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The Real Crooks Are The Ones Who Perpetrated This Scam – Not The Shareholders

Haters of the big banks cheered when Federal prosecutors decided to sue Bank of America (NYSE: BAC), alleging that they defrauded Fannie Mae and Freddie Mac of at least $1 billion.

But they shouldn't have. Because no matter how satisfying it might be to see justice done after the financial crash of 2008, the truth is the real crooks have already gotten away.

Now four years later, the only people that will suffer will be the bank's unfortunate shareholders, not the bad guys who perpetrated the scams that cost a fortune during the mortgage meltdown.

After all, this wasn't the first lawsuit filed against Bank of America in this mess.

Last year the Federal Housing Finance Agency filed suit against the bank for similar offenses. And in February the bank agreed to a $1 billion settlement of a case brought by the Brooklyn attorney's office claiming fraud on guarantee claims against the Federal Housing Agency.

Also in February, the bank and five other mortgage lenders combined to agree to a $25 billion settlement of claims over mortgage fraud.

Now, according to estimates by Credit Suisse, the final cost to Bank of America of all the lawsuits relating to mortgage fraud during the bubble will come to around $40 billion.

And guess where that will come from?…

Not from Bank of America's top management, nor from the loan officers and other middle management who actually perpetrated the frauds.

Instead, it will come out of the pocket of Bank of America shareholders, who are almost entirely innocent of any wrongdoing.

The Worst Take Over Deal of All-Time

The irony is that those shareholders did not even unwittingly invest in a bank that was doing dodgy deals. Almost all the lawsuits and losses come out of Countrywide Financial, a very much more aggressive operation, bought by the foolish Bank of America CEO Ken Lewis in January 2008, under the impression that the combined bank would then be able to dominate the mortgage market.

That has to be just about the worst takeover deal of all time, by any company – and there have been some lulus.

Mind you, if the suit is accurate in describing Countrywide's behavior, a lawsuit appears highly justified.

Countrywide imposed a process called "the hustle" on its mortgage approval process, under which bonuses linked to the quality of loans were replaced with those based solely on volume. What's more, experienced underwriters were removed and replaced with "data entry clerks" and instituted a process to "remove the roadblocks."

This "hustle" produced a mortgage pool that was 57% defective, according to an internal study.

However nobody at Bank of America was pushing Countrywide, then an independent company, to engage in sleazy lending practices. That was the job of its CEO Angelo Mozilo.

Mozilo, who made around $600 million from bonuses and the sale of his company to Bank of America, paid a mere $72 million to settle charges against him, and has since walked away scot-free to enjoy his lucrative retirement.

The Real Crooks of the Mortgage Crisis

There are other guilty people in the mortgage crash of 2008, notably those who set up the insane system by which the federal government essentially guarantees most mortgages and established two private sector companies to run the system and make profits from it.

Both Fannie Mae and Freddie Mac were involved in accounting scandals a decade before the crash, yet they were allowed to continue growing while the relevant Congressional pooh-bahs – notably former Senator Chris Dodd (D-CT.) and Rep. Barney Frank (D.-MA) – blocked any attempt to reform them.

So incestuous was the system, that Dodd even got a special-terms "Friends of Angelo" home mortgage from Countrywide.

And then, in an unbelievable exhibition of chutzpah, Dodd and Frank got their name on the 2,000 page legislation to reform the system after the crash – a reform which, needless to say, has added to the U.S. financial system mountains of bureaucracy and almost no additional soundness.

The disgrace is that none of the top honchos involved have gone to jail.

Not Mozilo, not Dodd, not Frank. Not Jon Corzine, whose brokerage MF global had $1.8 billion of customer funds suddenly "disappear."

Instead, prosecutions have focused on the little guys, the retired Army sergeant described by the Financial Times, who tried to flip houses in Nevada using forged mortgage documents and has been sentenced to 15 months in prison.

Yes, small-time crooks need to be prosecuted, and there were plenty of them. But there have been no successful prosecutions against the big-time crooks who ran the system – and let's not forget those like Goldman Sachs' trader Fabricio Toure who used subprime mortgages as a tool to stuff dozy European banks with billions in losses.

Under the current system, only Bank of America shareholders, mostly entirely innocent of wrongdoing, look likely to suffer.

As a former "insider of insiders" London merchant banker, I can tell you that's not right.

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  1. Dan | November 7, 2012

    Why isn't Clinton's roll in the housing boom and bust more widely publicized? Without his orders to issue sub-prime mortgages, we wouldn't be in this mess.

  2. Jerry PittmaN | November 7, 2012


  3. anthony | November 7, 2012

    only in america?

  4. Martin | November 7, 2012

    Marvellous article, thank you. However I do feel that shareholders deserve the hit too. As soon as banks started offering 100% mortgages it was clear that they were off the rails, and probably guilty of criminal negligence.

  5. Don Broomall | November 7, 2012

    Any dam fool blaming shareholders is ill informed, the crooks are the directors.

  6. fallingman | November 7, 2012

    Oh come on.

    What…shareholders are deaf, dumb, and blind? If they haven't clued into BofA's serial stupidity and serial criminality by now, they deserve to lose money.

    BofA is a cesspool and has been for a long time. If Ken Lewis's idiotic Countrywide acquisition and the inherited fraud liability were the only thing we were talking about here, you could make a case for feeling sorry for the shareholders, even though that deal screamed "STUPID" on its face. But it isn't.

    They've been in the middle of so many sleazy deals and criminal operations you literally need a scorecard.

    Here's a start.

    And how about that Merrill acquisition where they paid maybe 15 times too much for what's amounted to a ship's anchor? Could have had it for a couple bucks a share had they waited…what…24-48 hours?

    Hard to believe you're feeling sorry for anyone dumb enough to still be a long term investor with these clowns and mountebanks. And traders have to know the risks from all the lawsuits.

  7. walt roginski | November 7, 2012

    Let's prosecute all the crooks at every level—especially those at the highest.

  8. Tim Kyle | November 7, 2012

    Excellent article. As usual the real 'gangsters' get away.

  9. Marvin | November 7, 2012

    That's a great article Martin. It's what I've suspected all along but have never actually seen in print so eloquently.

  10. PTRio | November 7, 2012

    Martin, I respectfully disagree. BofA shareholders are not totally innocent. Granted, Ken Lewis and Angelo Mozilo were primarily responsible and held duties to shareholders to act in their best interest, and failed miserably, but shareholders of any given company hold the power to elect their leaders. They hold the power to demand the firing of those leaders, as well. In the case of BofA, shareholders elected Ken Lewis, the man behind the worst business deal in the history of business deals. You cannot excuse the shareholders as if they were totally innocent, they were asleep at the wheel. They are not innocent. And the company owners, which in essence means it shareholders, should be punished for the deeds of the leaders they elect. Only by doing so will shareholders take their responsibilities more seriously.

    If shareholders elect irresponsible and incompetent leaders, they should not be exempt from the harm that causes others, such as US taxpayers. That would only encourage less shareholder participation and supervision, which would inevitably result in more terrible business deals. Being a shareholder includes duties, not just benefits. Voting for company leadership is one of the duties. If that leadership screws up, why should taxpayers be the ones responsible for the mess and the expense?

    Given the options of holding the US taxpayer responsible, or holding shareholders responsible, to me the choice is obvious.

    • fallingman | November 7, 2012

      And hey, when you see that management is composed of fools and thieves, you can simply SELL.

    • Capt. Pete Rosko | November 11, 2012

      I'm a Bank of America shareholder but not an attorney or a CPA. I trusted the "propaganda" coming out of BoA, because I was also a long time customer with the bank. I guess, "you can't fix stupid!"

  11. remi | November 7, 2012

    It's Fabrice Tourre, not Fabricio. Known as the Fab, with a F like French and F like another word. read this:

  12. W.D.Hyder | November 7, 2012

    Most (No) investors who buy a few (hundred) shares of any co. are able to judge the qualifications of "the people they employ". That is why boards of directors do the hiring, firing & determine compensation and benefits of executives. To imagine that I could influence any of those things gives me far to much credit. Mom & Pop do not (never have) been driving the boat (ship). Yes we end up taking it in the shorts (wallet) because we are unimportant to our elected officials who answer only to their preferred lobbyists who enrich them.
    If those who would seek to defraud were left with nothing more than the least of the defrauded, perhaps, they might rethink their nefarious ways.

  13. robert | November 7, 2012

    Shareholders who act like sheep get sheared.

  14. dourdan | November 7, 2012

    what we have here is a couple of potential james ellroys

  15. Don Chamberlin | November 7, 2012

    Crooks like Ken Lewis, (and another Ken: Ken Lay) and stupid (or corrupt?) politicians like Dodd and Franks seem to avoid consequences for their greed or ineptness. The petty thief who steals a few bucks to buy baby food gets locked up. Lewis, Dodd, and Franks have effectively starved more babies and destroyed average people and all the petty thieves combined. All should be punished. This kind of smugness by business leaders gives all business, and all success, a bad name and has led to the class warfare we are now experiencing in this country. Sad.

  16. bob | November 7, 2012

    so how do we make some money off of ba?buy some puts?

  17. Ron J | November 7, 2012

    We labbeled…TADDLETAILERS to shame them We called them draw the wrong attention… without them…we all lose. Think about all the people who would have exposed this stuff if they were not afraid of what WE would have done to thier lives. Another sample….Poor areas of towns….don't tell because they are outed…so crime is more rampant…..0pps….white collar crime .IS..not rampant is it……..(not)

  18. Julio Cárdenas Avilés | November 7, 2012

    Las grandes empresas buscan que sus acciones estén dispersas en miles de accionistas ubicados en diversos lugares del orbe, el motivo principal es manejar la empresa con un pequeño grupo de accionistas bien ubicados hacía propósitos "bien estudiados". Una forma de mantener felices a sus accionistas es con los dividendos, estos solo miran los dividendos y el precio de la acción en la bolsa, mientras este creciendo no se preocupan de nada más.

  19. uberengineer | November 7, 2012

    Seems to me getting smaller returns for the next year or 2 will simply balance out the fact that they were receiving EXCESSIVE returns before, only made possible by the fraudulent activities of the banks.

    What is it about American capitalists, that they will try to argue that no matter how "dirty" the money they "earned" is, they should still get to keep it?!?!?

  20. David Mortimer | November 7, 2012

    Keep the anger going, Martin. We are doing your work for you over here in Australia. We have found S&P guilty of negligence in a case brought against them and AMB Amro. Cracks are appearing, your turn.

  21. J hopson | November 7, 2012

    Good article. There was a basketball team of bad players, but the "Michael Jordon" of bad players team was Fannie and Freddie. Their massive political contributions kept the bad conduct alive. Take them out of the game with the ball, game over and none of this. When the Feds control all, look to the Feds for causes. Start with Criis Dodd and Barney Frank and their stonewalling of common sense Fannie and Freddie balance sheets and financial projection requirements.

  22. Richard | November 8, 2012

    Your comment,"Under the current system, only Bank of America shareholders, mostly entirely innocent of wrongdoing, look likely to suffer. "

    Very thought provoking article!!! More than just the shareholders were the loser as a result of this jobbery. The biggest losers were home buyers. Many of them probably are still in their homes and have large amounts of negative equity. While shareholders have some equity, what little that may be. The jobbers were highly reward for their scam.

  23. Mark | November 8, 2012

    Truly sad because Angelo Mozilo deserves to be in Jail. When Countrywide was ripping everyone off nobody cared and Countrywide was so bold they even withheld homeowners insurance checks from Katrina victims. Dept of Justice must have a guilty conscience and so they should.

  24. Steve | November 8, 2012

    Bush is to blame. Ask Obama and all who showed up to support him.

    • Howard | November 11, 2012

      Youve got to be kidding. This mess was ordered by Clinton in order to increase home ownership numbers regardless of ability to pay. He needed the numbers to cover his budget shortfalls and he told freddie & fannie to cover the loans regardless of credit worthness. Bush should have shut it doown but he had 9/11 to deal with

  25. Kristen M | November 9, 2012

    Great article — exactly as I had pieced it together but I never saw it written up like that… it is great to see someone with your knowledge state it …clearly! Now I can show it around!! IT's alll so CRAZY MAKING…especially that Mozillo wasn't even charged with anything! I did read Congressmen got special loans from Countrywide …but I can't believe they are ALL Corrupt! BUT WHO should have brought charges against him? Anyone know?? SEC or ?? Ditto on the other companies exposed via 60 Minutes etc.! Why isn't there more outrage expressed against the lack of cases against these folks? At least if Mozzillo went to jail, that would show SOMETHING was done! As to BofA stockholders…why punish them??….likey mutual funds bought BofA for lots of 401K accounts etc… MAINLY though, seems like fining a COMPANY CANNOT *PREVENT* FUTURE CHEATING/CRIMINAL BEHAVIOR, eh? IF WE PUT THE RESPONSIBLE PARTIES IN JAIL, that MIGHT ACTUALLY PREVENT THE NEXT SCAM, EH? Alot better than punishing stock holders… Surely some laws were broken…BUT WHO WAS SUPPOSED TO CHARGE THEM? Was it the SEC or who? And why didn't they?? Thanks for any answers…please…it just drives me nuts to think of the injustice …..I wonder why SOME NEWSPAPER's FRONT PAGE doesn't show a statement like this, updated everyday with a new number: "NNN DAYS, AND COUNTING, THAT NO ONE HAS YET BEEN TRIED FOR THE MORTGAGE-FRAUD CRISIS HERE IN USA" …?

  26. constance harris | November 11, 2012

    And what about the families who were left homeless! They should ALL be put back into their homes and only required to pay their property taxes for however long they wish to dwell in the homes.They were doomed the second the pen hit the paper! Captilism-A fraudulent economic system that insures excessive financial gain by which a greedy m*th#%f`#^er, cleverly (cleverly being the key word) preys amongst the unlearned, docile sheeple and their hard earned wages, creating an extremely unbalanced society that initially results in chaos, war, increased taxes, increased power of government, increased regulations, tyranny and oppression of every class.

  27. Steve P | November 11, 2012

    The truth was being told about Slick Willie (Clinton) long before Bush took office. I have to go with Dan on this one. Bill should have never opened the flood gates. This great talker helped get our current Pres elected one more time. Where's the credibility? Oh yeah, Clinton also let Osama Bin Laden slip through the crack to become the worst terrorist of all time!

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