Obama's new mortgage-fraud unit met with skepticism

McClatchy NewspapersJanuary 25, 2012 

WASHINGTON — President Barack Obama's State of the Union pledge to create a special unit to punish fraud in mortgage finance met with skepticism Wednesday for coming so late in his term and amid signs that his administration is close to settling with large banks accused of shoddy mortgage-lending practices.

Obama said Tuesday night that he was asking Attorney General Eric Holder to create a special unit of federal prosecutors and leading state attorneys general "to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis."

The new unit, the president said, would "help turn the page on an era of recklessness that hurt so many Americans."

Critics said the announcement might have been more appropriate at the start of the Obama administration, not in the fourth year of his term. And it appears to duplicate a lot of groundwork already done.

"It just seems like more maneuvering," said Chris Farrell, director of research for Judicial Watch, a conservative group that promotes transparency in government.

A sympathetic member of the congressionally created Financial Crisis Inquiry Commission, charged with getting to the bottom of the 2008 financial crisis, also questioned Obama's timing.

"He should have done it three years ago in January 2009, when the trail would have been fresh, witnesses' memory would have been fresh, the statutes of limitations would have been necessarily missed," said the commissioner, who requested anonymity to speak freely. "I think it's high time that it be done — people need to be held accountable."

The work group is being created even as the Securities and Exchange Commission over the past two years has been settling civil lawsuits against big banks such as Goldman Sachs, JP Morgan Chase and Citibank. They all stood accused of misrepresentation about the safety of complex mortgage bonds they sold to investors.

"Personally, I've certainly been disappointed in the outcomes of the SEC investigations, and as yet they have not brought significant actions against entities that ... had all kinds of misrepresentation," said Barry Zigas, director of housing policy for the Consumer Federation of America.

Consumer advocates, and many ordinary Americans, are unhappy that no big Wall Street figures have been sent to jail for financial crimes tied to the near-collapse of the U.S. financial system in 2008, a crisis rooted in shoddy mortgage lending.

McClatchy's investigative reporting after the crisis showed how Goldman Sachs duped investors who were buying mortgage bonds, and how the ratings agency Moody's Investors Service traded top ratings for mortgage bonds for more business from big Wall Street banks. This reporting was later confirmed by Senate hearings and the Financial Crisis Inquiry Commission, which held lengthy hearings and issued a comprehensive report outlining causes of the crisis.

Moreover, there already is a Financial Fraud Enforcement Task Force, comprised of more than 20 federal agencies and 94 U.S. attorneys offices, along with state and local law enforcement officials.

A Department of Justice official, demanding anonymity because he was not authorized to speak, said the agency will create a new Residential Mortgage-Backed Securities Working Group. It will be run as an offshoot of the existing task force and will look narrowly at how mortgages were bundled together into mortgage bonds.

"There are currently active civil and criminal investigations by task force members into this market, as well as new investigations forthcoming, and this new working group is a specialized offshoot of the (task force) that brings together the DOJ, state attorneys general and other federal entities in an effort to collaborate on these investigations, pool resources and streamline processes to investigate those responsible for misconduct contributing to the financial crisis in a comprehensive way," the official said.

The Financial Crisis Inquiry Commission already looked at much of this, insisted Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a Republican appointee to the commission.

"We had access to everything that any such task force (unit) would look for and we couldn't find enough evidence ... for criminal referrals," said Holtz-Eakin. "I think what we found out is that stupidity is not illegal. A lot of this was bad business decisions, unwise, but it wasn't illegal."

The newly announced working group will be co-chaired by SEC enforcement chief Robert Khuzami and by Lanny Breuer and Tony West, assistant attorneys general who respectively head the Justice Department's criminal and civil divisions.

Significantly, New York Attorney General Eric Schneiderman will take the lead on the working group for state attorneys general. He forcefully argued against a proposed $20 billion to 25 billion settlement being worked out by the Obama administration and five large banks_ Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial. Schneiderman exited the talks last summer angry that a settlement would stop further investigation.

His appointment to the new unit, however, seems a way to clear obstacles for a proposed settlement that was sent to states for review on Monday, prompting speculation that a deal is near.

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