AG Holder: “Thank you Fed and OCC”

By William K. Black

The second omission in Attorney General Eric Holder’s press conference about the settlement with Citi was “Thank you Fed and OCC.” The Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) are Citi’s financial regulators. In my first installment in this series I explained Holder’s shameful failure at the press conference to thank Richard M. Bowen, III – the whistleblower who handed DOJ on a platinum platter what should have been its criminal case against a vast swath of Citi’s most senior leadership.

Holder’s Failure to Thank the Regulators

Holder also failed to thank the Fed and the OCC at the same press conference. He should have thanked them for their criminal referrals on Citi’s senior managers and their provision of irreplaceable expertise throughout the investigation. In particular, he should have praised examiners A, B & C, who the Fed and OCC detailed to the FBI so that they could serve as its in-house experts. By detailing examiners to work for the FBI they are able to receive “6 (e)” grand jury testimony and documents and explain their significance to the FBI and the prosecutors.

Holder’s failure to thank the Fed and the OCC, however, stems from a different flaw than his failure to thank Bowen. Holder didn’t thank the Fed and the OCC for the forms of assistance that I identified because the Fed and the OCC did not provide any of these forms of assistance to the FBI and the prosecutors. Holder did not even thank the Fed and the OCC examiners for their regular examination findings. Even the most mediocre examination of Citi would have documented the endemic and egregious underwriting failures in its purchase of loans and its pervasive frauds in its “reps and warranties” to Fannie and Freddie and other secondary market purchasers. It also would have documented that the examiners had put Citi’s senior managers on written notice of both findings and their promises to fix the problem. Subsequent regulatory examinations would have documented that those promises were false and that both defects had increased sharply. These regulatory actions would have made it far easier for DOJ to prosecute Citi’s senior managers.

The fact that Holder gave no “shout out” to the Fed and the OCC at the press conference, therefore, proves three facts. First, the agencies did not provide the direct aid to the FBI and DOJ that is essential to successful prosecutions against fraud epidemics. Second, the agencies’ examinations and follow-up supervisory actions regarding Citi were so poor that they failed to provide essential support to the prosecutorial effort. Third, the failure of Holder and Obama, and the regulatory leaders of the Fed and OCC to demand (and produce) the immediate restoration of the criminal referral process and to detail examiners to the FBI to support the major investigations is indefensible and ruinous. It reveals the administration’s true preferences – Bush and Obama refused to take the most basic steps to prosecute the elite banksters that led the fraud epidemics that caused the financial crisis and the Great Recession.

The only agency that the press conference says made a substantive contribution to the investigation of Citi was the Federal Housing Finance Administration (FHFA). But there is a kicker even there, for the FHFA staff involved was not the regulators, but FHFA’s Office of the Inspector General. It is the FHFA’s regulators (actually, their predecessor at OFHEO) who should have made the criminal referrals against Citi and its controlling officers because they regulated Fannie and Freddie – the primary victims of Citi’s frauds.

The Regulators’ Criminal Referrals are Essential to DOJ Success

The FBI white-collar unit has only a bit over 2,000 agents – about two per industry. That means that FBI white-collar specialists will rarely have any expertise in any particular industry and that they cannot possibly “patrol a beat.” They must wait for criminal referrals to begin to investigate elite white-collar frauds. But banks will not make criminal referrals against their CEOs. Only the banking regulators have the expertise, access, and staff to make the thousands of criminal referrals essential to prosecute sophisticated accounting control fraud schemes.

Whistleblowers can episodically alert the DOJ to aspects of sophisticated frauds. My first column in this series discussed Holder’s disgraceful approach to whistleblowers. That approach has cost our Nation enormously.

This column discusses the destruction of the vital criminal referral systems at the banking regulatory agencies that produced the greatest success in prosecuting elite white-collar criminals in history in response to the S&L debacle. In combination, Holder’s failures on criminal referrals and whistleblowers have eviscerated the ability to investigate and prosecute the banksters that led the fraud epidemics that caused the crisis. The real problem, of course, was the lack of willingness by the Bush and Obama administrations to prosecute elite banksters.

Over 30,000 Criminal Referrals by OTS

In the core years of the savings and loan (S&L) debacle the Office of Thrift Supervision (OTS) made over 30,000 criminal referrals. The referrals, and DOJ’s initial delays in prosecuting, led to enormous media and public pressure on DOJ to act on our referrals and prosecute the elite S&L frauds. This led to over 1,000 felony convictions in cases designated as “major” by DOJ. The OTS made the removal of fraudulent officers from the control of S&Ls (typically via receiverships) its top priority and assisting their prosecution our number two priority. We were the most vigorous proponents of prosecuting the elite bankers and the elite professionals that aided and abetted their frauds.

Criminal referrals begin the transfer of expertise from the agency to the FBI and the DOJ that is essential to successful investigations and prosecutions. The criminal referral explains the fraud scheme, the suspects, and provides the most important documents with tabs to guide the FBI and AUSA to the key passages.

The regulators serve as “Sherpas” for the FBI and DOJ. We do the “heavy lifting” of the investigations because we have more personnel and vastly more industry expertise, including far more experience with accounting fraud schemes that are the “weapon of choice” in finance. We also serve as the “guides” to the “summit” – the C Suite where the frauds are led.

OTS “detailed” some of our top examiners to work with the FBI for months or even years to serve as their internal experts. I assisted in the training of AUSAs and FBI agents on how to prosecute and investigate sophisticated bank frauds led from the “C Suite.” OTS officials served as fact and expert witnesses at trial. We hyper-prioritized our cases by working with DOJ to create the “Top 100” list of the most destructive frauds. Those frauds involved roughly 300 S&Ls and over 600 high level suspects. Nearly all of them were prosecuted. Despite the ability of such defendants to secure the services of the world’s best criminal defense lawyers the AUSAs achieved a 90% success rate in securing guilty pleas or convictions after trials.

By adding the regulators’ findings to its own investigations the FBI was able to dramatically increase its effective resources. There were roughly 2,500 agency examiners, supervisory agents, appraisers, accountants, and attorneys that could transfer the benefits of their expertise to the FBI and the DOJ. Each of us had substantially greater industry expertise than any FBI agent assigned to the S&L cases. At the peak, the FBI assigned nearly 1,000 agents to investigating the S&L cases out of what was then a total of 2,500 white-collar agents. Congress, over the opposition of the first President Bush, mandated (and specially funded) DOJ to hire additional AUSAs and FBI agents and assign them to prosecute the S&L frauds.

The Destruction of the Regulators’ Criminal Referral Process

During the Bush administration, the banking regulatory agencies abandoned the criminal referral coordinators that were essential to our prosecutorial successes. The agencies essentially ceased making such referrals. The OTS, OCC, and the Fed apparently made zero criminal referrals in response to the crisis. The FDIC is smart (and cynical) enough to refuse to answer the question. The Obama administration, despite my recurrent demands, has done nothing public to restore the criminal referral coordinators and make criminal referrals and the support of prosecutions a top agency priority. The current OCC head has explicitly refused to make supporting criminal prosecutions an agency priority. The Fed has suffered from the leadership of three of the most notorious opponents of criminal prosecutions – Alan Greenspan, Ben Bernanke, and Timothy Geithner. The N.Y. Fed was the worst of the worst under Geithner’s leadership and the Financial Crisis Inquiry Commission (FCIC) noted that it was at its absolute worst in its refusal to regulate Citi.

The Evisceration of the FBI’s and DOJ’s Capacity

Because of reassignments in response to the 9/11 attacks and later security threats the total number of FBI white-collar agents available today is roughly 2,000.   The Bush administration refused to allow the FBI to hire agents to replace those that were reassigned to national security. The FBI also changed its priorities – making national security tasks priorities one-through-nine. That understates, however, the evisceration of the FBI’s capacity to investigate effectively sophisticated financial accounting frauds for several reasons.

  • The destruction of the criminal referral system from the regulatory agencies
  • The FBI’s drastic downgrading of the priority of investigating even the most devastating financial fraud
  • The transfer of the FBI white-collar specialists that the FBI leadership considered most competent to national security, and
  • The transfer of the FBI white-collar specialists that the FBI leadership considered to have the best accounting and financial expertise to national security – precisely the skill set that is also most vital to successfully investigating and prosecuted sophisticated accounting control frauds by banking leaders

The assignment of 1,000 FBI white-collar agents to investigate the highest priority S&L frauds was obviously an extraordinary commitment of resources to a single industry that had total reported assets of only a bit over $1 trillion by 1992. By comparison, each of the four largest U.S. banks now has greater assets than the entire S&L industry in 1992, and the fifth and sixth largest banks today are each nearly as large as the entire S&L industry in 1992.

In his press conference announcing the settlement with Citi, Attorney General Holder boasted that the Department of Justice (DOJ) task force going after the largest U.S. banks’ frauds had 200 total personnel (many of whom work only part-time for the task force). DOJ claimed at the press conference that it had reviewed “nearly 25 million documents” in the Citi civil case alone. (Do the math, and consider the credibility of even that claim.)

Relative to the S&L debacle, we have today less than one-fifth the criminal investigative resources and no counterparts to the thousands of expert S&L regulators conducting their investigations under orders to make the support of criminal prosecutions a top priority. All those investigators and prosecutors are working cases on only one of the three fraud epidemics – the secondary market sales – and they refuse to prosecute even when they find what Holder described as “egregious” fraud that contributed “mightily” to the crisis. This would be bizarre if it were a serious prosecutorial effort because it would allow the most culpable banksters to defraud with impunity. No serious prosecutorial effort would ignore the twin epidemics of mortgage origination fraud by lenders – as Holder and Obama have done.

Instead of the hyper-prioritization of prosecutions in response to the S&L debacle the combined prosecutorial record of the Bush and Obama administration against the elite banksters who led the three fraud epidemics remains .000. It isn’t that they lost the cases – they refused to prosecute the any elite bankster for the frauds they led that drove the financial crisis. People did go to prison for mortgage fraud, but they were typically “Fred and Mary” cases that would, overwhelmingly, never have been brought had the FBI and DOJ prioritized their cases.

The Bush administration was even worse on this point – providing only 120 total FBI agents to investigate mortgage fraud as late as FY 2007, refusing to create any national task force, and assigning none of those agents to investigate any of the major frauds. Bush’s epic failures, however, provide no defense of Obama and Holder’s refusals to prosecute or even condemn the fraud epidemics.

The obvious question is whether the current crisis, caused by the three most destructive epidemics of elite financial frauds in history, is so much smaller than the S&L debacle that it warranted Bush’s and Obama’s Bush League provision. The S&L debacle was contained by the regulators and prosecutors before it could cause even a mild recession. Its total resolution cost was $150 billion. The current crisis caused the Great Recession and cost the U.S., according to the latest estimates by economists, $21 trillion in lost production. (A trillion is a thousand billions.) It also cost over 10 million Americans their jobs. Both of those losses are significantly larger in the EU. Even if we ignored the EU and ignore the loss of jobs (which we should not do) that would mean that the current crisis imposed costs that were 140 times larger than the S&L debacle.

The staffing levels provided by the Bush and Obama administrations to investigate and prosecute the banksters that drove the current crisis are farcical – and everyone involved knows that they are farcical. The result has been the greatest strategic failure in the FBI and DOJ’s history of dealing with elite financial frauds. A fraudulent CEO of a major bank knows that he can loot “his” bank with impunity.

By Failing to Restore Criminal Referrals and Encourage Whistleblowers Holder Has Crippled Investigations and Prevented Prosecutions

When Frontline began conducting its research on bank frauds during the crisis (for the program “The Untouchables”) it found that dozens of whistleblowers were eager to aid their investigation – and that the FBI had never contacted any of them. Sources from within the FBI revealed to Frontline that the FBI also failed to conduct other routine investigative techniques essential to being effective.

Economists of all stripes believe in “revealed preferences” – “actions speak louder than words.” The (in)actions of Holder and his predecessor under Bush, Attorney General Mukasey, roar. It is not simply that DOJ has failed to prosecute – it has failed to take the most basic steps essential to conducting effective investigations. It has refused to restore the essential criminal referral system by the banking regulatory agencies and it has refused to make a real effort to enlist a national movement of whistleblowers against the elite banksters who caused the crisis

Without the expertise that only regulators and whistleblowers can provide the FBI and the DOJ are left adrift. If you do not have expertise in the industry you will often fail to recognize the fraud schemes. Economists did not understand the accounting control fraud schemes that drove the second, far more destructive, phase of the S&L debacle.

“The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (Akerlof & Romer 1993: 60).

Even experts in the industry often fail to understand accounting control fraud schemes. Vincent Kaminski, the honest and exceptionally competent head of risk analysis at Enron explained recently:

“There is one particular book I wish I had read in the early days of my business career, which would have saved me and the firms I worked for a lot of money.

Many companies that have eventually gone bankrupt have been very successful at projecting the image of unstoppable success for a long time

The book, entitled The best way to rob a bank is to own one: how corporate executives and politicians looted the S&L industry, was written by William Black, associate professor of economics and law at the University of Missouri-Kansas City. It is based on his experience as a regulator of savings and loans (S&L) institutions during the S&L crisis of the 1980s and early 1990s. Within its pages, Black introduces the concept of ‘control fraud’ – effectively, a very simple recipe for great riches and limited civil and criminal liability.”

There are several examples from the current crisis demonstrating that these failures to understand accounting control fraud make effective investigations and prosecutions impossible.

“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”

I wrote, twice, to Wagner to explain that in his sentence “they” refers to the senior officers and “themselves” refers to the bank. It makes perfect “sense” (disregarding ethics for the moment) for the CEO to become wealthy through the “sure thing” of looting the bank. Wagner never responded or corrected his obvious error. Holder has put Wagner in charge of a key Bank of America investigation even though Wagner does not believe the officers of a bank would ever deliberately make or buy bad loans. Note that this is precisely what Bowen documented at Citi – yet Holder still does not understand the fraud epidemics or the crisis because he has no clue about the “recipe” for accounting control fraud by a loan originator or purchaser.

To their credit, the FBI realized by 2006 that the organization and lack of prioritization made failure certain and proposed to Attorney General Mukasey that he form a national task force with far greater investigative resources that would prioritize investigations of the largest home lenders. Mukasey refused, claiming that the mortgage fraud cases were the equivalent of “white collar street crime.”

Mukasey was, of course, correct, but he missed one key point. He was the one that assigned the FBI to investigate only the smallest cases, those provided by criminal referrals for mortgage fraud made by the banks and so their investigations rarely found major frauds.

The other example is a deliberate deception that exploited the DOJ’s and the FBI’s lack of industry fraud expertise. With no infusion of expertise from the regulators the FBI became so desperate for financial industry expertise that it formed what it refers to as a “partnership” with the Mortgage Bankers Association (MBA) in 2007 – the trade association of the “perps.”

The MBA pulled off the extraordinary con of the FBI by manufacturing a fictional “definition” of “mortgage fraud” under which the (is anyone surprised?) the bank CEO and the bank are always innocent victims. The con worked brilliantly. The FBI and DOJ repeat endlessly, with no critical thought, the MBA’s faux definition of “mortgage fraud” under which accounting control fraud cannot exist.Indeed, the FBI press release announcing the MBA partnership embraces the definition and portrays the industry – at a time when 40% of the loans it was originating were fraudulent “liar’s” loans and its leaders were extorting appraisers to inflate appraisals – as the blameless victim of mortgage fraud. The FBI and DOJ, therefore, never look for accounting control fraud – just as a zoologist will never join a hunt for unicorns.


If Holder is not praising the federal financial regulatory agencies for their critical role in aiding the prosecution of Citi’s senior managers then there is an obvious logical corollary – the heads of those regulatory agencies should be fired today and the acting directors who replace them should immediately restore the criminal referral process and make the support of prosecutions of the elite banksters a top agency priority.

3 responses to “AG Holder: “Thank you Fed and OCC”