So far the highest ranking Wall Street executive to stand trial for misconduct that might be construed as having contributed to the financial crisis of 2008 is a mid-level Goldman Sachs (NYSE:GS) bond salesman memorably named Fabrice "Fabulous Fab" Tourre.
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The Dick Fulds, Jimmy Caynes and Angelo Mozilos of the world resigned or got fired, excoriated in the media and in some cases fined (Mozilo) for their roles in the housing and credit crisis five years ago that brought the global economy to its knees. But none of these former chief executives (nor any of their immediate underlings) has been brought to trial either in criminal or civil court for their actions leading up to the crisis.
For that reason enforcement agencies such as the Securities and Exchange Commission and the Department of Justice have taken a lot of heat from angry critics who believe Wall Street, especially top executives, got off far too easy.
New York Attorney General Eric Schneiderman seems determined to address that perception. A lawsuit filed by Schneiderman’s office last week against mortgage giant Wells Fargo (NYSE:WFC) is the AG’s latest high-profile effort to cast an unflattering light on some of Wall Street’s biggest players and to highlight what Schneiderman clearly sees as their roles both leading up to and in the aftermath of the crisis.
“He’s just following the business model of that office,” said Columbia University law professor John Coffee.
Coffee noted that Schneiderman’s two immediate predecessors, Andrew Cuomo and Eliot Spitzer, burnished their reputations by aggressively policing Wall Street while serving as AG and both men wound up catapulting themselves to the governor’s office.
“It certainly worked for those two,” said Coffee.
Going After the Institutions
Schneiderman, wary perhaps of the difficulty of successfully prosecuting individual Wall Street CEOs for the misdeeds of their sprawling companies, has instead gone after the institutions. In addition to Wells Fargo, the AG has threatened or filed crisis-related suits against Bank of America (NYSE:BAC), Credit Suisse (NYSE:CS) and JPMorgan Chase (NYSE:JPM).
Not exactly bit players.
Schneiderman says of his seemingly one-man crusade that it’s a matter of fairness and of maintaining integrity in U.S. securities markets. Most Americans, he likes to say, believe the markets are a “rigged casino.”
“When major players cheat it doesn’t just hurt their counterparties, it hurts the integrity of the entire system,” Schneiderman said in a recent speech to journalists in Manhattan.
The big banks should have seen this coming when five of them – Wells Fargo, JPMorgan Chase, Bank of America, Citigroup (NYSE:C) and AllyBank -- signed off early last year on the $25 billion national mortgage settlement.
Schneiderman, using the leverage afforded by his position as AG of New York, home to Wall Street and the nexus of the U.S. financial industry, refused to agree to a settlement that barred any future prosecutions of the banks for their roles in the housing crisis.
Instead, the settlement focused on allegations the banks mishandled possibly millions of mortgages that were falling into default and headed toward foreclosure, loans that might have been modified to help borrowers stay in their homes. The banks agreed to the combined $25 billion fine and promised to revamp their mortgage and foreclosure procedures.
Wells Fargo was sued by Schneiderman’s office last week for failing to comply with elements of the settlements, allegations the bank has denied. Bank of America, threatened with a similar lawsuit, agreed to beef up its compliance with the settlement.
Dubious Mortgage-Backed Securities
The suits filed earlier against JPMorgan and Credit Suisse are more reflective of Schneiderman’s efforts to hold accountable the big banks that trafficked heavily in what are known as mortgage-backed securities in the run-up to the financial crisis.
Many of these securities were packed with mortgages of dubious quality and then sold to investors under the premise they would increase in value as the loans were paid off. But when homeowners started defaulting on their mortgages in large numbers around 2007 countless mortgage-backed securities plunged in value and the losses wreaked havoc on the investors who bought them. The ripple-effect across the financial system was devastating.
JPMorgan and Credit Suisse were sued in October and November 2012, respectively, for allegedly misleading investors about the quality of the mortgage-backed securities they packaged and sold. Both banks have denied the allegations.
While Credit Suisse is fighting the suit, JPMorgan is in a different situation. The suit against the largest U.S. bank by assets was brought by the Residential Mortgage-Backed Securities Working Group, a state and federal task force created by President Barack Obama to investigate misconduct by banks that may have contributed to the financial crisis. Schneiderman is co-chair of the group.
JPMorgan is reportedly in talks to settle the charges, which stem from securities created and sold by the investment bank Bear Stearns, which JPMorgan bought at the request of the government in early 2008 as Bear Stearns teetered on the brink of collapse. JPMorgan has balked, however, not only at a reported $11 billion settlement figure but also at the government’s demand that the bank admit wrongdoing, a concession that could leave JPMorgan vulnerable to numerous costly civil suits.
Just Getting Started
Coffee, the Columbia University law professor, said a settlement with JPMorgan could trigger a spate of deals by other big banks facing similar lawsuits, a dynamic that would save the government a lot of time and money.
“I think everyone wants this behind them,” Coffee said.
But others take a far dimmer view of the suit. A Wall Street Journal editorial criticizing the action was headlined “Looting JPMorgan, Again.” And banking analyst Dick Bove of Rafferty Capital said in a note to clients, “If this company does not fight, it will be blackmailed by government forever.” In a recent interview on FOX Business, Bove said any settlement by JPMorgan could embolden government regulators to file additional lawsuits against the deep-pocketed bank.
Schneiderman counters the criticism by saying the mortgage-backed securities market “blew up the American economy.” “This is not a secret,” he told a group of journalists last week. “It was all in plain view.”
Five years after the crisis peaked, it seems Schneiderman is just getting started.