Thursday, November 27, 2014

Individuals Causing the 2008 Housing Crisis Receive No More Than a Slap on the Wrist

Following the 2008 housing crisis, several of the banks involved paid large settlement fines. JPMorgan Chase was one of those banks. The Justice Department used evidence from an anonymous whistleblower in the prosecution, but until recently the whistleblower remained anonymous. Matt Taibbi recently released an article in Rolling Stone describing why the whistleblower, Alayne Fleischmann, has gone public with what she knows. Ironically, the Justice Department wasn’t committed to bringing “justice” to those individuals who contributed to the fall of the economy through fraudulent activities. In fact, Attorney General Eric Holder said the following:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

What is the Justice Department doing if they aren’t bringing justice to those responsible for major crimes? When Fleischmann realized that much of what she reported to the SEC and the Justice Department was not being fully pursued, she decided she had to go public with what she knew.

Alayne Fleischmann was a deal manager for JPMorgan Chase (hereafter, Chase) in 2006. While working there, she witnessed a change in the way Chase purchased and re-sold mortgage-backed securities. Prior to this time, Chase bought home loans that were likely to be repaid (a maximum 5% defect rate), and sold them to hedge funds, pension funds, and other investors as high-quality mortgage securities. Fleischmann’s job, along with others, was to make sure that the bank didn’t buy and re-sell bad loans.

After Chase hired a new "head diligence manager", the bank changed its mortgage securities practice. The new manager implemented a no-email policy in an effort (according to Fleishmann) to eliminate paper trails of fraudulent activity. Simultaneously, Chase began buying home loans that were very unlikely to be repaid.

There is nothing illegal or fraudulent about buying home loans are unlikely to be repaid, but Chase packaged them with other home loans and sold them in high-quality mortgage securities. When Fleischmann and those working with her advised the bank to not buy the mortgages, “’the head diligence manager started yelling at his team, berating them, making them do reports over and over, keeping them late at night.’ Then the loans started clearing.” Fleischmann wrote a letter to another managing director explaining what was going on, but nothing changed. Less than a year later, Fleischmann was laid off.

After the economy crashed, Fleischmann was interviewed by the SEC and the U.S. attorney’s office to blow the whistle on Chase. At first it seemed like they were going to make progress with prosecuting those at Chase who contributed to the economic collapse in 2008. However, the government appeared to only be interested in giving a slap on the wrist to those responsible, rather than prosecuting them to the full extent of the law. According to Dennis Kelleher of the financial reform group Better Markets, the DOJ and SEC “typically charge only one offense when there are dozens. It would be like charging a serial murderer with a single assault and giving them probation.” Overall, the SEC only charged Chase with a $297 million fine for misrepresentations on one deal.

It seemed like things might be improving when Eric Holder’s office scheduled a press conference to announce civil-fraud charges against Chase. However, that morning Jamie Dimon, CEO of Chase, called the Associate Attorney General and asked for negotiations to be reopened to settle the case outside of court. “The ordinary citizen who is the target of a government investigation cannot pick up the phone, call the prosecutor and have his case dropped. But Dimon did just that,” Taibbi writes.

In the end, Chase has only had to pay a settlement of $13 billion. While at first this seems large, and it was reported as the largest white-collar settlement in history, the amount Chase (or its shareholders) is paying is much lower and, importantly, the executives responsible for the fraud are avoiding serious consequences.

For example, $4 billion of the settlement is composed of what is called “consumer relief,” which is more of an accounting falsehood with a clause that says if Chase would already grant relief to a consumer, then they will still do that. It makes the overall settlement look bigger and they lose nothing for it. Another $7 billion of the settlement is treated as a write-off, effectively causing taxpayers throughout the country to pay for about $2.4 billion of the settlement.

Overall, the settlement only materialized to about $6.6 billion for Chase. In addition to this, Chase’s stock value increased by about $12 billion after the settlement, so it could even be argued that Chase benefited from the settlement. Chase seems to agree that they benefited, because Dimon, the CEO responsible for the settlement, received a 74% raise for "working out “a string of banner government settlements,” according to a New York Times article.

Why is it that Attorney General Eric Holder doesn’t push prosecutions further? Why is nobody in jail after the 2008 crisis? These are questions that need to be answered and need to be acted on by the Attorney General and others responsible for seeing that justice is delivered. As Taibbi stated in his article, “Truth is one thing, and if the right people fight hard enough, you might get to hear it from time to time. But justice is different, and still far enough away.”

Check out the interview below with Alayne Fleischmann and Matt Taibbi on Democracy Now.

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