That pesky problem of actually having to prove in court that banks committed fraud and actually having the case survive on appeal

Image courtesy of Adobe Stock
Image courtesy of Adobe Stock

A hurdle that keeps popping up when the U.S. or other governments take a banker to trial is being able to prove the case in court. Now the pesky issue is surfacing of having a case survive on appeal.

5/23 – Wall Street Journal – Bank of America Penalty Thrown Out in Crisis-Era “Hustle” Case / Appeals court says government didn’t prove case, bank doesn’t have to pay $1.27 billion – The ongoing challenge of all the allegations of bad behavior in the banking world before the Great Recession continues to face the little bitty problem of actually proving cases in court.

Take a look at the latest collapse of a government case.

The Second Court of Appeals threw out a conviction of Bank of America for mortgage fraud. The government claimed civil fraud for mortgages sold to Fannie Mae and Freddie Mac on the basis that the loans turned out to be of a lower quality than promised. The appeals court ruled that was a breach of contract but does not meet the threshold for civil fraud.

The court pointed out what to me are scary implications – a material breach of contract could be turned into a civil fraud violation.

What makes this an even more troubling loss is this now-invalid conviction was the blunt instrument the feds used to push a $16.65 billion settlement from Bank of America.

Making this even worse is the bad behavior was from Countrywide, which BofA bought in the middle of the financial crisis, possibly or likely or perhaps at the urging of the feds to keep the failing company from completely collapsing.

What would have happened if BofA knew this case wasn’t going to survive on appeal? Would they have reached the $16B settlement?

This now-overturned conviction was also a major threat looming over the head of all of the other banks giving them motivation for their multi-billion dollar settlements.

What would’ve happened if all the other banks knew this case would collapse on appeal?

5/23 – Wall Street Journal – Why Bank of America Won – Knowingly selling Fannie and Freddie bad mortgages wasn’t bad enough to count as fraud – Article explains why this case didn’t involve fraud. When Countrywide entered into the contract to sell loans to Fannie and Freddie, they promised the loans would be at “investment quality.” When the economy fell apart the loans they delivered were not considered to be of that quality. The court found that to be breach of contract, not fraud.

Description provided by the author is that when times are good, people can make lots of promises about what they’re going to do later. When the market falls apart making it hard to keep his promises or very expensive to do so, people may break their promises.

That is not fraud.

That is a breach of contract.

So for those who think there should be lots of bankers in jail and lots of companies that have been hit even harder for penalties, keep in mind there is that very serious problem of actually proving a case in court. Even more important is having a case strong enough to survive on appeal.

5/24 – WSJ Opinion Journal – The Real Mortgage Fraud – Video discussion goes over the case.

Here is one question in the background that is interesting. I have not seen it discussed anywhere else on this case or in general.

Did Fannie and Freddie and Ginnie know they were buying subprime mortgages?

Did they know they were getting less than “investment quality” mortgages? Discussion in the video suggests they did. That would be a fascinating question for enterprising reporters to pursue.

5/24 – Wall Street Journal– The Bank Fraud That Wasn’t / A federal appeals court overturns a politicized mortgage case. The editorial page weighs in on the collapsed case.

The appeals court also tossed the $1M fine against a Countryside Financial executive. Editorial closes with wondering where she goes to get her reputation back. Perhaps a public apology from the feds would be a good start.

Article suggests this entire case was an effort to placate those who want to see bankers in jail. A civil fraud conviction was a good start. The only problem is if you want to see banks pay up you have to actually prove the case.

I haven’t dived into the court records and I certainly haven’t looked at any of the loan files. The editorial asserts the loans that went into the sales packages were in fact prime loans.

One paragraph summary of the entire “fraud”:

Countrywide did rush loans through its mortgage pipeline that turned out to be bad credit risks. But it did so in part because Fannie and Freddie were in a rush to buy them. They were hardly innocent victims.

Editorial points out that the judges declared the government did not even try to prove intent. They didn’t even aim for anything other showing Countrywide did not fulfill their contractual requirements. Yet that counts as fraud today.

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