Back in (William K.) Black

The numbering kind of falls apart at 6 and 7.  You have my best guess.

Or you could ignore his system altogether and come up with a dozen or two “epic fails.”

Is B of A the Most Embarrassing Department of Justice Suit Ever?

By William K. Black, New Economic Perspectives

Posted on August 8, 2013

The Department of Justice’s (DOJ) latest civil suit against Bank of America (B of A) is an embarrassment of tragic proportions on multiple dimensions.  In this version I explore “only” seven of its epic fails.

The two most obvious fails (except to the most of the media, which failed to mention either) are that the DOJ has once again refused to prosecute either the elite bankers or bank that committed what the DOJ describes as massive frauds and that the DOJ has refused to bring even a civil suit against the senior officers of the banks despite filing a complaint that alleges facts showing that those officers committed multiple felonies that made them wealthy by causing massive harm to others.  Those two fails should have been the lead in every article about the civil suit.

The next most obvious DOJ fail, also ignored, was that the DOJ compounded the first two fails by congratulating itself for holding the frauds “accountable” for their crimes.  One can only imagine the hilarity with which B of A senior officers in their mansions they bought with the proceeds of their frauds must have greeted the DOJ’s latest pratfall.  If DOJ’s leadership cannot find the intestinal fortitude to renounce their infamous “too big to prosecute” doctrine they can at least have the decency to stop praising themselves for violating their oath of office and their duty to the Nation.

The fourth fail adds a new means by which DOJ has caused long-term harm to the Nation.

The complaint alleges that the Federal Home Loan Bank of San Francisco (FHLBSF) and Wachovia were prudent purchasers of B of A’s mortgage backed securities (MBS) – unlike the normal, imprudent MBS purchasers whose numbers are so large as to be “countless.”  Any competent defense counsel for the banks and bankers, credit rating agencies, etc. being sued for fraud will be eagerly quoting DOJ and demanding that the courts dismiss the lawsuits of investors that purchased MBS sold with the aid of fraudulent “representations (reps) and warranties” on the grounds that the investors were imprudent because they were “chas[ing] … higher rates of return.”

Fifth, it is hilarious for DOJ to claim that (in 2008) Wachovia, one of the Nation’s most notorious originators of fraudulent loans; was a victim of unique purity when it bought MBS from B of A.  Of course, it was equally hilarious when B of A responded to the complaint by claiming that it could not have engaged in fraud because Wachovia and the FHLBSF were financially “sophisticated.”  Criminologists have long observed how vulnerable the allegedly sophisticated are to being defrauded.

(Sixth) Why does DOJ Pretend that B of A’s Fraud Only Occurred in 2008 in One Deal?

The Complaint demonstrates that B of A engaged in widespread fraud, yet it sues only against one of the B of A’s officers’ relatively smaller frauds (though even it, at $885 million, is huge).

Again, it becomes clear that DOJ does not understand the most basic facts about the actual B of A fraud schemes and is unwilling to bring even a civil action large enough to recover a substantial amount of the losses caused by B of A’s vastly larger fraudulent sales of fraudulent mortgages.  I have explained that no honest lender would take the actions B of A’s officers took to ensure that its underwriting was pathetic.  In the home mortgage lending context this will produce widespread mortgage origination fraud.  Fraudulent loans can only be sold to the secondary market through further fraud.

DOJ is focused on a false assumption that the secondary market is the key rather than the ability to borrow and grow by reporting record (albeit fictional) profits in the near term by following the fraud recipe.  DOJ also fails to ask the obvious question – if the secondary market caused such a drastic and perverse change in home lenders’ economic incentives why didn’t the secondary market purchasers realize that fact and take steps to protect themselves from the lenders’ perverse incentives?  Nobody had a gun to Wachovia and the FHLBSF’s heads and required them to buy B of A’s fraudulent MBS.

(Seventh) An excerpt from paragraph 50 of the complaint illustrates DOJ’s factual and analytical incoherence and indicates why its incoherence has been fatal to any prosecution of the credit rating agencies for their role in aiding and abetting fraud in the secondary market.

These statements are, at best, disingenuous.  The credit rating agencies could have required that they be provided with the loan types on all the underlying mortgage files.  The investors could have refused to purchase the MBS unless B of A gave them the right to review a sample of the loan files.  The credit rating agencies and the purchaser deliberately refused to review even a sample of the files of the loans sold in the secondary market.  Had they reviewed a sample of the B of A’s loan files (and been honest) they would have never have purchased the loans because the quality of B of A’s portfolio was awful – and rapidly falling.

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    • on 08/08/2013 at 19:48

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