Big Banks Could Face Mortgage Fraud Charges
The SEC appears to be on the verge of doing what the Justice Department has yet to attempt — prosecuting the biggest players responsible for the mortgage securities fiasco that trashed the U.S. economy.
The securities watchdog has sent so-called Wells notices to Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Fargo (WFC), indicating that the agency may recommend enforcement proceedings against the banking firms. The investigation seems to focus on whether the companies misrepresented the quality of securities based on subprime mortgages that they bundled and sold to investors in the years leading up to the 2008 financial crisis.
A move by the SEC to file suit would represent the federal government’s strongest legal measure to date against Wall Street banks in connection with the mortgage meltdown. Despite ongoing investigations, the Justice Department so far has refrained from filing criminal charges against the firms for their role in the housing crash. It also ended related investigations into the country’s biggest subprime lenders, including Countrywide Financial, IndyMac, and New Century Financial, after deciding not to prosecute the firms.
Lanny Breuer, head of the criminal division at the Justice Department, in December defended his agency’s record of pursuing financial fraud in an interview with CBS TV program “60 Minutes.”
“If a company is intentionally misrepresenting on its financial statements what it understands to be the financial condition of its company and makes very real representations that are false, we want to know about it. And we’re gonna prosecute it,” he said.
One explanation for the lack of federal prosecutions is that regulators have concluded that big banks’ mortgage practices during the housing boom may have been reckless or unethical, but stopped short of being illegal. It isn’t against the law to sell securities that go bad so long as firms don’t do so knowingly. Criminal suits also face a higher burden of proof than civil cases. So prosecutors may not have brought charges out of concern that they couldn’t make them stick.