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Hold Banks to Account for Their Role in Crisis

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This article originally appeared in The Sacramento Bee on September 11, 2011.

Three years ago this week, the financial system came unhinged. In rapid-fire succession, one major financial institution after another crumpled as years of recklessness on Wall Street and regulatory neglect in Washington took their toll. Before it was over, the federal government had committed trillions of dollars to bail out the nation's largest banks and the economy was in tatters, with gnawing questions remaining about what went wrong and who was responsible.

The unraveling had dire consequences. Twenty-four million Americans are unemployed or unable to find full-time work, with wages as a share of gross domestic product at the lowest level since the 1930s. Meanwhile, the banks barely skipped a beat, with compensation at publicly traded Wall Street firms reaching a record $135 billion in 2010.

Sadly, there has been too little progress made so far in fixing our financial system so that it works for all Americans, not just the titans of finance, and there have been few consequences for those who drove our economy over the cliff. To turn the page, we must vigorously pursue financial wrongdoing to deter future malfeasance and seek just compensation for those who were harmed by violations of law. This isn't about settling scores; it's about righting wrongs and learning the lessons of history.

To date, we have seen few criminal prosecutions and too many civil enforcement cases settled for pennies on the dollar with no admission of wrongdoing. Yet, buttressed by the investigations of the Financial Crisis Inquiry Commission, the Senate Permanent Subcommittee on Investigations, and various enforcement agencies, there is now a rising tide of legal actions seeking redress from banks that acted improperly. Some of the cases are beginning to lap up onto Wall Street's doorstep.

The states' attorneys general are pursuing claims against banks for their "robo-signing" of court affidavits in foreclosures and for servicing abuses against homeowners seeking to modify their loans. That effort could bring a settlement of $20 billion and reforms of bank practices.

The Federal Housing Finance Agency has sued 18 banks for misleading Fannie Mae and Freddie Mac about risky loans in mortgage securities that the banks sold to those entities, resulting in more than $30 billion in losses. Evidence uncovered by the Financial Crisis Inquiry Commission indicates that the banks knew but failed to disclose the fact that many of those loans did not even meet the stated standards of the lenders that originated or securitized them.

The Federal Housing Administration is suing Deutsche Bank for recklessly approving 39,000 mortgages for government insurance, in blatant disregard of whether borrowers could pay back the loans. Prosecutors have acknowledged that more banks may be under scrutiny.

And investors have launched a barrage of litigation against banks for their actions in selling them risky mortgage securities that quickly soured. By one count, there are at least 90 such suits seeking nearly $200 billion. Among the plaintiffs: insurance giant AIG, still largely taxpayer owned, is suing Bank of America and is reportedly readying cases against Goldman Sachs and others.

These actions hold out the possibility of recompense and reform in the wake of disturbing breaches of ethics. Yet, the path to successful conclusion is by no means certain.

The banks named in these lawsuits will spare no expense in the legal fights ahead. After all, they spent nearly $52 million in the first quarter of this year just on federal lobbying to protect their interests. They have powerful political allies like Sen. Richard Shelby of Alabama, the Banking Committee's ranking Republican, who has called the effort by the state attorneys general to help beleaguered homeowners a "shakedown." Eight Republican attorneys general have weighed in, raising objections to a settlement that would provide principal reductions to homeowners.

The banks are reportedly demanding that any settlement in this case come with a broad release for wrongdoing committed in originating, packaging and selling the disastrous mortgages at the heart of the financial collapse.

Perhaps most troubling is a growing chorus in the financial arena suggesting that holding the banks financially responsible for their actions might sink the banks and the financial system. These concerns are misplaced. The 10 biggest publicly traded U.S. banks have tangible common shareholder equity in excess of $600 billion, with the regulators able to require more if needed. Their profits topped $62 billion in 2010. They are healthy enough to be paying billions of dollars each year in dividends and to have given out $464 million in collective compensation last year to the top five executives at each of those banks. Moreover, the legal system is likely to balance these concerns as plaintiffs have clear incentives to seek maximum recoveries without precipitating bankruptcies. In any event, money isn't the only remedy: Reforms of corporate governance and bank practices can provide meaningful change.

It's critical that the banks not be given an unlimited pass for past transgressions - to ensure that the truth of what happened to our country is revealed and justice is not short-circuited by financial power. To date, front-line public officials appear to be holding firm. For example, Illinois Attorney General Lisa Madigan, a leader in pursuing cases to help homeowners harmed by bank abuses, recently made it clear that any settlement with the attorneys general will not include the broad waivers the banks are seeking.

When the Financial Crisis Inquiry Commission issued its final report in January, the commission made it clear that its report should not be the end of the examination of the financial crisis, given there was still much to investigate and fix. Let's allow our system of justice to work. After all, while the nation's megabanks may be too big to fail, they aren't too big to be held accountable.

Phil Angelides served as the chairman of the Financial Crisis Inquiry Commission, which conducted the nation's official inquiry into the financial and economic crisis. He previously was California's state treasurer. Reach Angelides at pa@angelides.com.