xthread: (Default)
[personal profile] xthread
In another venue, someone argued 'the people who caused the mortgage meltdown be in jail?!'

I don't know if any of you, dear readers, happen to hold that view, but, if you do, would you be so kind as to tell me, in general terms, who you think ought to be in jail, and in specific terms, what you think they should be in jail for?

Let me note two important things at the outset: remember that lying to people is usually only against the law if you're doing so to cheat them out of money (which is why Bernie Madoff is in jail), and it's unconstitutional to make laws that make something retroactively illegal.

Got your moral outrage ready? Go!

Date: 2011-02-21 09:14 pm (UTC)
From: [identity profile] electricpaladin.livejournal.com
I think what a lot of people are reacting to is the blatant immortality of some American business practices. We've made a system where people do whatever it takes to get ahead, regardless of what happens to anyone else. It doesn't seem that our financial leaders feel any obligation to their community, their country, or even their own employees.

It's hard to get into this topic without tripping up on some of the basic problems with capitalism - and pointing out the problems with capitalism is (*gasp!*) communism, so a lot of people shy away from it and end up sounding merely outraged.

As for myself, I don't think they should be in jail now. You're right - it's unconstitutional to make something retroactively illegal. The business practices they indulged in were legal at the time, so they're off the hook. However, I do believe that the mortgage meltdown should cause us to re-examine some of our basic assumptions about how we distribute resources in this country.

Date: 2011-02-21 09:23 pm (UTC)
From: [identity profile] xthread.livejournal.com
I don't think they should be in jail now. You're right - it's unconstitutional to make something retroactively illegal. The business practices they indulged in were legal at the time, so they're off the hook

Mmm, that strongly suggests that you think that some set of those practices, that weren't illegal, should become so.. pray elaborate?

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Date: 2011-02-21 10:26 pm (UTC)
From: [identity profile] dr-memory.livejournal.com
Anyone and everyone involved in the "Office of Special Plans" debacle, up to and including Dick Cheney.

I'm really not overly fussed about precisely what charge, although "high treason" has a nice ring to it.

Date: 2011-02-21 10:31 pm (UTC)
From: [identity profile] xthread.livejournal.com
Well, yes, but that's rather far afield from the financial crisis..

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Date: 2011-02-21 10:49 pm (UTC)
davidlevine: (Default)
From: [personal profile] davidlevine
Everyone involved in approving loans for people who were not actually able to pay them -- as defined by generally accepted standards and practices in force at the time -- should be jailed.

I also think a case could be made for jailing those who reduced the standards to the point that the standards could be met by people whom common sense would indicate they couldn't possibly pay (on grounds of failing to fulfill fiduciary obligations to the bank).

Date: 2011-02-21 11:00 pm (UTC)
From: [identity profile] xthread.livejournal.com
<thinky> ... hmmm.. I think you mean 'those people who were approving loans to people who could be identified before the fact as having no actual way to pay back the loan.' At last count, State level cases have been brought against a number of people for fraudulently changing loan applicants applications before filing them, as well as taking out loans on behalf of people who hadn't actually applied for a mortgage. But both of those cases don't actually affect very many people.

So I'm guessing your argument is that approvers who approved dubious loans were committing fraud?

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Date: 2011-02-21 11:00 pm (UTC)
From: [identity profile] kat1031.livejournal.com
Those who were and are involved in instances of fraud (robo-signers, brokers who mis-stated incomes/assets and appraisers who inflated values of homes, plus all those above them in the chain who specified that it should be done) should be prosecuted for fraud.

I'm not sure if there's a criminal case for breach of fiduciary duty at the federal level, but if there is, I wouldn't be adverse to seeing some trials for that.

Date: 2011-02-21 11:11 pm (UTC)
From: [identity profile] xthread.livejournal.com
On the first case sold, and State AGs have been pursuing such cases.. Paradoxically, while there are enough of them to give State Prosecutors fits because of too much case load, my understanding is that they weren't a large enough part of the overall market volume to move the market.

Do you think that those are a substantial fraction of all loans approved in the last decade? (I'm particularly interested if the answer to that question is 'yes,' by the way)

WRT breach of fiduciary duty... that's a very hard case to make. There's plenty of stupid to go around, but if we start locking people up for stupid, well, that's going to be a difficult world to live in. Certainly anybody who said 'there's a lot of dodgy loans in this portfolio, we should paper over that and sell them anyway,' has a solid bullseye on their forehead for civil fraud and quite probably criminal, but everything I've read anywhere points out that there was a lot more buyer-side throwing caution to the wind than there was seller-side skullduggery. The sellers were disclosing 'this is a high-risk product' and the buyers were then cheerfully buying, on the theory that 'hey, the market can't crash everywhere at once at the same time, the mortgages are insured by the Fed and the bonds are insured by AIG, somebody will have money we can recover from.'

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Date: 2011-02-22 05:49 am (UTC)
From: [identity profile] kest.livejournal.com
Kat, remind me, would you, how you got in here? Was it my fault, or is this just another instance of it being too small a world?

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Oops, you triggered a lawyer....

Date: 2011-02-21 11:10 pm (UTC)
From: [identity profile] judith-s.livejournal.com
1. There is a world of difference between something that is illegal (e.g. mortgage fraud, as practiced by many lenders and brokers) and something that is prosecuted. It appears that while it certainly was illegal to write many of those mortgage contracts, none or very few of the folks involved have been prosecuted. This oversight, if we can call it that, is what many of us would like changed.

2. There was very clear fraud in the bundling of mortgages, some of which is being litigated now under civil laws. Again, fraud is illegal, but this does not mean that it is prosecuted. It should be.

3. If you want the specific statutes violated, you know you can always ask me. :)

4. The fraud in the foreclosure industry has been exposed quite thoroughly as well. Signing legal documents fraudulently is quite illegal. And yet, I don't see large prosecutions there either.

5. Also, while we're at it, I believe we should prosecute the Office of the Comptroller of the Currency, but that was is much harder (it requires proving willful disregard, which is quite tricky). If you need more on that, read Watters v. Wachovia Bank (Supreme Court, 2007).

Re: Oops, you triggered a lawyer....

Date: 2011-02-21 11:24 pm (UTC)
From: [identity profile] xthread.livejournal.com
How many humans do you think we're talking about? How large a fraction of the market? When I hear people say 'where are the perp walks,' I'm assuming they also mean, even if they're not saying, 'it's the fraud that got us in to this mess.'

Re: Oops, you triggered a lawyer....

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Re: Oops, you triggered a lawyer....

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Re: Oops, you triggered a lawyer....

Date: 2011-02-22 05:29 am (UTC)
From: [identity profile] feyandstrange.livejournal.com
To quote a relative:

"The only explanation is the FDIC management must have been smoking dope and inhaling," says Richard Newsom, a retired FDIC and California state banking examiner who reviewed court documents, FDIC reports, financial filings by UCBH (the bank's holding company), and other documents forwarded by SF Weekly. "They knew he[Tommy Wu] was a scumbag eight years ago. But they did nothing."

...
Last fall, Tommy Wu's bank collapsed, taking with it $1.3 billion in FDIC insurance funds, while devouring the $300 million UCB got from the Troubled Asset Relief Program (TARP), meant to fortify supposedly healthy banks.

from: http://www.sfweekly.com/2010-12-29/news/the-mad-quest-of-mr-wu/

My uncle's colorful phrasing aside, there are indeed indications of higher-level looking-the-other-way and profiteering, and being able to prosecute *that* would be lovely. (Uncle Dick is also the man who brought down the Lincoln S&L guy, for context.)

admittedly off topic...

Date: 2011-02-22 12:08 am (UTC)
From: [identity profile] allessindra.livejournal.com
There's plenty of stupid to go around, but if we start locking people up for stupid, well, that's going to be a difficult world to live in.

well, they can start making room for the stupid-in-this-particular-way-on-the-side-of-the-lending by releasing all the (IMO) foolishly imprisoned 'victimless crime' committers (mostly zero tolerance mandatory sentenced drug 'dealers').

If we're going to lock up stupid, let's lock up the ones who were stupid at other people, thus harming the entire frekking economy, as opposed to those who were arguably mostly stupid just to themselves.

Re: admittedly off topic...

Date: 2011-02-22 12:37 am (UTC)
rowyn: (studious)
From: [personal profile] rowyn
I'd much rather see drug users and dealers freed than yet more people imprisoned.

Date: 2011-02-22 12:36 am (UTC)
rowyn: (Default)
From: [personal profile] rowyn
No, really, there shouldn't be a law. Laws and prisons have their place, but the fact is that most problems in this world are not best solved by throwing people in prisons.

Date: 2011-02-22 02:03 am (UTC)
From: [identity profile] dixiemouse.livejournal.com
While there was certainly a good amount of fraud that went on (as previously covered)... there was also a certain number of people that bought more than they could afford on the "interest only" type loans, thinking they would just take care of it "later".

Now, are these types of loans shady? Yes. But if you are going to be greedy or personally negligent, then is it someone else's responsibility?

The problem with tossing people in jail it that there are at least two different groups that were affected, and in one group you would be jailing people that may not be as responsible.

Date: 2011-02-22 06:47 am (UTC)
From: [identity profile] corpsefairy.livejournal.com
It's at least partially someone else's responsibility if that someone, who is supposed to be a trusted expert on your side, assured you that you could handle it. That person has experience! They're working for you! They should know how these things are likely to turn out, right?

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Date: 2011-02-22 02:56 am (UTC)
From: [identity profile] feyandstrange.livejournal.com
I suspect that a lot of "predatory lending" occurred, much of which was gray or actually illegal (an awful lot of those mortgages are being retconned now because a team of lawyers goes through them and finds illegalities or proves that there's a possibility of defrauding or predatory intent). That's probably not a jail time offense, I forget now; fines vs the institution as a whole?

IIRC there was a lot of dodgy business practice, and some of that was so actively harmful (S&Ls basing their whole inventory on crappy mortgage debt sort of things) that it should be regulated to keep harm from happening to the innocent customers (e.g. the victims of predatory lending or who just happened to have savings accounts at Bank of Stupidly Uncapitalized Junk MOrtgages, not the investors). Basel 3 and all that, oh god I'm in no condition to discuss this right now arrrrgh.

Date: 2011-02-22 04:04 am (UTC)
From: [identity profile] xthread.livejournal.com
Yeah, but we keep coming back to 'what's a lot?'
The numbers that Judith is pulling up suggest that fraud was less of a problem even than I think it was, which surprises me - her data is suggesting that fraud rates were on the order of 1 in a thousand. At rates that low, I'm not sure we'd even know if everyone responsible had gone to jail, because it's so few cases.

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Date: 2011-02-22 03:23 am (UTC)
From: [identity profile] blue-estro.livejournal.com
Setting aside legality and rational, etc, I think folks who want those responsible jailed aren't getting it for other reasons.

Jailing folks is *expensive*. Fine the fuckers. :}

Date: 2011-02-25 06:13 am (UTC)
From: [identity profile] cardboard-dream.livejournal.com
I was just thinking this.

Especially with these infographics on my mind:

http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

Date: 2011-02-22 04:41 am (UTC)
From: [identity profile] gravitrue.livejournal.com
I don't think there are good answers out there about why Lehman was allowed to crash (with naked shorts contributing, no less; were any of those prosecuted?) and no-one else. I suspect there never will be any investigation into this. I have no theories or suspicions, but it would not surprise me in the least if there was illegal collusion and perhaps big payoffs involved at CEO and Treasury Secretary levels.

Date: 2011-02-22 04:55 am (UTC)
From: [identity profile] xthread.livejournal.com
Go pick up a copy of Too Big To Fail (http://www.amazon.com/Too-Big-Fail-Washington-System---/dp/B004HEXSM2/ref=sr_1_1?ie=UTF8&qid=1298350522&sr=8-1), an extremely good documentary of exactly why Lehman was allowed to fail and nobody else was.

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Date: 2011-02-22 05:24 am (UTC)
From: [identity profile] feyandstrange.livejournal.com
Another thing: didn't we arrest a bunch of people already? Or are people forgetting those Bear Sterns perp walks?

Date: 2011-02-22 05:28 am (UTC)
From: [identity profile] xthread.livejournal.com
Well, yes, and laid of a few tens of thousands of line finance people in Manhattan as well.
And fired the CEOs of almost every major financial institution in the country.
But that doesn't fit the conceptual narrative, so people forget.

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Date: 2011-02-22 06:58 am (UTC)
From: [identity profile] bemused-leftist.livejournal.com
Well, jail is a strawman here.

Date: 2011-02-22 07:01 am (UTC)
From: [identity profile] xthread.livejournal.com
You think 'throw in jail' is just a proxy for 'censure from polite society,' with an added dose of 'commit physical violence upon,' in some cases?

Date: 2011-02-22 06:39 pm (UTC)
From: [identity profile] apostle-of-eris.livejournal.com
There were oceans of outright FRAUD.
If the laws already on the books were actually enforced, several financial districts would have been depopulated.
Since several excellent books on the details are available, I'll leave your Googling to you.

Date: 2011-02-24 08:23 pm (UTC)
From: [identity profile] corpsefairy.livejournal.com
FWIW, I don't know if this is what you intended, but the way you framed this really sounds as if you're saying, "I know all about what happened and how it works, but I'm not going to tell you. Now, defend yourself!"

It's kinda condescending.

Date: 2011-03-02 06:47 pm (UTC)
From: [identity profile] xthread.livejournal.com
The viewpoint 'the CEOs must have known, lock 'em up and throw away the key,' looks to me like magical thinking. Given the available data we have about what happened, I can't imagine a way to justify that viewpoint with logic that holds together better than the Underpants Gnomes. It doesn't look like it makes any more sense than the argument 'it's all the fault of the deadbeat poor people who borrowed money they couldn't pay back!'

But I know that people who hold that point of view think they have reasonable reasons for holding it. And I'd rather ask them what those reasons are instead of imputing a rationale for their view.

Date: 2011-03-02 05:50 pm (UTC)
From: [identity profile] a-steep-hill.livejournal.com
I saw this and didn't have time to post an elaborate response. But fortunately someone did my work for me.

At least some of the bigwigs at some of the major dealer/trader banks/departments (which are rightly distinguished from boring old commercial banks) can almost certainly be prosecuted under Sarbanes-Oxley.

Note that the law requires the CEO and CFO (at least) to certify their knowledge of the bank's position and the soundness of its risk practices. Ignorance is no defense: if you didn't know, and you said you did, you're guilty. If you failed to certify, you're guilty.

To this I would also add: criminal prosecution of large chunks of the mortgage origination and securitization industries. The abuse of well-established real estate law (i.e. blowing it off completely) in the securitization and transfer of mortgages is well established and quite widespread, if you read past the MSM version of the situation (a few isolated incidents, my ass). If the (again, well established) laws are taken at all seriously, then quite a few individuals are guilty of selling things as mortgage-backed securities which were nothing of the sort: the transfer of the note was not done according to the law, and so it is invalid, and so the MBS is in fact just an empty piece of paper. So there should be some good opportunities for prosecution there.

There is probably also some opportunity to be found by looking for violations of fiduciary responsibility. I am not an expert on the concept, but selling a client a bunch of securities while simultaneously betting against those same securities (i.e. selling short) seems like it would be a violation of fiduciary responsibility. Perhaps not (in which case, we need to update the definition), but hey, we've got plenty to work with in the first two categories.

All this would be expensive and time consuming, and certainly be a net money loser for the DOJ and everyone else involved - I have no pretense that the fines and clawbacks would be even close to covering the cost of prosecution. But that's not the point. The point is to remind these "masters of the universe" that they are not above the law.

Except that they are. As recent events have made apparent. Welcome to the Plutocratic States of America. Your servant's livery will be delivered shortly.

Date: 2011-03-02 06:36 pm (UTC)
From: [identity profile] xthread.livejournal.com
Let's see..

There is probably also some opportunity to be found by looking for violations of fiduciary responsibility. I am not an expert on the concept, but selling a client a bunch of securities while simultaneously betting against those same securities (i.e. selling short) seems like it would be a violation of fiduciary responsibility

As the rules are currently written, if you're selling to other qualified investors, you're required to disclose interest, but that's the extent of it. There are a handful of solid cases of the seller failing to make that disclosure, but they're a drop in the bucket (small fractions of a percent of all transactions); those cases are getting SEC attention, and that sort of failure-to-disclose is obviously an act of fraud, no matter what the political stripes of the listener, so our odds of seeing some convictions are high. Of course, this is securities litigation, so we won't see those convictions for several years yet.

criminal prosecution of large chunks of the mortgage origination and securitization industries. The abuse of well-established real estate law (i.e. blowing it off completely) in the securitization and transfer of mortgages is well established and quite widespread, if you read past the MSM version of the situation (a few isolated incidents, my ass)

You bet - I think we can all agree that there are tens of thousands of line mortgage brokers who performed clearly fraudulent acts. The problem is that those people are all bottom-feeders - they're middle class people who were cutting corners because everybody else was doing it, who've now left the business because there's no money there anymore, many of them going bankrupt along the way. They're the garden variety fraud of writing up a totally bogus mortgage application. I think going after a bunch of them is a good idea, and state levels attorneys' general are doing so, but that doesn't sound like who you're thinking about.

If the (again, well established) laws are taken at all seriously, then quite a few individuals are guilty of selling things as mortgage-backed securities which were nothing of the sort: the transfer of the note was not done according to the law, and so it is invalid, and so the MBS is in fact just an empty piece of paper.

Well... that's a lot harder. Until the home-buyers stopped paying, there wasn't any question about the mortgages being valid - the borrowers were paying what they believed were their mortgages every month, the servicers were divvying those payments out to the MBS holders. Pretty much everyone involved seems to have thought those were valid mortgages until the borrower stopped being able to pay.

On a somewhat tangential note, the maker of Inside Job (http://www.imdb.com/title/tt1645089/) is speaking about all this on KQED right now.

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