I follow mortgage-backed securities
litigation closely enough to be disgusted at the greed that
fueled the securitization of insufficiently underwritten
mortgages issued to homeowners who had no hope of paying them
off. Sure, MBS investors and the bond insurers that backed MBS
trusts were sophisticated and, to some extent, forewarned about
the timebombs lurking in those mortgage pools. But you can't
read the voluminous MBS filings by monolines and investors --
including the federal agency that oversees Fannie Mae and
Freddie Mac -- without wishing that someone be held accountable
for sending the housing market on a slide, and dragging down the
rest of the economy with it.
To date, accountability has been an elusive goal. I'm not
talking about private suits or breach-of-contract put-back
claims, in which MBS issuers are beginning to acknowledge
billions of dollars of exposure to investors and insurers. But
state and federal regulators and prosecutors have lagged behind
the private plaintiffs bar (and the Federal Housing Finance
Agency). As best I can tell, there have been no criminal
prosecutions of people or institutions involved in
mortgage-backed securitizations. On the civil side, the U.S.
Attorney for the Southern District of New York, Preet Bharara,
brought an MBS-based suit against Deutsche Bank last May. This
summer, the New York Attorney General, Eric Schneiderman, filed
Martin Act claims against Bank of New York Mellon for its
conduct as Countrywide MBS securitization trustee. In October,
the Delaware AG, Joseph Biden III, filed a civil suit against the Mortgage Electronic Registry System that accuses the banks
that established MERS of using it as a vehicle to bundle
mortgages they didn't actually own. And last week, the Illinois
AG, Lisa Madigan, sued Standard & Poor's for giving undeserved
AAA ratings to overly risky mortgage-backed notes.
Those, however, are the only major government cases stemming
from mortgage-backed securitizations that I'm aware of. For well
over a year, the MBS industry has been under intense scrutiny by
government investigators, from (among others) Congress, the
Justice Department, the Securities and Exchange Commission, and
the N.Y., Delaware, and Massachusetts AGs' offices. So far, we
haven't seen a lot of tangible results from those
investigations.
That's why I'm skeptical that the new MBS fraud task force,
introduced Friday at a press conference headlined by U.S.
Attorney General Eric Holder, SEC Enforcement Director Robert
Khuzami, and N.Y. AG Eric Schneiderman, is going to wreak
vengeance on MBS wrongdoers.
Both Khuzami and Holder, in fact, emphasized what their
lawyers have already done in probing financial fraud. "To be
clear, investigations into RMBS offerings have been ongoing at
the SEC. Along with experts across the agency, we have a
specialized unit dedicated to the effort," Khuzami's press release said. "We already have issued scores of subpoenas,
analyzed more than approximately 25 million pages of documents,
dozens and dozens of witnesses, and worked with our industry
experts to analyze the terms of these deals and the accuracy of
the disclosures made to investors." (Under Khuzami, the SEC has
brought several actions against companies and banks that
allegedly under-reported their exposure to subprime mortgages;
and several more against banks and individuals that allegedly
deceived investors in MBS derivatives.) Holder's press release
pointed to the securities, bank, and investment fraud cases the
Justice Department has recently prosecuted, along with DOJ's
Fair Lending settlement with Countrywide parent Bank of America.
The benefits of creating an umbrella task force to oversee
investigations already underway by state and federal regulators
aren't clear to me from the task force's announcements. There
will apparently be additional resources dedicated to MBS fraud.
Holder said that there are now 15 DOJ lawyers, investigators,
and analysts working on MBS matters. They will be supplemented
right away with 10 FBI agents, and another 30 DOJ staffers will
join the team "in the coming weeks." Khuzami and the DOJ also
said the task force will enhance coordination and streamline
processes. "It will ensure that we pool the different
capabilities, resources, legal theories and remedies that each
of us bring to the effort," Khuzami's press release said.
Okay, streamlining is good. So is the apparent expansion of
the state AGs' mandate. "We have jurisdiction to go after every
aspect of the mortgage bubble and the crash of the financial
market," Schneiderman said at the press conference, according to Housing Wire. (Here's the AG's press release.) "We have
jurisdiction over every MBS issued over the last decade with
Delaware and New York joining the group." As if to underline
that point, the task force announced that in recent days it has
subpoenaed 11 financial institutions.
But the AGs, according to a DOJ spokesperson, won't have any
greater prosecutorial reach via the task force than they already
have in their own states. "Membership in the RMBS Working Group
will not empower state Attorneys General to enforce any statute
that they could not otherwise enforce," the DOJ told me in an
email. "The Working Group and its federal and state co-chairs
will coordinate investigations and make decisions about which
office or offices should conduct various pieces of these
investigations and which should be done jointly depending on the
facts, the law and the jurisdiction."
So when you put aside the press releases, what the MBS task
force really adds to existing investigations is some additional
DOJ manpower and better coordination among the various state and
federal agencies.
There are clearly political benefits that come with the
announcement of the new task force. It's an gesture to critics
who want to see MBS securitizers and trustees answer for their
actions. Reuters has also obliquely suggested that membership in
the MBS task force may persuade Schneiderman and other AGs who
have voiced opposition to the Obama Administration-backed
mortgage abuse settlement with top banks to support the proposed
$25 billion deal.
I hope that's not why the President called for an MBS task
force. I hope the task force will, in some manner, tell the
country whether it's true that MBS issuers abandoned even their
own lax underwriting standards, ignored warnings from inside and
outside mortgage loan reviewers, and packaged deficient loans
into doomed securities. I hope that even if regulators and
prosecutors don't bring cases, they tell us who got rich in the
securitization business. I want everyone who lost money through
their mutual fund or pension fund's investment in MBS -- and all
the people whose mortgage lenders told them they could afford a
loan they really couldn't -- to know those names.
That's what I want. But I'm not holding my breath.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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