Client Note: Occupy the Courtroom?
A look at the President’s new mortgage fraud task force
By Tucker Warren, (202) 822-1205, email@example.com
In his State of the Union address last week, President Obama announced the creation of the Residential Mortgage-Backed Securities Working Group, a new task force intended to, in the Presidents words, “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” The President hopes this aggressive new effort will demonstrate a commitment to holding bankers accountable that will rally voters angry about Wall Street excess. Questions remain however, about what the working group can ultimately accomplish that the array of commissions and task forces previously created to address the financial crisis would not have otherwise.
Why It Was Created
The motivation for creating the working group is probably as strongly rooted in the political dynamics of an election year as it is in law enforcement objectives. President Obama has faced growing criticism from the political left who find his efforts to rein in Wall Street woefully lacking. A recent HPS/YouGov poll found that the top two policy goals of Democratic voters are taxing the rich and regulating Wall Street. As illustrated by the larger themes of his recent State of the Union Address, the President has taken an increasingly populist course of late in an attempt to bolster flagging support from his base. The President’s mortgage fraud working group is in keeping with this broader populist turn.
As a tool to investigate and prosecute mortgage industry misdeeds, the new working group appears largely redundant. Since the 2008 financial crisis, multi-year investigations by the Senate Permanent Subcommittee on Investigations (PSI) and the Financial Crisis Inquiry Commission (FCIC) have compiled millions of documents, heard hundreds of witnesses, and held more than 20 days of public hearings.
A number of task forces have been established over the last three years, some of which are nearly indistinguishable from the working group. For example, in 2009 President Obama created the Financial Fraud Enforcement Task Force (FFETF) to coordinate federal and state efforts to prosecute mortgage fraud among other things.
In 2010, when the FCIC asked the Department of Justice (DOJ) about including state securities regulators and attorneys general in its fraud enforcement efforts, it said that the FBI’s Mortgage Fraud Task Force and Working Groups had “expanded the jurisdictional boundaries for law enforcement” and that “working together, the law enforcement agencies could share not only intelligence but had the ability to prosecute cases across state and federal prosecutive jurisdictions.” [Full Reply]
Despite these efforts, there has not been a single prosecution of a high-ranking Wall Street executive or major financial firm. As President Obama explained in a December 9, 2011 interview with Steve Kroft of 60 Minutes, “some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.” That fact remains unchanged.
Certainly the pursuit of any criminal and civil wrongdoing is appropriate and an investigative task force that includes the caliber of people involved in the working group must be taken seriously. Nevertheless, it is hard to see that this effort differs substantially from previous initiatives. Neither the evidence nor the people involved have changed. The only thing that has changed is the calendar. It is now 2012, an election year.
What to Expect
The inclusion of New York Attorney General Eric Schneiderman, known for his “tough guy” reputation and aggressive efforts to win $25 billion in fines from banks, has created high expectations for the working group. The lofty expectations can in part be attributed to the potential application of state laws such as the Martin Act, a New York state law that offers more flexibility than federal securities law and exceeds the legal powers given to regulators in other states.
The application of state laws and the political climate in Washington may very well give the public the trial it has been yearning for. But the volume of information produced by previous investigations combined with the fact that federal and state authorities have been coordinating efforts since 2009 may mean that there is little legal basis for criminal prosecutions of mortgage industry executives. Reflecting President Obama’s comments on “60 Minutes,” Attorney General Eric Holder’s statement on Friday announcing the task force cautioned, “behavior that is unethical or reckless may not necessarily be criminal.”
In setting expectations for the Residential Mortgage-Backed Securities Working Group, one should consider that commissions and task forces in Washington have generally succeeded in making valuable contributions to the public dialogue, but have fallen short of the public’s lofty expectations.
Tucker Warren is a Managing Director at Hamilton Place Strategies and former Communications Director at the Financial Crisis Inquiry Commission. Hamilton Place Strategies’ clients include members of the financial services industry.