Should the government aim its sights on corporate banks or the individual executives who run them?

  • Both (70%, 16 Votes)
  • Banks (22%, 5 Votes)
  • Individuals (9%, 2 Votes)

Total Voters: 23

The United States government filed a civil suit against Bank of America (BofA) for numerous bad loans government-backed finance companies acquired from Countrywide in 2008. Countrywide allegedly engaged in a scheme to sell thousands of fraudulently underwritten mortgages to Fannie Mae and Freddie Mac (Frannie).

Countrywide pushed loans through a program called The Hustle. The aim was to pass off egregiously substandard loans to Frannie. Ultimately, taxpayers were left responsible for billions in defaults.

How is this program different from those chastised under the industry settlement? The Hustle, short for HSSL (High-Speed Swim Lane), was initiated in 2007. The program’s motto was “move forward, never backward.” BofA purchased Countrywide in 2008 but kept the practice up until 2009. Mortgage defaults began to increase. By 2008, more than a third of Countrywide’s loans were defective, compared to the 5% industry standard.

Countrywide intentionally removed internal controls (known in the industry as tollgates) designed to root out risky borrowers and maintain underwriting standards. Countrywide also intentionally removed trained underwriters and replaced them with inexperienced processors.

Prosecutors claim these less qualified underwriters manipulated loan forms by putting in higher income amounts for borrowers so the loan would qualify for Frannie’s increased purchasing standards. These bad practices are not particularly new. However, the massive scale and continuance under BofA is unprecedented.

Prosecutors seek to recover $1 billion in penalties from BofA. The complaint is brought under the federal False Claims Act (FCA), allowing for triple damages. The case has unsealed a whistle-blower lawsuit against BofA by an ex-vice president who was repudiated for objecting to The Hustle scam.

BofA officials and Frannie have begun to discuss accountability for the billions of dollars in failed loans leading to the financial crisis. Frannie’s demands for loan refunds, also known as put-backs, have increased to $12.3 billion from the previous quarter.

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Lawsuits against banks are numerous, but few cases target individuals. Executives conspire in programs like the hustle, not “entities.”

For instance, the former chief executive officer (CEO) of Countrywide Financial paid $67.5 million to settle a civil fraud case with the Securities and Exchange Commission, but never faced criminal charges.

The true criminals get off Scott-free, while smoking gun evidence piles up against them because a corporation can be sued as a person. The only problem with trying a corporation as a person is that it becomes a scapegoat upon which greedy executives – the truly guilty ones – can dump their due punishment. Purging the guilty parties from their respective offices will help to prevent fraudulent practices from occurring again and protect the economy.

Unfortunately, the likelihood of this taking place is nil, as evidenced in case history thus far. The only action that’s been taken has been to appease the public. It’s merely a charade to show the populous the government is doing something.

Those hungry for justice will likely starve. That’s because there is a systemic flaw in the collusion of the government with the financial giants: they depend on one another for their very existence.

The Treasury Department estimates that roughly $19 trillion in housing wealth was demolished due to these profligate lending practices. Of course, this doesn’t even begin to account for the aggregate losses to GDP due to the employment crisis. To make lenders pay for this wrong doing would wipe them from the face of the earth. Now, while that may sound like an enticing proposal to some, it is unfortunately untenable in practice.

Since we will never be paid back with cash, it seems reasonable to take our pound of flesh.

Re: U.S. Accuses Bank of America of a ‘Brazen’ Mortgage Fraud from the New York Times and Bank of America Sued by U.S. Over Mortgage Loan Sales from Bloomberg