Bank of America “Hustling” to Gather $1.3 Billion Fine

May Be Only the Tip of an Iceberg

Econintersect:  U.S. District Court Judge Jed Rakoff handed down an order for Bank of America (BofA) to pay $1.27 billion to Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) for restitution of losses from defective mortgages sold by the former Countrywide Financial Corp. which was merged into BofA in 2008.  The only individual charged in the case, former Countrywide vice president Rebecca Mairone, was ordered to pay $1 million.

The prosecution had sought $2.1 billion.  At the time of the original verdict last October it had been estimated that losses suffered by the two government-controlled mortgage companies would total about $848 million.  But during discovery in the penalty phase which ended last December a larger amount of securities were found to be  involved.  Reuters reports the total paid to Countrywide by Fannie and Freddie for the mortgages in question was almost $3 billion.  After review Judge Rakoff ruled that the prosecution could prove only loses of 43% or $1.27 billion, his final award.

An quote from Reuters in the 24 October 2013 GEI News article:

The case centered on a program called the “High Speed Swim Lane” – also called “HSSL” or “Hustle” – that government lawyers said Countrywide started in 2007.

The Justice Department contended that fraud and other defects were rampant in HSSL loans because Countrywide eliminated loan-quality checkpoints and paid employees based on loan volume and speed.

The Justice Department said the process was overseen by Mairone, a former chief operating officer of Countrywide’s Full Spectrum Lending division. Mairone is now a managing director at JPMorgan.

About 43 percent of the loans sold to the mortgage giants were materially defective, the government said.

In his ruling on damages, Judge Rakoff called the Countrywide actions “brazen“.  He wrote:

“While the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

Bank of America’s problems with mortgage fraud are far from over.  There are currently negotiations between the Department of Justice and BofA for much larger settlements than this one.  The Financial Times mentions that one case which includes misdeeds by Merrill-Lynch, also acquired by BpfA in 2008, as well as Countrywide, has settlement amounts reported in the $13 billion to $17 billion range.

Econintersect Note: GEI reader Rob Carter has submitted to us a list of bank settlements for misdeeds that totals over $200 billion to date.  While that may seem a lot it amounts to only 1.5% of the financial losses attributed to the Great Financial Crisis by Better Markets in 2012.  And in 2013 a report from the Dallas Fed estimated that the ultimate economic cost of the crisis could exceed $60 trillion.

The sad part of the story of this criminal activity is that the crooks actually only collected for themselves a small fraction of the damages they cause in the process of “pocketing their booty”.  If all the corporate profits and executive compensation were totaled for the years 2003-2008 they would certainly be only a few trillion dollars, possibly only a couple. So, if the “ill-gotten gain” was $2-3 trillion, up to ten times (or 30 times by Dallas Fed reckoning) as much financial damage resulted for the economy.  This is the kind of money multiplier we can certainly do without.

And it seems that justice for such vandalism should consist of full forfeiture of all the gains, at the very least, and criminal prosecution for the most “brazen” activities.  The result would be a deterrent to future repetition of such actions and would leave the economy only 90% in the hole instead of 99% or more as things stand today, using the Better Markets loss estimate.

Of course, if the Dallas Fed has the numbers right, the vandals profited by only 3% or 4% of the total damage they caused.  And, in that case, full forfeiture of all gain would still leave us more than 96% in the hole.

John Lounsbury

Sources:

• Bank of America ordered to pay $1.27 billion for ‘Hustle’ fraud (Jonathan Stempel, Reuters)

• Bank of America: Convicted of Fraud (GEI News, 24 October 2013)

• BofA ordered to pay $1.3bn in ‘Hustle’ case (Tom Braithwaite, Kara Scannell and Camilla Hall, Financial Times, 30 July 2014)

• Tallying the Full Cost of the Financial Crisis (Karen Weise, Bloomberg Businessweek, 14 September 2012)

• The Cost of the Crisis Caused by Wall Street = No Less than $12.8 Trillion Dollars (Press release, Better Markets, 12 September 2012)

• Global Cost of Great Financial Crisis Could Exceed $60 Trillion (Tyler Atkinson, David Luttrell and Harvey Rosenblum, Federal Reserve Bank of Dallas, GEI News, 23 November 2013)