The trial of Abacus Federal Savings Bank is finally over, and the verdict is "not guilty" on all counts. This outcome should be a tremendous relief to advocates of Wall Street accountability, and the fact that the case got as far as it did should be an extraordinary embarrassment to District Attorney Cyrus Vance and his office. As the dust settles, it's important to learn from what happened with Abacus so that regulators and elected officials avoid making the same mistakes again.
If you haven't heard of Abacus, don't worry; the bank's relative obscurity is part of what makes its story so ludicrous. Before delving into the Abacus case itself, however, it's worthwhile to remember the Kafka-esque context surrounding it, particularly the last decade's house of mirrors mortgage industry. Indeed, between 2005 and 2007 alone, somewhere between 1 and 4.8 trillion dollars in fraudulent mortgages were issued to the American people, with banks taking mortgages that they knew were at a high risk of default, repackaging them, then selling them to pension funds and other risk-averse clients as "safe" investments.
The overwhelming majority of these frauds were perpetrated by massive financial institutions, and those banks have paid civil fines to the government as punishment for their actions. But those large banks also have access to no-interest federal loans, so the money mostly goes around in a circle of non-accountability, cloaked in the same kind of intentionally confusing language that allowed junk mortgages to be resold as gold in the first place. Only one bank has been indicted in criminal court, the first criminal case to be brought against a bank since 1991. And that brings us back to Abacus.
Abacus Bank was founded in Chinatown in 1984 by Thomas Sung, a real estate developer and lawyer. Mr. Sung wanted to give Chinese immigrants who couldn't get the time of day elsewhere the opportunity to build a life and build credit. It was good business - Chinese immigrant borrowers have ten times fewer defaults than the population at large - but Mr. Sung saw it as a civic duty, never paying himself a salary or a dividend while giving thousands of Chinese immigrant families the opportunity to rise from poverty. Today he sits on the board while his daughters run the company.
It is an uncontested matter of public record that beginning in December of 2009, Mr. Sung's daughters fired a group of employees who were found to be engaging in unethical mortgage practices. The Sungs reported their findings through the proper channels and expected they would have to pay a civil fine. Instead, they found themselves at the receiving end of a criminal case that consumed over five years of the district attorney's limited resources, the only criminal case against a bank in the modern era, despite Abacus Bank's entire business representing only a minute fraction of the multi-trillion dollar mortgage market.
Adding insult to irony, the exceptionally high rate of repayment by Abacus's Chinese immigrant customers resulted in over 100 million dollars of profit for Fannie Mae. Even the District Attorney Vance, who prosecuted the case, conceded that "The irony of this case is the majority of the loans originated by Abacus have continued to perform."
In short, the only Manhattan bank to face criminal charges in the entire mortgage crisis was a tiny family bank with a founder who never personally made any money from the enterprise and which generated millions of dollars in profit the old fashioned way: through customers paying back their loans on time, with interest.
Assuming that the DA's office was not harboring some kind of animus toward immigrants or Chinese-Americans, the only explanation for its pursuit of Abacus Bank is that the real culprits of mortgage fraud were deemed "too big to indict", while Abacus was not. For this reason, advocates for accountability must make sure that the government's limited resources are directed not only towards investigating and prosecuting banks, but towards investigating and prosecuting the right banks. Otherwise, cases like Abacus will continue to send big banks the message that they are free to act with impunity - because small banks will be made to suffer in their stead.
Michael Auerbach is a Senior Vice President at the Albright Stonebridge Group and a resident of Chinatown.