Justice Department in this instance will naturally protest that the Abacus case had nothing to do with Eric Holder, because Abacus was not prosecuted federally. But upon closer examination, Collateral Consequences showed loudly in this case.
Mainly, it showed in those “extraneous matters”—in the nonprosecution of every other bank in America that really was guilty of responsibility for the financial crisis. Those noncases certainly can be laid at the institutional feet of Holder’s Justice Department.