WASHINGTON -- President Barack Obama vowed during Tuesday's State of the Union Address to establish a new financial crimes unit dedicated to investigating and prosecuting "large-scale" financial fraud. By naming New York Attorney General Eric Schneiderman to the squad, Obama put enormous pressure on the outspoken Wall Street critic to join a foreclosure fraud settlement that Schneiderman has frequently rejected as overly acquiescent to the financial establishment.
As a political statement, Obama's announcement marks a change of rhetorical tone from an administration that has been reluctant to directly criticize Wall Street. But the Obama team's weak record on Wall Street fraud -- and the presence of two big-bank-friendly regulators on the panel with Schneiderman -- cast doubt on whether the new enterprise will be able to take serious action against the big banks instrumental in the 2008 meltdown.
"We will also establish a financial crimes unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments," Obama said. "I am asking my attorney general to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans."
Earlier in the speech, Obama ripped bankers for gorging themselves on risky practices that plunged the economy into recession.
"It was wrong," Obama said, referring to the financial impropriety leading up to 2008. "It was irresponsible. And it plunged our economy into a crisis that put millions out of work, saddled us with more debt, and left innocent, hard-working Americans holding the bag."
Such bluntly critical language marks a rhetorical shift for Obama. Although the president's relationships with Wall Street have been strained for years, he has not actually spoken out against the banking establishment in speeches or interviews outside of a late 2009 interview with CBS' "60 Minutes." During that interview, Obama criticized " fat cat bankers" who had received bailout money and then lobbied against Wall Street reform. Financial elites reacted vehemently to the interview, and by the end of 2010, Obama was defending the bonuses paid out to JPMorgan Chase CEO Jamie Dimon and Goldman Sachs CEO Lloyd Blankfein, praising both as "savvy businessmen."
Where it comes to enforcing laws against financial abuse, neither Obama's Securities and Exchange Commission nor his Department of Justice have been aggressive with big banks. Obama has already established a specialized financial crime unit -- the Financial Fraud Enforcement Network, a coalition of law enforcement agencies created by executive order in November 2009. The group's official bio cites its raison d'etre as, "To hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening."
But the existing task force has not taken significant actions against the big banks that sparked the crash, instead focusing on much smaller players.
In the aftermath of the savings and loan crisis, more than 1,100 bankers were jailed for financial fraud. But since the 2008 crash -- a far greater financial calamity -- nobody working for one of the six largest banks has been criminally prosecuted for financial crimes tied to the meltdown. And while the SEC has settled several civil allegations of malfeasance with big banks, the agency has accepted relatively small amounts, earning the ire of some federal judges in the process.
The head of enforcement at the SEC, Robert Khuzami, who was previously the top lawyer at Deutsche Bank, has been castigated repeatedly by homeowner advocates and by federal Judge Jed Rakoff for inking settlements viewed as too lenient on big banks. Khuzami will share authority with New York's Schneiderman on the new task force announced during the State of the Union Address. Justice Department deputy Lanny Breuer, a former top white-collar crime defense attorney for the high-powered Washington, D.C., law firm Covington & Burling will also be on the panel.
For more than a year, the Obama administration has been urging state attorneys general to reach a settlement with the nation's five largest banks over allegations of widespread fraud in the foreclosure process. Schneiderman has objected to the deal at almost every level, insisting that it offers banks too much legal immunity for serious wrongdoing, and fails to address other financial improprieties in the sale of fraudulent mortgages and the packaging of those loans into bonds.
In addition to the new crime unit, Obama announced he's "sending [to Congress] a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low interest rates." The refinances will be funded by "a small fee on the financial institutions" to ensure that the program does not add to the deficit while also giving “banks that were rescued by taxpayers a chance to repay a deficit of trust.”
Leveraging the nation's unusually low interest rates is a good economic strategy, said Mark Zandi, chief economist at Moody's Analytics. "If homeowners are able to pay a lower interest rate on their mortgage, they pay less in mortgage interest, so it frees up cash for them to spend on other things. So, it's literally just like a tax cut, with new money that will find its way into the economy."
However, a large-scale refinance program could flounder if the government doesn’t require bank participation, said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. "The banks don't always play along the way you want them to, so if their participation is voluntary, that's a problem."
The refinance strategy has been tried before by Obama. In 2009 he introduced the Home Affordable Refinance Program to help homeowners who were "underwater," that is, they owed more on their mortgage than their home was worth. When first introduced in 2009, Obama projected that HARP could help 4 million to 5 million borrowers. As of last fall, only a half-million had refinanced through the program. Hoping to increase program efficacy, Obama loosened the eligibility criteria last October. It is likely that tonight's announcement is a further expansion of that program.
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