Eric Schneiderman: Mortgage Task Force Eyeing Broader Suits
One year after President Obama launched a new task force to investigate fraud during the subprime mortgage crisis, a co-chair of the group says a desire is now growing among prosecutors for a more aggressive response to the meltdown.
New York Attorney General Eric Schneiderman says there is little question fraud played a role in the 2008 financial crisis. In October, his office filed the task force’s first case, a civil suit alleging “a systemic fraud on thousands of investors” by JPMorgan Chase between 2005 and 2007.
As FRONTLINE reported in The Untouchables, the case also marked the government’s first major fraud suit against a Wall Street bank for the crisis.
“I think what we’ve expanded and what we have done is to increase the appetite for these broader-platform cases that address systemic patterns of fraud rather than going on a deal-by-deal basis,” Schneiderman told FRONTLINE correspondent Martin Smith. “I think that’s a huge step … And that’s what we are seeking accountability for, and that’s what we’ll continue to pursue.”
Schneiderman said his investigations began with the due diligence firms that banks hired to gauge the quality of loans they were buying and packaging into mortgage-backed securities. “We found in several cases that we brought already — and we have other investigations under way — it was a sham,” he said.
This is the edited transcript of an interview conducted on Dec. 4, 2012:
When were you first made aware of the abuses of due diligence? When did that first get your attention?
I took office in early 2011, and at that time there was an effort under way by all of the other AGs [attorneys general] and several federal agencies to negotiate a settlement with the largest servicing banks. I determined pretty quickly that it didn’t adequately address all the problems of the conduct that had blown up the American economy.
We wrangled for six, eight months, and it ended up with us getting a very sympathetic ear in the White House and the president announcing in the State of the Union address at the beginning of 2012 that he was creating this unprecedented state-federal working group that included the Justice Department, the SEC [Securities and Exchange Commission], my office, HUD [the Department of Housing and Urban Development], the inspector general over [at] FHFA [Federal Housing Finance Agency], which is Fannie Mae and Freddie Mac — really the entities with the resources and the jurisdiction that we really need to collaborate to get to the bottom of what happened to the American economy.
And our office has focused on the due diligence process because we were really looking to bring cases that were not about one deal or five deals or 10 deals, but to bring what we call “platform cases” that are about a systemic pattern of misconduct.
And the heart of that was the representations that were made to the public that these firms, these banks, had a rigorous due diligence process, and that they checked the loans they were getting, and they packaged them together into mortgage-backed securities, and that they were making sure the lenders they bought them from were following the right guidelines, and they had an ongoing process they represented over and over again to keep track of the loans. And if there were loans that turned out to be bad, they had the right to make the originators, the lenders, take them back.
We found in several cases that we brought already — and we have other investigations under way — it was a sham. A lot of them used the same third-party due diligence firms to screen the loans. There’s evidence that they knew they were taking loans they shouldn’t take. There’s evidence that there were folks who tried to raise the alarm and were silenced. …
They were more concerned, at the end of the day, about their relationship with these mortgage firms, Countrywide and others, than they were about their responsibilities to their investors. That’s really the heart of our office’s piece of this broader investigation, these systemic misrepresentations.
No one would have bought any mortgage-backed securities, not one certificate, not one share, if they hadn’t had confidence that they were checking the loans to make sure they had the proper paperwork, that the folks who had taken them out could afford them. They represented that they were doing that, and we’ve determined that in fact they were not.
… After you were sworn in as the attorney general [of New York], Jan. 1 of 2011, you started paying closer and closer attention to this due diligence that, as you would put it I think, is at the core of the fraud that led to the financial meltdown and the crisis.
… We started our investigation in the spring of 2011. We started subpoenaing firms in May, June of my first year in office. It took a while to get up to speed with what was going on. There had been some preliminary work done, but there wasn’t an active investigation going on when I took office.
I had been running for statewide office, and before that I had been in the state Senate, so I was familiar with the work of the financial crisis inquiry commission. I was familiar with Sen. [Carl] Levin’s [D-Mich.] inquiries and excellent report. But I really hadn’t ever had a chance to get into the details. So I’m running for statewide office, it was a pretty consuming project, and I really got a chance to dig in.
Now, I have to say I spent 15 years in private practice, and I spent a lot of that time working on securities matters. I represented some big financial firms, so it wasn’t information that was difficult for me to digest when I got it, and it really is not that complicated.
For all of the efforts to rewrite history, we really know what happened. And it really is stunning to me that there are folks trying to pretend this was not a manmade crisis, or that this was something that just couldn’t have been prevented.
You get to 2003, 2004, and interest rates are going up. People who could refinance their mortgages have all refinanced their mortgages. To keep the volume of mortgage-backed securities going, they had to lower the standards for loans. And this happened across the industry.
And as we’ve developed the information about specific institutions, we’re bringing complaints against those institutions. Our colleagues in the working group are also bringing their own complaints depending on what their jurisdiction is. And the federal government has a longer statute of limitations than we have. So we’re trying to make sure that everyone does what they can do, and we work together. That’s the only way we’re going to get the best result.
But it’s clear to us that the standards went down. You can look at things like interest-only loans, negative amortization loans that were a tiny portion of the market in 2003 and how they grew as you get into 2005, 2006. You can look at no-documentation loans and the abuse of what are called “stated income loans,” where they just took someone’s word for how much money they were making.
And you can see how this really was an effort built somewhat out of desperation; that they were making so much money with the securitization machine, they were making so much money pooling these mortgages and selling the shares to people all over the world, they just didn’t want to let it stop. And the standards at some point got so low that we ended up with the collapse of the entire economy.
Your predecessor, Andrew Cuomo, had as the AG negotiated an immunity deal with Clayton Holdings back in 2008. I don’t know what, if anything, came of that. What was that about?
Clayton Holdings is one of the third-party due diligence firms that has provided us with a lot of information. They were doing due diligence for Bear Stearns, which is now owned by JPMorgan Chase; for Credit Suisse; and for other institutions. They were all using the same firms. And Clayton Holdings has cooperated with us, and —
Did they need immunity to cooperate?
They’ve produced a lot of useful information. I wasn’t involved in the original negotiation of the deal, but they have been a very good source of information for us.
But that deal was cut in 2008, and then we go until 2011 before you really pick up the case. In that interim period, was anything going on?
There were some other inquiries going on. There was some action taken related to the ratings agencies. But we did pick up and focus on this more when I became aware of the settlement that was being negotiated when I took office.
This is the robo-signing settlement?
This was the robo-signing settlement.
That really has to do with the behavior of banks post-crisis.
That was what I learned, and that was why I said I wasn’t going to provide a release to the banks for the conduct that actually created the crisis, that —
They wanted amnesty. They wanted to agree to a settlement and then leave us alone.
And if I was representing them, I would, too. They wanted as broad a release as they could get. And the level of the inquiry that is now under way with the working group, the commitment of resources from the federal government, the president’s elevation of this by putting it in the State of the Union, has produced a much more aggressive level of activity, and we’re doing a lot of good investigative work.
You were drawn to the work of a private law firm, Patterson Belknap [Webb & Tyler], in 2011, Erik Haas and his team of attorneys at Patterson Belknap.
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, some by government entities, the FHFA had brought cases.
And there were private plantiffs’ class actions that had been brought, and cases by other players in the market, and Patterson Belknap had brought a couple of those, but there were a lot of other firms — Quinn Emanuel [Urquhart & Sullivan] and others — that had brought private lawsuits also. And rather than re-invent the wheel, we talked to, and our federal counterparts talked to, a lot of folks in the private bar.
Were you drawn for any particular reason to the monoline cases? Did they offer an opportunity to get at the documentation inside or the due diligence work that had gone on?
Well, some. We started our own investigation in the spring of 2011, and we’ve reviewed millions of pages of documents and interviewed dozens of witnesses and taken depositions. So it was really a supplement to that.
But we looked at those cases and we looked at other cases. We subpoenaed records, and there’s a big, fat spreadsheet of cases that have been brought by various players out there against these institutions. But you have to keep in mind, individual firms or investors can only sue for their damages. They can sue for the particular deals they worked on, or they bought shares in.
And what we’ve put together is a platform case, which is really much broader. It’s about the systemic pattern of conduct, because, as we allege in our complaints, no investor during this period of time would have purchased any mortgage-backed securities if they had realized that the due diligence process was a sham, that the quality control process was a sham, and that the representations about underwriters meeting standards and originators meeting standards was really not being followed through.
So coming out of the foreclosure settlement with the banks, you agreed to take on mortgage fraud. You had already started looking at due diligence abuses, and you were interested in going at that. But how did it come about that you took on that task and agreed to be the co-chair of the working group?
It became clear to me by the spring of 2011 that the settlement that was being negotiated when I took office wasn’t really going to get to the heart of the conduct that blew up the economy. And in fact, the banks wanted to be released from any further investigations of that conduct.
So I dug in and I talked to my counterparts in the federal government, and we went back and forth about things for a while and agreed that a settlement of the servicing abuses was important. There were a lot of people being foreclosed on who shouldn’t have been foreclosed on, and we were able to do a lot of good through the servicing settlement.
In New York, we have pretty good laws to protect you from foreclosure if you have a lawyer. But when I took office, 50 percent of the people who were being thrown out of their homes never talked to a lawyer at any stage of the process. So we stopped, we got money in the settlement to pay for legal services and really launched these programs that are keeping a lot of folks in their homes now.
But none of that addressed the issues of the securities fraud that had actually created the crisis in the first place. Keep in mind that people were being foreclosed on, because during the crash, Americans lost $7.4 trillion in home equity.
So you wanted to focus on the abuses that had caused the financial crisis.
I wanted us to deal with both. And we ended up dealing with both.
The president had announced in November of 2009 the formation of a financial fraud task force. Now we get to the State of the Union address in 2012, and he announces the formation of the working group. A lot of people are thinking, what was the financial fraud task force doing? Why do we need a new working group?
This is in fact a working group of the financial fraud task force. There are other working groups. There had not been a working group dedicated to the investigation of the crash of the mortgage-backed securities market, so this specific focus is really what has been reinvigorated. And the president got it, made a personal commitment to it, and is backing up that commitment with the resources.
… The ability to work with and share information with the SEC, the Department of Justice, our other colleagues, folks at HUD, has been essential. And these are huge, complicated cases with a lot of facts, and this is the right way to do it. …
Is it wrong, though, for people to wonder why this wasn’t really going on before? The Fraud Enforcement and Recovery Act passed in 2009, signed by the president, was all about getting at the mortgage fraud on Wall Street, the securitization fraud. But you’re saying that there was no real focus until the formation of the working group on securitization fraud?
No, I can’t say that. I obviously don’t know what was happening in any detail before I took office. But it wasn’t as though we were writing on a blank slate. There had been some cases brought. There were some investigations under way.
There were no cases brought by the Justice Department.
Oh, no, there have been some cases brought. The U.S. Attorneys’ Offices, which is the Justice Department, had brought some actions. And the SEC had brought some actions.
No criminal actions.
No criminal actions, but civil actions. Well, actually, they did bring some criminal actions, and some of them were unsuccessful, actually.
You mean the Bear Stearns hedge fund manager case? But that was, of course, on guys that were buying product rather than selling it. So going at the real core of this was going after those people that were packaging up the residential mortgage-backed securities and kicking them out the door, and that wasn’t the case about that. What we’ve noticed is that nobody really was, as far as we can tell, going after the people that were responsible for securitization until your case in October of this year.
Our complaint was a significant breakthrough, but not because other cases hadn’t been brought. But there were other cases and investigations that were really sort of deal by deal for the most part.
Our platform case was about the course of conduct over a period of years, and that is a significant difference. But again, we were not writing on a blank slate. There was work that had been done that we built on.
… I can’t think of one case.
There are a lot of cases that were brought either by a U.S. Attorney’s Office or the SEC, again, mostly relating to specific deals, specific packaging and security–
But most of the low-level fraud, right, at the origination?
Well, no. … There were claims that were pursued against the lenders, the folks like Countrywide that were actually making the loans. And then the next level is the banks that purchased the loan from these bad lenders to package them to bad mortgage-backed securities to sell to investors who, if they had known the truth about that whole process, would not have bought the securities at all.
There were cases pursued against lenders. There were some cases that were pursued against banks. I think it’s fair to say that there was a real invigoration of the effort. That was really what I was looking for when I started talking to my federal counterparts. And now we’re into the fall of 2011.
And I have to say that the folks at the White House got it, understood the need for a more intensive focus. And look, you need to get the people together who have the broadest jurisdiction. You need to ensure you have the resources, and you have to make sure that you have the will. And I think we nailed that. We have a new, invigorated focus with the working group.
I don’t want to take away from that accomplishment and that progress, but was there a sense … in the press and among critics of the Justice Department and the administration’s response to the mortgage crisis that this was coming very late in the day.
I can’t really speak to that. It certainly was clear to me when I started to look into this area that there needed to be accountability. This is essential to our justice system that the American people have confidence that there is one set of rules for everyone. There’s not a group of people who are above the law because they’re running big financial firms.
John Doe on the street will tell you that there should be accountability, and he was telling us from 2009 forward.
And I think that cry actually got louder and louder as we went along. And the efforts under way now, they’re certainly the broadest efforts there ever have been. But there really are three goals, as I’ve said. One is to hold accountable the folks who engaged in misconduct.
Now, some of the conduct was bad conduct but was not illegal because of regulatory failings that took place really in the last 15 years. And you can see a series of actions that I think were really reckless deregulation that allowed some of this conduct to take place.
Everyone knows that the Glass-Steagall Act was repealed, which separated banks from investment banks. There was a change in the capital requirements for banks, how much they had to set aside for mortgage-backed securities. And in 2004 there was just this horrendous moment in American law where not only did Congress refuse to rein in predatory lending, they pre-empted states from doing it.
So it was a combination of bad regulatory and legal actions that were taken and some actual criminal or unlawful conduct. And sorting out which is which is important. Now we’re doing this investigation on a parallel track to other folks who are busy with the rule-making process and trying to get a set of laws and rules and regulations to make sure this never happens again.
And I think we’re contributing to that process in our investigation also, because again, there are these extraordinary efforts to rewrite history that we keep running into over and over again, making it sound as though this was an earthquake or a tsunami or something, that this wasn’t a manmade crisis created by reckless deregulation and just plain greed. And that’s what it was. And we’re going to tell the truth about this as long as we have to.
I look forward to us getting a set of rules of regulations in place, as we did in the United States for decades and decades in the 20th century, people made money. The markets had good regulations, and they weren’t crashing every 15 or 20 years.
That was true for the first time in history with Western markets between 1929 and 1987, and that’s because we had a good set of regulations that worked for everybody. People made money. A lot of people made a lot of money, but the markets were safe.
You promised to have results in six to eight months after you stepped into your role with the working group.
And our first complaint was filed right around then.
What gave you the confidence that you would have results in that relatively short period of time, given that the government had gone for three years before you got there, three or four years with really very little to show?
When the working group got set up in February of 2012, we already had an investigation under way. We’d already subpoenaed a lot of the records of class actions and private parties that had brought lawsuits. We knew some of what we were going to get from the Justice Department and the SEC, and we understood and had a strategy to really go to the heart of the due diligence process, to focus on that, to focus on the representations made to investors that these banks were checking all the loans, they were making sure everything was in order, that they held the lenders they were buying the loans from to standards and enforced those standards.
We realized that this is where the system broke down, and this was a pattern of systemic fraud that we thought our office, given our jurisdiction and our resources, could bring actions relatively quickly on. …
And I have to say that it would never have been possible without the working group to move this quickly. But it’s a commitment of resources that really you have to have the federal government in on to move this fast in an area where there are so many facts and there are so many deals that are involved.
A lot of documents, a lot of emails, a lot of deal documents, a lot of examining all of the prospectuses and the prospectus supplements to see what the misrepresentations were. Labor-intensive, and it’s something that we would be able to move, but we wouldn’t be able to move this fast without the support and assistance and collaboration of our federal counterparts.
In the last quarter century, 25 years or so, there’s been a sea change in the complexity of finance, and it has put the government in a position of having to play catch-up to find the needles in the haystack, find the incriminating emails or documents, or to find the witnesses in an industry that has grown enormously and that has extraordinarily deep pockets.
It took some of the private … law firms that have been involved in pressing these kinds of due diligence cases years and years of digging and work. Some have argued … that government is struggling to keep up with the deep pockets to go after these complex financial crimes.
I think if you step back and look at what’s happened over the last 25 years, in a way it’s even worse than that. It’s not just a matter of government resources. There’s been a sort of a cultural shift that free-market fundamentalism has emerged as an idea that has more acceptance than it should, because it doesn’t hold up under any honest scrutiny.
But the notion that markets are self-regulating, this has really permeated society in a way that it never did, and I think that we’re paying some of the price for that. The reckless deregulation [that] took place over the last 20 years was a big part of what allowed people to do the things they did. And some pushed even beyond what we think was legal.
But there really was a cultural shift. I mean, this notion that the housing bubble could go on forever, that the housing prices could keep going up and they were never going to go down, it’s not supported by any legitimate economic analysis, this sense of institutions really being involved in complex transactions that weren’t being disclosed.
The decision not to regulate derivatives at the end of the ’90s was really a terrible decision. There were a series of bad decisions made in government as this ideology swept the country, and I think we’re now trying to rebuild that.
But it is important to recognize that in the history of Western markets, since the 1600s through the tulip bubble and the South Seas bubble and Western Europe, markets really were crashing every 15 or 20 years, except the period between 1929 and 1987 when we had a good series of regulations that were passed under the New Deal, bipartisan consensus that this was a good system to protect people from the violence of market crashes, as the government seeks to protect us from the violence of war.
And then when the supply-side, neoclassical economic stuff came back into fashion with the Reagan administration, and it started to unwind, we started to go back to the old pattern. The markets crashed in ’87, worse than that in 2008, and that’s something that our lawmakers and our regulators have to address.
Who did you sue and why? For what?
We filed a series of cases — more to come — against banks that were packaging and marketing mortgage-backed securities. First case was Bear Stearns, which is now owned by JPMorgan Chase. Second case, Credit Suisse. …
But the pattern of conduct is similar. And there were people who in fact were involved at the private firms, who were hired to screen mortgages for many of the banks, who worked on several different institutions’ accounts, who reported the same sort of pattern, that they were flagging bad loans; they were flagging bad lenders.
These are whistle-blowers for you that used to work inside these due diligence contract firms?
Some are whistle-blowers and some are folks that we just saw what they were saying when we subpoenaed the emails and subpoenaed the records, that there clearly was a pattern of making representations to the public that these banks had what they called a robust and intense due diligence process; that they were checking all the mortgages, first of all, to make sure the paperwork was in order, and second of all to make sure they were good loans, that they had a system of screening them, of sampling them.
They held the lenders, folks like Countrywide and some other firms, to standards and insisted that they follow particular underwriting guidelines, and they claimed that they had a process — this is true of each of these banks — keeping track of these loans even after the securities were sold. So if there was a bad loan in there, they would make the originator, make the lender take it back.
The due diligence process at these firms, as we’ve alleged in our complaints, was a sham. No one would have bought mortgage-backed securities from a bank that said: “Well, we don’t do due diligence. We can’t tell you the quality of these mortgages. We’re not keeping track of the folks, the lenders we’re buying them from.” So that’s why we were able to bring platform cases that don’t just focus on one deal or five deals, that focus on a pattern of conduct over years.
The contracts that the banks had with the purchasers, the pension funds and whatnot that bought these mortgage-backed securities, in the paperwork of those contracts it says, “Some of these loans may turn out to be defective.”
And that’s always been the case. But mortgage-backed securities were a good investment for decades, back in the era when most of us had 30-year fixed-rate mortgages. And there would be a few people who would default, but you dealt with that problem by having extra loans in the mortgage-backed securities. These were not always toxic instruments. This is very important to recognize.
But if the language in the contract says that some of these may be defective, where is the fraud? Haven’t they lawyered themselves carefully enough that they can avoid a charge of fraud?
No, not if they are representing that, well, everyone understands there may be some people who for medical reasons or for problems with their employment are going to default. Some portion, where you have tens of thousands of mortgages being pooled together, some folks aren’t going to make it.
The key to the fraud that we’ve alleged is that they also promised those investors that they were at least screening to make sure that the loans, at the time they got them and put them into the mortgage-backed securities, deposited them into the trust that was sliced up and sold, that those loans had been screened, that they were checking, that they had a process to make sure that the lenders were legitimate and were following industry guidelines, and they hired these third-party firms to look at mortgages.
And we have alleged and we have substantial evidence that the internal emails reflected a process that was just broken down. It was not working. They were not adequately screening. And by the time you get to 2006 and 2007, they were scared of alienating the lenders. They wanted to buy loans more than they wanted to protect their investors by the end of this cycle.
Was it that the due diligence was poor, or was it that the bank took the due diligence work that they were given and ignored it and knowingly then sold the loans?
It was a combination of the two. There were a lot of cases that we’ve documented where someone inside an institution or someone at the third-party due diligence providers, the people screening, who were really special firms, who did nothing but this, individuals would raise the issue. And a lot of the due diligence firms would send loans in that were either rated 1, 2, 3: 1, great loan; 2, got questions but maybe you want to make an exception; 3, no way.
And we have all these cases of loans that were rated 2 and 3 being waved in and emails where folks say to their traders, “Don’t reject any loans from these lenders; otherwise we won’t be invited to the next auction.” They were so desperate for loans that they were afraid of alienating even the worst lenders in America.
The Comptroller of the Currency put out this list of the 10 worst lenders in the 10 worst cities in the country, and these big firms were doing business with a lot of those folks. So it was not a secret that there were problems there.
By the time you get to 2006, 2007, there’s a lot of internal debate and discussion. People knew what was going on. People understood that it wasn’t a matter of one or two people not able to meet their obligations. They understood that they were putting loans into these securities that should never have been deposited there.
The people who missed the first payment, it’s called EPD, Early Payment Default. There were thousands and thousands of folks who had never made one payment, and as we’ve unraveled this process, [we’ve found] people whose incomes were clearly overstated, so this is what they promised the investors they would check, and this is what we have found. And we’ve alleged that they really didn’t.
And you’ve alleged in the case of Bear Stearns and Credit Suisse that they passed these things on knowingly, intentionally, knowing they were bad?
… In order to charge a crime, you need to show intent. Beyond a reasonable doubt, you have to show that it was an intentional action. You filed civilly. Under the Martin Act, you don’t even have to show intent, correct?
We don’t have the same requirements as federal law, but 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 didn’t intentionally press forward understanding the quality of the loans was degenerating rapidly, and that they were putting more and more bad loans into these securities.
I think we have alleged, and I think that the facts will show intent, even if we don’t have to. This is not a case of a little bit of negligence. This is a case of willful and gross negligence and significant misconduct by a lot of people.
That’s what we’ve alleged.
And why did you decide to file a civil case rather than a criminal case?
We pursue the facts. And the cases that we can make, we’re making. We haven’t foreclosed criminal proceedings, but we’re taking what the game is giving us, and we saw the civil platform cases as probably the easiest to make, the most effective to make, from our office’s point of view.
We have a shorter statute of limitations than the federal government. But we concluded this was the best route for us to take, knowing that other parts of the working group may go in other directions.
… Why does this fall short of a criminal case?
It is a much higher burden of proof. It’s a much higher standard. You have to be able to isolate individuals. And the goal of the people who we’re calling out for this sort of justice, really, is not just to get midlevel folks who show up in the emails. They really want the people at the top who directed the whole course of dealing.
And that evidence has, in our investigation, proved hard to come by, something that will show proof beyond a reasonable doubt of the intent to commit fraud by the top folks. Tough to find. We’re still digging. And you know, sometimes as you proceed with an investigation, people change their minds about whether or not they’re going to cooperate.
In the civil suits, such as the Quinn Emanuel or Patterson Belknap, people are named. And your suit, which closely resembles some of those suits, has removed the names. Are you less confident that you can actually find the people responsible inside the bank, inside Bear Stearns, for example?
We do identify some people by name in the complaint. We haven’t sued them individually, because, again, what we’re alleging is a pattern of systemic fraud that really goes beyond any individual. And our platform cases are just one aspect of the work that’s being done right now. You’ll see different sorts of cases coming from different working group members as we move into 2013.
But we concluded that this was the most effective way we could use our resources to get the broadest relief and hold the firms accountable, and frankly, also just to make sure that we continue to tell the story of what really happened. And I think we’ve laid that out in a lot of detail in these complaints, and we are seeking substantial recoveries from the firms we’re suing.
… People are confused as to why individuals haven’t been held responsible. People want closure, and they want people, not institutions, held responsible, held accountable. Reading through your suit, you are clear that there was intentional fraud. And talking to you, it’s clear to me that what you saw was intent. … Is it that you can’t prove that beyond a reasonable doubt?
We thought the facts clearly supported a civil case. The criminal standard is just a much higher standard, and rightly so. Yeah, it’s just something that in our assessment of the facts, our assessment of the evidence, we concluded that the most effective way for us to go forward was with these civil platform cases.
There are other actors in the working group who have other options available. But as the investigations go forward, I think you’re going to see a variety of different complaints.
I am very much one of the people who wants to see justice done here. … Either in the area of reckless deregulation that took place or in the area of the actual packaging and selling of these securities, I think there was the kind of misconduct that really is contrary to our American traditions. These were bad actors taking advantage of their power, and people should be held accountable.
As to what our office can do as opposed to other agencies, we’re taking our best shot to get as broad a case out there against each institution as we possibly can. And the platform cases, we think, are a major contribution to this.
Do I understand the desire for individual accountability? Do I understand that people are frustrated with the sense that a middle-class person steals a little bit, they get arrested and go to jail, and the sense that bankers stole a lot and they didn’t? I understand that completely.
We’re proceeding more aggressively, I can safely say, than any other office really has. And we are getting more done with the collaboration of our working group partners now than certainly was being done when I took office. But do I understand that frustration? Absolutely.
… Are we going to ever see any of these individuals deterred from future bad behavior by criminally charging them?
Right now we’re following the facts. I can’t say. I certainly think that deterring the bad behavior should be one of the primary goals of our collective efforts, and I think that a lot of my colleagues share that interest.
One of the things that you allege in your suit and you focus on is this practice whereby the bank would get a bunch of mortgages in, they’d do the due diligence, they’d find a bunch of defective loans, and they’d go back to the originator and they’d say, “You know, cut us a break; give us a discount.” And then they’d pocket that money and not offer it to the investors who had bought those same bad mortgages.
This is a pattern of fraud we’ve seen across different institutions. They wouldn’t check the loans coming in. Their due diligence process was not what they represented it to be. Then they also claimed they had a quality control process where they would continue to monitor loans after they were packaged and sold as securities. They had an obligation to take that money and make the deal that was in the best interest of the investors, and in a lot of cases they didn’t.
A legal obligation?
A contractual obligation?
To monitor the loans and inform the investor if, in fact, the package was turning rotten?
They had the ability to do what was called a “put-back.” They could put the loan back to the lender and get another loan or get compensation. And in some of the cases, as we’ve alleged, they were just cutting deals with the lenders, saying, “You’ve got to give us a discount on the next set of loans, and we’ll let this one go,” and not taking the bad loans out of the trust, so that the investors were left holding the bag, and they were getting the benefit of whatever they got from the originators.
By the end, a lot of these banks were so timid in their dealings with the originators. They were just scared that they would be unable to get loans to issue more mortgage-backed securities, so they were really willing to turn a blind eye to the worst misconduct by the worst lenders, particularly in 2006, 2007.
And again, that’s why there’s not really a question in my mind that a lot of people in these institutions knew what was going on and understood that they were not issuing good mortgage-backed securities, that they were not doing their job to screen out bad loans.
They were just making too much money, and everyone else was just making too much money, that they all got caught up in this wave. And $7.4 trillion of home equity, lost; $1.3 trillion in retirement funds, lost. That’s the price that we paid for this pattern of misconduct.
Is there anything in the contracts that you’ve seen that excuses the banks’ behavior, that allows them to negotiate a discount with the originators, for instance, and not inform the purchaser of these mortgage-backed securities?
Different banks had different language, and there are some that changed their language over time to try and give themselves more options. But uniformly, when you have a quality control process — and again, the fraud is about misrepresentations — you can do whatever you want as long as you’re telling your investors the truth about what it is. …
And if you’re an investor, it makes sense. No one wants to buy a security backed by mortgages if you are not promised by the institution sponsoring that security that they’re going to make sure the loans are good, they make sure that the originators, the lenders, are complying with the appropriate guidelines, and that they have a process in place to check the loans so that you can see if, for example, there are a whole series of loans where people are defaulting before making their first or second payment.
That’s an indication that this is a bad batch of loans. They had to retain the right to go back to the lenders and put back these loans. And that was supposed to be for the benefit of the trust of the investors that owned the loans.
That trust was breached by the institutions that we’ve sued. And we have investigations under way into some other institutions that we think followed the same pattern of misconduct.
Explain who the victims are here.
The victims are investors, which were all around the world. And it’s not just fat cats. People think sometimes it was just a lot of pension funds. A lot of labor unions lost money, a lot of Main Street money that was retirement funds.
And the second batch of real victims were the homeowners, because the incentive was there for the banks to make a lot of loans to people, and [they] had very aggressive tactics that folks couldn’t afford. In many cases, people who qualified for cheaper loans with lower interest rates were getting loans that had balloons at the end of them that really ended up with them owing more money than they should have owed.
And the third set of victims, quite frankly, there are a lot of people who were thrown out of work and lost their jobs and suffered other economic damage who didn’t even own mortgage-backed securities. This bubble and crash melted down the economy all over the world. The collateral damage is huge, and that’s why the cry for accountability is so strong.
… This crisis is several years back. If this was so clear and so intentional and so many people knew about it, and so many commissions and hearings brought this forward, how is it that we are just now beginning to file lawsuits? And why aren’t those lawsuits against individuals, and why is this taking so long?
It’s hard for me to address the specifics of what happened before I got here. In early 2011, when I first took office, I came to the same conclusion that you have, that there was misconduct; some of it was reckless deregulation, and some of it was just misconduct by the folks at these institutions. Believe me, we’ve moved as fast as we could. You have to ask others about what happened before then.
… Clearly you asked questions.
I’ve asked questions, and it’s not true that nobody was taking it on.
But can you name a lawsuit?
We built on a lot of work that had been done. And if you look at the actions brought by the U.S. attorney Southern District, Eastern District, some other U.S. attorneys around the country, on behalf of different actors, the SEC, sometimes others, there were cases brought.
I think what we’ve expanded and what we have done is to increase the appetite for these broader-platform cases that address systemic patterns of fraud rather than going on a deal-by-deal basis. I think that’s a huge step, and that’s what we’re looking at now. And that’s what we are seeking accountability for, and that’s what we’ll continue to pursue.
I can’t think of one even individual case concerning mortgage fraud where somebody was indicted and tried.
Well, we’ll look at the records. We’ve certainly reviewed everything that had happened before we started. There were quite a few civil actions, and I think there were some criminal cases that were also brought. They’re challenging cases.
Believe me, there are a lot of folks who are ambitious, aggressive prosecutors out there who have been looking at these materials. It’s not that [there] wasn’t work going on. I think that we were able to refocus and reinvigorate it when we got the working group formed. We’re moving forward now. …
Some people suspect that there was an attitude of going slow on the prosecution because the banks were fragile. They’d just been bailed out, received billions in federal money, and that going after them in 2009, 2010 was simply not in the best interests of the country. Do you reject that, or you accept that?
I understand the sensitivity when the banks were fragile. But really, once you pull through and we’re into the recovery, holding people accountable for the conduct that put them in that condition was essential.
And there are decisions you can make after you do an investigation — you know, you’re going to prosecute, you’re not going to prosecute; prosecutors do that all the time — reasons for showing some degree of mercy or reasons that you think are in the public interest.
But this misconduct had to be investigated, has to be brought out in public, and I think that by the time we got to middle-, late 2009, the financial industry was really healthy enough to be able to have the same level of accountability that you would if you were running a grocery store or you were running a construction company. If you break the law, if you commit fraud, you have to be held accountable.
And I think that [to] the extent there were folks who were concerned about the global economy, the bailout worked. The economy did not freeze up. It was a very tense period of time. I think that there are a lot of us who wish there had been more strings attached to the bailouts, that there had been some limitations put on what financial firms could do. But in my mind, when I came into office, there was no excuse for folks not to be investigated and not be held accountable for their conduct.
And the financial services industry is doing well. It’s healthy. I want the U.S. financial markets to remain the best in the world and the greatest in the world. They can’t do that if the public thinks it’s a rigged casino. So this is as much in the interests of the folks on Wall Street as it is in the folks on Main Street.
I don’t view what we’re doing as punitive. I view what we’re doing as essential to restore public confidence in our financial services industry and to send the message that there’s one set of rules for everyone.