The Lehman Moment: The “Normalization” of Fraud

Sept. 15 is the eighth anniversary of the Lehman Brothers bankruptcy. Not enough time has passed yet for me to recall those anxious days without getting angry.

 Sen. Elizabeth Warren, D-Massachusetts, has used the occasion of this anniversary to suggest the next administration should “investigate and jail” those Wall Street bankers who committed crimes. Although I doubt there will be any perp walks, I do have some ideas about how to proceed.

Before we look into the senator’s suggestion, it is time for an honest appraisal of one of the lingering mysteries of the financial crisis: Why were there were no prosecutions of major executives?

It’s a fair question. I believe there were 10 areas where fraud and abuse took place. These were the Mortgage Electronic Registration Systems; mortgage pools; securitization; “misplaced” mortgage notes; force-placed insurance; servicing fees; fake documents; false affidavits, perjury and robo-signing; foreclosure mills; and active military members losing homes while on duty.

I am convinced that these cases were easy to prosecute, that a first-year law student would have a 90 percent conviction rate, that the documentary evidence was overwhelming, especially of mortgage and foreclosure fraud. As we know, there were no prosecutions of any significance — not at the state level, not at a federal level.

After much research, I have come to believe that at the highest levels of government, the financial industry managed to convince prosecutors that it was against societal interests to bust bankers. The revolving door between government and the private sector, between regulators and regulated, figures in this. If you’re a prosecutor, but you might like a big payday from business, do you really want to go hard on the companies that might offer you a job one day?

The bigger problem has been the normalization of fraud. We found out in 2008 that Department of Justice prosecutions and Securities and Exchange Commission enforcement actions against Wall Street had fallen 87 percent. Before you blame the George W. Bush administration, that same lack of prosecutorial zeal continued under the administration of Barack Obama.

On the anniversary of Lehman’s collapse, it is worth recalling just how blatant some of the misdeeds were, and the surprising lack of prosecution for the bank’s accounting improprieties. Of course, among the leading example was something called Repo 105, which involved moving billions of dollars in liabilities off the firm’s balance sheet near the end of each reporting quarter, then putting them back on the books a few days later. The maneuver hid enormous financial weakness. As far as I’m concerned, this was fraud plain and simple, a conclusion supported in the report by the court-appointed Lehman bankruptcy examiner.

Beyond Lehman Brothers, Warren will find the ripest area for prosecution in improper foreclosures. Fraud was rampant; every robo-signed document was an act of perjury; every fabricated signature was fraud. I suspect there were thousands of low-level bank employees guilty of these crimes, and they could be pressured into revealing those responsible further up the food chain. I doubt it was the chief executives who ordered these actions, and the ideas certainly didn’t come from the burger flippers recently hired to work in the foreclosure factories. It was senior bankers who came up with a way to institutionalize perjury.

How and why prosecutors fell down on the job is an area the senator might consider exploring. Maybe take a closer look at the revolving door and issues of regulatory capture. At the very least we still need a dogged probe of the financial crisis like that done by the Pecora Commission, which examined the causes of the 1929 Crash.

This would bring closure, and hopefully move us past the alternative of never-ending scandals and fines. And if you think things have changed, just consider the latest scandal: the thousands of Wells Fargo employees who opened millions of fake accounts in the names of real customers, just to meet unrealistic sales goals. It is more evidence that bad incentives are rampant in the financial industry and top executives either look the other way or that they don’t know what’s going on in the companies they run — a sign, if nothing else, that big banks are too big to manage.

Justice has not yet been served. The time left to see it done is almost over, with less than two years remaining on the longest statutes of limitations. I am not holding my breath.

_ Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

6 Responses

  1. The truth is this mortgage mess is a deliberate plan of certain European interests to bankrupt America and put us into serfdom, just as Thomas Jefferson predicted. There is no money, only debt, created by European Banksters and their American agents, from your birth trust under the1302 Global Trust. Until we tell the truth and recognize it we can not accurately defeat it.

  2. Anomaly, this is why they derail any defenses. They’re collecting all the dough for their own self interests.

  3. (Need an option to edit, when most of the bloggers are stressed up people)

    Yeah ! Pension funds. This may be why law enforcement authorities are not favoring homeowners to defend illegal foreclosures right across the nation. If this goes on, there wont be any pension in the USA if the dollar value collapses.

    Making them to close their businesses may be better than paying fines.

  4. Yeah ! Pension funds. This may be why law enforcement authorities are not giving favoring homeowners to defend illegal foreclosures right across the nation.

  5. Reblogged this on Deadly Clear and commented:
    Until the federal and state governments are willing to tell the American public that they gambled away their pension funds on Wall Street there will be no ptocecutions – because with prosecutions the truth comes out. There are already too many sealed files in these bank related cases. Transparency is a necessity… But then our governments don’t think the American public can handle the truth.

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