A continuing source of frustration for many Americans has been the fact that no one on Wall Street has gone to jail for the mortgage fraud that nearly crashed the world financial system in 2008. But in the last three weeks the dam has broken and the indictments are beginning to emerge. It may have taken a long time, but perhaps the departure of Tim Geithner, the boy with his finger in the dyke, will signal a new attitude by the Obama administration towards the Wall Street Miscreants.
The first step was the amazing Frontline episode The Untouchables, which depicted a craven Assistant Attorney General, Lanny Breuer, who went out of his way to protect the bankers, fearing an indictment would crash the financial system. Soon after the program aired, Breuer announced he was returning to private practice, probably to represent the big banks.
Next came the Department of Justice suit against Standard and Poors for their outrageous rating as AAA, securities that they knew were junk. The suit quotes internal S & P emails.
“Rating agencies continue to create an even bigger monster — the C.D.O. market,” one S.& P. employee wrote in an internal e-mail in December 2006. “Let’s hope we are all wealthy and retired by the time this house of card falters.”
Another S.& P. employee wrote in an instant message the next April, reproduced in the complaint: “We rate every deal. It could be structured by cows and we would rate it.”
Finally comes word this morning that Jamie Dimon and his pals at JP Morgan Chase were just as involved in mortgage fraud as any other bank, despite Dimon’s attempt to paint himself as the good guy during the 2008 meltdown.
According to the court documents, an analysis for JPMorgan in September 2006 found that “nearly half of the sample pool” — or 214 loans — were “defective,” meaning they did not meet the underwriting standards. The borrowers’ incomes, the firms found, were dangerously low relative to the size of their mortgages. Another troubling report in 2006 discovered that thousands of borrowers had already fallen behind on their payments.
But JPMorgan at times dismissed the critical assessments or altered them, the documents show. Certain JPMorgan employees, including the bankers who assembled the mortgages and the due diligence managers, had the power to ignore or veto bad reviews.
The real problem with establishment types like Tim Geithner and Lanny Breuer is that they went to Ivy League schools and couldn’t imagine that their establishment peers would possibly commit fraud. And even if they saw evidence of the fraud, then preserving The System became more important then sending their classmates to jail. President Obama bought into that establishment trope in his first term. He surrounded himself with people like Geithner, Larry Summers and Bob Gates. But I sense something has changed. The appointment of Mary Jo White to head the SEC could be a sign that heads are going to role, but the real change will come from more lawsuits filed like the S & P case. Certainly the other ratings services, Moody’s and Fitch, are equally guilty of pay to play services. One of Obama’s greatest legacies could be a real financial reform agenda.