While Congress is now hard at work trying to figure out who is to blame for the deepening financial crisis, it seems quite obvious that lots of folks in Washington dropped the ball. I am shocked that collectively the federal agencies failed to spot the warning signs of massive and growing fraud in the home mortgage industry. Clearly, there was a trail out there that led directly to Wall Street. Lots of folks in Washington were asleep at the switch. The Connecticut Attorney General Richard Blumenthal has been ahead of the curve in dealing with corporate fraud. He had this to say on the subject of fraud in the financial institutions’ matter:

The failure to connect the dots is completely reprehensible and should now lead to strong and effective indictments and prosecutions for fraud.

Over the last five years, evidence of widespread fraud and deception in the home mortgage business was presented to the FBI, the SEC and the Federal Reserve Board chairmen, Alan Greenspan and Ben Bernanke. Unfortunately, none of these presentations resulted in a comprehensive or coordinated federal reaction. I have to wonder – if our firm, which has been involved in civil litigation with a number of these financial institutions, knew about how bad a number of these companies were – why didn’t the government regulators and specifically the Bush Administration know? Our litigation was widely reported by the media and was no secret.

In July, 2007, a coalition of civil rights groups met with Federal Reserve chairman Ben Bernanke in Washington, D.C., to present concerns that minority homeowners were being particularly hard hit by predatory lenders whose tele-marketing schemes resulted in hundreds of thousands being tricked into mortgages they could not afford. Ultimately, thousands were forced into foreclosure.

Evidence of widespread fraud emerged in discovery conducted in the civil law suits brought against a number of mortgage brokers affiliated with Lehman Brothers. If our law firm and others knew that there were serious problems in the mortgage industry, how could this have been ignored in our nation’s capital? In fact, we wrote about the problems in this Report. There was no follow up or real interest from the FBI or the federal prosecutors in pursuing criminal cases even though there were verdicts and settlements made public in a number of civil suits.

Now the FBI is finally conducting criminal investigations involving allegations of fraud involving Lehman Brothers and other major Wall Street financial institutions. The government learned very late in the game that suspect mortgage brokers had been repackaging bad loans and selling them as high-interest paying investments to banks around the world. The corporate bosses had felt there was nobody to regulate them and that they could get away with anything with no fear at all of the consequences.

Perhaps, the Securities Exchange Commission should bear the largest share of the blame because it has direct jurisdiction over such investments. They failed to take action to stop the sales of these flawed investment instruments to the public in general. However, it may be that the underlying real estate transactions at issue may have been “done entirely outside the regulatory authority of the SEC.” It’s almost certain now that a number of Wall Street’s CEOs – past and present – will face criminal prosecution. One lesson the government has learned the hard way because of this mess is that the “voluntary regulatory program” simply won’t work. That was the Bush-Cheney-McCain approach to dealing with the sub-prime lenders and we are now paying for the lack of regulation they espoused.

Source: Associated Press, Bloomberg and Reuters

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