Last night, PBS’ Frontline looked at a question many Americans have
asked — Why have no top Wall Street executives been prosecuted for their
part in the 2008 financial crisis? — and took it right to man at the
Justice Dept. who isn’t bringing those charges.
You can watch the entire show — broken up into four segments — below, and there are a ton of supporting materials and content
available on the Frontline website. But for those who just want to get a run-down of the episode, here are some highlights:
1. Former Countrywide exec realizes that maybe his company’s lending policies are a bit lax
Only months after starting at Countrywide in 2005, Michael Winston saw a
car in the parking lot with a plate reading “FUND EM.” Here is his
recollection of the conversation he had with a co-worker –
Winston: “‘FUND EM’… That’s an interesting plate. What do you suppose that means?”
Co-worker: “That’s [Countrywide CEO] Angelo Mozilo’s growth strategy… We have a loan for every customer.”
Winston: “A loan for
every customer. How can that be? What if the person doesn’t have a job?”
Co-worker: “Fund ‘em.”
Winston: “What if he has no income?”
Co-worker: “Fund ‘em.”
Winston: “What if he has no assets?”
Co-worker: “Fund ‘em.”
Winston: “What are the criteria you use to make lending decisions?”
Co-worker (smiling): “If they can fog a mirror we’ll give them a loan.”
2. Interviews with due diligence underwriters reveal how lenders knowingly ignored fraud.
Before banks buy up bundles of mortgages made by other lenders, they
send teams of due diligence underwriters to review the files and make
sure they aren’t buying piles of radioactive mortgages.
Tom, a due diligence supervisor who would go on to become a
whistle-blower, recalls his underwriters laughing and comparing stories
as they came across mortgages that were obviously problematic.
“Here’s a guy that’s moving from $500 rent to a $650,000 house, and
he’s an electrician and his wife’s a waitress — HA HA HA — everyone in
the room laughing,” he says.
In cases where it was obvious that the lender had made a mistake or
that fraud had occurred during the approval process, the underwriters
say there were forbidden from calling it by its real name.
“We couldn’t say the word ‘fraud’ because we couldn’t prove that it
was fraud,” explains another underwriter, who says she and her
co-workers were repeatedly told to never use that word. “Even if we
suspected, we had to say ‘This
appears to be… incorrect.’ You would never say ‘fraudulent’.”
Tom says that when due diligence teams would tell their contacts at
the bank about high levels of defective loans — such as one bundle where
the defect rate was around 50% — “Everything got… renegotiated and
redone.”
In spite of the fact that Tom has been a whistle-blower in private lawsuits against banks, he says he was only
recently contacted by anyone from the Dept. of Justice.
3. The Citi Exec who tried to warn everyone the sky was falling.
As the housing bubble began to swell, Richard Bowen, a former Senior VP
and chief underwriter in Citi’s commercial lending group, responsible
for purchasing $90 billion/year in mortgages from other lenders, noticed
that “approximately 60% of these loans did not meet” the bank’s credit
policy guidelines.
As the volume of mortgages increased through 2007, the rate of defective mortgages increased from 60% to in excess of 80%.
In November 2007, Bowen tried to alert Citi higher-ups, including
then-chairman, and former Secretary of the Treasury, Robert Rubin, to
the breakdowns in Citi’s internal controls. He requested an outside
investigation, and pleaded for the executives to call him ASAP.
Bowen heard nothing back, so he tried again a month later. “I said,
‘Please, contact me! You need to know the details behind this,” he
recalls.
Bowen, who was demoted before ultimately leaving the company,
testified before lawmakers about his failed efforts. Citi has since
admitted to some wrongdoing in various civil actions, but not a single
top executive has been indicted on criminal charges.
4. How an oddball Senator from Delaware tried to goad the DOJ into properly investigating Wall Street.
Ted Kaufman had been appointed to the U.S. Senate in 2009 to fill the
seat vacated by new Vice President Joe Biden. He had no intention of
seeking re-election, and didn’t care about what Wall Street thought of
him. So who better to be the one to push investigators to take a hard
look at big banks?
After the DOJ failed to successfully prosecute a pair of Bear Sterns
hedge fund managers, there were rumblings that investigators had become
gun-shy about going after employees at another big bank.
So in 2009, Kaufman announced he was convening an oversight committee
to see what exactly the DOJ was doing with regard to its investigation
into Wall Street’s involvement in the mess.
“They started telling me about this great thing they had out in
California, this web to catch the mortgage brokers who had given out the
loans,” he recalls about an early meeting with investigators. “I made
it clear to them — absolutely positively — This is not about L.A., this
is totally about what went on on Wall Street. That’s what the bill says
and that’s where the emphasis is.”
And, what do you know, one week before the hearing was to convene,
the Obama administration suddenly announces the creation of the
Financial Fraud Enforcement Task Force, which claimed that it would not
hesitate to bring charges, where appropriate, against any level of the
financial world.
“The only reason that fraud task force was announced at that point was because someone had to go to the hearing,” says Kaufman.
Unfortunately, though investigators talked a good game in the early
going, the Task Force has not resulted in a single high-level
prosecution tied to the 2008 crash.
5. The DOJ Prosecutor tries to explain the lack of Wall Street indictments
In spite of documents and testimony uncovered by private lawsuits and
investigators for the Financial Crisis Inquiry Commission that would
seem to point to rampant fraud at high levels of many banks, the DOJ has
not sought a criminal indictment against any executives.
So Frontline asked Lanny Breuer, the Assistant Attorney General who
should be prosecuting these offenses, why no criminal cases have come to
fruition.
“We have to prove beyond a reasonable doubt — not a preponderance,
not 51% — beyond any reasonable doubt that a crime was committed,”
explains Breuer. “If we can not establish that, that we can not bring a
criminal case.
“But we don’t let these institutions go. We’ve brought civil cases.
We’ve brought regulatory cases and the entire approach here is to have a
multi-pronged, comprehensive approach to what gave to the financial
crisis.”
As for criticisms that his office has not made prosecuting Wall
Street a priority, he responds, “I made it an incredibly top priority.
But when we can’t bring a case, we have an ethical obligation not to
bring those cases. But it’s not for lack of trying. Our lawyers are
working incredibly hard and it’s a disservice for anyone to suggest
otherwise.”
Frontline confronted Breuer with claims made by former lawyers in his
office who claimed the prosecutor was overly fearful of losing a
high-profile case, and that Breuer’s office had begun no investigations
into Wall Street, had issued no subpoenas, reviewed no documents, nor
requested any wiretaps.
“We have looked hard at the very types of matters you’re talking about,” says Breuer.
In an attempt to demonstrate that his office is not afraid of
tackling Wall Street, Breuer points to the prosecution of Raj Rajaratnam
on insider trading charges.
When Frontline’s Martin Smith points out that this case has
nothing
to do with the financial crisis of 2008, Breuer replies, “The financial
crisis is multifaceted, and what we’ve had is a multi-pronged,
multifaceted response. And it’s simply a fiction to say that where
crimes were committed we didn’t pursue those cases… You have more people
in jail today for securities fraud and bank fraud than ever before.”
But not a single Wall Street executive.
6. The moment an optimist gave up hope of ever seeing justice.
Before leaving office, Sen. Kaufman convened a hearing to see what
exactly Breuer and his colleagues had been up to. At the hearing, the
prosecutor did not seem to show any urgency in going after Wall Street
executives.
“At that point, I just began to feel like ‘I’m being gamed here,’”
recalls Jeff Connaughton, Kaufman’s former Chief of Staff and author of
the book The Payoff. “Not only was no one going to be held to account
for the financial crisis, but… no one was going to be held to account
for the failure to hold Wall Street to account.”
7. Documentary maker wonders why he’s not having trouble finding whistle-blowers
Director Nick Verbitsky’s documentary, Confidence Game, features candid
interviews with former Bear Stearns employees who have since gone on to
become whistle-blower witnesses in private lawsuits against the bank.
“The ease with which I found these people and the things that they
were telling me — it wouldn’t have taken a lot of effort on the part of a
regulatory entity in Washington to have done this,” says Verbitsky.
“What have you guys been doing? I went out and found these people in my
spare time, basically.”
He says it wasn’t until a year after the public learned of his film that he was contacted by the DOJ.
8. Breuer dismisses Frontline’s ability find reliable sources
When Frontline’s Smith asks Breuer about why the DOJ is having such a
problem bringing indictments when whistle-blowers seem to be readily
available, the prosecutor almost loses his temper.
“I don’t accept for one moment that you all are finding
whistle-blowers that we’re not,” he declares emphatically, eliciting a
startled response from Smith. “What I do believe is that when we speak
to the whistle-blowers we have to make a determination as to whether
what they say is really a criminal case.”
9. Breuer explains why it’s okay for him to worry about the welfare of banks
In 2012, Breuer spoke at the New York Bar Association and mentioned that
he loses sleep at night thinking about the impact a high-profile
lawsuit could have on financial institutions.
“Is that really the job of a prosecutor — to worry about anything other than simply pursuing justice?” asks Smith.
To which Breuer responds, “I think I am pursuing justice… In any
given case, I think I and prosecutors around the country, being
responsible, should speak to regulators, should speak to experts.
Because if I bring the case against Institution A and as a result of
that case there’s some huge economic effect — if it creates a ripple
effect so that suddenly counter-parties and other financial institutions
or other companies that have nothing to do with this are affected
badly, it’s a factor we need to know and understand.”
Kaufman says Breuer never once discussed this concern with him during
any of their meetings: “That is not the job of a prosecutor, to worry
about the health of the banks, in my opinion. The job of the prosecutor
is to prosecute criminal behavior. It’s not to lie awake at night and
decide the future of the banks.”
10. Have Wall Street execs finally dodged prosecution?
While there have been numerous civil and regulatory actions against
banks, these suits do not single out individuals within the
institutions, and there don’t appear to be any criminal charges coming
down the pike.
Attorney David Boies, who has represented both plaintiffs and
defendants in suits against banks, says that while financial
institutions may continue to be put through the lawsuit mill for a
while, “There are probably a lot of individuals who have breathed sighs
of relief over the last two or three years.”
