Saturday, October 04, 2014

On the 2008 Meltdown: The banks said, "The borrower made me do it."

In September of 2014, something quite amazing happened in a federal court in Sacramento. You won't see it on the mainstream press, God no. So don't go looking it up on CNN, ABC, CBS or NBC. But PBS is picking this one up from Slate on the Moyers and Company show.

Here is what I'm talking about, in a nutshell. Four men were prosecuted and acquitted for mortgage fraud. They were charged with lying on their loan application for a loan they got in the go-go days of 2006, you know, one of those fantastic Bubble Years. Fortunately for them, the defense had a novel argument.

In those days, the banks didn't care what you put on your application, as long as they could send you the statement. At least, not the honest banks. The banks issuing the bad loans didn't care about the borrower's ability to pay, rather, the executives were more concerned about volume. Volume, volume, VOLUME! They were handing "liar's loans" out to anyone who wanted one based on stated income. In that case, an underwriter testified that in certain cases they were prohibited from verifying the borrower's income.

The defense won their case with an acquittal from a jury. The jury was convinced that bank executives didn't really care because their bonuses were piling up a mile high. The defense was able to show that the bank did not have clean hands. The Clean Hands doctrine says you're not entitled to relief from a court if you contributed to the cause of action. In other words, if you acted in bad faith, you could sue for relief but you can also expect to your request to be denied.

These bankers didn't need clean hands because they were engaged in control fraud. Control fraud is where an executive allows fraud to continue as an ongoing part of the business, while receiving immense compensation at the expense of the company. In this case, executives made bonuses on the huge volume of really bad loans. When the bank tanked, the executives kept their money.

This case is being seen as a watershed moment, a way to now hold the 0.1 percent accountable for their fraud on the country that led up to the financial meltdown in 2008. True, the defendant didn't have clean hands either, but if the bank doesn't care about the information on the loan application, the bank doesn't get relief when the loan is not paid back. Relief is what you and I know to be "justice".

Defense attorneys arguing mortgage fraud cases are now talking to each other and sharing this information. It is quite possible that this defense tactic could spread and make it very difficult for the Obama Administration to ignore requests to prosecute bank executives. At the very least, it would be politically unpalatable to continue the current course considering the political contributions they have received from the banks. Remember, Obama put Tim Geithner, in charge of the US Treasury after running the New York Federal Reserve Bank. Say, isn't that the same Federal Reserve Bank that acts like a captured regulator? I think so.

The news of that jury verdict in this mortgage fraud case also removes support from the argument proffered by the banks and their supporters that, "The borrower made me do it." Actually, the conservatives I've debated with usually say that government policy forced the banks to make the unqualified loans that were fueling the housing bubble. Yes, the government forced the banks to make loans to people who couldn't afford to pay them back, right?

You mean to say that the same bankers who can afford rockstar legal counsel couldn't mount a defense against a charge of failing to make a loan to someone who couldn't afford to pay it back? Say it ain't so!

This is the cognitive dissonance in the reasoning behind making the banks out to be victims in the meltdown. The banks were not forced to make bad loans by government policy, were warned not to do so, and could easily have mounted a defense against being forced to make a loan if they didn't want to. But they sure didn't mind the loan fees piling up as a result of giving out those loans.

Perhaps sooner than later, we can start to see some action on the part of the Justice Department to prosecute the executives who covered the country in the liars loans that tanked our economy. On the other hand, we might have to wait until someone like Elizabeth Warren or Bernie Sanders is elected to be president before we see any bank executives go to jail as a result of their part in any mortgage fraud.
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