Bank of America: Sued for Defrauding Government

Econintersect: Preet S. Baharara, U.S. attorney for Southern District of New York in Manhattan, has announced the filing of a civil complaint against the Bank of America (NYSE:BAC) charging the firm with defrauding the federal government. The suit was brought jointly with the FHFA (Federal Housing Finance Agency). The FHFA oversees the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The suit derives from activities at Countrywide Financial from 2007 to 2009. Countrywide was acquired by Bank of America in 2008 during the financial crisis meltdown.

The suit seeks damages of more than $1 billion from the bank. This follows the settlement of another suit by an investor group class action for $2.43 billion at the end of September. In April 2012 BofA agreed to a $2.38 billion settlement with the attorney generals of 26 states to settle another civil suit. That settlement also required BofA to provide a total of $8.68 billion in relief to individual mortgagors. Before the current claim is resolved, BofA will have agreed to pay settlements totaling $13.5 billion in compensation for fraud.

However, no criminal charges have been filed to date.

The audacity of the actions alleged is briefly summarized by a Dealbook quote from Mr. Baharara:

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope.”

How brazen was the conduct? The internal code names for the program at Countrywide were “The Hustle” and “High-Speed Swim Lane.” An internal audit by Countrywide in January 2008 found that 57% of the Hustle loans were defective. This was in January of the year after the program was started!

Here is a list of some of the Bank of America actions alleged in the complaint:

Underwriters were eliminated from the loan approval process;
Income verification was routinely missing;
Loan processors submitted unvalidated data (widely falsified, according to Bharara) into a computer automated loan processing system with no audit controls;
Employee bonuses were given for loan volume and there were no compensation factors for quality of loans;
After the January 2008 internal audit, Countrywide offered bonuses to quality control employees who could “rebut” the high default rates found in the January 2008 audit;
The program was continued after Bank of America took over Countrywide.

Fannie and Freddie packaged these loans into securities and sold the MBS (mortgage backed securities) to investors. That process used certifications from the banks that the loans met underwriting qualifications specified by Fannie and Freddie.

Editorial comment: It is a sad statement of the state of U.S. law if lying in such a brazen manner, doubling down on incentives to employees to continue fraud and to implement cover-up progams are not a felonies. Considering the widespread societal damage from the actions, they should be classified as Class 1 Felonies in the opinion of Econintersect.

These actions are among the most egregious examples of control fraud, as defined by William K. Black. Such fraud is designed to allow executives to extract illicit personal gain from the corporations they control, and to defraud the customers and clients of their company to further their personal financial interests.

Econintersect recommends recent news articles related to the criminologic character of the financial system and its relationship to government in comments by Michael Hudson and by William K. Black.

How do investors view the “punishment” of Bank of America? The stock is down pennies today, in line with the narrowly down day for the major indices. The chart year to date emphasizes the market judgment. With the stock up 68% since the beginning of the year the market is saying:

A 2012 cost of $14.5 billion in tort settlements represents the company “getting off cheaply”; and/or
The $14.5 billion is merely the cost of doing business.

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