Bill Black: The Inaugural Financial Fraud Lemons of the Week Award Goes to DOJ

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City

The Bank Whistleblowers United announce the inaugural Financial Fraud Lemons of the Week award. There can be no more fitting recipient than the ironically named Department of Justice (DOJ). The “lemon” is used in the economics and criminology literature to refer to a car of surpassingly terrible quality. The quality is so bad that the car can only be sold through fraud. We will award it each week to an example of dishonesty or cowardice about financial fraud that is worthy of public ridicule. We want to leave room in our scale for truly spectacular examples, so this first award will only receive Four Lemons. The first award is for what has become a routine example of dishonesty and cowardice by DOJ. Its conduct should be a scandal of national proportions, but by now everyone expects DOJ to embarrass our Nation when it deals with elite bankers.

DOJ wins the inaugural award for picturing its humiliating settlement with Morgan Stanley as a triumph. This first column in a series we will do on DOJ’s refusal to prosecute the scores of senior bankers that led Morgan Stanley’s criminal enterprise will focus on DOJ’s press release. In the course of the series we will see that state and federal investigators, the Financial Crisis Inquiry Commission, and Clayton’s (not very) “due diligence” reviews have repeatedly documented that Morgan Stanley was one of the largest criminal enterprises in the world and committed tens of thousands of acts of fraud that cost the American people billions of dollars in losses.

But you would never guess that from the DOJ settlement with Morgan Stanley, which at least partially explains why readers were presented by article titles that are themselves worthy of our weekly lemons awards. The New York Times entitled its story “Morgan Stanley to Pay $3.2 Billion Over Flawed Mortgage Bonds.” Headline writers are normally hired to craft bold titles that will grab the reader’s attention, but this was one written to be a snorer. The Wall Street Journal’s title was even more somnolent: “Morgan Stanley to Pay $3.2 Billion to End Government Mortgage Probes.” The mortgages weren’t even worthy of the euphemistic “flawed.” The WSJ title portrayed it as if it were a settlement of an extortionate nuisance suit.

There was no moral content in either title, even though they are reporting one of the most destructive financial fraud schemes in history. Neither article used the “f” word, though at least four governmental investigations found massive fraud at Morgan Stanley in its sale of mortgage paper.

The DOJ press release on the case partially explains why the newspapers were not forced to use the “f” word in their coverage. DOJ refused to make clear statements about Morgan Stanley’s massive fraud schemes. This column focuses on only four, spectacularly dishonest aspects of DOJ’s press release, each of which earned them a lemon.

“Today’s settlement holds Morgan Stanley appropriately accountable for misleading investors about the subprime mortgage loans underlying the securities it sold,” said Acting Associate Attorney General Stuart F. Delery. “The Department of Justice will not tolerate those who seek financial gain through deceptive or unfair means, and we will take appropriately aggressive action against financial institutions that knowingly engage in improper investment practices.”

“Those who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “This resolution demonstrates once again that the Financial Institutions Reform, Recovery and Enforcement Act is a powerful weapon for combatting financial fraud and that the department will not hesitate to use it to hold accountable those who violate the law.”

The first lemon is for the not-so-artful attempt at a slight of hand. How can a bank be held “appropriately accountable” for tens of billions of dollars in fraudulent mortgage sales? We can’t imprison a bank or shame it. The bank is inherently incapable of being held “appropriately accountable” because that is a moral concept and a bank has no soul to damn.

The second lemon is for failing to admit that DOJ held no Morgan Stanley official “appropriately accountable” while claiming that its settlement did the opposite. Delery claims that DOJ “will not tolerate those who seek financial gain through deceptive or unfair means.” The settlement proves the opposite, for DOJ “tolerated” Morgan Stanley’s senior officers being made wealthy through leading a massive fraud scheme – with zero accountability imposed on those officers. Delery claims DOJ “will take appropriately aggressive action against financial institutions that knowingly engage” in fraud. A “financial institution,” cannot “knowingly engage” in fraud except through vicarious liability for the actions of its officers. Delery is admitting that Morgan Stanley’s officers “knowingly engage[d]” in fraud and became wealthy by doing so, but DOJ took no “action against” those officers, much less “aggressive” prosecutions.

The third lemon was awarded for Mizer’s claim that DOJ’s settlement with Morgan Stanley proves that “those who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct.” There is the small discordant note that the settlement meant that those senior Morgan Stanley officers that led the epidemic of fraudulent sales of mortgage product that were one of the three great fraud epidemics that caused the financial crisis have, as with every DOJ settlement, entirely “evade[d] responsibility for their misconduct.” DOJ, once more, refused to prosecute these elite frauds, did not require that they be fired, did not require them to give back their bonuses and other compensation that they received due to fraud, did not sue them, and did not even name them. Mizer then extended his lie by claiming that “the department will not hesitate to use [the law] to hold accountable those who violate the law.” True, DOJ did not “hesitate” to apply the rule of law to elite bankers – they once again refused to do so. Morgan Stanley could only “violate the law” vicariously – through the actions of its officers. If Morgan Stanley violated the law DOJ could, and should, have prosecuted those officers.

The fourth lemon is awarded for unintentional honesty in the midst of trying to mislead the public.

Today’s settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered billions of dollars arising from misconduct related to the financial crisis. The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis.

We have agreement from DOJ, collectively through its pathetic settlements, that Bernie Sanders’ charge is correct. Agencies of the United States, after investigation, have confirmed at virtually every enormous bank that the business plan was fraud. Moreover, DOJ admits that the fraud epidemics by the world’s largest banks were leading causes of the financial crisis and the Great Recession. The Bank Whistleblowers United have confirmed both of these points.

Read closely the first sentence of the relevant portions of the paragraph quoted above. The paragraph, with minor variations, is a standard part of DOJ’s press releases on the big bank settlements. It is a paragraph designed to brag about the accomplishments of the “RMBS Working Group” which was tasked with prosecuting a particular crime – “fraud” – in the RMBS market. Collectively, the settlements demonstrate that the fraudulent sale of mortgage product through false representations and warranties dominated this secondary markets. As the reader can see, DOJ is big into bragging and this is the key task force that they brag about.

So, which prosecutions of elite Wall Street bankers who led this fraud epidemic do they brag about? What prosecutions of non-elite Wall Street bank officers do they brag about? What prosecutions of non-elite non-Wall Street officers such as New Century’s middle-level officers do they brad about? They cannot find a single prosecution to brag about. Instead, they are reduced to trying to brag about “billions of dollars” in fines paid not by the officers leading the frauds, but by the shareholders. We award our fourth lemon to this attempt to mislead the reader into believing that the greatest strategic failure to prosecute in modern DOJ history represents a triumph.

In the second column in this series we ask President Obama to end these humiliating failures to prosecute the senior executives leading the largest and most financially destructive criminal enterprises in the world by implementing our plan to restore the rule of law to Wall Street. We stress that he can do so without any new legislation or rules and we offer to help implement the plan. We urge the public to join in asking Obama to implement our plan.

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  1. allan

    Let’s give the mic to the great man himself:

    To the extent that individuals have not been prosecuted,” Mr. Holder told the National Press Club, “people should understand it is not for lack of trying. These are the kinds of cases that people come to the Justice Department to make. Young people who want to be assistant U.S. attorneys in the Southern District of New York and Eastern District of Virginia, San Francisco, live for these big cases. The inability to make them, at least to this point, has not been as a result of a lack of effort.

    They tried. They really did. Honest. Now watch this drive.

  2. Mark Sullivan

    Several years ago, I noted this shift from criminal prosecution to civil compromise. It is much easier to extort a settlement through the threat of criminal prosecution- wherein the parties involved don’t have to risk career suicide.

    It is a game of cowards wherein the victor claims a great victory while the suspects are free to carry on and engage in new and evolving types of fraud. The victims are never made whole nor is that ever really a consideration. It is an odd and perverse outcome, one which allows everything to continue as though nothing had really been decided- except that some money changed hands.

  3. Disturbed Voter

    There is no honesty among thieves. Don’t expect criminals to restore the rule of law. Bonnie and Clyde over the cliff with Thelma and Louise. We wanted a restoration of the roaring Twenties, and we got it.

  4. Richard Bowen

    William Black is dead on. The large bank settlements were nothing more than payments of extortion to the DOJ to lock up the massive amounts of evidence so the American public won’t see how widespread and pervasive the fraud truly was that was perpetrated on this country.
    (Richard Bowen is a founding member of Bank Whistleblowers United)

  5. griffen

    New Century was one of the bigger names and nary a whiff of settlement from their bankrupted corpse. The rot had to begin somewhere.

    Two thumbs up for the mention.

  6. diptherio

    We urge the public to join in asking Obama to implement our plan.

    May as well ask the sun not to rise tomorrow…or am I being cynical?

    1. Ray Phenicie

      I suppose if the pressure on the White House was of monumental proportions-thousands and thousands of phone calls, emails and faxes over several weeks along with demonstrations in the vicinity of the White House-maybe there would be some response on the part of the Oval Office. But therein lies a major point in American Politics and it is one that causes me no end of grief when I consider the present and future of American Democracy. And that is the cry to get people involved so change can occur.

      Change cannot occur if people don’t know what they want or what it is that is wrong with the current system. Bernie Sanders is preaching up and down the pikes and pathways of this ‘yuuuge’ country of ours and is doing a wonderful job. He preaches on the very subject addressed in this post. But I ask again, “how many of the involved citizenry even understand the full scope of the terrible deal worked by Wall Street on millions of Americans?” How many homes (3 million? 5 million?) were fraudulently repossessed? How many billions is that at a low average of $150,000 per home? $450 billion in stolen goods for 3 million homes. $750 billion in theft for 5 million home. This is only for stolen homes. The math is easy to do for 12 million stolen homes. The Financial Crisis Inquiry Report states that Wall Street Fraud resulted in the loss of $11 trillion in individual household wealth. We, the studious commentariat at Naked Capitalism, are familiar with the ins and outs of the shamefully criminal theft organized by 10 or eleven of the larger Wall Street entities. Not to mention the fraud worked by thousand of their subsidiaries and partners in crime. But does the average person sitting with Bernie Sanders know all of this? No. And for this we can thank again the Main Gutter press that works for the establishment power brokers who have captured the regulatory agencies and the Congress

      And again, that is the problem. Because being conversant on the details is the key to working a revolution. The voices of the harmed homeowners have been muted by a press that is openly in the pay of Hillary Clinton’s establishment. Include in that also, Barack Obama’s establishment buddies and supporters. And now I’ll get down to some nitty gritties that are not very nice. I have many a Friend (?) on Facebook who continually place posts about how Barack Obama is so great; these posts regale the reader, stating he is the most wondrously effective President in defending Democracy and furthering the goals of government by the people, for the people and of the people since Abraham Lincoln uttered that famous phrase seven score and six years ago. Really, I say? And then, I lose scores of friends on Facebook. O. K. by me. But those same friends and I were part of a religious community that prided itself on fighting for social justice. The intellectual dishonesty of my former associates overcame me and I fled the premises and stopped the notices on Facebook.

      So I conclude with this statement and task my fellow readers: Do your fellowships include supporters of Barack Obama? Do you confront them with a statement like “Well you know he oversaw the largest fraud actions in human history?” I question whether Bernie Sanders could stand up and make that statement. He decries corruption in governmental dealings but does he name names? No.
      Barack Obama and Eric Holder are two names I never hear him utter when he talks about the monumental theft worked on the rest of the world by Wall Street and still being worked by Wall Street. What about you? Do you name names?

      1. Bubba_Gump

        Heck yeah I name names. And “Eric Holder” is always one that catches people off guard. Most don’t understand the role and responsibilities of the attorney general.

      2. Kathryn M Tominey

        Well if you remember that the FBI investigation into mortgage fraud was finishec in 2002-2003. The Bush OFTS appointee took steps to prevent States AGs from prosecuting fraudsters. Bush43 was active in placing politically republican civil servants in key positions in violation of federal law. Many, including the notorious Lanny Breuer were placec then. Professionals like Hedge fund Paulson and Kyle Bass saw what was happening, kept quiet and made billions betting securities would fail.

        This set the stage for more of the same when the market collapsed.

        I hope these articles and associated chorus of complaint will force the new USAG off of dead center. And Hillary as well.

  7. TedWa

    To the banks the fines are just the cost of doing business with a corrupt government. Praise for mediocrity is the cover for not actually looking to find any guilty parties – it’s the worst kind of pandering to the “exceptional” American. They really think we’re that dumb.

    1. Robert Coutinho

      Collectively, as voters and citizens, we really are that dumb. Therein lies the burn (Bern?) [sorry, I couldn’t stop myself]

    2. H. Alexander Ivey

      ‘they are reduced to trying to brag about “billions of dollars” in fines paid not by the officers leading the frauds, but by the shareholders.’

      We need to quit talking about shareholders as if they were the true “owners” of the banks. There isn’t any shareholders, anymore, who operate like owners or long term investors. The people who really pay the banking fines are the bank consumers or customers.

  8. DorothyT

    Bernie Sanders made mention in last night’s debate of the financial fines, saying that no Wall Street executive has been prosecuted. However, he lost the opportunity to flesh this out. This was in the context of criticism or praise for the Obama presidency. Hillary Clinton is on board the praise bus, and Sanders doesn’t need to throw him under the bus but can and should make strong points about his handling of recognized mortgage fraud. It could have been a teachable moment as well had he mentioned the significantly higher foreclosure rates for Blacks and Latinos than for whites.

  9. Down2Long

    I had the misfortune of having two loans purchased by Saxon Mortgage, the servicer owned by Morgan Stanley. As I recall they bought the New Century loans since they had principal lender to New Century. Years and years in court, including complete flouting of my Chapter:11 bankruptcy settlement. To finally land in Ocwen’s terrible grasp when the dust settled.

    John Mack is from hell. I just wished I had flown back east the day Occupy (I think it was) bussed in hundreds of Saxon victims to march around his ginormous mansion in Connecticut. That was the extent of justice. In the old days he would have hauled out and hung by his silk necktie from some stately tree. Pity he wasn’t.

  10. Blurtman

    The USA has had an unprosecuted criminal as a recent Treasury Secretary. $5.1 billion fraud settlement! And we are to cheer the appointment of Loretta Lynch? Is not a two-tiered justice system a hallmark of tyranny?

  11. Kris Alman

    Corporations are people, my friends. Uberpeople: an elite American tribe whose language is the dollar. The checks to politicians move the fulcrum on democracy so there is no balance in the three branches of government. The cost of doing business puts them above the law–even when they shirk their fiduciary responsibility to shareholders.

    Let’s learn from Iceland.

  12. Stuart Gittleman

    Bill, let’s be fair. Our esteemed protectors don’t just whack the biggest fraudsters with a strand of overcooked linguine, but they also apply the same draconian punishment to the “little fish” who make it safe for the sharks to swim in our economic waters polluted with dishonesty.

    Case in point: The day before the DoJ and the AGs of IL and NY announced the deal with Morgan Stanley, the SEC went easy on a financial analyst at a major U.S. manufacturer charged with three separate incidents of insider trading based on his knowledge of the financial results ahead of the public announcements. He was ordered to disgorge his illicit profits of $109,077, with interest, but only fined $36,000 (it’s usually at least but often a multiple of the amount of illegal gain or loss) based on his “asserted” inability to pay a fine. even though his LinkedIn page says he’s a finance director at another major U.S. manufacturer and held that position for over a year before he cried poverty to the SEC. Not surprisingly, his name doesn’t appear on the DoJ website.

    I’m not saying we need a “broken windows” approach to every case of financial wrongdoing, frisking each suspect with little or no evidence and throwing them in a holding cell, but what messages do the cases big and small send to anyone thinking whether they can get away with their misconduct.

  13. Ray Phenicie

    I got carried away on my rant above and forgot what I wanted to state in the way of a question. Do the billions captured in fines go towards restitution of the harmed parties? Most likely not; the DOJ takes the check and it is key stroked into oblivion never to be seen again. But should not the harmed parties be given the money? I know of course the $3 billion and change is probably about 1/100th of what was racked up in fraudulent deals. Just a minor point in this era of a numbed proletariat who has been desensitized beyond belief on this.

  14. Saltaire

    Thank you professor Black and your esteemed colleagues at University of Missouri-Kansas City for helping those of us schooled in other disciplines to understand the fraudulent banking and financial hocus pokus stew out there.
    Most of us are busy trying to survive this rigged economy with little to no time to engage in policing our corrupt system of regulators or those who have installed them. How would one go about stopping this fraud? Of course we are fortunate to even learn how bad it is, but then what?
    The presidential election primaries have fortunately presented us with Bernie Sanders, it is about time someone stood up as he is doing. We are among those growing millions who have donated several times to his campaign with great hope he can provide the leadership to allow us all in some way to participate in changing the way business is done in our nation. We are all so stuck it isn’t funny, we just cancelled a credit card now asking over $200. fee, our credit score is mid 800’s. Maybe this is in anticipation of CB negative interest rates or just desperation.
    Don’t mean to waste valuable space here in such a valuable and worthy forum, just needed to vent. I read NC when I can and appreciate what good work they do.
    By the way, it is my understanding that many of the fines levied by the DOJ are overdue and haven’t been paid although it is only what I have read.

  15. Skippy

    “There’s no question that this is a time when corporations have taken over the basic process of governing.” – Galbraith on the NewsHour.

  16. Parker Dooley

    I was able to speak to Christie & Bush in NH and asked each if he would appoint an attorney general who would identify & prosecute the individuals in corporations found which admitted to criminal actions. I specifically addressed the lack of agency of corporations, and used the examples of Purdue-Frederick and HSBC, each of which admitted to crimes which look like a slam dunk for a prosecutor. Christie replied that he would never try to influence an attorney general’s priorities while Bush seemed unaware of HSBC’s money laundering activities. I wasn’t able to speak to any other candidates.

    The Purdue-Frederick/Oxycontin issue seemed to have particular resonance among the NH crowd.

  17. griffen

    In the linked press release by DOJ, announcing the settlement, there is a fourth bullet point that should be highlighted further. If only for how the circumstances were exaggerated further still, by knowing participants. This is utterly disgusting.

    “•Through these undisclosed practices, Morgan Stanley increased the percentage of mortgage loans it purchased for its RMBS, notwithstanding its awareness about “deteriorating appraisal quality” and “sloppy underwriting” by the sellers of these loans. The bank has now acknowledged that “Morgan Stanley was aware of problematic lending practices of the subprime originators from which it purchased mortgage loans.” However, it “did not increase its credit-and-compliance due diligence samples, in part, because it did not want to harm its relationship with its largest subprime originators.” Indeed, Morgan Stanley’s manager of credit-and-compliance due diligence was admonished to “stop fighting and begin recognizing the point that we need monthly volume from our biggest trading partners and that . . . the client [an originator] does not have to sell to Morgan Stanley”

    And there it is. We need volume! Forbidden is the notion that an originator sell to another bank.

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