A modern Pecora Commission could right Wall Street wrongs
Barry Ritholtz
January 28 2012

~~~

What shall we make of this surprise pronouncement in President Obama’s State of the Union address? A belated investigation has been launched into the role of fraud in the financial crisis.

This much is clear: Despite rampant illegalities, bank fraud and countless cases of perjury, the response to date — at the federal level and from most, but not all, states — has been underwhelming, cowardly even. A few principled holdouts — the attorneys general of Delaware, New York, Nevada and California — refuse to rubber-stamp a pre-investigation settlement with banks, but that’s all. Despite chances to bring crooks to justice, there has been little action.

So, here we are, four years after the great financial collapse, three years after the recovery began and in the last year of Obama’s term — and the president has finally decided to investigate the role of fraud in the great global financial crisis. Hence, this new task force — the unit of Mortgage Origination and Securitization Abuses — begins behind the curve. The statute of limitations is, in many cases, close to elapsing.

Even so, do not dismiss the investigation out of hand because of the timing: History informs us that a serious investigation can begin four years after the fact. Recall that Ferdinand Pecora was the fourth chief counsel for the Senate committee that investigated the Wall Street crash of 1929 and subsequent Depression. He was appointed in 1932 and received broad investigatory powers in 1933. His report ran thousands of pages. Thanks in large part to Pecora’s findings, Congress passed the Glass-Steagall Banking Act, which separated commercial and investment banking; the Securities Act of 1933, which established penalties for filing false information about stock offerings; and the Securities Exchange Act, which created the Securities and Exchange Commission to regulate the stock exchanges. Nearly 50 years of financial stability followed.

The personality in charge can make all the difference. In an encouraging sign, Obama appointed to the task force New York Attorney General Eric Schneiderman, one of the few attorneys general not railroaded into a premature settlement with banks of the robo-signing-foreclosure scandal.

Critics have derided the task force as little more than election maneuvering. The politics are obvious: Both Occupy Wall Street and the tea party were very unhappy with the bank bailouts; they seem even less happy with the lack of prosecution.

It’s fair to ask: Is this new task force a meaningless exercise?

It is too soon to tell, of course. Like good poker players, we can look for “tells” that signal whether this will be a farce or a serious player. We’ll find clues in the structural setup of the office as well as the areas it investigates.

In the setup of the office, four aspects are crucial:

• Does the office have subpoena power (as the New York attorney general’s office has through the Martin Act)?

• Are there going to be public hearings (preferably in the Senate)?

• Will the commission have a significant budget?

• Will it be a forum for whistleblowers and crowdsourcing?

Without such powers, the office would be a farce, helping to shield banks from the fallout of their wrongdoings.

What the office investigates will also reveal how serious this is. Both pre- and post-crisis topics should be investigated, including:

MERS: Mortgage Electronic Registration Systems was created by banks without any authority or enabling legislation. It allowed the rapid transfer of mortgages, avoiding state and county filing fees amounting to billions of dollars. Without MERS, it’s hard to imagine that the massive volume of mortgage securitizations could have occurred. How were lenders able to circumvent mortgage filings with town and county registrars? Did they engage in illegalities? How many billions of dollars do they owe in fees for transferred notes? And what percentage of MERS assignments were fraudulent, made for entities that did not exist?

Origination fraud: Why did lenders accept “stated income” loans? Why did they abandon traditional standards? Michael White, a Countrywide subprime unit employee, called this “origination fraud,” observing, “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default.”

RMBS: Wall Street’s securitized mortgage pools (residential mortgage-backed securities) contained a broad variety of flaws, some so egregious that they amounted to fraud. In plain English, we’re talking about bad paperwork and misrepresented pools of mortgages to borrowers whose debts were significantly understated and whose median incomes and credit scores were significantly overstated.

Insurance fraud: Look at a bank tactic in which legitimate home insurance is canceled and new insurance provided at a substantially higher fee through a subsidiary or affiliate of the bank mortgage holder. This extra expense in some cases led to foreclosures.

“Pyramid” servicing fees: An illegal practice in which current payments are applied to past late fees, generating more late fees and additional interest owed and creating a delinquency where none existed. This tactic also led to foreclosures that were probably unlawful.

Lost mortgage notes: How is it possible that the most important part of the mortgage contract — the promissory note — was consistently lost or misplaced by banks? It is unfathomable to anyone who has ever handled documents. At best, it’s gross incompetence. At worst, it’s willful document destruction during litigation.

Document fraud for sale: There were many examples of alleged document fraud, but the one crying out for investigation involves Lender Processing Services’ DOCX subsidiary. The firm seems to have been selling fabricated documents for a fee to lawyers and banks. Indeed, Lender Processing Services, which processes nearly half of all U.S. foreclosures, could require a separate investigation.

False affidavits, perjury (robo-signing): We do not know who ordered the robo-signing of foreclosure documents, the false notarizations, fraudulent written statements to courts and perjury. This should be easy to investigate, like flipping a nickel-bag dealer to get to the drug kingpin. Astoundingly, this easy-to-investigate felony (via notarized perjurious statements submitted to foreclosure courts) has yet to be prosecuted.

Foreclosure mills, process servers: Law firms engaged in rampant fraud that corrupted the foreclosure process. If found guilty, those folks should be disbarred and jailed. Same for the “sewer service” process servers who threw away legally required notices to delinquent homeowners.

Soldiers and Sailors Relief Act: Federal law protects active-duty service members from foreclosure and eviction. I find violation of this law reprehensible. If it were up to me, I would let the Special Forces — Navy Seals and Army Green Berets — handle this as they see fit.

Even with criminal statutes of limitations elapsing, we can achieve some measure of justice against the crisis wrongdoers. Lawyers can be disbarred and corporate insiders banned from serving in publicly held firms again. CEOs and CFOs can be fired. A significant investigation, with subpoena powers, a real budget and public hearings would go a long way toward restoring public confidence.

Schneiderman has an opportunity to create a legacy for himself that lasts far beyond the next election cycle. If he lacks the tools to do so, he should demand them or resign in protest.

~~~

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture.

Category: Apprenticed Investor, Foreclosures, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “A modern Pecora Commission could right Wall Street wrongs”

  1. USSofA says:

    Lets not forget about the role that the rating agencies played although I’m not sure how illegality could be proved.

  2. MayorQuimby says:

    A modern Pecora commission would probably also out corrupt links between the TBTF establishment and WASHINGTON DC which is why it will not happen.

  3. Master Shake says:

    Christ, how can anyone not be cynical about this obvious election year pandering? Willingly suspending your disbelief BR because Obummer is your guy?

    ~~~

    BR: If you actually read the article, you would see it lays out a way to determine of this is a cynical political manuever or a real commission. (Try to be less of douche in your next comment)

  4. Petey Wheatstraw says:

    This is all about letting the statutes of limitations run out.

    “Lawyers can be disbarred and corporate insiders banned from serving in publicly held firms again. CEOs and CFOs can be fired. A significant investigation, with subpoena powers, a real budget and public hearings would go a long way toward restoring public confidence.”

    So? The only lesson being taught here would be that crime does, indeed, pay enough for a very comfortable retirement.

    Whatever happened to Bosky and Milken? Do they still live better than the vast majority of Americans? I’ll bet they do.

    Public confidence might be restored, temporarily, but the toxic waste these criminals mined our financial system with will continue to wreak damage and destruction on our economy, and that of the world, as far out as can be projected. We haven’t even begun to identify and defuse these mines — much less prosecute those who booby-trapped our system with them.

    While Obama will engage in perfunctory jaw-boning and symbolic prosecutions of expendable representatives of the criminal class, make no mistake: He is a right-wing supporter of the status quo, dressed in the rhetoric of hope and change. He’s as big a fraud as any in the Wall St./Banking juggernaut.

  5. Sechel says:

    The bank settlement is preceding the investigation with the states giving releases and is being led by some of the same people who didn’t take action for the last several years. NY is a key state that can actions on its own with real impact at the national level, so it makes sense for the Obama administration to bring in Schneiderman on board to get to sign on to the deal on the table and to help sell it. And let’s not forget that a key part of the settlement is a re-write of contract law, as Fed Governor Dudley pointed out not to long ago, by having first lien holders take modification losses while leaving second liens held by banks in tact and in a superior position. As far as the process is concerned, I’m from Missouri, “show me”.

  6. simoncz says:

    I really do hope Mr Schneiderman turns out to be another Pecora. In Britain the main stream media owned by Murdoch and others of his kind still peddle the myth that everything is clean and run by the best people ever to walk this earth. They must be wonderful or they wouldn’t be paid so much, would they?
    If Schneiderman gets going strong it helps us over here to point out that if US can mount a clean up then there is no excuse for not doing so in UK.
    The CIA lists UK as a money laundering centre on their website. Now why would they do that if everything is so wonderful in London?
    They spin us the same line too, after all Murdoch owns media both sides of the pond. It’s all the fault of government, which means taxpayers must foot the bill. Global meltdown has nothing to do with the private sector according to this meme. So taxpayers must pay up, not the financiers. And anyone who suggests otherwise is a fool or a socialist they say.
    Mr Schneiderman could end up being of great help to everyone not just the US. You really are that big.

  7. Master Shake says:

    Obama a right-wing supporter the status quo? LMFAO! Basically, you’re simply saying that anything you don’t agree with/think is wrong is “right wing.” The flip side of the coin are those on the right who think Romney is a closet lefty because he supports thinks they don’t like. FIRE has bought off the establishments of both parties, and the faux right-left dichotomy and bickering is a mug’s game. The only candidate running this year who hasn’t been co-opted is Ron Paul, and I can guess what you think about him.

  8. Tim says:

    Well let’s all hope and pray that Schneiderman reads this post. Any way to make sure that might happen?

  9. Winston Munn says:

    Desperation is a terrific motivator. Unfortunately, the Great Recession did not produce the desperation of the depression, and so it is unlikely enough pressure will be applied to politicians to accomplish any worthwhile change.

  10. TLH says:

    The reason there has been no prosecutions is that the political class benefited from the fraud. Alan Greenspan is paraded out as an expert on CNBC. The Treasury Department did not change from Bush to Obama. CEO salary at the present level is stealing from the shareholders. We do not have capitalism. No free market in the bond market due to the federal reserve. No free market in health care due to the insurance cartel, drug cartel, and hospital cartel. Tax system that favors corporations moving overseas. Personal tax system that is inefficient. A dysfunctional political system that is only interested in bribes (campaign contributions). Is there really a choice come November?

  11. Bill Wilson says:

    It’s hard not to be cynical about this.

    Up to this point, the Obama administration seems to be tied to the idea that what’s good for Wall Street is good for Main Street. A well meaning idea that’s actually the path to ruin. It’s easy to forget that the road to hell is paved with good intentions.

    All you can do is hope that criminals will be punished, and that lessons learned will lead to reform.

  12. bswhouston says:

    Sadly, all meaningful political discourse takes place behind the curtains of anonymity provided by blogs. If only our leaders in Congress (an oxymoron if ever there was one) were interested in the welfare of the nation and not their “phony-baloney jobs” (thank you Mel Brooks), these discussions, and real action, might have taken place in Congress years ago. I am equally frustrated at the slow pace of investigations and prosecutions, but the President can only do so much, and when Mitch McConnell and John Boehner are fighting him every step of the way on every matter of importance, I am impressed he gets anything done. At least the President has decided to stop playing footsie with the GOP and has engaged them in the fight they have been having with him for the past three years. The solution to all our problems is a filibuster-proof Democratic majority in the Senate, and the Democrats taking back the House. Period. End of story.

  13. Jim67545 says:

    From a local Sunday real estate column, titled “Are stated-income loans returning?”

    “Many of us remember how pleasant “stated income” loans were. Approximately 5 years ago they were considered the norm. No tax returns were required and fast approvals were expected. But in recent years only fully documented loans have been available and the loan-approval process became arduous…..(then a discussion of the Freddie reintroduction of stated-income under HAMP for performing refies they hold)… Yes, all of this could be a change in direction for the mortgage world. For many months and even years, most borrowers have been very qualified but burdened with excessive paperwork to prove their qualification…. Interest rates will continue at favorable low levels and a gradual lessening of documentation requirements will speed the loan process.”

    Just wanted to get your blood heated up. One person’s “origination fraud” is another person’s idea of fast and good service.

  14. Herman Frank says:

    Beautiful words of “frustration”, “sadly”, “we can hope”, “perhaps”, and “maybe”. Whether left, centre or right, money has bought the best legislation money can buy – for those who cared enough to prepare the playing field. We’ll find out that it’s all been legal, that perfectly legal waivers were granted, that there’s small print which lets the culprits off the hook, ….. and we have to explain to our friends, family and whoever asks “how it got to be this kind of obviously slanted system”. I can’t explain it anymore! What to tell our son? He has to be a fair player, an upright citizen, a law- (and rules-) abiding cosmopolitan with empathy and compassion for his fellow man. Throw in a good portion of environmental responsibility and curiosity to learn and listen, and he’s there. And his old man has to explain to him why one man who broke all the rules gets to keep $100+mln, is deemed “the smart one”, and the neighbor who got fired got thrown out of his house and had to move “because he wasn’t so smart”. We’re good people who are being treated like dirt, and I don’t like that.

  15. Master Shake says:

    >> The solution to all our problems is a filibuster-proof Democratic majority in the Senate, and the Democrats taking back the House. Period. End of story. <<

    Bwahahahhahhahahah!

  16. rd says:

    The originations and initial securitizations stature of limitations will probably run out without any action by the Obama Administration. However, it is likely that the ongoing default and foreclosure crisis is creating many new illegal activities related to servicing mortgages, allocation of proceeds to securities, robosigning to inappropriately insert mortgages into securities after their trust closing dates. There are likely to be Federal tax shelter problems that could require significant restatements of past income tax returns.

    There are still lots of ways to get a high percentage of the people who have been perpetuating the financial problems.

  17. carleric says:

    Burdened with excessive paperwork to prove their qualifications?> You are kidding right? It takes a few minutes, a trip to Kinko’s and then a visit to the lender to qualify. People whining about excess work either are hiding something or are too dense to deserve a loan of any size.

  18. willid3 says:

    seems this whole mess wasn’t a secret. back in 2003-2006.
    and ignored too
    http://www.nytimes.com/2012/02/05/business/mortgage-tornado-warning-unheeded.html?_r=1&ref=business

  19. Frilton Miedman says:

    USSofA, I agree with your first comment on ratings agencies, they played a major role and they’re largely being ignored.

    It’s baffling to see them use the “first amendment” defense, if lying to promote or sell a product is first amendment freedom of speech, then the Constitutional rights of a very large portion of our prison population have been violated.

    Whistle-blower incentives are by far the BEST way to catch these guys….if Dick Fuld’s former secretary, or Loyd Blankfeins accountant have a chance to make millions in exchange for information on illegal activities, they are FAR more effective than appointing a future Goldman Sachs employee to investigate Goldman Sachs.

    We all know the TBTF’s solution to these problems is to offer politicians, investigators & regulators a job for turning a blind eye.

  20. AlexM says:

    Move along here, nothing to see…

  21. CitizenWhy says:

    There’s a very simple way to sort all this out: The more a person is paid, the more he/she must be. Therefore only those at the bottom of the pay scale need to be punished. That’s the American way.

  22. CitizenWhy says:

    Whhops, meant to write:

    There’s a very simple way to sort all this out: The more a person is paid, the more honest and honorable he/she must be. Therefore only those at the bottom of the pay scale need to be punished. That’s the American way.

  23. alnval says:

    Well said. Glad the Post is still asking you for your opinion. You’re clearly not interfering with their own agenda. Any possibility that you may go into syndication?

  24. victor says:

    BR: I agree wholeheartedly that an investigation, any investigation would be beneficial. But I do have a question, being that this is after all a BIG PICTURE blog: when you write that Wall Street did this and that, you surely include all super-major financial institutions and if so, what of the foreign banks (French, British, Belgian, Swiss, Chinese) which by key metrics (market cap and assets) are actually bigger than their US counterparts? Could a Pecora like commission obtain/enforce meaningful info from them via US generated subpoenas?

  25. Jim67545 says:

    On”Insurance Fraud”, who cancelled the homeowner’s insurance? The homeowner? The Insurance company – usually because of non-payment of premium? The Lender/Servicer?

    I find it almost incomprehensible that a Lender/Servicer would cancel the homeowner’s insurance. First of all, few if any insurance companies would cancel the insurance purely on the Servicer’s say-so. They have continuing legal exposure if they cancel the insurance improperly. (I speak from some experience.) Secondly, the amount of potential commission would hardly justify the uproar upping the borrower’s payment a bunch would cost. Only the most oblivious borrower would fail to notice. And, once the borrower learns of what occurred the force placed insurance would be cancelled by reinstating the homeowner’s insurance, not to mention the legal risks.

    Lord knows there is plenty to be upset about in housing but I am unconvinced that this is one of them.

  26. Thatguy says:

    bswhouston,

    LOL!!!! Are you like that memento guy that can’t create new memories??? Because if you had one you would remember that “a filibuster-proof Democratic majority in the Senate, and the Democrats taking back the House.”
    describes almost exactly the first 2 years of Obama’s term where he did precisely bupkus to prosecute the frauds.

    Nice try, but anyone with a D or R after their name isn’t part of the solution.

  27. Stan Klein says:

    The list of misbehaviors doesn’t include mortgage originators lying to private mortgage insurance companies that they maintained their published due diligence standards while abandoning them. The private mortgage insurers are suing the originators to take back the failed mortgages. Some of the information being used by the AG’s comes from those lawsuits.

  28. Stan Klein says:

    Thatguy: The Democrats had a filibuster-proof Senate for about 4 months of Obama’s first 2 years. First, there was the extended fight in Minnesota over the election results. Then there were the deaths of Kennedy and Byrd. Finally there was the Massachusetts special election in January 2010 which was “won” by Brown.

    I put won in quotes because there is now good evidence that there was voting machine tampering involved. The normal disparity between hand and machine count jurisdictions in Massachusetts is about a quarter percent. Coakley carried hand count jurisdictions by about 2%, while Brown led in machine count jurisdictions by about 5%. That is an unprecedented 7% disparity, highly suggestive that the counting machines were rigged. (See http://electiondefensealliance.org/files/BelieveIt_OrNot_100904.pdf for details of the analysis.)

  29. Stan Klein says:

    Thatguy: Obama only had a 60-vote (“filibuster-proof”) Democratic Senate for about 4 months of his first two years in office. First, there was the seat from Minnesota that remained open for months while courts decided the election outcome. Once there were 60 votes, Senators Kennedy and Byrd entered their terminal illnesses, during which they could only be brought to the Senate floor for very special votes. After each died, there was a period when the seats were unfilled until appointments were made. Finally, in January 2010, Brown “won” the special election in Massachusetts to replace Kennedy.

    I put “won” in quotes because there is strong evidence that voting machine tampering was involved in Brown’s “victory.” The usual difference between Massachusetts vote percentages in hand-count and machine-count jurisdictions is around a quarter percent. Coakley led in hand-count jurisdictions by 2% and Brown in machine-count jurisdictions by 5%, an unprecedented difference of 7%. This strongly suggests that Brown’s totals were due to machine tampering. There was no post-election checking to validate the machine counts. Details of the analysis can be found at http://electiondefensealliance.org/files/BelieveIt_OrNot_100904.pdf