The federal government is saddling up another enforcement entity to investigate wrongdoing during the mortgage crisis that began to unfold in 2008.
Announced during President Obama's State of the Union address in January, the task force, called the Residential Mortgage-Backed Securities Working Group, will reside within the Department of Justice and will investigate abuses by the financial services industry, especially those relating to residential mortgage-backed securities.
According to a statement by U.S. Attorney General Eric Holder, the unit will “streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”
The working group is not the first to probe the mortgage backed securities mess. In 2009, Obama established the Financial Fraud Enforcement Task Force, which also promised to work with state and local authorities to rein in abuses during the mortgage crisis. The new Residential Mortgage-Backed Securities Working Group will work under the FFETF and along with the Securities and Exchange Commission, said Holder. The Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act, also has a similar mandate. And the Securities and Exchange Commission said last November that it would begin compiling a separate list of enforcement actions related to the financial crisis, partly as a way of promoting its efforts in the area and to deflect criticism that is hasn't done enough to punish those responsible for the financial crisis.
Now some are wondering if the establishment of the working group isn't just another effort to deflect criticism, raised by groups like Occupy Wall Street, that the government isn't doing enough to pursue those responsible for the crisis that set off the housing collapse and ensuing recession in 2008. “Is this responding to popular sentiment, or are they really trying to get out there to constructively do something a little bit different?” asks Tom Gorman, a partner with law firm Dorsey & Whitney.
Still, some say the new working group is unique in its structure, which includes a collaborative effort between state and federal enforcement authorities. It's “very different” from anything else that's been done in the past, says Gorman. “I can't think of any other instance where they took this approach.” Typically, while other working groups at the federal level share information with the states, “they're not really designed to include the states,” explains Gorman.
The RMBS working group will be co-chaired by New York Attorney General Eric Schneiderman, and several senior officials both at the Department of Justice and the Securities and Exchange Commission. These officials include Lanny Breuer, Assistant Attorney General for the Justice Department's Criminal Division; Tony West, Assistant Attorney General for the Justice Department's Civil Division; John Walsh, U.S. Attorney, District of Colorado; and SEC Enforcement Director Robert Khuzami.
“If I was one of the major financial institutions involved in this, I would be very concerned that this is an effort to appease the popular sentiment that all the major players on Wall Street ought to go to prison.”
—Tom Gorman,
Partner,
Dorsey & Whitney
Currently, the working group consists of 15 civil and criminal attorneys, as well as 10 agents and analysts from the Federal Bureau of Investigation. In the coming weeks, Holder said another 30 attorneys, investigators, and support staff from U.S. Attorneys' Offices will join the unit. The working group additionally includes officials from the Department of Housing and Urban Development, the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, the Treasury Department, and the FBI.
Holder added that the working group already has met to discuss “the structure of our investigative efforts, how teams should and will be organized, and how information can be shared more effectively.”
Who's in Charge?
With so many organizations focusing on mortgage crisis era investigations, and plenty of overlap among responsibilities, some say they are puzzled over the actual purpose of the working group. “It's not entirely clear what the focus of it is,” says Gorman.
Numerous agencies have been investigating the securitization process for years, Gorman adds. He cites the Justice Department's prosecution against Lee Farkas, former chairman of collapsed mortgage lender Taylor, Bean, and Whitaker, as one example. The SEC also has brought numerous civil cases such as those against the former senior executives of sub-prime mortgage giant Countrywide Financial, Goldman Sachs, and Citigroup.
ATTORNEY GENERAL SPEECH
Below is an excerpt from Attorney General Eric Holder's speech regarding the new Residential Mortgage-Backed Securities Working Group:
Beginning with its first full meeting—which will take place immediately after this press conference—the working group will streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities. I am confident that this new effort will improve our ability to ensure justice for victims; help restore faith in our financial markets and institutions; and allow us to answer the call that President Obama issued [in January], in his State of the Union address.
… the President referenced this initiative, asking us to, “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”
That is precisely what we intend to do. And the good news is that we aren't starting from scratch.
Over the past three years, we have been aggressively investigating the causes of the financial crisis. And we have learned that much of the conduct that led to the crisis was … unethical, and, in many instances, extremely reckless. We also have learned that behavior that is unethical or reckless may not necessarily be criminal. When we find evidence of criminal wrongdoing, we bring criminal prosecutions. When we don't, we endeavor to use other tools available to us—such as civil sanctions—to seek justice. My number one to commitment to the American people is that we will continue to devote significant resources to combating financial fraud and be as aggressive and creative as we can be in holding accountable those who, in violating the law, contributed to the financial crisis.
For example, in just the last six months, the Department has achieved prison sentences of 60, 45, 30, and 20 years in a variety of financial fraud cases charging securities fraud, bank fraud, and investment fraud. And, just last month, I announced the largest fair lending settlement in history, resolving allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against minority borrowers from 2004 through 2008.
With this new working group, we will marshal our civil and criminal capabilities to build on these efforts—by focusing on abuses in the residential-mortgage backed securities market. I am pleased to report that this working group has considerable Department resources behind it as it builds on activities that have been underway through the broader Task Force. Currently, 15 attorneys, investigators, and analysts—here at Main Justice and throughout our U.S. Attorneys' Offices—are supporting the investigative efforts that this Working Group will be focusing on going forward. And the FBI has assigned 10 agents and analysts to work with the group immediately. In the coming weeks, another 30 attorneys, investigators, and support staff from U.S. Attorneys' Offices will join the Group's work.
We are wasting no time in aggressively pursuing any and all leads. In fact, as part our current investigations, the Department recently issued civil subpoenas focusing on issues related to the market for residential mortgage-backed securities to 11 different financial institutions—and you can expect more to follow.
Of course, I can't go into detail about our existing investigations. But I can tell you that significant efforts are moving forward, by both federal and state authorities. And I can assure you that, if we uncover evidence of fraud or other illegal conduct, we will bring the appropriate criminal or civil charges.
Source: Attorney General Eric Holder's Speech.
“Hopefully, they're taking a different approach here, because it wouldn't make a lot of sense to reinvestigate what's already been done,” says Gorman. “It wouldn't seem to be fruitful to go back and re-plow that ground.”
Others have similarly worried that the working group could derail the proposed $25 billion deal currently underway between state and federal officials and the five biggest banks: Bank of America; JPMorgan Chase; Citigroup; Wells Fargo; and Ally Financial to settle allegations of abusive foreclosure practices.
At the press conference, Housing and Urban Development Secretary Shaun Donovan, however, responded that's not the intent of the working group. Even if the settlement released companies from further law enforcement efforts, Donovan said that the releases being contemplated were “quite narrow, focused on the conduct that was actually investigated, focused on the conduct that we have found significant problems with,” and are “narrow enough to allow us to go forward aggressively.”
But the election-year timing of the creation of the working group is raising questions in the minds of some critics. “Is this responding to popular sentiment, or are they really trying to get out there to constructively do something a little bit different?” asks Gorman.
In investigating the causes of the financial crisis over the past three years, it's been discovered that much of the conduct that led to the crisis was “unethical and, in many instances, extremely reckless,” said Holder. “We also have learned that behavior that is unethical or reckless may not necessarily be criminal. When we find evidence of criminal wrongdoing, we bring criminal prosecutions. When we don't, we endeavor to use other tools available to us—such as civil sanctions—to seek justice.”
The working group wasted no time in getting started. The Justice Department said it recently issued 11 civil subpoenas to financial institutions focusing on the residential mortgage-backed securities market, “and you can expect more to follow,” warned Holder.
He would not elaborate on any more details or the targets of those investigations. “Presumably, they are the bigger banks that were intimately involved in the securitization process,” says Gorman.
“If I was one of the major financial institutions involved in this, I would be very concerned that this is an effort to appease the popular sentiment that all the major players on Wall Street ought to go to prison,” says Gorman. “It's that kind of environment that really pushes prosecutors into bringing cases they shouldn't.”
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