Justice Department Finally Gets Around to Suing Bank Of America For Helping Wreck the Economy

Impact

In a civil suit filed yesterday, the Department of Justice alleges that, on the cusp of the 2008 financial crisis, Bank of America (BoA) committed fraud by knowingly selling $850 million in toxic mortgage-backed securities. The megabank intentionally overstated their value while suppressing any evidence to the contrary, giving us yet another picture of the futility and unaccountability of a self-regulating financial system.

Even in 2008, a lot of rules and procedures went along with selling mortgage-backed securities, many of them industry-mandated policies meant to deter fraud. For example, BoA-Securities provided investors with a variety of tapes, tables, and statistical information (collectively known as Preliminary Marketing Materials) which established the securities' value. The $850 million of securities, which were acquired by BoA in 2007, showcased all of the tell-tale signs of having what the industry refers to as "origination" problems, i.e. fabricated household incomes, job titles, and other factors that may have resulted in riskier loans.

Warning of such problems, which would drastically affect the value of the securities, required further investigation through a process known as Loan Level Due Diligence, which would have, in this case, established the inherent risk in the securities. Over the protests of its own internal Due Diligence Group, the DOJ argues that BoA intentionally avoided any further investigation of the securities, saving themselves $15,000 in expenses and protecting their ability to sell the securities with a straight face. In addition, BoA neglected to tell investors that they had not even directly acquired the vast majority of the securities (70%) themselves but had instead purchased them wholesale through a third-party mortgage broker, which even in 2008 were known to deal in riskier securities.

Investors, pension funds, and federally-insured financial institutions, most of which thought they were making safe, long-term investments, ended up losing approximately $100 million after buying what Bank of America's own CEO once referred to as "toxic waste." In its defense, Bank of America released a statement saying that the "Prime mortgages were sold to sophisticated investors who had ample access to the underlying data" ... or, in other words, the victims really should have known better.

As both sides prepare themselves for a what will no-doubt be a multi-year litigation battle, the Department of Justice is making clear that the American people can expect many more such suits from President Obama's Financial Fraud Enforcement Task Force. Whether or not this marks a policy shift for the Obama White House, which has in the past been more sheepish in its prosecution of fraud in high-finance, remains to be seen. Just last year, the Justice Department opted not to prosecute HSBC despite compelling evidence of their role in an international money-laundering scheme, believing that any successful prosecution would drastically harm the bank and thereby threaten the global financial system. Bank of America shares are down 1% since the news broke yesterday; however, they are up 97% over the past 12 months. I guess you can say that so far they are doing just fine.