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FHFA Inspector General End Runs DoJ, Joins Forces With New York Attorney General Schneiderman

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The development reported by the Financial Times’ Shahien Nasiripour, that the inspector general for the FHFA, the supervisor of Fannie and Freddie, and the Federal Home Loan bank, has decided to share information with New York State attorney general Eric Schneiderman, is far more significant than it appears on the surface.

It’s a well deserved slap in the face of the Department of Justice.

I’m not certain of the precise scope of powers of the FHFA inspector general. But typically, federal inspector generals have limited scope of action. They can only subpoena documents and cannot subpoena witnesses. And, of course, they are not prosecutors and cannot launch cases. The theory of IGs is that if they uncover something unsavory, they’ll hand it off to the Department of Justice. But as a former IG has pointed out, the DoJ does not take case leads from the IGs unless they are fully fleshed out, and that is well nigh impossible to do in the absence of speaking to witnesses.

The Department of Justice has AWOL on the mortgage and banking beat, no doubt to avoid ruffling powerful possible Obama donors. Inspectors general are in theory independent, and on top of that, the FHFA is an independent agency and is not running the Administration playbook (I’ve been told by people involved in bank regulation that Geithner has tried pressuring FHFA acting chief DeMarco to no avail).

So what does the FHFA inspector general do, certain that Eric Holder will ignore any misdeeds he finds? Turn to another prosecutor who can bring cases that can bring cases that are national in scope. From the Financial Times:

The collaboration between New York’s top prosecutor and the federal auditor overseeing half of the US home loan market raises the spectre of criminal probes and increased scrutiny of Wall Street’s once-lucrative role in packaging mortgages into securities.

Eric Schneiderman, New York attorney-general, has the power to file criminal charges as part of his investigation into banks’ role in packaging mortgages into securities for sale to investors, who have suffered hundreds of billions of dollars worth of losses.

Steve Linick, the inspector-general overseeing the Federal Housing Finance Agency, US mortgage financiers Fannie Mae and Freddie Mac, and the Federal Home Loan Banks, is probing allegations of fraud involving mortgage-backed securities purchased by Fannie and Freddie. He is also investigating wrongdoing by lenders that allegedly sold fraudulent home loans to Fannie and Freddie, according to testimony Mr Linick gave in Congress last week…

The partnership is bolstered by Mr Schneiderman’s ability to use the Martin Act, a 1921 state law that allows him to bring misdemeanour and felony criminal charges against alleged wrongdoers doing business in New York. The prosecutor can operate across state lines, essentially acting on behalf of investors across the US.

This is a win-win on several fronts. Not only can the FHFA inspector general have the New York attorney general use its subpoena and prosecutorial powers to advance its cases that the AG also thinks are promising, but the New York AG can presumably also take advantage of the IG’s expertise and staffing. State attorneys general are thinly staffed relative to the demands on them, so pooling resources could help the AG bring more cases (not just in combination with the IG, but by freeing up staff).

I am wondering if the tide is turning on the legal front. Catherine Masto is moving along quickly with her pursuit of mortgage abuses. As we indicated when she brought her criminal case against two mid level LPS employees, she appears to be going systematically, from the bottom of the crime racket. First she has gone after the foot soldiers. Now she has filed a wide ranging civil suit against LPS, which handles over half the foreclosures in the US via its network of foreclosure mills. Based on reports I have heard about LPS conduct from multiple, credible sources, I am quite confident that Masto has solid evidence backing the charges in her suit. LPS is likely to claim it believed it did nothing wrong (!) because it was acting as directed by its clients. Or Masto may separately be able to prove the servicers were well aware of LPS’s actions by getting her hands on internal documents or LPS’s software (impermissible practices institutionalized in the software cannot be a secret to the servicers). So expect Masto’s suits to lead to the heart of the servicing industry. She has found the thread that can unravel the entire garment and is pulling hard.

Another intriguing sign is the SEC case against former Fannie and Freddie executives over their alleged misreporting of subprime exposures in investor reports. This looks to be a cagey crowdpleaser. Obama gets to say he is going after executive bad conduct…and it happens to be at the company Republicans love to hate. Expect more Obama populist window dressing as we get closer to the election.

The mortgage industrial complex is starting to look a smidge vulnerable. That time is long overdue. I hope readers will cheer these tough minded state attorneys general on in the courageous work.

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47 comments

  1. Conscience of a Conservative

    And yet the Iowa A.G. says a settlement is days away…
    Christmas he says.. and with Sheila Bair as a foreclosure accord monitor What gives?

    1. Lambert Strether

      And the Iowa primariez are coming up shortly. So it will be interesting to see whether and how this “days away” scenario plays out in that context. If indeed there is some sort of settlement, I’m guessing the Iowa Citizens for Community Improvement will not be pleased, and will be more than happy to translate or gloss whatever weasel words the Obama campaign comes up with in support of it.

      1. KnotRP

        Wake me up when Angelo’s free pass has been rescinded and this all catches up with him. Not. Gonna. Happen.

        The rest is election year theater by a President and a
        Congress that have to do a little Anti-Banker Kabuki Spectacular Spectacular, to entertain the useful voting idiots until the election has passed. Then the con resumes…

        1. flory

          Amen. I see it as a bad sign that the only executives indicted so far are from favorite Republican targets. I’ll believe Obama means what he’s now saying when Holder goes after Citi or BofA executives.

    2. Yves Smith Post author

      No, it has been reported that Bair has no interest in the position.

      And Miller’s office has been saying a deal is weeks away since January. They also said in August they’d have a deal by Labor Day.

      1. Phoenix Woman

        A-yep. FHFA’s IG is in essence saying “I have decided to refer the case to someone who might actually prosecute it. Oh, and Eric? Tell Timmy Geithner to go pound salt.”

  2. bob

    I hope he gets a foot into the door of MF too. No country club federal prison, as if that were even a threat under Holder….

  3. YankeeFrank

    I cheer for their noble efforts as one of the only rays of light in an otherwise bleak picture of grotesque fraud and malfeasance as far as the eye can see. It appears there are still a few of us in places of power that hold true to the best ideals of the 20th century that no one is above the law and that justice must be done. These state AGs are showing the Obama crew for the reptilian and slimy lot they are: forever rationalizing and temporizing in favor of vested interests heedless to the long term damage their slippery immorality is doing to our nation and the world.

  4. Greg R

    …the SEC case against former Fannie and Freddie executives over their alleged misreporting of subprime exposures in investor reports…a cagey crowdpleaser…more Obama populist window dressing…
    Bingo!

    And we’re supposed to believe that a day after Khuzami publicly attacks Judge Rakoff.

    1. Sleeper

      Are you sure that the Fannie and Freddie tempest is not a sort of back handed swipe at Newt ? The level of fanfare and the timing are a little suspicious to me .

      Any way after all is said and done, the Fannie and Freddie executives will continue to get their bonuses and get their legal fees paid by the taxpayers, the SEC will administer a slap on the wrist (lightly), the DOJ / FBI will studiously ignore the issue and the 99% end up paying.

      Sounds like a win / win for our two tier justice system – good theater but poor justice.

      1. alex

        “Are you sure that the Fannie and Freddie tempest is not a sort of back handed swipe at Newt?”

        That would be pretty dumb of Obama, as Newt is almost certainly someone he can beat (Newt appeals to the R ase, but outside of that he’s reviled).

        And, even if it is politically motivated, I don’t care. Prosecuting someone in this mess at least opens the possibility of more prosecutions.

        1. EH

          Sure, but it also takes F&F off the table as a weapon against Obama. It’s the Rove strategy writ lefty: attack your own weakness. Newt is just a convenient proxy to have F&F dealt with in the public sphere so it’s not a distraction in the actual campaign.

      2. JD

        Ron Paul is the slap that Newt will be getting in Iowa.

        PPP Iowa Tracking Poll
        Paul 23%/Gingrich 14%

        Last Week’s PPP Iowa Tracking Poll
        Paul 21%/Gingrich 22%

        How quick things change politically these days.

  5. Middle Seaman

    For the sake of the US democracy, we should hold on to the hope that prosecution of the financial criminals, whoever they are, is just around the corner. Continuing the Obama/Holder way means that only non rich people have to be law abiding.

    Obama/holder do not intend to prosecute not only because they don’t want to offend donors. These two feel, behave and act as part of an especially privileged ruling elite; the criminals are their “family.”

    1. Sleeper

      Sorry Middle Man -

      We have and have had for sometime a two tier justice system – visit a county courthouse – no slack for petty criminals, drunks and dopers – these folks will be working off a conviction for years while their conviction forces them to the low wage margins of society but buy a congressman or two (and the sums are astoundingly small – maybe $ 10,000) and you’ll be surprised to see what happens.

    2. LucyLulu

      Obama and Holder won’t have to prosecute. Schneiderman is going to do it for them, and he has already demonstrated that he has no problem bucking the Obama administration. There are also a few, admittedly only a few, Congress critters who are backing the prosecutions. Rep. Miller, D-NC, on the House Financial Services Committee, is one of them.

  6. LucyLulu

    The FHFA’s subpoena powers were broadened by the Housing and Economic Recovery Act of 2008, and they were given additional powers of enforcement, above and beyond those of the state AG’s.

    I had written a more detailed post but the site refused to let me submit it. Probably just as well.

  7. Blunt

    I’m sorta surprised that anyone would or even could imagine that the mud-worms of the Obama Administration would do anything that might mean a change from business as usual.

    Come on, this is the administration of the man who signed NDAA this weekend and has effectively ended civil liberties in USA at all in favor of military detention for anyone “deemed” (not adjudicated or proven) to be harboring or providing aid and comfort to terrorists (whomever those may be on any one day — we know it’s not Al-Qaida as all of their top leadership has been slain according to the Obama Administration.)

    I suspect that the real terrorists will turn out to be Schneiderman and Masto, Yves, protesters in OWS and others who wish to return to some semblance of life in America prior to it total capture by the criminal syndicates.

    1. nonclassical

      BE “Blunt”…view Adam Curtis’ “The Power of Nightmares”=BBC
      video..the “al-Qaeda” worldwide terrorist organization is a fabrication of Bush-Cheney-now Obama…

      ..as pointed out, Cheney and Rumsfeld first blamed worldwide
      terrorism upon Soviets, pushed the idea on Reagan who for
      2 years rebuked it..William O. Casey-CIA link finally falsely validating…

      The American people are being played beyond their imaginations…

  8. Susan the other

    When Schneiderman, Masto, Coakley, Biden, Harris and hopefully others have established their evidence and won their civil and criminal prosecutions it will open the floodgates for individuals to sue. So can the settlement which is due before Christmas be binding at all? It sounds like a nullity already.

    1. Yves Smith Post author

      The settlement only stops those AGs from suing. And you are correct, the real significance was to stop public officials from developing fact sets that private claimants (not just individuals, but investors as well) in their cases.

      So yes, if a group of determined AGs keeps moving, it does not appear having the other states settle has much impact.

  9. Rory

    I want to root for Schneiderman, but we have a corrupt U.S. government which has already legislated away the Bill of Rights and has the free Internet in its sights. If the NY investigation gets too close to the wrong people, I fear that Congress will simply legislate away the Martin Act (Federal pre-emption of interstate commerce, etc.). I hope I’m wrong.

    1. Nathanael

      That, if done, would simply be another nail in the coffin of the federal government (there are a lot already); once it is sufficiently disrespected and unpopular its word will no longer be law. It’s already close to that point with patent law and well beyond it with copyright law (which nobody serious can respect any more). The more areas in which the federal government is lawless and incompetent, the less it becomes able to enforce its will. Congress and the President seem intent on making it as lawless and incompetent as possible, which fits with Grover Norquist’s plan.

      For once I’m glad we have state governments.

      Conflict between California state courts & police and federal courts & police has already been ramping up with the Federal government’s refusal to respect California’s drug laws; this sort of thing could happen in New York over foreclosures (we take our real estate seriously in New York).

      The removal of the federal government would go pretty well for those of us in the Northeast or the Pacific Coast, and the Upper Midwest would do OK as well. The South would collapse totally and the Mountain West would have a lot of trouble.

      1. Nathanael

        Oh, I forget to mention the election theft in 2000. The Supreme Court as a whole has (and deserves) no respect since that point, and its rulings are only meaningful to the extent that police and bankers are willing to enforce them. After a while, if this trend of the courts throwing away their legitimacy continues, the police and bankers, who don’t respect the courts any more than the rest of us, will start freelancing and making their own law. (The bankers already have, actually.) God only knows what comes after that.

        1. mac

          I find it hard to believe that someone is still wailing about the 2000 Election, Hint it is 2012, it’s over grow up!

  10. Dave Angle

    One of the reasons that we see no meaningful federal prosecutions is that Eric Holder and Lanny Breuer were both neck deep in Covington & Burling – one of the largest enablers of the mortgage industry crimes. Obama’s Chicago hedge fund connections are another, similar reason. Significant prosecution would expose their involvement and gain from the crimes.

  11. ron

    The ongoing attempt for justice in the financial industry reminds me of the war on Drugs with the routine PR release by the authorities of the captured of another drug kingpin. Sooner or later folks need to understand that our financial system is rotten to the core has infected the entire society and owns most of the political and judicial actors. The idea that better laws or tighter regulation or the capture of various financial villains will solve this issue is native.

  12. steelhead23

    Cheer these tough-minded AGs? Hell, I’d sing their praises in full Verdi. All I want for Christmas is CEO indictments. I’m shaking the boxes under the tree in anticipation.

  13. Gil Gamesh

    Christ, what it takes to get laws enforced around here. Still, before we suffer the illusion of “rule of law”, consider: can a grant of immunity be far behind? You watch.

  14. Rcoutme

    “It is from numberless diverse acts of courage and belief that human history is shaped. Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring, those ripples build a current that can sweep down the mightiest walls of oppression and resistance.”
    - Robert F . Kennedy

    “In this point of the case the question is distinctly presented whether the people of the United States are to govern through representatives chosen by their unbiased suffrages or whether the money and power of a great corporation are to be secretly exerted to influence their judgment and control their decisions.”

    - Andrew Jackson

    “I am more than ever convinced of the dangers to which the free and unbiased exercise of political opinion — the only sure foundation and safeguard of republican government — would be exposed by any further increase of the already overgrown influence of corporate authorities.”
    - Martin Van Buren, Eighth President of the United States

    “As we view the achievements of aggregated capital, we discover the existence of trusts, combinations, and monopolies, while the citizen is struggling far in the rear or is trampled to death beneath an iron heel. Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.”
    - Grover Cleveland, 22nd and 24th President of the United States

    “I again recommend a law prohibiting all corporations from contributing to the campaign expenses of any party.… Let individuals contribute as they desire; but let us prohibit in effective fashion all corporations from making contributions for any political purpose, directly or indirectly.” Teddy Roosevelt added, “The fortunes amassed through corporate organization are now so large, and vest such power in those that wield them, as to make it a matter of necessity to give to the sovereign — that is, to the Government, which represents the people as a whole — some effective power of supervision over their corporate use. In order to insure a healthy social and industrial life, every big corporation should be held responsible by, and be accountable to, some sovereign strong enough to control its conduct.”
    - Theodore Roosevelt

    There are lots more, btw.

    1. F. Beard

      Without the counterfeiting cartel, the banking system, to borrow from the corporations would be much more broadly owned and thus more response to the general public.

      I think the attacks on corporations are off target. What is inherently wrong with consolidating capital for economies of scale and voting on its disposition? Nothing that I can see. Of course corporations are not people and should not be able to contribute to campaigns but if corporations were broadly owned then that might be irrelevant anyway.

  15. Min

    Fraud and bubbles,
    Fraud and bubbles,
    Go together with
    Clawback muddles.

    Sorry for the bad rhyme, but you know what I mean.

    We could not have had the financial crisis without massive fraud.

    1. Joe Rebholz

      “We could not have had the financial crisis without massive fraud.”

      Actually I believe we could because the system itself is defective and can generate crashes all by itself, fraud or no fraud. The fraud of course made it worse and caused the crash to occur sooner.

  16. indio007

    Like I’ve been saying. These banks have been getting paid on FHA insurance claims. What evidence does FHA demand to pay out? Are the demanding the note and/or mortgage before paying out the claim? I think these banks are robosigning those too.
    I remember someone using FOIA to view claims submissions and there was no attached paperwork to support to claim. Unfortunately you can use the Federal False Claims Act for information which is FOIAable. The paid officials won’t do anything so here we sit.

  17. kravitz

    Sounds like it also makes the OCC Fraudclosure Review Shamm irrelevant as well. Why take the survey that may void your legal rights (by the OCC’s own testimony last week) when there are investigation like the one above?

  18. monkeybreath

    I assume that Oblabla’s lack of action was due to corruption. I can not help but wondering if the corruption of the DOJ is so pervasive that Holder and Obama do not control the dept. i believe that sen stevens prosecution might have intentionaly sabatoged to give him an appeal

  19. Jimbo

    >The Department of Justice has been AWOL on the mortgage and banking beat, no doubt to avoid ruffling powerful possible Obama donors.

    No doubt under direct orders from the WH since 1/20/2009.
    Imaginary conversation: “Let’s sacrifice the Rule of Law,” said Geithner to Obama, “as it would simply look bad to give the banks trillions of dollars and then indict their officers.”
    Geithner also know that the protection racket is a house of cards and thank-god today some of the cards slipped.
    On the same day Obama said on 60 Minutes that “no laws were broken” the FBI announced financial fraud in the highest places was responsible for the fun in 2008.
    Is it possible that the schemed for expiration of the statutes of limitations will not unfold as pre-planned at 1600 PA Avenue?

  20. ifthethunderdontgetya™³²®©

    Another intriguing sign is the SEC case against former Fannie and Freddie executives over their alleged misreporting of subprime exposures in investor reports. This looks to be a cagey crowdpleaser. Obama gets to say he is going after executive bad conduct…and it happens to be at the company Republicans love to hate. Expect more Obama populist window dressing as we get closer to the election.

    Lest we forget, Fannie and Freddie did not create the problem.

    That they’re the target of Obama’s Administration after all this makes me suspicious as hell.
    ~

  21. john c. halasz

    “Catherine Masto is moving along quickly with her pursuit of mortgage abuses. As we indicated when she brought her civil case against two mid level LPS employees, she appears to be going systematically, from the bottom of the crime racket.”

    Huh? Wasn’t it a 606 count criminal indictment against the two LPS operators?

    1. Yves Smith Post author

      aarh, something got lost in the edit, I though I had both the civil case (the one just filed) and the criminal (the one against the two employees). Fixing.

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