Why DOJ prosecutors have done nothing about subprime crime


My broker’s phone number is in the top righthand drawer of the desk

One of the great “mysteries” of the post-financial-crisis era is why there has been almost no prosecution of obvious criminality, particularly in the mortgage business. We have been told it is more complex than it appears; that the securitization process has made determining exactly who was harmed complicated; that this complexity makes convincing a jury a crapshoot.

All of these arguments fail to withstand even cursory scrutiny when it comes to foreclosure fraud. The robo-signing, document fabrication and mass perjury should have been fish in a barrel for even a newbie prosecutor. Why did the government fail to go after so many perpetrators of mass fraud?

A Justice Department inspector general’s report released this week raises that exact question. It found that: “DOJ did not uniformly ensure that mortgage fraud was prioritized at a level commensurate with its public statements” and that the Federal Bureau of Investigation “ranked mortgage fraud as the lowest ranked criminal threat in its lowest crime category…”

This all took place during an era of limited legal enforcement for white-collar crimes. Prosecutions for financial felonies began falling under the George W. Bush administration, and kept right on doing so during the Barack Obama administration. At least we can’t blame this governmental incompetency on partisanship…

So why were there so few prosecutions? I have three theories:

1) Endowment Effect & Sunk Cost Fallacies: The TARP, ZIRP and FASB rule changes were not especially popular.

2) Economic Threat:…“The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone. It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”

3) The wrong players in key roles: When Obama began his administration, he appointed experienced people to key economic roles. Unfortunately, their resumes included helping to create the financial crisis.

RTFA for all the gory details. Barry Ritholtz has the wonderful habit of trying to tell the truth as he sees it, as he finds it. That doesn’t inhibit his willingness to identify corruption no matter how widespread, inclusive of “nice” people.

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