By William K. Black
Bloomington, MN: December 18, 2014
Holiday greetings! Today’s semi-sermon considers verses from tracts many consider sacred.
John 3:20 (KJV) For every one that doeth evil hateth the light, neither cometh to the light, lest his deeds should be reproved.
Talmud: Here I will simply summarize the Miracle of the Lights. When the temple was restored to Jewish control its sanctified olive oil for the lamps had been profaned. Only one portion, enough to last one night was still pure. That portion, however, miraculously continued to light the temple for over a week until new sanctified oil could arrive.
The common theme, of course, is the blessings that light brings in making it much easier for good to prevail over evil. In the financial world we use a related concept – transparency. In finance, we implicitly assume that transparency also involves providing light. (Anyone who has walked into a glass door on a very dark night knows that transparency without light is no great protection.) John 3:20 is also about accountability – the desire of the evil to use darkness to avoid having their evil “deeds” “reproved.” A related verse, from our semi-sacred secular texts, was doubtless influenced by these religious themes – Supreme Court Justice Louis Brandeis’ famous phrase was that “Sunlight is the best disinfectant.”
In finance, because of the deliberate destruction of effective financial regulation by Presidents Clinton and Bush and President Obama’s refusal to recreate it (yes, the Republicans want to degrade it further), our only means of bringing light to the dark places where the elites “doeth evil” is whistleblowers. This article is about a financial whistleblowers The Obama administration had, in this very week when Jews celebrate the Miracle of the Lights, the perfect opportunity to bring far more light – and accountability – to finance. The administration, however, failed to do so. Obama never misses a chance to miss the chance to hold the banksters accountable.
Turning to America’s Former Secular Religion: Baseball
Sometimes life sends a 75 mph (not-so) fastball down the center of the plate that is simply begging to be knocked out of the park. That happened on December 17, 2014, with what is supposed to be the heart of the U.S. batting order for ensuring the rule of law, President Obama, Attorney General Eric Holder, and U.S. Attorney for the Southern District of New York, Preet Bharara up to bat. Each was called out on strikes. Worse, they were called out on strikes without ever getting the bat off their shoulder and swinging at a pitch that even an AAA second baseman would have crushed into the stands. No one is surprised at Obama and Holder maintaining their perfectly imperfect batting average of .000 – all on called third strikes – against the senior bankers who grew wealthy by leading the three fraud epidemics that caused the financial crisis and the Great Recession. Bharara is the shocker, for he has been the proverbial “one-eyed” prosecutor in the valley of the morally blind. This made him the “king” of financial prosecutors.
I’ll use the New York Times to illustrate the coverage of the whistleblower event that this article discusses. They entitled their article: “Whistle-Blower on Countrywide Mortgage Misdeeds to Get $57 Million.” If you know the case, then you know that the NYT is the article to read about the whistleblower because it was the NYT that so casually and gratuitously smeared him in its October 24, 2012 article when his identity first became publicly. I wrote an article criticizing those smears which I’ll return to later in this piece. The title of the 2012 NYT piece smearing Edward O’Donnell, the whistleblower, was “U.S. Accuses Bank of America of a ‘Brazen’ Mortgage Fraud.”
An Important Detour
Two important points of interest along the way are worth noting. The “Deal Book’s” 2012 article unintentionally revealed how depraved the mainstream financial media had become. Upon learning that the whistleblower (a) had as a bank officer attempted to prevent the fraud and had been retaliated against for doing so, (b) had then brought the fraud to the attention of Bharara, and (c) upon learning the facts from O’Donnell, Bharara viewed the fraud as “brazen” – the Deal Book attacked O’Donnell. O’Donnell is the only one who acted with courage and integrity. He is the obvious hero of the piece. The Deal Book made no snide remarks about Countrywide and Bank of America’s corrupt senior officers who had ripped off the U.S. Treasury (by defrauding Fannie and Freddie). That contrast is why I used the word “depravity” to describe how odious Deal Book has become.
Second, in 2012 even “Deal Book” was willing to have the title of its article use the words “brazen” and “fraud.” That was before Bank of America’s ever mounting catalog of felonies surged over the last two years. That was before the Bank of America admitted substantial fraudulent conduct in conjunction with the largest civil settlement in history. That was before Bharara used the O’Donnell’s revelations and testimony to win a fraud case against Bank of America and one of its senior officers. That was before the trial judge wrote these words about what the jury had found that senior Bank of America/Countrywide officials had done in the case.
“FIRREA is a so-called ‘hybrid’ statute, predicating civil liability on the Government’s proving criminal violations (here, mail fraud and wire fraud) by a preponderance of the evidence. Unlike private civil actions, therefore, a FIRREA action is not primarily intended to serve compensatory functions but rather to serve quasi-civil punitive and deterrent functions. This is demonstrated on the face of the statute by the fact, inter alia, that the statute describes the monies to be paid, not as compensation to be paid to the immediate victim of the misconduct, but as a ‘penalty’ to be paid to the Government. At the same time, because there is no threat of imprisonment nor the stigma associated with a criminal charge, the burden of proof is preponderance of the evidence and the so-called ‘rule of lenity’ has no application. In short, FIRREA seeks to impose substantial civil penalties for criminal misconduct affecting federally insured financial institutions. 12 U.S.C. § 1833a(c) (2).
In determining the appropriate penalty, therefore, as well as the appropriate definition and calculation of loss and/or gain, attention must be paid to precisely what predicate crime has been proved and what its essential elements are. Here, the essential crime found by the jury was “a scheme to induce Fannie Mae and/or Freddie Mac to purchase mortgage loans originated through the High Speed Swim Lane by misrepresenting that the loans were of higher quality than they actually were.” Ct.’s Instructions of Law to the Jury at 11, ECF No. 265. 4 The HSSL program implemented this scheme by, inter alia, transferring primary responsibility for approving loans from quality-focused underwriters to volume-focused loan specialists employing automated underwriting software, eliminating the quality-assurance checklist, suspending the ‘quality of grade’ compensation reduction that previously provided disincentives to low-quality loan origination, and reducing the ‘turn time’ for loan funding from 45-60 days to 15 days.
[T]he essence of the crime proved was a fraudulent scheme to induce Fannie Mae and Freddie Mac into purchasing risky mortgages originated through the HSSL program….”
To sum it up, after a full trial with some of the best criminal defense lawyers in the world backed by Bank of America’s immense wealth and resources, Bharara’s trial team convinced a jury, by the preponderance of the evidence, that Countrywide/Bank of America committed “crimes” consisting of intentionally, and massively, defrauding Fannie and Freddie. Further, if you read Judge Rakoff’s opinion closely about the nature of the fraud – deliberately gutting underwriting standards and making the incentives perverse in order to create fund enormous numbers of bad loans – you know that this was an “accounting control fraud.” That is, of course, what I’ve been explaining for many years.
With all these new facts available to them about Bank of America’s frauds, the unprecedented size and universality of frauds committed by each of the largest banks, and the recognition even by the NY Fed – the apologists-in-chief for Wall Street – that Wall Street’s “culture” was profoundly corrupt, the NYT abandoned the word “fraud” in its title and substituted the euphemism “misdeeds.” “Misdeeds?” That’s what your three year old nephew does at a picnic.
Back to my Baseball Metaphor and O’Donnell’s $57 Million Whistleblower Award
The December 17, 2014 NYT article explains how O’Donnell got $57 million (so far) as an award for blowing the whistle on Countrywide and Bank of America’s crimes.
“The amount is little more than half the $104 million the Internal Revenue Service paid in 2012 to a former UBS banker, Bradley Birkenfeld, who spent two and a half years in prison for helping his wealthy American client avoid paying taxes. Mr. Birkenfeld was rewarded by the I.R.S. for providing information about the inner workings of the bank’s tax avoidance scheme.
Mr. O’Donnell’s role in providing ammunition to the federal prosecutors who pursued the so-called global settlement with Bank of America was not previously known. It only became public in a court document filed on Monday. But this is not the first time Mr. O’Donnell has served as a critical whistle-blower in helping the government pursue claims against Bank of America and, more specifically, Countrywide.
An earlier false-claims lawsuit filed by Mr. O’Donnell was instrumental in Mr. Bharara’s pursuit of a civil fraud claim against Bank of America and a former Countrywide official for selling shoddy mortgages. The lawsuit centered on a program at Countrywide nicknamed the hustle, which rewarded employees for producing more loans regardless of the quality.
In July, a federal judge ordered Bank of America to pay a $1.27 billion penalty in that case. The former Countrywide executive who faced civil action in that lawsuit, Rebecca Mairone, was ordered to pay a $1 million fine for her role in directing the program.”
The NYT did not apologize for its earlier smear of O’Donnell, but at least its 2014 article was respectful. Two points are worth making about the size of the settlement. As the article explains, it is about half the size of the Birkenfeld award – and Birkenfeld was part of the criminal conspiracy at UBS to aid wealthy Americans to evade even their greatly reduced taxes brought to them by President Bush. The case against UBS led to such a weak settlement that UBS was widely perceived as having gotten off exceptionally lightly. O’Donnell performed with integrity and was a vastly more helpful and useful whistleblower than was Birkenfeld, so the Department of Justice’s (DOJ) demands in its negotiations with O’Donnell that he accept a far smaller award is bizarre.
Second, and this will bring us back to my primary theme, DOJ’s tight-fisted approach to the best whistleblowers like O’Donnell and his counterparts at many banks (I’ve written several articles about the great service to our Nation provided by Richard Bowen, formerly with Citi) is self-destructive. If DOJ really wanted to prosecute the elite bankers it would deliberately be highly generous in its awards to whistleblowers in False Claims cases that lead to these massive recoveries for the government.
Think of the flip side – the way the mortgage frauds operated. The officers running the schemes to originate millions of fraudulent mortgages routinely provided exceptionally generous incentives to the loan brokers to ensure that they delivered those millions of fraudulent loans. A loan broker – among the lowest employees in the mortgage fraud food chain – could get a $20,000 fee for originating a single crappy “non-conforming” loan in the range of $700,000 if he or she could con the borrowers into paying about 200 basis points above the rate at which the lender was actually willing to fund the loan. The FCIC report quotes the testimony of the guy that Countrywide and its ilk hired to train loans officers. He explained that the typical prior job for a loan broker was a minimum wage fast food job and that the “best” (by which he meant “worst”) loan officer could easily make $1 million annually by making crappy loans. The $20,000 fee that loan brokers could make for making crappy/predatory loans was a significant portion of the “profits” that the lender would (fraudulently) recognize on making the crappy loan and then selling it through fraudulent “reps and warranties” to the secondary markets. The senior officers running these fraud schemes recognized that they would make far more money by being generous and using the prospect of such a killing degrade the ethics of the brokers and induce them to bring in huge amounts of crappy/predatory loans with fraudulently inflated appraisals and borrowers’ incomes.
The bad guys used financial incentives to degrade ethics and reward the least ethical people. DOJ refuses to use financial incentives to encourage good people to do the right thing and stop ongoing frauds that can trillions of dollars in losses. Whistleblowers of integrity always suffer retaliation and that retaliation typically causes them great harm. The combination of injury, courage, and integrity makes generous awards a sensible policy. DOJ thinks it is saving the Treasury money by being cheap on whistleblower awards and that it must negotiate hard to reduce such awards. This is significantly insane – if DOJ’s goal is to maximize people blowing the whistle on elite frauds.
The Prosecutors That Didn’t Bark, or Wag Their Tails
Sherlock Holmes famously solved a case by focusing on what did not happen – the dogs that did not bark. The things the NYT wrote in 2012 and 2014 relating to O’Donnell are important for the reasons I have explained. The most important, and revealing “tell,” however, is what the articles do not report. In a world of great financial journalism the articles would have discussed the matter I’m about to explain, but in the world we live in the blame must go almost exclusively to Obama, Holder, and Bharara. There is not a word in the article from Obama, Holder, Bharara or anyone in the U.S. government (Thomas Curry, Bank of America’s anti-regulator, is the most unforgivably absent regulator) saying three simple things:
- Thank you Mr. O’Donnell
- O’Donnell’s courage and integrity was a great public service, we ask in the strongest terms possible for everyone with knowledge of frauds and crimes to follow his example and contact us. We will vigorously pursue all credible leads on these elite frauds to the fullest extent of the law.
- We are delighted, in addition to our cash award of $120 million (a more appropriate figure), to announce that President Obama, Attorney General Holder, and U.S. Attorney Bharara will personally present Mr. O’Donnell with (pick your prestigious medal). At that same ceremony we are also proud to announce that other American heroes such as Richard Bowen, Alayne Fleischmann, and Rachel Steinmetz will be receiving that same award. (The names I have given are simply illustrative, many more whistleblowers should receive the award.)
I have checked seven other major financial media outlets and none reports any statement by any representative of the U.S. government in conjunction with the financial award to O’Donnell. To their credit, Reuters contacted Bharara’s office to seek a comment. “A spokeswoman for the U.S. Attorney’s office declined comment.” Simple politeness, particularly in this holiday season, should have led Bharara’s people to say a simple “thank you” to O’Donnell.
Please read my 2012 article responding to the NYT article smearing O’Donnell. I’ve been making this point for years. DOJ was humiliated by the Frontline documentary (“The Untouchables”) when the producers made the point that they were inundated by whistleblowers as soon as word got out that they were investigating the failure to prosecute – and, overwhelmingly, the whistleblowers explained that DOJ never tried to contact them. Each of the three very large bank civil cases brought by DOJ was made possible by whistleblowers. O’Donnell was not contacted by DOJ – he initiated the contact. At each of the press conferences announcing that they were bringing the three largest domestic bank cases (1) DOJ failed to mention the whistleblower, (2) failed to thank the whistleblower, and (3) failed to call on new whistleblowers to come forward. It was almost if they didn’t really want to be inundated with whistleblowers exposing the crimes of the elite bankers.
But O’Donnell’s award is the true ball down the heart of the plate that begs to driven out of the park. It should, of course, have been a larger award than to the felon who flipped and helped the IRS. An award of over $100 million sends a different message, as does making the largest award in history. But even at $57 million it is a very large award (and it will eventually grow even larger). It was the perfect opportunity for the White House, DOJ, and the Comptroller of the Currency to symbolize that the administration had reversed course and was determined to restore the rule of law in America and hold the elite banksters accountable with the aid of heroes like O’Donnell.
The timing of the opportunity, after the administration’s disgraceful capitulation to Citi and JPMorgan’s extortion in the Cromnibus bill that sets up the future public bailout of the largest banks and bankers after they cause the next financial crisis was heaven sent to rehabilitate Obama. But this is the same President that chose the infamous Holder and Curry. It is the same President, who at a fundraiser in Palo Alto in 2013 – after even the most frenzied proponents of “light touch” financial regulation (in the UK) confessed that it was a principal cause of the financial crisis – used those notorious code words to assure his wealthy donors: “We believe in a light touch when it comes to regulations.” What could go wrong with that?
Obama, Holder, Bharara, and Curry are all obsessed with symbolic “messaging.” I checked the home pages of the websites of DOJ and Bharara’s office on December 18, 2014 to see if they even mentioned the award to O’Donnell or thanked him. I couldn’t find a word about O’Donnell on their home pages. I did find, however, on Bharara’s shop’s site (1) a photo of an award ceremony presided over by Holder honoring seven of Bharara’s attorneys for the Bernie Madoff prosecutions and (2) a photo of Bharara announcing the prosecution of a “massive” mortgage fraud case involving 20 loans to members of an extended family. I’m happy they prosecuted Madoff, but it was a slam dunk case the fraud had nothing to do with causing the financial crisis. If 20 loans are “massive,” then what were the over two million fraudulent “liar’s” loans originated by criminal enterprises like Countrywide and its ilk in 2006 alone?
This entire pattern would be surreal if one believed that the Obama administration actually wishes to regulate banks vigorously and effectively and actually wishes to prosecute vigorously the elite bank frauds who cost this Nation over $20 trillion in lost GDP and over 10 million American jobs. But no one believes that, so the refusal to restore the rule of law is all too real.
The way in which they spurned a heaven-sent invitation to drive one out of the park is simply the latest proof that in Obama’s case we need to revise the introductory question to Pesach’s famous “four questions.” For Obama, it should read, “Why is this night the same as all other nights?” The Obama administration never misses an opportunity to miss an opportunity to hold accountable the senior bankers who were made wealthy by leading the three fraud epidemics that caused the financial crisis and the Great Recession.
I would love to be proved wrong. Please, Mr. President, do the three simple things that I suggested. “Thank you Mr. O’Donnell” is a great start.
It’s interesting that one of the first incarnations of Citi, National City Bank of NY, prior to the Wall Street Crash that brought us the Great Depression, was found bundling non-performing South American bonds with those of better ratings and fraudulently characterizing those bundles as higher rated tranches. According to the Wiki article on Citi, Senator Carter Glass said of the then Chairman Charles E. Mitchell that “Mitchell, more than any 50 men, is responsible for this stock crash.” So the bundling of fraudulently rated securities isn’t even a new game and Citi appears to have tradition for it. For further info see Ron Chernow’s House of Morgan.
We get it. How about an article on how to make Elizabeth Warren President of the United States. That is, what can we do about this?
SteveK9– We would have to organize, and would have to push harder than the banksters are pushing to keep themselves free from regulation and from laws against fraud. Not impossible to do, but it’s difficult in the U.S.– since most Americans can’t even be bothered to show up to vote in the mid-term elections, much less to become politically active.
“If DOJ really wanted to prosecute the elite bankers it would deliberately be highly generous in its awards to whistleblowers in False Claims cases that lead to these massive recoveries for the government.”
Yes, the DOJ would. And it doesn’t do that, which leads to the obvious conclusion.
“Obama never misses a chance to miss the chance to hold the banksters accountable.”
Why would he hold banksters accountable? As neoliberal economists are always saying, we live in a “free market” economy. Politicians are just one of the commodities that are auctioned off to the highest bidders, when those bidders donate to individual or party political campaigns. The purchasers of both major parties include the banksters. So both major parties are obligated to give the banksters a high ROI, which is what is happening.
Justice– or protection from it– is purchased on the neoliberal’s “free market”, just like every other commodity or service. Although it is rather pricey, the ROI can be phenomenal. Apparently nothing is sacred, or is safe from the “free market” in our system.
The right to destroy the earth from pollution, the right to take extreme risks of bankrupting the U.S. and world economies, the right of insurance companies to “make a killing” off of sick people, the right to get the country into unnecessary wars so that one can make a “killing” off of selling weapons and putting soldiers unnecessarily in harm’s way– these “rights” are auctioned off to the highest bidder, just like e.g. oil and mineral rights are.
Thanks for a great article. Your observations reveal a stark and simple truth about the complicity of our so-called watchdogs with the criminal over-world.
I notice that Joe’s comments section in the next post down is closed. But maybe using Kickstarter to get that technology solution to democracy going would be feasible, as a way of solving the problems noted by Bill in this current post? What do folks think?
Jill, there’s an effort at Indiegogo right now. In addition, other efforts are going on.