Tuesday, October 29, 2013

DoJ Wins One Against BoA

DoJ Wins One Against BoA

Last week a jury in Manhattan found Bank of America liable of committing civil fraud.  The case involved Countrywide, the mortgage unit of BofA.  As the credit bubble was about to burst, Countrywide packaged up highly questionable mortgages and sold them to Fannie Mae and Freddie Mac as prime or investment grade securities.   The government sponsored agencies lost about $1 billion on them.  The outcome of the case seems notable to me for two reasons.
Random Meeting At the Bank (1996)
First, the Department of Justice’s case was built on the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a piece of legislation enacted after the savings and loan scandals.  The act allows the DoJ to try cases of fraud using a lower standard of evidence than in a criminal proceeding.  The standard is a “preponderance of the evidence” rather than evidence beyond a reasonable doubt. DoJ’s case was aided by the lower standard.  In addition, the statute of limitations is ten years, which means that the DoJ still has plenty of time to sort through the misdeeds of the credit bubble.

Second, the government’s case targeted only one Countrywide executive, Rebecca S. Mairone.  She was responsible for overseeing the Hustle program, an acronym derived from an initiative called “high speed swim lane,” which quickly moved loans off the bank’s books.  The jury found her liable for fraud because her employees deliberately mischaracterized the nature of the loans as they packaged them up.  Apparently Ms. Mairone had recently joined Countrywide when she was put in charge of clearing these questionable mortgages off of the lenders books.  Ms. Mairone’s liability in this case has stirred up a great deal of controversy, much of it quite beside the point.

Her lawyers picture Ms. Mairone as a hard-working single mom who took time off to attend her kids’ events.  Her critics describe her as a very aggressive manager.  Evidently she was much admired by many women in the organization because she took on Countryside’s male-dominated culture and succeeded.  Whether she attended Girl Scout meetings or was able an able player in the bank’s culture seems rather irrelevant.

In my view there are only two relevant issues involving Ms. Mairone.  Was she culpable in passing off toxic mortgages to Fannie Mae and Freddie Mac?  According to the jury, the answer is yes.  The case will be appealed, and perhaps an appellate court will find some legal error in the DoJ’s case.  But for now the first issue is settled.

The second issue is much more troubling.  Why was Ms. Mairone the only executive pursued in this case.  Anthony R. Mozilo, Countrywide’s founder and chairman, settled fraud charges with the SEC.  The settlement was for only $67.5 million, and Countrywide paid $20 million of that amount.  The settlement hardly put a dent in Mr. Mozilo’s net worth.  Moreover, the DoJ decided not to pursue criminal fraud charges against him.  That leaves open the question of why Mr. Mozilo and other senior executives weren’t pursued using the FIRREA standard.

Critics have attacked the DoJ for its failure to bring cases against senior executives at any of the major banks.  Lanny Breuer, former head of the DOJ’s criminal division, argued that the evidence against the top executives was insufficient to bring a case. It’s hard to know whether Mr. Breuer was right or not because we’re not privy to the DoJ’s investigative files.

However, it should come as no surprise that midlevel bank executives have been easier targets than the higher ups.  Financial institutions are adept at creating level after level of hierarchy to protect the executive suite.  Thus it shouldn’t come as any surprise that the evidentiary trail grows thinner and thinner as investigators try to get closer to the chairman’s office.     

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