Last Wednesday, nearly lost in the furor over Rupert-gate and the debt ceiling crisis, came the surprising news that the Federal Reserve has issued a cease-and-desist order against a too-big-to-fail bank. The bank was Wells Fargo, which was also fined $85 million and ordered to compensate customers it had unfairly — indeed, illegally — taken advantage of during the subprime bubble.
What made the news surprising, of course, was that the Federal Reserve has rarely, if ever, taken action against a bank for making predatory loans. Alan Greenspan, the former Fed chairman, didn't believe in regulation and turned a blind eye to any and all subprime abuses. His successor, Ben Bernanke, is not the ideologue that Greenspan is, but, as an institution, the Fed prefers to coddle banks rather than punish them. That the Fed would crack down on Wells Fargo would seem to suggest a long-overdue awakening.
Yet, for anyone still hoping for justice in the wake of the devastation wrought by the financial crisis, the news was hardly encouraging. First, the Fed did not force Wells Fargo to admit guilt — and even let the company issue a news release blaming its wrongdoing on a "relatively small group." The $85 million fine was a joke; in just the last quarter, Wells Fargo's revenue exceeded $20 billion. And compensating borrowers isn't going to hurt much either. By my calculation, it won't top $20 million and is likely to be far less.
Most upsetting of all, the settlement raises the question that just won't go away: Why can't the federal government prosecute financial wrongdoers?
I realize that the Federal Reserve can't bring a criminal case (and, to be fair, there are statutory limits on how big a fine it can levy). But the Justice Department can certainly prosecute. Yet ever since it lost an early case against two Bear Stearns fund managers in 2009, it has gone after only the smallest of small fry: individual borrowers, brokers and appraisers who lack the means to do much more than plead guilty.
In March, for instance, I wrote about the sad case of Charlie Engle, the ultra-marathoner, who was convicted of lying on a liar loan — that is, exaggerating his income on a subprime mortgage application — even though the evidence against him was thin. Prosecuted by Neil H. MacBride, the U.S. attorney for the Eastern District of Virginia, Engle was sentenced to 21 months in prison.
Now compare Engle's alleged crime to the case the Federal Reserve brought against Wells Fargo Financial, which, until it was shut down last summer, was the subprime subsidiary of Wells Fargo, based in Des Moines, Iowa. There were several allegations, but the one that caught my eye was that Wells employees "falsified income information on mortgage applications." In other words, they lied on liar loans! The only difference is that the lying was done by a group of Wells Fargo brokers rather than by some poor sap like Charlie Engle.
What's more, despite Wells Fargo's "bad apples" defense, this practice appears to have been quite widespread — "fostered," as the Fed puts it, "by Wells Fargo Financial's incentive compensation and sales quota programs." Matthew R. Lee, the executive director of Inner City Press/Community on the Move and Fair Finance Watch, spent years bringing Wells' subprime abuses to the attention of the Federal Reserve. "They ran storefront lending offices that were one step above pawnshops," he says. "The way the compensation was designed insured that abuses would take place. It was a predatory system."
These are exactly the kind of loans — built on illegal practices — that gave us the financial crisis. Brokers working for subprime mortgage companies routinely doctored incomes to hand out subprime loans they knew the borrowers could never repay — and then, after taking their fat fees, shoveled the loans to Wall Street, which bundled them into subprime securities. This was the kindling that lit the inferno of September 2008. So again, I ask: Why is there no criminal investigation into what went on at Wells Fargo Financial?
The person I called for answers was the press secretary to Nicholas A. Klinefeldt, the U.S. attorney for the Southern District of Iowa, which includes Des Moines. A glance at Klinefeldt's 2011 news releases suggests that he takes the MacBride approach to mortgage fraud: Only the little guy has anything to fear. Needless to say, his press secretary knew nothing about the Wells Fargo case and even questioned whether the Southern District of Iowa had jurisdiction, despite the company's long tenure in Des Moines.
The next day, he referred me to a Justice Department spokeswoman. I wrote her an e-mail laying out my question as plainly as I could: "I am trying to understand why the mortgage brokers who work at a major bank are getting a pass when they have lied on liar loans," I said.
That was Friday. On Monday, at 8:30 p.m., a half-hour from press time, the Justice Department sent me a statement claiming that in 2010 "the number of defendants in mortgage fraud cases more than doubled" from 2009.
Not one of those defendants ever worked for Wells Fargo Financial.
© 2011 New York Times News Service