JPMorgan Chase CEO Jamie Dimon (Credit: Reuters/Yuri Gripas)
A year ago, President Obama gestured toward the first lady’s box at the State of the Union address at Eric Schneiderman, the attorney general of New York. Schneiderman had just agreed to co-chair the Residential Mortgage-Backed Securities working group, an initiative between state and federal law enforcement officials and bank regulators, designed to investigate and prosecute fraudulent Wall Street activity that led to both the creation of the housing bubble and its collapse. In exchange, Schneiderman dropped his objections to a settlement over some of the banks’ fraudulent post-crash activity, particularly around fraud in foreclosure processing.
Recentprofiles of this event have called last night’s State of the Union the “anniversary” of the formation of the working group. But you can’t really have an anniversary of something that never existed in the first place. There never was a Residential Mortgage-Backed Securities working group, never a so-called task force dedicated to ferreting out Wall Street fraud — the deceptive origination of mortgage loans, sale of worthless mortgage-backed securities for huge sums, and subsequent unloading of toxic debt to unsuspecting buyers. The working group fails to exist as a tangible entity to this day. What does exist is the same years-old Financial Fraud Enforcement Group that serves as a conduit for press releases about investigative actions already in progress.
Schneiderman’s “task force” (a generous appellation) was merely a politically motivated shell organization grafted onto that public relations strategy. This was evident almost from the moment of the announcement, but the coalition of self-proclaimed bank accountability advocates, who had backed the administration into a corner over the lack of prosecutions, decided to align with Schneiderman and his kabuki task force, losing whatever leverage they may have had. If those same groups who feel “betrayed” and “lied to” had stayed on the outside and shamed those in power into action, we would probably have more accountability today.
Within a few months of the State of the Union announcement, a hearing in the House Financial Services Committee confirmed the essentially invisible nature of the task force. Maxine Waters, then a senior member of the committee and now the Democratic ranking member, asked Robert Khuzami, then the head of enforcement for the Securities and Exchange Commission, whether the entity had sufficient resources to investigate. Khuzami replied that the agencies involved – the SEC, the New York AG’s office and the Department of Justice – were supplying the resources. No new dollars were dedicated to the effort. When Waters asked when the task force would hire an executive director, Khuzami said they hired a “coordinator” to facilitate inter-agency activity. Specifically, he uttered this incriminating evidence: “We hired a coordinator, but most of the investigative work being done here is not really being done by a staff that belongs to the task force, it’s being done by the individual investigative groups that make up the task force.”
This is the key point. There are no offices, no phones and no staff dedicated to the non-task force. Two of the five co-chairs have left government. What “investigators” there are from the task force are nothing more than liaisons to the independent agencies doing their own independent investigations. In the rare event that these agencies file an actual lawsuit or enforcement action, the un-task force merely puts out a statement taking credit for it. Take a look at this in action at the website for the Financial Fraud Enforcement Task Force, the federal umbrella group “investigating” financial fraud. It’s little more than a press release factory, and no indictment, conviction or settlement is too small. The site takes credit for cracking down on Ponzi schemes, insider trading, tax evasion, racketeering, violations of the Americans With Disabilities Act (!) and a host of other crimes that have precisely nothing to do with the financial crisis. To call this a publicity stunt is an insult to publicity stunts.
Consider the first of the few major cases to specifically come out under the aegis of the RMBS working group. New York A.G. Schneiderman brought a suit against JPMorgan Chase over Bear Stearns’ fraudulent misrepresentations of mortgage-backed securities to investors. The case, filed nine months from the start of the non-task force (but, strategically, one month before the presidential election), borrowed liberally from private litigation brought against Bear Stearns two years ago by the mortgage bond insurer Ambac. The lawyer who authored that case, Karla Sanchez, left Ambac’s law firm, Patterson Bellknap Webb and Tyler, and went to work as an executive deputy attorney general for one Eric Schneiderman. In other words, the big case from the vaunted “task force” was basically written two years earlier, by a lawyer working in Schneiderman’s office, with virtually no new information added to the claims. Schneiderman could have filed this case any day over the last two years, without a scintilla of outside participation. Subsequent cases also appear cribbed from either private litigation or existing investigations, and include little that’s new or noteworthy.
This P.R. effort served the interests of everyone involved except the interests of justice. The Obama administration desperately wanted to complete the settlement with the biggest banks over the ongoing activity of foreclosure fraud, and wanted to get a growing outcry for holding bank fraud accountable under control before the election. Schneiderman wanted the president’s seal of approval, and to project a positive image among progressives for “going after” the banks. The banks wanted to settle as much of their liability as possible, protecting their profits and keeping executives out of jail. They all got what they wanted.
The progressive groups who paid lip service to seeking bank accountability didn’t get what they claimed to want. But they should have thought of that before jumping in with Schneiderman and offering unreserved praise for the un-task force before it even began to reveal itself as a fake. The day of the announcement, the Campaign for America’s Future, MoveOn.org, the New Bottom Line, the AFL-CIO, the Campaign for a Fair Settlement and more all sent out glowing press releases touting the president’s leadership and the tremendous opportunity presented by the task force. MoveOn called it “the biggest victory yet for the 99%.” This was farcical. The announcement collapsed the unified front against the foreclosure fraud settlement, which has delivered little meaningful relief to families and no accountability to Wall Street. The task force never even got started. These groups are now justifying their misjudgment by claiming Schneiderman “got played.” Schneiderman doesn’t see it that way; he said definitively that he would leave the task force if he found it unworkable, and yet he’s not only sticking around but approvingly speaking of its efforts. Someone got played, but it wasn’t Eric Schneiderman.
Maybe these groups who claim to be interested in accountability should have recognized the value of what pressured the White House to set up the diversionary tactic of a task force in the first place: public shaming. Last month’s Frontline documentary “The Untouchables” has had arguably more of an impact on reviving moribund financial fraud cases than anything else. Within a couple of weeks of its premiere, the head of the criminal enforcement division, Lanny Breuer, announced he would step down. Then, DoJ suddenly decided to sue credit rating agency Standard and Poor’s over its conflict of interest in rating clearly fraudulent securities as safe assets, a case it had been investigating for two years. You can view this as an accident of timing; it seems more like a direct response. Shaming has done far more than a pretend task force, though that’s admittedly a low bar. You would think outside pressure groups would have recognized the virtue of outside pressure instead of trying to play an inside game.
President Obama didn’t mention the task force in this year’s State of the Union, though he did say that homeowners now “enjoy stronger protections than ever before.” He also made reference to a Burmese man, who, in reference to a presidential visit to Rangoon, reportedly said, “There is justice and law in the United States. I want our country to be like that.” Hopefully they don’t get news about the “task force” in Rangoon; I wouldn’t want to burst the man’s dreams.
David Dayen is a freelance writer based in Los Angeles, CA. Follow him on Twitter at @ddayen.MORE DAVID DAYEN.