Phil Angelides: Enforcement of Wall St. is “Woefully Broken”


January 22, 2013
Phil Angelides was chairman of the Financial Crisis Inquiry Commission, which was created by Congress in 2009 to investigate the causes of the crisis. In its report, submitted in January 2011, the commission concluded that the crisis was avoidable, a result of excessive risk taking, failures of regulation and poorly prepared government leaders. This is the edited transcript of an interview conducted on Oct. 11, 2012.

What was the FCIC?

The Financial Crisis Inquiry Commission was established by the Congress and the president in 2009 to be the official inquiry by the government into the causes [of] the financial and economic crisis that so devastated this country.

We were a 10-member commission appointed by the Congress of the United States. We were given a modest budget, ultimately just short to $10 million, with a very broad charge to look at the causes of the crisis that brought down our economy and caused so much devastation around this country. …

And also our charge was if we found potential violations of law, we were to refer those matters to the appropriate law enforcement authorities.

How many criminal referrals did you make?

We made a number of referrals. It’s up to the law enforcement entities to determine whether they’re criminal or civil. And you know, at the end of the day, we were not judge and jury. Our mandate was if we saw matters that rose to the level of potential violations of law we were to turn those matters over to the enforcement authorities, and we did that. …

We had a very broad mandate and a relatively short time in which to do our work. We ended up interviewing more than 700 witnesses. We held 19 public hearings. We had the power of subpoena which we used when necessary. We reviewed millions of pages of documents — corporate documents, regulatory documents — most of which had never seen the light of day.

Because of the breadth of our mandate, we knew that we couldn’t look in every nook and cranny of the financial world or in the regulatory world. So we decided to approach our work really through a series of case studies looking at specific institutions, specific practices as we looked at what happened overall in the marketplace.

But your job was to focus on mortgages and the role that the housing bubble played in leading to the crisis of 2008?

Well, our role was to look at what caused this crisis. And clearly a big focus of our effort ultimately became the mortgage machine, the madness that overtook our financial industry and ultimately devastated this economy. …

You’re not attorneys, primarily; you’re not a judge and jury. But you are detecting when something might be fraudulent and making referrals. How did you go through that process of making those decisions?

So first of all, we did have some attorneys on our commission, and people like Brooksley Born, who’s the former head of the Commodities Future Trading Commission, was on our commission. [Democrat] Bob Graham, a former governor and senator from Florida, served on the commission. And we did have attorneys on our staff.

Now, our primary mission was not to be a prosecutorial body. But as we did our investigations of various institutions and various practices, when we came across what appeared to be potential violations of law, the staff would identify those. They would bring those to the attention of the commission. And each and every referral that we did make to law enforcement agencies did come to the commission for a vote to pass those on to the law enforcement entities.

But really, the referrals of potential violations of law were really the byproduct of our look at a set of practices that existed at a whole set of institutions, from AIG to Bear Stearns to Merrill Lynch to Countrywide, the sets of institutions on which we did deep-dive investigations.

Have any of those referrals, to your knowledge, resulted in indictments?

Well, I have not yet seen criminal indictments that emanate out of our investigation or the investigations that were undertaken, for example, by [Sen.] Carl Levin [D-Mich.] and the [Permanent Subcommittee on Investigations (PSI)]  at the U.S. Senate.

My hope is that the wheels of justice are turning, albeit slowly, and that the information we provided and that others have provided are the basis of a more thorough investigation. …

Are you surprised that there’s been no criminal prosecution to date?

I’m surprised in this context: We didn’t find isolated wrongdoing. We found pervasive wrongdoing throughout this whole industry. We found a fundamental corruption throughout the chain of origination of mortgages to the packaging of those mortgages to the selling of those mortgages to investors all over the world.

And it’s hard for me to believe that all of this was unknowing, this was accidental, this was happenstance, because it really does add up very dramatically to a pervasively corrupt pattern of behavior.

You know, one piece of information that we released were documents from Clayton Holdings, who performed due diligence for two dozen banks, who were buying mortgages from the Countrywides, the Ameriquests, the New Centurys, packaging those loans up and selling them to investors.

“It’s hard for me to believe that all of this was unknowing, this was accidental, this was happenstance, because it really does add up very dramatically to a pervasively corrupt pattern of behavior.”

And if you look at the reports of Clayton Holdings, they’re in black and white, and they’ve got numbers. And what they show is in each of these banks they were buying loans, … Clayton Holdings was finding that a substantial portion of the loans, I think overall from January of 2006 to March of 2007, that 28 percent of the loans did not meet the standards of the lender or of the bank buying those loans.

And notwithstanding that very clear evidence in black and white, in numbers, bank after bank after bank, here’s what those banks did. They took those loans, they knew they were defective, and notwithstanding that, they never told the investors. In fact, they told investors quite the opposite. When they knew that they didn’t meet the appropriate standards, they told the investors that in fact they did.

And so you look at that pattern of behavior which seems to be knowing and pervasive, and I think it raises very serious questions about whether this is criminal conduct. Now, I’m not an attorney, and I’m not a judge, and I’m not a jury —

But you’ve looked very hard at all this stuff, and you’ve come to a conclusion that this looks like some form of fraud?

I don’t think there’s any question in that regard. In fact, our commission report said about this information from Clayton, what it said was it raised serious questions about violations of securities laws. And we said that not as judge and jury but in public as we released this information.

And here’s what’s almost the most pernicious [part]. These banks would hire Clayton to look at the loans they were buying. The reason they hired them is really the following: Let’s say they were buying loans from Countrywide. They would get the information from Clayton, they would look at it and say: “Well, you know, Countrywide, we’re paying you $100 for these loans, but there’s a lot of bad stuff in here. We’re not going to pay you $100. We’re going to pay you $80.”

So they used it in a sense to put more money in their pocket and then never took that information and passed it along. And now we find from [New York State] Attorney General [Eric] Schneiderman’s lawsuit that when they did find bad loans, they got money from the lenders who sold it to them, they put it in their pocket and never passed it along to investors.

So they negotiated a discount with Countrywide, but they didn’t pass that discount along to the investors, the pension funds that bought the mortgage-backed securities that they were selling.

Well, and what they were supposed to do is when they found a bad loan, they were supposed to kick it out, and now we find out they didn’t kick it out. We find out that they passed along the investors, and they took some money because it was a bad loan.

And even had they kicked out a few of those loans that they found were bad, these were simply samples?

Yes. They would sample 2 to 3 percent of a loan package. They were finding overall among all the banks that 28 percent of these loans were wholly defective, but they would never sample the other 95 to 97 percent of the loans. They took those without any sampling.

And it’s interesting. If you read our report, you’ll see that I believe it was the folks at New Century had a rule, it was called “Three strikes, you’re out.” … If a loan got kicked out, they’d just resubmit it, hoping that it wouldn’t fall into the sample the next time and it would get right through. If a loan got kicked back three times, then they’d give up.

The analogy a few people have used and that makes sense to me is an originator of mortgages is like a supplier of auto parts [in that] they’re taking that, putting it together, making a car and selling it on without real concern for the quality of the parts going into the automobile.

But it’s deeper than that. I mean, first of all, they did a level of due diligence, but it wasn’t what they represented they were doing. They were telling these buyers, “We’re really scrubbing these loans; we’re really looking at them.” And in fact, they were doing a cursory look, but the cursory look was turning up dramatic defects.

The analogy I think with what you just gave me with parts in a car is they might test those brakes one or two times or maybe 10 times, and three times they’re turning out to fail, notwithstanding that they’re putting it in the car and selling it, and they’re telling the buyer: “It’s all good. We’ve tested this. It’s all fine.”

But you know, at the very core of this … is that a lot of the focus for the last few years has been on individual transactions, individual cases where it’s been identified that institution X sold bad loans to institution Y. …

And if you talk to someone like Lisa Madigan, the attorney general of Illinois, she points out there’s a much bigger fraud going on here, which is the whole mortgage origination machinery of the 2000s were companies pushing fraudulent no-doc, low-doc loans into the marketplace, making those loans so they could make their fees and then passing those bad loans up through the system.

And in 2004 the FBI warned in clear terms that there’s the threat of an epidemic of mortgage fraud developing across this country which if it was unchecked would leave us with losses bigger than the savings and loan crisis. …

And so what you had is you had rapidly ascending numbers of what are called Suspicious Activity Reports [SARs]. These are reports that banks are supposed to file when they see potential criminal activity. And from 1996 to 2005, the number of Suspicious Activity Reports around mortgage fraud more than doubled.

And then from 2005 on, it begins to accelerate dramatically, tens of thousands of reports of potential criminal activity. It was systemic, it was pervasive, and it was a set of companies moving a product through the marketplace willfully being driven.

So I wanted to take you back to Clayton Holdings for just a second more. You identified fraud in the —

We said — again, not being judge and jury — that we believed it raised serious questions about violations of law.

Right. And you had no doubt that this was fraudulent behavior?

Well, I looked at the facts, and the facts are the facts.

Why is it that you could draw such a conclusion and that over the last four years there has been no prosecution of banks for their passing of these bad loans through the pipeline?

Obviously I’m a private citizen now. And the day we finished our report, we made our referrals, I returned to private life, so I can’t look into the machinery of the investigation.

And I’ve always felt — take particularly the Clayton instance — that what we laid out was a roadmap, again, in black and white, stark numbers, clear evidence that banks knew of defects, and notwithstanding that, passed on millions of loans to investors.

Not by accident?

No, this wasn’t one-off. This wasn’t —

This was with intent?

Well, you have to prove that in court.

But as far as what you could see, it was intentional behavior on the part of the banks to pass these loans on?

Sure, it was systemic; it was deliberate; it was their nature of doing business.

So when the Justice Department says, “It’s very hard to make a criminal case; you have to show intent,” you saw intent?

Well, the intent seemed to be that notwithstanding what these loans were, they would be passed on; they would be sold.

And not by accident?

Not by accident and not happenstance. Now, I will say this: that what I saw those documents being is in a sense a roadmap and really a call to do a systematic bottom-to-top examination of what happened at these various institutions, starting with the people at due diligence and moving up in those banks to find out who knew what when.

But this wasn’t, you know, done by phantoms. It wasn’t done by gremlins. It wasn’t done in the passive tense. These banks, whether it was Citigroup or JPMorgan or Merrill Lynch, they and the individuals within those banks were undertaking these practices. And the end result is they were the ones selling them in the marketplace; they were the ones representing that the loans did meet all the standards.

Now, my hope and belief is that the resources of the Residential Mortgage-Backed Securities Working Group, co-chaired by Attorney General Schneiderman, is now focusing on this very set of conduct. The first civil case has been brought against JPMorgan, who bought Bear Stearns, in which this evidence is front and center.

It’s been front and center in other cases like the Federal Housing Finance Agency’s cases that Fannie Mae and Freddie Mac were sold a bill of goods to the enormous detriment of taxpayers, probably $30 billion-plus in losses to taxpayers because of the peddling of fraudulent loans. But my hope is that the investigation proceeds, accelerates and identifies individuals of culpability

One thing that’s surprising about Schneiderman’s filing is that there’s no mention of any individuals. It’s as if it was done by gremlins; it’s as if there’s no actor.

Yeah, my hope is that these are each steps along the way.

Very late in the day.

Well, it is late in the day; there’s no question about it. There’s no question about it that more should have been done at an earlier point. And actually if you go back — let’s go back to the mid-2000s — what’s striking is at the very beginning, when the FBI warns about a pandemic of mortgage fraud, what does the Department of Justice do under Alberto Gonzales and Michael Mukasey? They pretty much do nothing.

In fact, Gonzales makes the case in our report that there are higher priorities. And albeit terrorism against this country is a high priority, but given the ultimate economic cost that we’ve borne, the devastating cost, what you never saw from the get-go here was the application of resources to determine whether in fact that was criminal behavior.

Look, I don’t think that what any of us should want are heads on a stake. I don’t think we want prosecutions for the purposes of revenge. But here’s what I think has to happen: If there have been wrongs committed, they have to be righted. And that means criminal prosecution if people broke the law, and that means redress and compensation to people from whom money was stolen.

Number two is I think it’s fundamentally important that the American people have a sense that the justice system treats everyone alike, that there’s not one set of rules for the wealthy and powerful and well-heeled, who can inundate Washington with thousands of lobbyists and hundreds of millions of dollars of lobbying expenses and political contributions, and a second standard for working Americans.

And you see this dichotomy in the prosecutions across this country, where all across the country people are being convicted for having lied on their mortgage application and no consequence for the very firms and executives who drove these products into the market and then sold them across the world and knew they were defective.

Here’s the final reason we need a vigorous enforcement effort, and that is you need deterrence. The current system of enforcement in the financial services industry is woefully broken. It works something like this: A bank and their executives break the rules, are charged with breaking the rules. Inevitably they settle, generally for a small fine when considered in the total cost of doing business. And then they go back to doing what they’ve been doing before. And so deterrence is fundamental here. …

I think what the American people in the end are owed is the real sense that the resources and will have been applied to pursue the case, not that we just want to string some people up — that would be wrong — but that a full effort has been made to deep dive into potential criminal wrongdoing.

I believe that because of the efforts of Attorney General Schneiderman, the president’s working group established earlier this year, we’re finally getting a head of steam up, but the clock’s been ticking. We’re running up against statutes of limitations.

… The banks could say — have said: “Look, we may have made the wrong decisions about some of these mortgages — we sold these things, and they proved to be defective — but it was not criminal what we were doing. We just made wrong judgments about our product. We put out a shoddy product, but we thought it was good. As long as people were willing to buy this stuff, we sold it to them. Greed or arrogance or even stupidity are not crimes.”

Yeah, I don’t think they thought it was a good product. I mean, they may have been caught up in the frenzy, but —

But if somebody’s willing to buy that product, is that a crime?

Well, but here’s what is the violation of law, civil or criminal — again, not as an attorney. If I tell you, “Look, I’m going to warranty –” you’re buying these thousand loans and I will tell you that you can look at the lender’s standards, and I’m going to tell you right now that the loans you’re buying meet the lender’s standards, and they didn’t, and they knew they didn’t. And you also have, you know, instances in many of these companies where people are warning about defects.

You have people inside of Wells Fargo, a woman named Darcy Parmer, [a mortgage fraud investigator and subsequent whistle-blower], who’s quoted in a report saying that on a routine basis that evidence of fraudulent loans [is] ignored by the banks.

You have [Countrywide’s CEO] Angelo Mozilo in 2004 and 2005 warning that the option ARMs — you know, these are these loans where people can pay less than principal so the amount of principal accelerates — warning that these loans could bring financial and reputational catastrophe to the company.

You have Francisco San Pedro, who’s the senior vice president at Countrywide, who’s supposed to be overlooking potential fraud within that company. And he’s identifying I believe in 2005, 5,000 loans that are problematical; in 2006, 10,000 loans; in 2007, 20,000 loans. But they’re reporting to the government a few hundred potentially fraudulent loans, far short of what they’re finding internally.

So the notion that people thought, oh, these are great products, I think is bunk. There was plenty of evidence all throughout the system that the loans being made, many were fraudulent, and they were being passed through the system. And this is where it really did become, I think, a pervasive corporate culture fraud.

How is it that these banks that have large legal departments and are very aware of the risks of litigation against them would allow for the mortgage-backed securities going out the door to have reps and warranties on it that were fraudulent, that were inaccurate? What did you find in your study?

Well, I think what you had were enablers. You had people who were making lots of money, being paid big fees, and not just people who were originating loans, packaging loans, selling loans — along the way, everyone’s making a fee.

Take Countrywide for a sec. I think in the early 2000s they generated about $1.5 trillion in loans. They sell 87 percent of those to other people. They’re a real business all along the way. Whether you’re a mortgage broker, whether you’re a lender, whether you’re a bank securitizing loans, you’re making a fee. So you’re making money by passing along the hot potato, the bad stuff. But also these law firms are making enormous monies to keep this machine going. It’s a tragic case.

But how would the legal departments allow the reps and warranties to be misstated?

I have no idea how they could or why they did.

As you referenced, Eric Schneiderman, the New York attorney general, has filed a lawsuit, the first of many. This first one’s against JPMorgan for what happened at Bear Stearns. Jamie Dimon has come back and said: “Look, you know, I did the government a favor. I did everyone a favor by buying Bear Stearns. This is unfair.” Is it unfair?

No, it’s not unfair.

Why not?

Well, first of all, JPMorgan, they’re big boys. I don’t think anyone here would say, “Poor JPMorgan, it’s an unsophisticated group of small bumpkins who didn’t know what they were doing.” They absolutely knew what they were doing. They bought this for a price that they bargained for. They got enormous government assistance in doing this. The government backstopped essentially close to $30 billion in Bear Stearns assets and potential losses. And like it or not, when JPMorgan did that deal, they took on the assets and the liabilities of that institution.

And I might add further that at the end of the day, the people from whom money was stolen, they are owed redress. And the fact is JPMorgan bought Bear Stearns. …

I want to go back to one other thing we were talking about, about the pervasive nature of this. … I think there’s something even deeper that’s happening within the financial industry that I think comes from enormous power and hubris. In the wake of the financial crisis, you would think that there would be some critical thinking about what happened and how things ought to be changed.

But what have we seen in the wake of that? We’ve seen allegations of money laundering at major financial institutions like ING, Standard Chartered Bank, HSBC. We’ve seen a bid-rigging scandal that’s broken out across this country where cities and towns were robbed of tens of millions, of hundreds of millions of dollars in interest earnings because banks colluded and rigged bids.

We’re seeing the Libor [London Interbank Offered Rate] scandal where at least Barclays and perhaps other banks — investigations are ongoing — may well have been fixing interest rates, by the way to the detriment of many savers and investors whose returns were tied to how that index did.

There’s a recent survey that came out in I believe June of this year of 500 senior executives in the U.S. and the U.K. in which 24 percent of those financial service executives say that they believe that to be successful in the financial industry, you might have to engage in illegal or unethical behavior; where 26 percent say that they have firsthand knowledge or they know of wrongdoing in the workplace; where 16 percent say if they could get away with insider training they would; where 30 percent say their compensation plans push them toward unethical or illegal behavior.

If you read the business pages today, it almost reads like a rap sheet. I mean, who would have thought — when you hear words like “money laundering,” “bid rigging,” “price fixing,” “fraud,” you think of the mob.

And you haven’t even mentioned MF Global, Peregrine or the “London Whale” [JPMorgan trader Bruni Iksil] trade.

And by the way, there’s tens of thousands of good people who work in this industry, but there is a corruption, I think, that’s very damaging to the sense of integrity of our financial markets and very damaging ultimately to our economy that’s got to be rooted out. But it won’t be rooted out if our system of broken enforcement continues.

… Some of the bankers would say, “Look, you know, this was all done in full view of what few regulators were sitting in their officers in Washington, and so it’s unfair to come along and suddenly talk about enforcing laws [while] the message was clear to all of us: Free markets are going to take care of everything.”

First of all, laws are laws, and a lot of the laws were on the books. And if they were violated there needs to be punishment for them. But the banks [have] to make the argument: “Look, we were highly successful in the 10 years running up to the crisis. We spent $2 billion on lobbying. We spent hundreds of millions, if not billions, on political campaign contributions to eviscerate a strong regulatory regime, and by the way, we’re still at it today.”

For them to say that, “Well, we were so successful at weakening enforcement; therefore we should not be penalized for that,” it’s an outrageous argument. …

“If you read the business pages today, it almost reads like a rap sheet. I mean, who would have thought — when you hear words like ‘money laundering,’ ‘bid rigging,’ ‘price fixing,’ ‘fraud,’ you think of the mob.”

Over the last 30 years, there’s been an emasculation of our enforcement capability with respect to the financial industry, and it was quite deliberate. There [was] first of all deregulation, which means the rolling back of laws overseeing this industry, or when there were opportunities to make sure that growing sectors of the financial industry like over-the-counter derivatives were regulated, the industry moved in.

But perhaps as perniciously there has been what you call desupervision, which is the defunding, the political pushback on regulators, the intimidation of regulators to do their job.

I mean, take a look at what happened to Brooksley Born, my fellow commissioner. She saw a problem arising with derivatives; she stepped forward, and then the crushing weight of the financial industry and their allies in Washington were brought to bear on her. … And I think we’re still seeing that today when we talk about a vigorous enforcement effort. It’s hard to change that culture overnight.

In putting together your report, you faced pressure from Wall Street and friends of Wall Street.


Tell me about that.

Let me just say two things. First of all, big picture, it’s going on today. As we sit here today, there are constant attacks on the budget of enforcers, attempts to cut the Securities and Exchange Commission budget even though they take in more money in fines than their whole budget. So this isn’t about saving the taxpayers money.

There are attacks on the Commodities Futures Trading Commission [CFTC] budget. Their budget is $200 million. The president asked for $300 million. The House Republicans slashed it to $180 million. And here’s the stupidity of it: They were aggressive enough in going after Barclays for fixing the Libor interest rate, and they got a fine of $200 million, enough to pay for their own budget, so good enforcement pays for itself.

But this is a pattern. This is an industry that is so powerful it goes after the very people who are charged with overseeing it and investigating it. And yes, we saw it at the commission. The fact is that we were there as public servants called by the Congress of the United States, people from all over this country, and by the way, a professional staff who took their time off to do service to the country to try to tell the story of what happened to the United States, how we got into this financial crisis with its devastating results. …

Even our own commission, which is the duly constituted investigatory body of the United States government, at the end of our work we were subject to an investigation by Darrell Issa (R-Calif.), head of the [Oversight and Government Reform Committee]  of the House of Representatives, who was trying to do anything he could to discredit us.

And it was quite disconcerting as an American citizen to know that someone was trying to discredit our work merely because we had the temerity to speak the truth, to lay out the facts and to frankly speak very bluntly about the most powerful of financial [institutions] in the country, Wall Street. …

And by the way, during the course of our investigation, Wall Street applied enormous resources to this effort. We had a budget of $9.8 million. There’s an attorney named Reg Brown who represented a number of banks who bragged that he was being paid by his banks more than our entire budget to represent his firms in front of our inquiry. Quite stunning.

And during the course of our work, Republican members of the commission actually brought before us resolutions to strike the word “Wall Street” from our report, to strike the word “deregulation” from our report, to try to emasculate it and eviscerate it. It was quite something to see. …

After the publication of the report or even during the putting of that report together, your hearings were public; a lot of information was getting out there. Did you receive phone calls from the SEC, the CFTC, the Justice Department, the FBI? Was there interest in what you were doing?

Well, we talked to those enforcement agencies all the time, so I would say that we were in constant dialogue, because we were often asking for information; we were talking —

But you were asking them for information. Were they coming back to you and taking a look at what you call the roadmap and saying, you know, “Tell us more; what more can you give us?” Were they showing an interest, in other words?

I think it depended on the agency. But at the end of the day, what we did is when we felt a matter rose to the level of potential violation of law, what we did was we took the evidence we had put together, we put together a memo, we sent that memo as well as the background documentation we had over to the enforcement agencies and said, “Here’s what we have.” And we recommended as a commission they look at it.

Now, we respected the formal process in the sense that we understand it was their job then to pick up the baton and run with it. …

They haven’t done any indictments.

As I said, what I expect and every American ought to expect is a full-throttle investigation with the resources to match.

And we haven’t seen that?

Yeah, we’ve been short of where we need to be. There seems to be improvement. But generally my view has always been that once we turn matters over to the investigators, they do have their own process. They keep it close to the vest, and I respected that.

I mean, we could have made, quote unquote, “great headlines” by announcing our referrals. But I thought as a matter of fairness to those who might be investigated and for the purity of the investigative process, it was for us to turn over to the investigators and for them to then run with it.

But no, I believe I’ve been very vocal that we need a number of things to happen. … Let me just talk about a couple of things that I think need to happen on the enforcement front.

First of all, there’s just the matter of resources. If you don’t look you won’t find. If you don’t have the resources and the army to look, you will not find. …

Now, back in the S&L crisis, the first President Bush asked for $50 million special appropriation, which a Republican president asked for and a Democratic Congress gave, which was enough to add 450 investigative personnel to bolster what was already a pretty good commitment by the Department of Justice to investigate potential crimes in the wake of the S&L crisis.

As you know, more than 1,000 bank executives were convicted or pled guilty to felonies. In this instance, resources have been modest at best. Now, the president asked for $50 million this year in terms of additional appropriations to fight financial fraud, but it’s been sitting up on Capitol Hill. Eric Schneiderman has been fighting for more resources for the mortgage fraud investigation.

And you know, the reports I see which are only public is that there’s about 200 people — I’m not sure they’re full-time — working on this. But clearly for the magnitude of what happened here, you need the resources. …

Secondly, you need to engage the regulators. You know, back in the S&L days, the regulators in a sense were the sherpas. They led the Department of Justice, the FBI to the potential wrongdoing. In the end they know financial fraud, financial crimes better than your run-of-the-mill Justice person might or FBI person might. …

In this crisis, you have these beaten-down regulatory bodies that have been deprived of staff, that have been under political pressure not to do their job. The culture of regulation has receded in the fact of this wonder of deregulation where banks are supposed to be able to protect their own interests, and somehow that will end up protecting the public. …

And as of this date, still the Office of the Comptroller of the Currency and still the FDIC and still the Federal Reserve are not part of the working group on mortgage fraud, and they need to be. …

But in the absence of any vigorous regulation, the last line of defense was the rating agencies and the due diligence firms and I suppose the originators and the banks’ own sort of in-house due diligence?

And that was supposed to be the great theory of deregulation, that the banks’ self-preservation instincts would be so great that they would result in protection of the public interest. …

The checkpoints were supposed to be that you would have internal due diligence, you would have rating agencies, and you would have the banks’ own self-preservation instincts.

Now, as to the third, the banks just kept selling these along the line. And they kept thinking, well, we don’t really care what’s in them because we’re making a fee, and we’re going to keep selling them. Well, at the end of the day, when the music stopped, they of course couldn’t sell them and they were left with tens of billions of dollars of this stuff on their own balance sheets, and they collapsed under the weight of it. …

Is it possible that at the tops of these firms that the executives did not know the extent of bad mortgages that were flowing through their companies?

I’m sure that’s possible, but what an investigation needs to do is it needs to start with the line people and move all the way up and find out what people knew and when they knew it and how much they knew.

And how it high it goes?

Yeah, but if you take a organization like Citigroup, for example, there’s clear evidence in our report that people involved in due diligence, like [senior vice president-turned-whistle-blower] Richard Bowen, signaled up the line all the way up to [former Treasury Secretary and Citgroup chair] Robert Rubin that something was wrong, that they were finding that some 60 percent of mortgages that they were buying weren’t meeting their standards.

And Citigroup has responded by saying that they looked at what Bowen had told them and took care of it.

That’s what they’ve said. And I don’t know what that means. …

[Bowen] found 60 percent of the loans, up to 80 percent by the end of it as defective.

Correct. Enormous percentages.

And your commission found him credible?

Yes, we did. We found him credible. And he produced also the information for us to show that he was sending the warning flares up the line all the way to Robert Rubin, all the way up the chain.

These were big institutions, so let’s keep that in mind. Is it possible that someone at the very top didn’t know of the practices going on below?

Well, we know Robert Rubin heard about it.

He certainly did. So here’s my view: First of all, the way you find out is you go all the way up the chain; you find out who knew what when. …

But if the excuse at the top was, “We didn’t know,” that’s a pretty poor excuse from people who are hauling down $10, $20, $30 or, in Robert Rubin’s case, $115 million a year.

Did you talk to Robert Rubin about this?

He testified before our commission.

And what was his response to Bowen’s charges?

Well, his response generally was a very disappointing response.

But he didn’t deny having gotten the report from Bowen?

… There was an acknowledgement by the institution that they received it. But you know, Robert Rubin’s general line, which I found disappointing, was that he had no operational control, no operational authority. He was chairman of the executive committee of the board of directors. He was paid more than $100 million a year.

And as I said at the time to him, which is you can’t have it both ways. I mean, you either were pulling the levers or you were asleep at the switch. And I think that’s what I would say for all the executives who now claim ignorance of what their institutions were doing.

But go back to the bigger picture. Their business, the [mortgage] securitizers was to move these huge volumes of loans into the marketplace. They either knew or they should have known, period.

Now, whether the absence of knowledge is criminal, that’s for judges, juries, prosecutors [to determine]. …

Was there a moment that made you most angry in the hearings or in the process of going through documents?

It built over time. There seemed to be a couple things [that] really gnawed at me and still do today. Number one is there seems to be almost no critical self-analysis among the leadership of Wall Street about what happened, what went wrong and what it did to the country, no coming to grips with the fundamental corruption that led to disaster.

And I think that that’s largely a result of in the big picture Wall Street was spared the consequences of its own horrific behavior. If you think about it for a minute, there’s been really almost no economic price. By 2010, while tens of millions of people were suffering in this country, Wall Street compensation hit a new record.

The biggest banks in this country are bigger than ever. This didn’t hurt their growth. The 10 biggest banks now control 77 percent of the nation’s banking assets. Take a look at last year: The five biggest banks had profits of $51 billion. And even though their stocks didn’t do well, each and every one of their CEOs saw their pay go up. …

It’s like a dramatic earthquake struck leaving rubble all over the country, and the only thing left untouched were the gleaming skyscrapers at the epicenter of the earthquake.

So there’s been no economic price paid. There’s been no real legal price paid. If you look at the current system of enforcement, as I said, it’s woefully broken. They break the rules, they pay a fine, they go about their business. And there’s no evidence that I’ve seen yet that improper behavior is abating. And you look at Goldman, even the record settlement that they paid for the Abacus transaction —

The $550 million?

Yes, the $550 million, less than 2 percent of their revenues for that year. And on the very day they settled, their stock goes up billions of dollars.

They’re charged by the SEC with having huddles, which they’re not supposed to have. These are meetings of analysts and traders, and they’re forbidden because they lead to the possibility of insider trading. So they get charged with that; they pay $22 million, which by the way they earn in seven hours of trading.

Look at Citigroup for a minute. They misled their shareholders and the investing public about what their subprime exposure was. They were telling everyone in 2007 it was $13 billion, and it was $55 billion. So what’s the penalty? The company gets fined $75 million, which means the shareholders pay.

“It’s like a dramatic earthquake struck leaving rubble all over the country, and the only thing left untouched were the gleaming skyscrapers at the epicenter of the earthquake.”

You know, in all these instances, it’s the shareholders who pay. That means your 401(k), your pension fund are paying the penalty for their wrongdoing. The CFO, Gary Crittenden, he paid $100,000 for that, and he made $7 million in 2007. You know, this is all akin to someone who robs a 7-Eleven, takes $1,000 and being able to settle for $25 and no admission of wrongdoing. I mean, will they do it again? Absolutely, because it pays.

And then finally they’ve really paid no political price. It’s quite remarkable to see the ongoing political power of the financial services industry. In the last two years alone, they’ve spent $300 million on lobbying in Washington. They’ve contributed over $200 million to federal candidates in the last two election cycles. And you know what? It’s working for them.

Two-thirds of the new rules under the financial reform law are still not in place. Think of this. It’s now four years after the financial crisis, more than four years after and the $600 trillion derivatives market is still in the shadows despite the best efforts of people like [CFTC chair] Gary Gensler to bring it out.

Still unregulated?

Yeah, when you strip it all away, still unregulated.

So given all that you’ve just said, what do you think you accomplished?

Oh, I think this is a battle for the future of the country’s economy that has to be won. I think what we accomplished is we told the truth about what happened, and truth is always very powerful.

But it has not resulted in much change based on the litany of things you just —

Right, and I will tell you something. I didn’t expect instant change, because what we’d seen is 30 years of a drive by this powerful interest at deregulation, 30 years of emasculation of regulatory entities, 30 years of weakened enforcement. And I believe to change that is going to require a very powerful political dynamic in this country, which I think is beginning to grow.

I think there’s an increasing number of people who want to break up the big banks, first of all because of a distorting power they have on the market but also because they distort our democracy. And they’re too big to regulate; they’re too big to manage. …

I see more and more people in this country left and right who are concerned about the dominance of the financial industry over the real economy. So I view this as a long-term struggle for the benefit of the American economy. …

So you’ve planted the flag?

We’ve planted a flag. We laid out facts that are a roadmap for investigators which I believe they must follow, and we must speak out to make sure they do. We’ve also, I think, laid down the ugly truth of what happened, which hopefully will be part of the seed corn of a change in the financial industry going forward, because here’s what I think needs to happen. Here’s [what is] at the heart of this. The financial services industry ought to be in place to serve the larger economy. It ought to be about providing lending capital for business expansion, for job creation. It’s become something very different.

It’s become a beast unto itself full of speculation, full of risk, full of contempt for the rules of American society and our economy. And in many respects, it needs to be corralled so it can go back to providing its real function, which is to support the American economy, be a lender and provider of capital to create wealth in this country. …

Jason M. Breslow

Jason M. Breslow, Former Digital Editor



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