News Journal: Prosecuting mortgage fraud not a priority

A couple of weeks ago, most often buried on the inside pages, newspapers ran stories about a Justice Department inspector general’s audit of the department’s efforts to address mortgage fraud. The headline in The New York Times was typical: “U.S. Criticized for Lack of Action on Mortgage Fraud.”
A better headline might have been “Justice Department Acknowledges that Rich Bankers Who Committed Fraud Won’t Go to Jail.”
Angry? You bet I am. Even more angry than I was back in 2009 when, as a U.S. senator, I saw shocking paper trails that I believed would have convinced juries to convict some crooked CEOs if there were aggressive efforts to prosecute them. That’s why I worked hard for and co-sponsored the Fraud Enforcement and Recovery Act, which in May 2009, gave an extra $55 million to the Justice Department over the next two years – over and above the Department’s normal appropriation. This money was specifically granted to bring to justice top executives who had engaged in fraud leading up to the financial meltdown.
When a bill is passed in Congress, hearings are usually held to monitor how the bill is being implemented. Chairman Leahy allowed me to chair Judiciary Committee hearings on FERA in 2009 and 2010. Before those hearings I met with those who would testify – including Lanny Breuer, assistant attorney general for the Criminal Division; Robert Khuzami, director of enforcement for the Securities Exchange Commission; and Kevin Perkins, assistant director of the FBI Criminal Investigative Division.
In these private meetings, as well as in later public hearings, I emphasized, and they agreed, that the FERA legislation wasn’t aimed at small individual mortgage brokers. Its main objective was to follow up on the many allegations of financial fraud by major banks and other financial players in the securitization process of bundling mortgages and selling them to customers around the world. It was the failure of these instruments that was at the heart of the financial crisis. All of them agreed to make this objective their top priority.
By the time the first public hearing was held on December 2009, I already doubted how much of a priority it really was. Just weeks before, the Justice Department had announced with much fanfare the Financial Fraud Enforcement Task Force, but some confidential internal communications revealed that the only reason it had been announced was to have something positive to talk about at my hearing. I also heard through the grapevine that Washington Justice Department officials had been calling U.S. attorneys around the country to see if they had any fraud cases that could be brought up at the hearing.
In the years since I left the Senate in 2010, fines, which are paid by shareholders not managers, have been levied against Wall Street banks, but not one employee of a bank been indicted. The audit by the inspector general simply made clear what has become all-too-obvious, despite repeated assurances to the contrary by Attorney General Holder and, until he recently left the post, Assistant Attorney General Breuer. The audit confirmed that the Justice Department had never made investigating mortgage fraud cases a top priority or, for that matter, any priority at all.
Among the audit’s conclusions: “Despite public statements by the Financial Fraud Enforcement Task Force and the department about the importance of pursuing financial fraud cases, including mortgage fraud, the F.B.I. Criminal Investigative Division ranked complex financial crimes as the lowest of the six ranked criminal threats within its area of responsibility, and ranked mortgage fraud as the lowest subcategory threat within the complex financial crimes category. Additionally, we found mortgage fraud to be a low priority, or not listed as a priority, for F.B.I. field offices in the locations we visited, including Baltimore, Los Angeles, Miami, and New York.”
The statute of limitations on fraud committed before the financial crisis is running out. It is safe to assume that no one who committed mortgage fraud will be prosecuted.
I draw two depressing conclusions. First, without a real threat of criminal prosecution, there is no deterrent effect on anyone who commits financial fraud in the future. Second, the lack of action on mortgage fraud takes us a perilous step closer to a two-tiered system of criminal justice – one for the poor and one for the rich. That’s something we cannot allow to happen.
Former U.S. Sen. Ted Kaufman writes a column each Sunday.