The Untouchables

>>NARRATOR: Tonight... >>Fraud and potential criminal conduct were at the heart of the financial crisis.

>>NARRATOR: More than four years later... >>No one going to jail, no individuals being held accountable.

This is totally about what went on on Wall Street.

>>NARRATOR: Frontline investigates why no Wall Street executives have gone to jail.

>>The FBI wasn't aiming high enough.

>>There was a definite sense that Justice backed off.

>>NARRATOR: Did the government fail?

>>MARTIN SMITH: A number of people told us that you didn't make this a top priority.

>>Well, I'm sorry if they think that, because I made it an incredibly top priority.

>>So you're telling me that not one executive on Wall Street committed provable fraud?

I mean, I just don't believe that.

>>NARRATOR: Tonight on Frontline, "The Untouchables."

>>Although this downturn started in the housing sector and in the financial sector, you're seeing a lot of things being hit.

>>Today's numbers suggest job losses are accelerating.

>>Almost 600,000... >>That's the biggest loss since 1974.

>>NARRATOR: In 2009, Wall Street bankers were on the defensive.

The great American mortgage bubble had burst.

>>This is a huge amount of money.

>>NARRATOR: The economy was in ruins and Wall Street bankers were being blamed.

Bankers admitted they had miscalculated.

But they were also worried that they could be held criminally liable for fraud.

>>He and President Obama will continue to work on... >>NARRATOR: With a new administration arriving in Washington, bankers and their attorneys expected investigations and at least some prosecutions.

>>...almost $50 billion in mortgage-backed securities.

>>SMITH: Was there a sense that there were going to be prosecutions of alleged fraud related to the mortgage crisis?

>>I think there was that expectation.

I think people had seen the financial crisis.

There was obviously a lot of conduct that had gone on that was improper.

And I think people were expecting to see some substantial prosecutions.

>>The men and women who duped would-be homeowners, who defrauded the American investor, need to be identified, prosecuted, convicted and thrown in jail.

>>NARRATOR: In Washington, there was broad support for prosecuting Wall Street.

>>I was really upset about what went on on Wall Street that brought about the financial crisis.

Not only destroyed the finance... almost destroyed the financial system of the United States, almost destroyed the financial system of the world.

That doesn't happen if there isn't something bad going on.

>>NARRATOR: But today, more than four years since the financial crisis of 2008, there have been no arrests of any senior Wall Street executives.

Chief of the Criminal Division at Justice, Lanny Breuer, says the problem is that greed is not necessarily criminal.

>>I am personally offended by much of what I have seen.

I think there was a level of greed, a level of excessive risk taking in this situation that I find abominable and I find very upsetting.

But that is not what makes a criminal case.

What makes a criminal case is that I can prove beyond a reasonable doubt every element of a crime.

>>NARRATOR: Some former prosecutors believe the problem is a lack of effort.

>>The Justice Department failed.

They have not done what needed to be done.

They didn't ever try to bring together in one coherent narrative, laying out the entirety of the story, against one of the major players and demand sanctions that are meaningful.

That to me is what has been fundamentally lacking.

>>NARRATOR: The story of how the big banks amassed enormous fortunes packaging home loans into securities and selling them to investors all over the world began, of course, on the ground with mortgage originators.

>>What my Econ I prof taught us was business goes in cycles.

My name is Michael Winston.

I worked for Countrywide Financial Corporation from 2005 till 2008.

They said their goal was world-class.

Goldman Sachs on the Pacific.

And they wanted me to realize their vision.

See now if you can reach up, with both fists... >>NARRATOR: Michael Winston once lived inside the bubble at mortgage originator Countrywide.

At first, Winston was impressed by CEO Angelo Mozilo and how he had turned Countrywide into America's number one mortgage company.

>>How ya doin'?

>>NARRATOR: But just a few months into the job, Winston had an encounter in the company parking lot.

>>I'd been there five months when I happened to park next to a car with personalized vanity plates.

And the personalized plates said, "Fund 'Em."

And I had a conversation with the person nearest the car.

I didn't know if it was the owner or just some guy walking by.

And I just said, "'Fund 'Em,' that's an interesting plate.

What do you suppose that means?"

And he said, "That's Angelo Mozilo's growth strateg for 2006."

And he said, "We have a loan for every customer."

>>A growing family with a lot of debt.

>>And I said, "A loan for every customer?

How can that be?"

>>A business owner whose income was hard to document.

>>"What if the person doesn't have a job?"

"Fund 'em," the guy said.

I said, "What if he has no income?"

"Fund 'em."

"What if he has no assets?"

And he said, "Fund 'em."

>>Every one of them was turned down for a home loan by three different lenders.

I'm with Countrywide, and I got them all approved.

>>I said, "I'm confused.

"What are the standards you use, the criteria against which you make lending decisions?"

And the guy looked at me, smiled smugly and said, "If they can fog a mirror, we'll give 'em a loan."

>>My name is Christopher Cruise.

I was a trainer of mortgage loan originators throughout the country.

There was a Plano, Texas, office in Countrywide, and people would sidle up to me, saying, "You wouldn't believe what's happening around here.

"You wouldn't believe the loans I've been getting approved here."

They were just flabbergasted at what would... what was going through the pipeline.

>>These are still on the books.

Did you know that?

>>NARRATOR: Christopher Cruise describes an industr driven to loosen its standards by demand from New York.

>>You got the sense that Wall Street was in control of underwriting standards and not the mortgage industry.

>>SMITH: What do you mean?

>>Well, if the underwriting was acceptable to Wall Street, if the underwriting was acceptable to the ratings agencies, that's all that counted.

And so my sense is, it was probably a game among the people in the mortgage business to say, "Let's come up "with one of the worst loans we could possibly imagine and see if Wall Street will buy it."

>>New homes are selling at the second highest rate on record.

>>And then that type of mentality translates into, "Don't worry about whether the documents are valid.

"Don't worry about whether we can verify income.

"Don't worry if the appraisal is any good.

"Just worry about getting the damn loan closed.

"Because if you can get that closed, "we can get that securitized "and then turn around and do another loan.

"Don't worry about it.

"There's too much money out there.

Just get the loan closed.” >>...expected to dole out $36 billion in bonuses this year.

>>This is totally about what went on on Wall Street.

Was, in fact, Wall Street going out into California and saying, "Hey, just put the mortgages together.

"Don't worry whether they're good or not.

"You get a fee, I'll take 'em, I'll bundle 'em up, "I'll sell 'em off to somebody else, "I'll make my money on that.

"And whatever happens to the mortgages doesn't really matter."

>>NARRATOR: Even during the bubble years, the Department of Justice had arrested and prosecuted many small mortgage brokers, loan appraisers and even homebuyers.

But to go after Wall Street bankers would prove to be much harder.

>>SMITH: The Justice Department has indicted something like 2,000 to 3,000 people that were making the loans, the loan originators.

>>Right.

Shooting fish in a barrel, that's what that is.

>>SMITH: No bankers have gone to jail.

Does that surprise you?

>>No.

It doesn't surprise me.

>>NARRATOR: To prosecute Wall Street, investigators needed to find proof of what the bankers knew and what they intended.

This meant identifying people on the inside who were willing to talk.

>>I have always believed you start at the bottom up in a bank, you start at the credit department.

Go to the credit department.

Find out what the credit department knew.

Those are the guys who wear green eyeshades, who don't get the big bonuses, who want to make sure that the loans, the underwritings are legitimate.

They actually crunch the numbers.

They're the ones who send the memos up to the folks who get the big bucks.

How the folks at the top react to those memos is what determines whether the bank acts properly.

>>NARRATOR: At the big investment banks, the credit departments hired contractors known as due diligence underwriters.

>>My name is Tom Leonard.

I was a due diligence underwriter.

>>My name is Eileen Loiacono and I was a contract underwriter.

>>My name is Chico Morton and I was a due diligence underwriter.

>>SMITH: What does a due diligence underwriter do?

>>A due diligence underwriter assesses the risk of buying loan portfolios.

So a company on Wall Street, they're going to bu a loan pool, or a portfolio of loans, and we would be hired to go in and take a sample of the loans and review them.

>>SMITH: So you were contract workers?

>>Yes.

>>SMITH: And then what would you do?

How would you go about doing the due diligence?

>>Well, we would travel to the location where the loans were stored.

And we'd have a room, either a hotel room, conference room, or some workroom where we could set up tables and our laptop computers.

>>SMITH: So these loans would come in in banker's boxes?

>>Yes.

A lot of times, we were doing the manual labor of... of moving the boxes of loans back and forth.

Load all these boxes on vans and drive 'em to the hotel.

Unload 'em at the hotel, into the room where the due diligence underwriters were working.

And there could be stacks all the way up to the ceiling.

And there could be anywhere from ten to 20 separate mortgages within each banker's box.

>>30 underwriters crammed at a table, you know, bumping shoulders.

And, you know, sometimes we're in there at 6:30, sometimes we're out at 10:00, 11:00, 12:00 at night.

I've been on jobs where we... we worked late.

>>SMITH: And so, what was it like?

What was the atmosphere like?

>>Um... it was like a party.

You know, we were all in hotels together, so, you know, it was definitely a party atmosphere.

We were getting through those loans as quick as we can.

They were not being looked at like they should have been looked at.

>>It wasn't uncommon to have an underwriter on one side of the room start to laugh and say, you know, "Hey, get a load of this.

"You know, here's a guy that's moving from $500 a month in rent "to a $650,000 house, and he's an electrician and his wife is a waitress."

(imitates laughter) Everybody in the room laughing.

Somebody else would have another story.

>>Schoolteacher making, you know, $10,000 a month.

Or a waitress making, you know, $12,000 a month.

You're supposed to exercise some common sense and, you know, like, say, "Okay, well, is it reasonable that they could make XYZ a month?"

But a lot of times, we didn't do that.

>>SMITH: You didn't do that, on the instruction of your supervisor, your lead?

>>Right.

>>SMITH: So the lead would say what?

>>Um... (laughing) "Looks reasonable to me."

>>SMITH: So he would say, "That waitress making $12,000 a month looks reasonable to me"?

>>Yeah.

>>SMITH: You're kidding.

>>Well, depending on the area.

You know, if it's... >>SMITH: What area does a waitress make $12,000 a month?

>>Las Vegas.

You know, if it's Vegas, then, you know, possibly with tips and all that stuff, or... >>SMITH: I can't do the math, but that sounds pretty high.

>>Right.

It is high.

>>You couldn't say the word "fraud" because we couldn't prove that it was fraud.

>>SMITH: Well, if you saw something that was a misrepresentation, you were expressly told, "Don't write 'fraud' or mention... use the word 'fraud'?"

>>All the time.

Even if we suspected, we had to say, "This appears to be incorrect."

You would never say, "This looks fraudulent."

>>SMITH: Were you told to ignore loans that you clearly knew contained fraud?

>>Um... Well, fraud, in the due diligence world, fraud was the F-word, or the F-bomb.

You didn't use that word.

>>SMITH: Even if a loan was clearly, you know, a stated income loan that made no sense, there was no support for... >>Yeah, but you didn't use the word "fraud" when you... >>SMITH: But it was fraud.

You saw loans that... >>By your terms and my terms, yes, it was fraud.

By the due diligence terms, it was something else.

>>NARRATOR: And it wasn't just outside contract underwriters who were finding fraud.

Insiders at the big banks were finding problems.

>>My name is Richard Bowen.

I was with Citigroup and I was a senior vice-president and business chief underwriter in the commercial lending group.

And the overall operations I had purview over involved about $90 billion a year of mortgages we were purchasing from other mortgage companies.

>>SMITH: And what were you to do with those $90 billion worth of mortgages?

>>I had responsibility to make sure that those mortgages met our credit policy guidelines.

>>SMITH: So the bank had agreed to buy these loans.

>>Subject to their meeting our credit policy.

>>SMITH: But you found out that the loans that you... your team was looking at didn't meet the credit policy?

>>We found that approximately 60% of the loans did not meet our policy.

>>SMITH: 60%?

>>60%, yes.

>>SMITH: 60% of the loans didn't meet the... >>Our policy, yes.

And the volumes increased through 2007, and the rate of defective mortgages increased from 60% to in excess of 80%.

>>NARRATOR: On November 3, 2007, Bowen wrote an e-mail to four senior Citibank executives including board chairman and former Secretary of the Treasury Robert Rubin.

"Since mid-2006, I have continually identified "breakdowns in internal controls.

"I must now communicate these concerns...

I am deeply distressed."

>>I actually included in that e-mail my cell phone, told them I was available this weekend, to please call me.

And in that e-mail, I also requested an outside investigation.

And in December, I sent another e-mail and I said, "Please contact me.

"You need to know the details behind this.

There are risks to the company."

>>Just a few months ago, they were giants, but now they need rescue.

>>NARRATOR: There were risks to the entire country.

By 2008, highly-leveraged banks stuffed with bad loans began to fail.

>>The Federal Reserve is bailing out Bear Stearns.

>>That business is gone.

>>SMITH: What did you think when Bear Stearns went down?

>>I couldn't believe it.

Like, I thought the whole banking system was about to go down.

>>NARRATOR: It almost did.

Billions drained from the economy overnight.

The party was over.

>>...in July and said everything was great, and off that a lot of people bought stock... >>Bill O'Reilly was having a temper tantrum on his show where he was going off about, you know, "Why didn't I hear about this?

"Why didn't somebody tell me about all this that was going on?"

>>This industry... 90%... 90%... >>And I almost threw my shoe through the television set.

>>We just heard the words, look, stop the BS here.

>>And I was screaming and yelling, "I did try to let you know!"

'Cause he had been one of the ones that I had sent e-mails and never received any response.

>>Millions of American taxpayers are still wondering, how did we get ourselves into this economic mess, and is there someone truly to blame?

>>Hello, everybody.

>>NARRATOR: To help prosecute those who were to blame, President Obama signed a new bill.

>>Four months ago today, we took office amidst unprecedented economic turmoil.

>>NARRATOR: It was designed to amend America's fraud statutes.

>>...sign the Fraud Enforcement and Recovery Act... >>NARRATOR: To make prosecution easier and also to increase funding for the SEC, the FBI and the Department of Justice.

(applause) >>Senator Ted Kaufman is a Democrat from Delaware, the man who now holds the seat vacated by Vice-President Joe Biden.

>>NARRATOR: Senator Ted Kaufman was a co-sponsor of the bill.

He was an unusual senator.

>>When this particular term is up, what are you going to do?

>>Oh, I am going to leave.

I would never run for office.

>>NARRATOR: Appointed to replace Senator Joe Biden, he had taken no campaign mone and was beholden to no lobbyists.

>>I want to see people who have committed such fraud and the havoc it's caused to this country... frankly, I want to see them go to jail.

>>NARRATOR: In early 2009, Kaufman joined his colleagues on the Senate Judiciary Committee to discuss bolstering the FBI and Justice Department's financial crimes units.

>>I'm going to ask some questions to each of you.

>>My feeling and Senator Leahy's feeling is that, you know, if you're going to stop crime, the best way is to punish crime, and the best way to do that is to put people in jail.

>>Senator Kaufman.

>>NARRATOR: Senators were surprised by how unprepared the government was to investigate Wall Street.

>>The deputy director of the FBI gave incredible testimony.

>>After 9/11, we moved almost 2,000 criminal investigative resources over to national security matters.

>>He said what happened was the government had transferred a great deal of the FBI agents over to anti-terrorism.

But they didn't replace them.

So we're basically down to 200 FBI agents.

>>We have about 240 agents... >>And what he said was essentiall during the savings and loan crisis, there were 1,000 FBI agents working on fraud.

>>Charles Keating, millionaire banker who was... >>NARRATOR: After the S&L crisis of the '80s, the government responded forcefully.

Back then, Justice convicted over 1,000 bankers, a third of them top executives.

>>...was led off in handcuffs today.

>>You've introduced a bill that you believe... >>NARRATOR: In the wake of the financial crisis of 2008, Kaufman wanted the government to respond as it had in the past.

>>We should find them, and if they're guilty of a crime, they should go to jail.

>>Why should people hearing you have any confidence that there will be serious investigations and serious penalties to some of the biggest and most powerful people in corporate America?

>>Trust me, it's going to happen.

I talked to... >>NARRATOR: Kaufman became front man for the new fraud enforcement bill.

>>Ted began giving speeches and writing op-eds about how important it was.

You know, we came up with this sort of slogan that, you know, when people rob a bank they know they're going to go to jail.

>>If somebody robs a store, they get caught, they go to jail.

If somebody robs hundreds of millions of dollars, they should go to jail.

>>When bankers rob people, they should know they're going to go to jail.

>>Commit a big crime, go to jail for big time.

These people should go to jail.

>>Lots of people on Wall Street said, "What are you doing?

"You're trying to destroy the banks.

"There's no crime up here.

"We didn't commit any crimes.

"There's no reason to come up here and start talking "about crimes.

"Plus, we're very, very fragile.

"And, you know, something could happen if, in fact, you start talking about crime."

Which was just totally completely ridiculous.

>>Do you believe you're being used as a scapegoat?

>>NARRATOR: There was one case already in the pipeline.

It had been started under the Bush administration and involved two Bear Stearns hedge fund managers charged with deceiving investors.

It was seen as a test case.

>>Aha.

Finally we're beginning to see the criminal cases that will evidence a determination by the Justice Department to bring to justice those individuals who misled the public, who misled investors, who, knowing that an investment was bad, still said it's good.

>>NARRATOR: At first, prosecutors were optimistic.

>>The knee-jerk reaction when this case was brought was that since people were incensed about what was happening with the economy, it would be a simple type of prosecution.

I think there was that general perception.

>>And so they figured that they'd have an easy conviction.

And, you know, I mean, I think they believed in what they were doing.

I'm not going to say they were malevolent.

But they were naïve.

>>NARRATOR: It wasn't the strongest case.

>>The government says that the e-mails are direct evidence... >>NARRATOR: With no whistleblowers talking, prosecutors had to rely on the interpretation of a few e-mails.

18 Wall Street defense attorneys went to work.

And after a three-week trial, the government failed to convince a jury that the hedge fund managers were guilty.

>>Breaking news involving those hedge fund managers... >>SMITH: Were you surprised by the outcome of the Bear Stearns hedge fund managers case?

>>I was a little surprised but I wasn't shocked.

These are hard cases to win.

>>SMITH: Was the Justice Department wrong to go after those two guys?

>>No, I thought that that was a reasonable case for the government to bring.

Now, the fact it's a reasonable case to bring doesn't mean you're always going to win.

>>The acquittal in that case left many of us feeling a little empty.

>>Got to put a big wrench in the government's prosecution scheme... >>There was a definite sense that Justice backed off and that they became timorous when it came to making the cases that would really have gone to the heart of what did happen in the crisis of '08.

>>NARRATOR: Senator Kaufman was worried.

He wanted to make sure that Justice wouldn't sh from the next opportunit and that the money Congress had appropriated would not go to waste.

>>Ted said to Chairman Leahy, "I would like to chair "an oversight hearing to ensure that these funds are being spent effectively."

>>We met with Lanny Breuer, who was the head of the Criminal Division.

We met with Rob Khuzami, who was head of enforcement for the SEC.

We met with a senior deputy in the FBI, Kevin Perkins.

>>We sat down, and we sort of got down to business, and Ted said, "Chairman Leahy has asked me to hold "an oversight hearing that will provide me "with a public forum to explore, you know, "just what you're doing on this front of investigating Wall Street."

Well, that certainly got their attention.

>>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.

And we made it clear to them, I made it clear to them, that absolutely positively I don't-- I'm not-- 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 what the emphasis is.

>>We said, you know, "Don't just come back here "a couple of years from now and say, you know, "'Look at all the small fry we nailed to the wall.'

"You know, we're talking about also investigating "senior-level people at Wall Street firms, even at the board level."

>>I think we might have been a little bit concerned at this meeting that the FBI wasn't necessaril at that point-- this is now fall of 2009-- aiming high enough.

>>NARRATOR: Shortly before the hearing, the Justice Department made an announcement.

>>President Obama has established the Financial Fraud Enforcement Task Force to investigate and to prosecute fraud and financial crime.

>>This is the value of oversight hearings.

A week before our hearing, they announce the fraud task force.

>>And we will not hesitate to bring charges where appropriate for criminal misconduct.

>>Somebody had to come to that hearing and talk about what they were doing.

And so that was the impetus, I am convinced till the day I die, that the only reason that fraud task force was announced at that point was because somebody had to go to the hearing.

>>Mr.

Breuer, last month we saw a jury acquit the two Bear Stearns hedge fund managers.

Are there lessons we can learn from that or was that just a one-off?

>>I'm a big believer in the jury system and juries are going to do what juries feel are right.

These are tough cases, but we are going to continue to bring them.

It's not a deterrence at all.

We're marching forward.

>>One of the things that oversight hearings do is it holds folks' feet to the fire.

We wanted to get them to say what they could in public that paralleled what they had said to us in private.

>>Why haven't we seen more board room prosecutions?

>>Senator, these are complicated cases.

Don't for a moment think that they're not being pursued and investigated.

>>From Main Street to Wall Street and beyond.

>>We are focused on that, and we will bring the cases where we... where it's appropriate.

>>SMITH: Isn't this a bit of theater?

I mean, they had the questions in advance.

>>Well, I thought it was fair theater, because, you know, we were asking tough questions.

>>If we come back a year from now, and we're having this hearing, how much progress do you think we'll have made?

>>I do think it served a purpose.

I mean, do I wish we had been even more aggressive?

Yes.

But we were willing to give them the benefit of the doubt.

And we felt like, okay, let's sit back and let them do their jobs.

>>Okay, you're going through this door on the left.

>>NARRATOR: But over the next year, it would be others, not the Justice Department, who put bankers on the witness stand.

>>We are audited and reviewed and subject... and we have due diligence practices.

>>Was your due diligence adequate?

>>NARRATOR: Beginning in January 2010, a fact-finding commission established and funded by Kaufman's Fraud Enforcement and Recovery Act held a series of public hearings.

>>In mortgage underwriting, somehow we just missed that home prices don't go up forever.

>>We held 19 public hearings.

We reviewed millions of pages of documents-- corporate documents, regulatory documents-- most of which had never seen the light of day.

Mr. Bowen.

>>Thank you, Mr. Chairman.

I witnessed business risk practices which made a mocker of Citi credit policy.

>>If you take an organization like Citigroup, for example-- people involved in due diligence like Richard Bowen... >>...to substantial risk of loss... >>...signaled up the line all the way up to Robert Rubin that something was wrong, that they were finding that some 60% of mortgages they were buying weren't meeting their standards.

Mr. Bowen sent you an e-mail.

>>NARRATOR: In one exchange, the commission asked Citibank's Robert Rubin to respond to Bowen's e-mail.

>>Did you ever act on that?

>>Mr.

Chairman, I do recollect this and that either I or somebody else-- and I truly do not remember who-- but either I or somebody else sent it to the appropriate people.

>>NARRATOR: Rubin told Angelides that actions were taken to improve the bank's due diligence operations.

But his recollections were vague.

>>I certainly don't remember toda whether I knew at the time or not.

I truly don't.

>>If the excuse at the top was, "We didn't know," that's a pretty poor excuse from people who are hauling down $10 million, $20 million, $30 million, or, in Robert Rubin's case, $115 million.

>>NARRATOR: Bowen was demoted and eventually left the bank, but later, Citigroup admitted wrongdoing in a civil fraud suit for failing to perform basic due diligence between 2004 and 2010.

Another focus of the commission was the work of a due diligence company named Clayton Holdings.

>>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.

And if you look at those documents, what they show is in each of these banks, Clayton Holdings was finding that a substantial portion of the loans did not meet the standards of the bank buying those loans.

And bank after bank after bank, 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.

So you look at that pattern of behavior and I think it raises very serious questions about whether this is criminal conduct.

>>NARRATOR: This was among several referrals the commission made to the Justice Department for further investigation.

We asked chief of the Criminal Division, Lanny Breuer, why such referrals hadn't led to charges.

>>I can't really talk about any specific case.

But Phil Angelides and I have had very direct and very good conversations.

But in reality, in a criminal case, we have to prove beyond a reasonable doubt-- not a preponderance, not 51%, beyond any reasonable doubt-- that a crime was committed.

If we cannot establish that, then we can't 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 multipronged, comprehensive approach to what gave rise to the financial crisis.

>>(chanting): Too big to fail, but not too big to go to jail!

>>NARRATOR: In April 2010, Goldman Sachs CEO Lloyd Blankfein was summoned to the Hill by Senator Carl Levin.

>>If Martha Stewart can go to jail, so can Blankfein!

>>NARRATOR: This would be the biggest showdown between Congress and a major Wall Street banker.

Blankfein was unapologetic.

>>Clients know our activities and they understand what market making is.

>>Do you think they know that you think something is a piece of crap when you sell it to them and then bet against it?

You think they know that?

>>The nature of the principal business and market making... >>Lloyd Blankfein argued it was perfectly okay, that at the same time we were selling securities to you, we were betting on the fact these securities were going to go down.

"But that's okay 'cause we're a market-maker and we're allowed to do that."

That sounds like fraud to me.

In the first half of 2007, Goldman Sachs sold long-position CDOs to its clients, right?

>>We sold... we reduced our risk.

>>So you were selling CDOs at the same time you were taking short positions on the same CDOs?

>>The best way of reducing your risk is to sell what you have.

>>I believe in a free market, but if it's gonna be truly free, it cannot be designed for just a few people.

It must be free of deception, it's got to be free of conflicts of interest, it needs a cop on the beat, and it's got to get back on Wall Street.

We stand adjourned.

>>NARRATOR: Senator Levin referred his committee's findings to Justice, but again, the department declined to bring any criminal charges.

>>No one going to jail, no individuals being held accountable for anything other than relatively paltry fines.

>>SMITH: The Justice Department says these are very difficult cases to bring.

Showing intent and proving every step of the crime beyond a reasonable doubt is a difficult thing to do.

>>I think that is without a doubt a factor in the difficulty of proving intent.

But I'm sorry, I just don't believe there was enough effort.

It just doesn't make common sense.

And so you're telling me that not one banker, not one executive on Wall Street, not one player in this entire financial crisis committed provable fraud?

I mean, I just don't believe that.

>>NARRATOR: Kaufman and Connaughton were running out of patience.

>>SMITH: I've talked to Senator Kaufman.

I've talked to Senator Grassley.

I've talked to staffers.

I've talked to a number of people.

They told us that they felt that you didn't make this a top priority.

>>Well, I'm sorry if they think that, because I made it an incredibly top priority.

But when we can't bring a case, we have a m... 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.

>>SMITH: In all of this, was there a case that you thought could have gone forward as a criminal prosecution that didn't?

>>You know, there were a lot of discussions along those lines.

You know, I talked to Lann when I was in the Criminal Division daily.

>>SMITH: Did you argue with him?

>>Yes.

And we would argue this back and forth, and then we... but when we finally came to a decision, sometimes I would be frustrated.

Sometimes I would be disappointed.

>>SMITH: You always accepted the decision?

>>But I accepted it.

>>SMITH: As a professional, you accepted it.

But did you accept it as a citizen?

>>Well, that's...

I mean, that's a bit different.

Because as a citizen, I would hope that something would happen to them, somehow, some way.

>>NARRATOR: Frontline spoke to two former high-level Justice Department prosecutors who served in the Criminal Division under Lanny Breuer.

In their opinion, Breuer was overly fearful of losing.

>>SMITH: We spoke to a couple of sources from within the Criminal Division.

And they reported that when it came to Wall Street, there were no investigations going on.

There were no subpoenas, no document reviews, no wiretaps.

>>Well, I don't know who you spoke with because we have looked hard at the very types of matters that you're talking about.

>>SMITH: These sources said that at the weekly indictment approval meetings that there was no case ever mentioned that was even close to indicting Wall Street for financial crimes.

>>Well, Martin, have you looked at what we and the U.S. Attorney community did?

I think you have to take a step back.

Over the last couple of years, we have convicted Raj Rajaratnam.

You'll say that's an insider trading case.

But it's clearly going after Wall Street.

>>SMITH: But it has nothing to do with the financial crisis, the meltdown, the packaging of bad mortgages that led to the collapse that led to the recession.

>>Well, first of all, I think that the financial crisis, Martin, is multifaceted.

And what we've had is a multipronged, multifaceted response.

And it's simply a fiction to sa that where crimes were committed, we didn't pursue the cases.

And that's why where crimes were committed, you have more people in jail today for securities fraud, bank fraud and the like than ever before.

>>SMITH: But no Wall Street executives?

>>No Wall Street executives.

>>NARRATOR: By September 2010, Senator Kaufman's term was nearing its end.

Before leaving, he held a second oversight hearing.

>>Criminals on Wall Street must be held to account.

>>Ted decided he wanted to have a second hearing before he left office so that he could question Breuer, Perkins and Khuzami.

>>We're now nearing the final quarter of 2010 without the sort of prosecutions that I fully expected we would hope to see by this time.

>>SMITH: What was the thinking?

I mean, if you can recount any conversations that you had with Senator Kaufman about, you know, "Let's pull these guys back into the room."

>>From our perspective, it was a big mystery.

You know, we really believed that there was sufficient evidence of fraud, that there should have been some cases.

>>If heads don't roll, nobody makes any changes.

I'm disappointed that in all of the wrongdoing that went on and all the fraud that went on, that there wasn't an effort to go after bigger fish than the evidence shows they went after.

>>I think many times you have very sophisticated parties on both sides of these... >>Mr.

Breuer basically kept his testimony at the level of generalities.

>>You know, where the right balance is... >>And I was sitting there behind the senator, thinking, "You're dancing around the central question."

Did the Department undertake a purposeful, concerted, timely investigation of higher-level Wall Street executives?

>>For very complicated cases, there are lots of different issues... >>And at that point, I just began to feel like, okay, I feel like I'm being gamed here.

>>They take time, they take the review of... >>Not only was no one going to be held to account for the financial crisis, but-- and I don't say this lightly-- no one was being held to account for the failure to hold Wall Street to account.

I really think this was a stain on the American justice system.

And I did not want to be an accomplice to that.

So I packed my bags, sold my house, and left town the day Ted Kaufman's term was over.

>>Bank stocks drove markets higher on Wall Street.

>>I mean, I literally was driving down I-95 the day he left office.

>>J.P.

Morgan reported a 47% increase in income for the fourth quarter, and Bank of America said... >>NARRATOR: Meanwhile, a freelance journalist and blogger named Teri Buhl was sipping cocktails in Connecticut.

>>I was actually at a fundraiser in Greenwich, and I met a man running for Congress.

And he told me about a documentary filmmaker, Nick Verbitsky, who had been collecting a lot of interviews from Bear Stearns employees.

>>So I go out and I find a borrower, and I lend this borrower $100,000... >>I actually had a friend who put me in touch with a couple of people who ended up in the film-- people that worked at EMC Mortgage, which is Bear's mortgage conduit, is really the factory floor of their entire mortgage operation.

>>The problem with due diligence is it's very costly.

>>We went through about three to four hours of multiple whistleblower tape detailing a massive fraud at the highest level inside of Bear Stearns against its own clients.

>>NARRATOR: Buhl wrote a stor for the Atlantic Monthly's website featuring two Bear Stearns insiders Verbitsky had interviewed.

>>And the first call I got after that story came out was from a few lawyers that wanted to meet our whistleblowers.

And they were representing a group of mortgage insurers called monolines.

>>SMITH: What did they tell you?

>>They told us that they were working on a massive fraud suit against Bear Stearns and that it's critical that our whistleblowers help build their case.

>>NARRATOR: The lawyers worked at the New York firm Patterson Belknap, Webb &Tyler.

They were suing Bear Stearns and its successor, JPMorgan Chase, on behalf of companies that had insured the quality of the loans Bear was selling.

In January of 2011, they filed a 161-page complaint.

>>And within 160 pages, that document essentially summed up what looks to be the core of the credit crisis.

>>NARRATOR: Mark Palmer has pored through the Bear Stearns lawsuit and a dozen other private suits now pending against other Wall Street banks for fraudulently misrepresenting the mortgages they packaged and sold.

>>SMITH: You say this is the core of the credit crisis.

>>I believe so.

Based on what we've seen thus far, frankly, I think there's some pretty decent evidence that the mortgage securitization industry was rotten to the core.

>>SMITH: Do you think the government should have brought criminal cases against these players?

>>I would find it difficult to believe that there wasn't sufficient evidence to at least indict many of the players involved here.

>>NARRATOR: In building their cases, attorneys at Patterson Belknap spoke to over 35 whistleblowers, many of them due diligence supervisors and underwriters.

Among them, Tom Leonard.

>>SMITH: It was Patterson Belknap that first got in touch with you about this?

>>Yes, yes.

>>NARRATOR: Leonard told the lawyers how due diligence was compromised.

>>SMITH: And you told the truth to them about what you had seen.

>>Yes, sir.

>>SMITH: And you were a supervisor?

>>Yes.

>>SMITH: And you saw what your... your underwriters were doing?

>>Yes.

>>SMITH: And you saw the instructions coming down from the banks?

>>Yes.

>>SMITH: What was the highest defect rate you ever saw on a job?

>>Oh, gosh.

We had a job that was, like, 50%.

But then the word came down, everything got renegotiated and redone... >>SMITH: In other words, you would come into a job, you'd find 50% of the loans were defective, but then the standards would be loosened so that you could qualify those loans... >>Right.

>>And mark them as not defective?

>>Right.

>>SMITH: Isn't that fraudulent?

>>Yes.

>>SMITH: Is this something you think is important for the government now to be prosecuting?

The kind of fraud that you saw?

>>Yeah.

I mean, it's... if it's still within the statute of limitations.

>>SMITH: The Department of Justice says that it's very hard to prosecute these kinds of crimes, because you have to prove criminal intent.

>>Yes, sir.

>>SMITH: How do you respond to that?

>>I think if I was sitting on the jur and I saw this information, that I could pretty well assure myself that there'd been criminal intent.

>>SMITH: Were you ever contacted by anybod in law enforcement or the Justice Department?

>>Not until just recently.

>>We are going to step up on the principle of one set of rules for everyone, equal justice under law.

>>NARRATOR: Finally, in late 2012, the State of New York sued a Wall Street bank for fraudulently misrepresenting the mortgages they packaged and sold.

>>Very simply, we're investigating the misconduct of folks who caused the bubble... >>NARRATOR: The man who brought the suit was New York Attorney General Eric Schneiderman, co-chair of a new state-federal working group that included the Department of Justice, the SEC and others.

>>...securities fraud against JPMorgan Chase as successors to Bear Stearns and Compan and EMC Mortgage Corporation.

>>NARRATOR: Although the case centered on bankers' fraudulent and deceptive practices, no individuals were named.

The suit was a civil, not criminal, case.

>>SMITH: And you've alleged in the case of Bear Stearns that they passed these things on knowingly, intentionally, knowing they were bad?

>>Yes.

We think the facts, as alleged in our complaints, make it very hard to conclude that by 2006 and 2007 the folks at these banks did not know what was going on, and that they were putting more and more bad loans into these securities.

>>SMITH: I guess I still don't understand.

If this was so clear and so intentional and so many commissions and hearings brought this forward, why is this taking so long?

>>You know, it's... it's hard for me to address the specifics of what happened before I got here.

Believe me, we've moved as fast as we could.

You have to ask others about what happened before then.

>>SMITH: What gave you the confidence that you would have results, given that the government had gone for three years with, really, very little to show?

>>We were able to do some work more quickly by subpoenaing the records of private parties that had brought actions.

>>SMITH: You were drawn to the work of a private law firm, Patterson Belknap.

>>Oh.

>>SMITH: Erik Haas and his team of attorneys at Patterson Belknap.

>>Well, we had... when we started our investigation, we took a look at what other complaints had been filed.

And there were a whole series of private complaints that had been brought, and Patterson Belknap had brought a couple of those cases.

>>SMITH: The complaint that was filed by New York Attorney General Schneiderman was based largely on work done by private law firms, work that goes back several years.

What does that tell us about the work that the Justice Department was doing all this time?

>>I do think...

I think it's unusual for, but not unprecedented for, the Justice Department to sort of follow on to the work of private litigants.

But it does raise the question, you know, why didn't the government develop it first?

>>SMITH: That's a real question.

>>It is.

>>SMITH: Given all the pushing that you were doing and Senator Kaufman was doing.

>>I think, yeah, I think it's an absolutely fair question to ask.

>>NARRATOR: Attorney David Boies, whose firm has represented both banks and plaintiffs suing financial institutions, has also reviewed Schneiderman's complaint.

>>SMITH: Schneiderman is bringing a civil case alleging fraud.

>>Yes.

>>SMITH: Couldn't it be filed as a criminal case?

>>I think that if you took every allegation that's made in Schneiderman's complaint and you accepted that as true and believe that you could prove that beyond a reasonable doubt, that could've been filed as a criminal case.

>>It was, like, $2.6 billion in one month... >>NARRATOR: Filmmaker Nick Verbitsky was finally contacted by the Justice Department this past August about the whistleblowers he found for his film about Bear Stearns.

It had been more than a year since those lawyers at Patterson Belknap first called him.

>>I think, you know, the ease with which I found these people and the things that they were telling me... You know, it wouldn't have taken a lot of effort on the part of a regulatory entity in Washington to have done this.

I'm an independent filmmaker, you know, I'm not a financial regulator, I'm not somebody who's running the SEC.

It's like, you know, what have you guys been doing?

What have you been looking at?

I mean, I went out and found these people myself and, you know, in my spare time, basically.

You know, and it... it was work, but it wasn't that hard.

>>SMITH: We have been able to contact a number of people who were inside the banks, doing due diligence work as contractors, who all told us that they were never contacted by the Justice Department.

>>Well, look.

I can't talk in general about nondescript, anonymous whistleblowers.

But here's what I can tell you.

Whenever I personally have been in any public setting, I've invited whistleblowers to come forward.

>>SMITH: But it shouldn't be so easy for journalists to go out and find whistleblowers that, at this point, four years after the... the meltdown, that haven't been contacted by Justice.

>>Martin, I don't accept... >>SMITH: No?

>>I don't accept for one moment that you all are finding whistleblowers that we're not.

What I do... let me continue.

What I do believe is that when we speak to the whistleblowers, we have to make a determination whether what they say is reall a criminal case.

>>SMITH: We've talked to whistleblowers, we've talked to people inside the banks who've told me, "Yes, there was fraud that went on."

>>And we've talked to hundreds and hundreds and hundreds of people in these investigations.

>>SMITH: And you're saying, in not one of those cases, having interviewed hundreds of people and looked at these things, you can't find one person in this whole mess that you can establish beyond a reasonable doubt that was selling these things knowingly, intentionally, and defrauded the investors.

>>We were not able to reach a level of... it would sustain beyond a reasonable doubt.

We were not able to show criminal intent sufficiently enough to obtain, what we believe... to obtain a conviction.

>>SMITH: Do you think the banks did all this unintentionally?

>>No, I personally don't.

But in the end, sure, I was frustrated.

Lanny was frustrated.

Lanny was disappointed.

I'm sure he was.

And so was I.

But we knew professionall this was the decision that needed to be made.

>>The jobs of tens of thousands of employees can literally be at stake.

>>NARRATOR: In September 2012, Lanny Breuer gave a speech explaining his reluctance to indict a major bank.

>>Those are the kinds of considerations in white-collar cases that literally keep me up at night.

>>SMITH: You gave a speech before the New York Bar Association.

And in that speech, you made a reference to losing sleep at night worrying about what a lawsuit might result in at a large financial institution.

>>Right.

>>SMITH: Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?

>>Well, I think I am pursuing justice.

And I think the entire responsibilit of the Department is to pursue justice.

But in any given case, I think I and prosecutors around the countr being responsible should speak to regulators, should speak to experts.

Because if I bring a case against institution A, and as a result of bringing 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 had nothing to do with this are affected badly...

It's a factor we need to know and understand.

>>That was very disturbing to me, very disturbing.

That was never raised at any time during any of our discussions.

That is not the job of a prosecutor, to worry about the health of the banks, in my opinion.

Job of the prosecutor is to prosecute criminal behavior.

It's not to lie awake at night and kind of decide the future of the banks.

>>SMITH: So is Wall Street breathing a sigh of relief?

>>I don't think people are breathing a sigh of relief, given the level of other litigation that's out there.

However, I think there are probably a lot of individuals who have breathed sighs of relief over the last two or three years.

>>NARRATOR: So far, in civil proceedings, the government has levied several billion dollars in penalties for misconduct in a crisis that's cost investors and homeowners many hundreds of billions of dollars.

But to date, not one senior Wall Street executive has been held criminally liable by the Department of Justice for activities related to the financial crisis.

>> Go to pbs.org/frontline for a closer look at civil cases and penalties that have come out of the crisis.

>>This is totally about what went on on Wall Street.

>> Martin Smith's extended interviews with Ted Kaufman, Lanny Breuer and Phil Angelides.

More of Frontline's coverage of the financial crisis, including our landmark series, "Money, Power and Wall Street."

Connect to the Frontline community on Facebook and Twitter or tell us what you think at pbs.org/frontline.

Captioned by Media Access Group at WGBH, access.wgbh.org >> For more on this and other Frontline programs, visit our website at pbs.org/frontline.

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