xthread | There Oughta Be A Law!

There Oughta Be A Law!

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!

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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.

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?

I think that the entire tale is one of people failing in their duty to make certain things illegal, personally. And making legal things that should have stayed illegal - I don't think the Glass-Steagall act should have ever been repealed.

I think that the entire tale is one of people failing in their duty to make certain things illegal

Pray elaborate..

I don't think the Glass-Steagall act should have ever been repealed - When I hear Glass-Steagal, I think people are talking about the wall between commercial banking and retail banking, with perhaps a side order of retail banks only being allowed to operate at the state level, not the interstate level. Are those the particulars you have in mind, or ?

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.

Well, yes, but that's rather far afield from the financial crisis..

I have room in my heart for a lot of hate.

I dunno, elaborating sounds like work....

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).

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.

<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?

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).

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.'

Something along those lines, yes. The important part is the harm they did to the loan recipients, who were condemned to eventual homelessness for the sake of the bank's profits, but the actionable offense is probably the harm they did to the bank.

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.'

I don't have any solid facts, but based on my experience with what happened in Vegas, I'd say that the proportion of loans in which there was fraud is not insignificant. It's obviously not "all" and it's likely not even "most", but I know that I was lied to by a broker, and I do believe that they artificially inflated the value of my house at one point. Fortunately, I'm informed and I do know that adjustable-rate mortgages are based on LIBOR and that LIBOR (especially during the downward end of the boom was moving around A LOT, which made getting an ARM stupid because it was going to adjust up rapidly and by a large number).

I was nearly yelled at by a notary because I wanted to read the documents I was signing. (I was told that they'd sent over a copy for review yesterday. I replied that yes, they did, but that document wasn't the document I was actually signing today and I was going to read anything I was being legally bound to and if they wanted this transaction complete, she was going to sit there, shut up and let me read.)

Yes, all anecdotal, but I'm inclined to believe that things like that weren't rare and they also weren't the worst.

Re: fiduciary duty, yeah, it's always really hard to prove. It's amazing to me that more people haven't been fired over this. I would bet that if I made a decision in my job that effed my company over to the extent that some of these decisions did to financial companies, my services would no longer be required.

That's an interesting question. There is very clear documentation that about 15% of the mortgages were fraudulently obtained (and the fraud was not by the borrower but by the broker or the bank), and that the bundling information was often falsified. But we'd need to prosecute to get more details (because discovery powers are a wonderful thing). Fraud was pretty prevalent (http://www.seattlepi.com/national/397690_fbiweb28.html).

Do I think it's a good idea to prosecute the little fish? Well, I'm fond of RICO; let's see if we can pressure the little fish to give up the bigger fish and see how far up the food chain we can trace the fraud. I expect it would reach quite high.

They weren't rare in any of the parts of the country where housing was holding up the economy.. Vegas was particularly one of those (along with Phoenix, Southern California, and the South Florida)..

More in a minute, I'm still chewing on the rest of the followup.

15%!??! Across all income levels and market categories?!

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.

Did I say that? I was talking about the overall levels. Obviously not the same levels of fraud across all income levels and market categories. I know this will come as a shock but knowledgeable purchasers and investors were much less likely to be defrauded.

I think it was a huge level of fraud, and mostly deliberately ignored by regulators until the housing market blew up. http://www.crime-research.org/analytics/mortgage_fraud0405/

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.

I'd much rather see drug users and dealers freed than yet more people imprisoned.

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.

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.

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