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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