Obama's Mortgage Crisis Working Group Falls Short Of Billing

02/12/2013 01:32 am ET | Updated Feb 12, 2013
  • Sam Stein Senior Politics Editor, The Huffington Post
  • Ryan Grim Washington Bureau Chief, The Huffington Post

WASHINGTON -- Hours before last year's State of the Union address, the Obama administration offered The Huffington Post an exclusive. During his speech, President Barack Obama would announce a new law enforcement unit aimed at exposing and prosecuting financial fraud behind the housing crisis. The unit would be co-chaired by New York Attorney General Eric Schneiderman, a progressive champion who'd been pressuring the White House to get tougher on banks.

"This is a big achievement and something the entire progressive advocacy community wanted [with respect to] housing policy," a White House official said back then.

A year later, progressives said they consider the panel a disappointment and, possibly, a diversion to placate Schneiderman and homeowner advocates. The Justice Department said it doesn't know what the fuss is about.

"You described it as a unit that was announced to great fanfare," said Tony West, the number three man in the Justice Department, in an interview. "A lot of people have the misimpression that this is some type of prosecutorial department that was set up. What the working group is is exactly that. It is part of the financial fraud enforcement task force. It doesn't stand alone."

People could be forgiven for the misunderstanding. During his State of the Union address in 2012, Obama announced that the "special unit" of federal prosecutors and state attorneys general would investigate "the abusive lending and packaging of risky mortgages." The unit, he added "will hold accountable those who broke the law ... and help turn the page on an era of recklessness that hurt so many Americans."

Schneiderman's working group, critics said, has not lived up to that billing.

"I do not see much of a result," said former Rep. Brad Miller (D-N.C.), a bank critic who was considered by Schneiderman as a possible executive director of the working group. "It certainly has not had the ambition that it was touted as having a year ago. And it's certainly not had the resources that it was touted as having. It has certainly not been the core commission of this financial crisis."

The unit, known officially as the Residential Mortgage-Backed Securities Working Group, was not without accomplishment. At the time it was announced, Schneiderman was withholding his support for a settlement between the U.S., state attorneys general and banks. The administration offered a deal: If he would drop his opposition to the settlement, he'd be granted additional investigative resources as part of a new unit that the president would unveil during the biggest speech of the year.

The White House said, "'We have to calm down the left. Let's create this thing and have another bite of the apple,'" said a high-level source familiar with the task force's development.

But anyone who has bobbed for apples knows they can be tough to bite. Shortly after the deal was announced, Iowa Attorney General Tom Miller, the lead advocate of the settlement and a Schneiderman rival, said publicly that his New York counterpart had been taken for a ride. Indeed, the deal came with an inherent catch-22: Schneiderman's leverage had come from his resistance to the settlement. Once he agreed to it, he found himself with less power. Top progressives interviewed for this story who know and like Schneiderman offered the same conclusion: He got played.

Some within the progressive housing advocacy community were unconvinced from the beginning that the working group would meet expectations. To alleviate concerns, Schneiderman had promised that if it fell short, he'd resign in protest.

"He very clearly said, 'If I've been played, I can resign. I will resign to call attention to the lack of ambition, the lack of authority of this task force,' but that is a pretty extreme step," said Miller. "Every Democrat in the country was supporting the Obama administration and urging progressive critics to hold their fire lest they elect Mitt Romney. It was probably politically impossible for Schneiderman to do that. It would've been self-immolation."

Asked for comment on the criticism of the working group, Schneiderman showed no interest in resigning or backing down. "Our legal actions are part of an unprecedented collaboration to bring accountability for the misconduct that led to the collapse of the housing market. No matter what obstacles or bureaucratic challenges we bump up against, we will continue to press forward aggressively," Schneiderman said in a statement to The Huffington Post.

In its first months, the working group suffered several hiccups. The first was an absence of resources -- money and staff -- to conduct thorough investigations. When staffers eventually arrived, the task force still had to confront a haphazard inter-agency framework and leaders with wildly different approaches. A lack of cohesion between the groups and the absence of a single figure to, as the high-level source put it, "herd cats" made it difficult to build strong cases.

Early on, the working group had a reserve of good will. "There were articles at the time from people who seemed to be in the know -- Mike Lux, Bob Kuttner, R.J. Eskow -- saying let's give this securitization task force a shot," said Miller. "This could be the core commission of this financial crisis, the thorough high-profile investigation that never happened."

Today, those liberal champions have soured.

"We all wanted more resources applied to this," said Lux, a Democratic strategist who served as Obama's liaison to the progressive community during the transition. "We all wanted Schneiderman to work with DOJ because DOJ could provide the resources. We all thought it was good that there was this effort. We were demanding a deeper and broader investigation, and we thought we got one. It turned out they didn't give that to us."

"I think Schneiderman is an honorable and a strong advocate, so I think he's been enormously frustrated by the barriers put up around him, when clearly this was a policy driven by a Justice Department that wanted to prop up the banks and an attorney general that doesn't have a pulse," said Robert Borosage of the liberal group Campaign for America's Future, who argued at the time of the settlement that the success of the unit would determine how smart a bargain it had been for progressives.

Simon Johnson, a Schneiderman backer and former top economist at the International Monetary Fund, said, "It’s hard to see the progress so far as particularly impressive."

For defenders of the task force, these criticisms are taken in stride. It takes time to carry out investigations, and critics were making judgments based off a tight calendar. Several cases were launched in the fall of 2012, suggesting that the task force may, indeed, just be revving up.

"Stay tuned," said West. "I think it has been quite a good process. If you could see the investigative matters that I know are under way and which we will see coming to fruition I think in the near-term future, and if you could sort of see the talented folks I see ... working on these matters, then maybe your view would be what mine is: that it worked out quite well."

In November, for example, Schneiderman's office filed a Martin Act complaint against Credit Suisse Securities LLC, alleging "fraudulent misrepresentations and omissions" to promote the sale of junk mortgage securities to investors. West said 15 Justice Department attorneys helped with the investigation and U.S. attorneys from around the country conducted 40 investigative interviews.

"It has worked out exactly the way, frankly, that we wanted to, which is identify those promising investigations and try to share information and data in a way that would enhance our ability to move those forward," said West.

But Borosage argued that Schneiderman would have filed the case regardless. And Miller said it was largely "copied and pasted" from a separate private lawsuit.

That same month, the Securities and Exchange Commission brought charges against J.P. Morgan Securities LLC, alleging it misled investors in residential mortgage-backed securities. The Justice Department also pointed to SEC charges against Credit Suisse Securities for misleading investors on residential mortgage-backed securities and another Martin Act lawsuit against J.P. Morgan by Schneiderman's office as evidence of the task force's growing activity.

The accomplishments that West cites may be notable. But for critics, there is always the question of whether more could have been done.

"There was a period of probably about a month Schneiderman was pushing to get the task force going, while the statute of limitations were ticking," Miller said. "He seemed to be trying to get the task force to sit down, to pick an executive director, decide on staffing. He even looked at office space himself, and he could not get a clear answer from any other members of the task force involved."

When the group did begin to ramp up, it struggled to manage different, often conflicting, objectives. The working group partner agencies include more than 10 state attorneys general offices (in addition to Schneiderman's), the SEC, the Department of Housing and Urban Development, HUD’s Office of Inspector General, the Federal Housing Finance Agency’s Office of Inspector General, the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s Office of Inspector General, the Recovery Accountability and Transparency Board, and the Financial Crimes Enforcement Network

According to those involved in putting together cases, officials at the SEC were naturally disposed to striking quick settlements rather than carrying out long-term investigations. The Justice Department, meanwhile, was worried about shaking a recovering housing market and fragile banks.

Lux, in particular, pointed an accusatory finger at working group co-chairman Lanny Breuer, the assistant attorney general for the Justice Department's Criminal Division, who has said he will leave his post next month.

"Lanny wanted to go back to a law firm that represented banks after he was done," said Lux. "He didn't want to prosecute the banks." After struggling with whether to be quoted leveling such a personal charge, Lux became comfortable with his gripes. "Come to think of this, this can all be on the record. I don't give a f--k."

Breuer did not respond to an email request for comment. But in a September 2012 speech before the New York bar, he did express worry that "innocent employees" could lose their jobs if indictments caused a bank to fail.

"In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders," Breuer said. "Those are the kinds of considerations in white-collar crime cases that literally keep me up at night and which must play a role in responsible enforcement."

Breuer's sleep notwithstanding, West said that the working group aggressively follows the evidence regardless of where it leads. "We don't hesitate to be aggressive, to be creative, to be careful but resolute in bringing cases against institutions or individuals that we need to hold accountable," he said when asked about Breuer's prosecutorial philosophy. "It's as simple as that."

Or not so simple. After the interview, a Justice Department representative who sat in on the interview, emailed HuffPost a section of the U.S. Attorney's Manual on "collateral consequences." It says, "Prosecutors may consider the collateral consequences of a corporate criminal conviction or indictment in determining whether to charge the corporation with a criminal offense and how to resolve corporate criminal cases."

Whether driven by Breuer's presence or not, the working group suffered from what the high-level source called "leaked leverage." With different actors wanting slightly different outcomes, it closed cases that may have potentially been made bigger. Among those cited include one last month, when the Office of the Comptroller of the Currency and the Federal Reserve reached a $8.5 settlement with 10 U.S. banks on charges of foreclosure abuses.

West said that members of the working group were aware the OCC settlement was in the works and had "discussions and conversations" about it. He insisted it's too early to judge the working group based on the settlements of the past year. On several occasions, he said he was unable to discuss the cases being currently put together, raising the tantalizing prospect that something impressive is coming. The Justice Department also noted that there are more than 200 lawyers, investigators and analysts now helping the working group do its investigative work, including a coordinating team of 12 based in D.C. that includes criminal prosecutors and FBI investigators.

This article has been updated with further discussion of New York Attorney General Eric Schneiderman's early comments on the working group.

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