So yesterday was a bad day if you were a Japanese bank with stubborn executives.
Back in March, Nomura inexplicably decided not to settle with the Federal Housing Finance Agency over lying about the quality of the underlying loans in mortgage-backed security pools. Fannie Mae and Freddie Mac only purchased $2 billion in Nomura securities, and based on the fact that other settlements went for around 12 cents on the dollar, Nomura would have coughed up something like $234 million if they settled.
But they wanted to challenge this extortion, and forced the FHFA to take them to court. Which FHFA did, detailing precisely the shoddiness of the loan files Nomura peddled, giving a baseline of the magnitude of the deception banks engaged in during the crisis. This is what I wrote during opening arguments in the FHFA/Nomura case:
If Nomura succeeds, banks will likely be emboldened to make more misrepresentations in their sales presentations, and investors will find themselves virtually powerless to stop it. Government regulators will probably feel like they cannot enforce securities laws against financial institutions. We could easily see another round of fraud, with banks secure that they can make clever enough arguments in court to get off the hook.
Well, Judge Denise Cote ruled for FHFA, ordering payment of $806 million, nearly four times more than what Nomura would likely have paid if they settled. And instead of appealing, they agreed to pay an even higher amount, $839 million, which I believe covers FHFA’s legal costs (it’s unclear if that’s in addition to the $839 million).
Note: RBS Securities underwrote some of the Nomura bonds, and was a named defendant in the case.
So the price of stubbornness was an additional $600 million. Not only that, but Nomura’s (and its counterparts’) proclivity for fudging mortgage bond deals was on full display. Which brings us to today:
A federal grand jury in New Haven has returned a 10-count indictment charging three former New York-based bond traders for Nomura Securities International, ROSS SHAPIRO, 41, MICHAEL GRAMINS, 33, and TYLER PETERS, 32, all of New York, New York, with conspiracy and fraud offenses.
There are two parallel cases: an SEC fraud charge (they apparently flipped three lower-level traders to get key documents), and this criminal indictment, which carries a maximum prison term of 20 years for each count.
Here’s the indictment. Shapiro, Gramins and Peters were, respectively, the managing director, executive director and senior-most Vice President of Nomura’s RMBS desk. They came as a team from Lehman Brothers, where presumably they ran pretty similar schemes. And all of this conduct post-dates the financial crisis; it was mostly about being market-makers for trades in mortgage-backed securities, matching buyers and sellers. Sometimes Nomura owned the bonds themselves.
The government argues that the traders stole from the buyers by falsely inflating the purchase price from the seller. Now if you’re Matt Levine that’s business; the traders were just buying low and selling high, and there’s always a little bit of deception in market-making. But even he acknowledges the cases in the indictment where the traders lied to their customers to induce a higher-priced sale. They even created straw buyers, i.e. “fictitious third parties in an effort to increase their profits,” and they “colluded with at least one outside client to deceptively broker trades on their behalf.”
This is substantially similar to the feds’ accusations against Jesse Litvak, a trader at Jeffries. In fact, both Litvak and the Nomura traders counted as their victims participants in the short-lived PPIP, an aborted program where Treasury would buy up MBS. So both Nomura and Litvak “defrauded” the U.S., which in interesting, since the whole point of PPIP was for the government to buy the securities at an inflated price relative to their value. So they were ripped off above the rip-off, and by the broker-dealers, instead of the banks who got the windfall by design. Anyway, Litvak was convicted and sentenced to two years in prison, but he appealed, and the 2nd Circuit may accept his contention that everybody lies a little in bond trading, which would devastate this case, it seems.
While there’s an interesting argument to be made about the line that should be drawn between “puffery” in salesmanship and fraud, I do want to also focus on another point. Every time DoJ puts out a press release on financial-related enforcement, they credit their Financial Fraud Enforcement Task Force, and in this case the Residential Mortgage Backed Securities Working Group. That was the group put together as the consolation prize for settling the (ongoing) mass document fraud in foreclosure processing, where Eric Schneiderman got to sit on a panel that would investigate “the bubble and the crash,” the origination and securitization of loans prior to the crisis. Only this Nomura case, and the Litvak one for that matter, regards conduct that occurred AFTER the crash, in the sale of MBS to the TARP-related PPIP and other investors.
Moreover, a quick look at who did the investigating in this case confirms that the vaunted “task force” is nothing more than a repository for press releases, capitalizing on other people’s work:
This matter is being investigated by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), the Federal Bureau of Investigation, the U.S. Department of Labor’s Office of Inspector General, Office of Labor Racketeering and Fraud Investigations, and the Federal Housing Finance Agency Office of Inspector General.
SIGTARP and the FHFA Inspector General have been among the most persistent at actually investigating financial fraud, particularly around the sale and marketing of MBS. I don’t even know how the Labor Department got involved in this one, but they aren’t even covered under the agencies the RMBS Working Group “brings together.” And the FBI is the FBI.
I suspect that SIGTARP and the FHFA IG did what they would do anyway, made the conviction, and the task force went ahead and took credit for no particular reason. There’s no reason to believe that this investigation would not have gone forward but for the crackerjack coordination of the task force. It was always a pretend enforcement agency serving as a PR vehicle. Which we knew already, of course.
And it goes without saying that if the agencies policed the conduct prior to the crisis the way they policed this series of incidents after the crisis, we wouldn’t be where we are.