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FCIC Referred Criminal Securities Fraud Violations to Justice Department a Year Ago

A statement sent my way from Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, plays into this debate over the RMBS working group in some interesting ways.

The crux of the matter is that Douglas Holtz-Eakin, a Republican commissioner on the FCIC who did not sign onto the final report, made some statement to the media about how the FCIC already investigated the areas of inquiry concerning the crash of the housing bubble and found no criminal wrongdoing. The article appeared in McClatchy:

The Financial Crisis Inquiry Commission already looked at much of this, insisted Douglas Holtz-Eakin, a former director of the Congressional Budget Office and a Republican appointee to the commission.

“We had access to everything that such task force (unit) would look for and we couldn’t find enough evidence … for criminal referrals,” said Holtz-Eakin. “I think what we found out is that stupidity is not illegal. A lot of this was bad business decisions, unwise, but it wasn’t illegal.”

Needless to say, Angelides took issue with this, not least because Holtz-Eakin didn’t even sign onto the final report. But in rebutting the claim, Angelides calls back something that was known when they released the report. On page xi, in the introduction, right up front, it says this:

In addition, the Commission was instructed to refer to the attorney general of the United States and any appropriate state attorney general any person the Commission found may have violated the laws of the United States in relation to the crisis. Where the Commission found such potential violations, it referred those matters to the appropriate authorities.

I remember confirming with the Justice Department that they received those referrals of potential violations of law from the FCIC. As it turns out, that happened a year ago Saturday. And we’ve heard nothing arising out of those criminal referrals from the existing Financial Fraud Task Force.

In addition, we knew at the time that those criminal referrals related to violations of secruties law, in other words precisely what the new RMBS working group would want to investigate. Angelides as much as confirms this today in his statement:

In addition, the report itself raises direct concerns regarding the legality of the mortgage securities activities that will be the focus of the new unit, in addition to containing significant facts on such activities. As just one example, in the section of the report (commencing on page 166) that contains evidence from Clayton Holdings regarding the mortgage securitization actions of a number of major financial firms, the report states (commencing on page 169): “Only a small portion – as little as 2% to 3% – of the loans in any deal were sampled, and evidence from Clayton shows that a significant number did not meet stated guidelines or have compensating factors. On the loans in the remainder of the mortgage pool that were not sampled (as much as 97%), Clayton and the securitizers had no information, but one could reasonably expect them to have many of the same deficiencies, and at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws.” As another example, on page 187, the Commission concluded, “Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-backed securities.”

The Justice Department has had this information, contained in depositions and official testimony, for a little over a year. They’ve done nothing. The Securities and Commodities Fraud working group would have been the natural arm of the Financial Fraud Task Force to which to refer those FCIC findings. The co-chairs of that group included Lanny Breuer and Robert Khuzami, who are also co-chairs of the RMBS working group that Schneiderman co-chairs.

Even those excited about this working group would have to admit that the same people at the federal level had the same access to the same violations of law and sat on their hands for the entire tenure of the Obama Administration. That’s why some people are skeptical that this new working group will lead to anything real. I recognize the claims that the dynamic around financial fraud and making Wall Street pay has changed generally, and that the Administration’s political people know they have a problem with coziness toward Wall Street, and so they may let the rope out a little bit. Plus there are prosecutors in DoJ at a lower level who may be dying to get their hands on some of this material and work with the new mandate to make some real noise. I understand that perspective. Time will tell if that will resolve in any different manner than the FCIC criminal referrals did.

Angelides closes by saying that “I look forward to President Obama’s newly appointed task force righting the financial wrongs that were committed, including the matters identified by the FCIC and referred to the Department of Justice.” So do I.

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David Dayen

David Dayen