By Charles H. Green
If you’ve followed this column for long, you’ve undoubtedly read my bellyaching about a personal sore subject, namely the mind-numbing inequality in the application of the “law” as it relates to large banks and their employees, versus small banks and theirs. As baffling as that sounds, trust me as a seasoned industry observer to assure you that it’s very different.
Since the financial crisis, this long-suspected condition has only become more clear due to several factors. Namely, the buying public has been largely up in arms about the financial bailouts, and wanted some blood in exchange. Part of the rulemaking assembled to deal with the crisis also armed the government with new and improved rules to combat genuine fraud and corruption. One example was by expanding the “False Claims Act” to cover federal loan guarantees, targeting those lenders filing claims for reimbursement, not the underlying borrowers who defaulted on loans.
And, for all the chorus of jeers around the Troubled-Asset Relief Program (TARP), the program landed its own Special Inspector General as a watchdog for the government’s interests over the thousands of Main Street banks that were bailed out under the program.
Hang ‘em high
The results? A field-day for prosecutors of all stripes. Thousands of bankers–community bankers, that is–have been indicted, prosecuted and imprisoned for a variety of financial sins. Some, in fact, were guilty of blatant theft, collusion, or misappropriation, borne of a fraudulent intention to personally enrich outlier bankers and their compatriots.
Others were guilty of the pitiful sin of lying about the true strength of the bank’s financial condition in a genuine effort to save it from insolvency, without the motivation of personal gain. But many of the bankers in that latter case ran out of luck before the bank’s money did, and discovery of their actions led to criminal indictment.
No one disputes that community bankers have gotten the overwhelming brunt of the personal effects of this prosecutorial muscle flexing. Big bank regulatory violations, fraud and overt criminal acts have largely been resolved with eye-popping fines paid out as the cost of doing business. And make no mistake that record-breaking profits since this crisis have easily covered these costs without even the bank’s board reprimanding management. But community bankers wind up in the slammer.
No where is this divide more evident than in two wildly contrasting stories that emerged last week that make this point crystal clear:
The first was that British regulators dropped their investigation and declared they would take no further action against Bruno Iksil, the storied “London Whale,” whose high-flying derivative contract speculation cost JPMorgan $6.2 billion in losses. In addition, the bank paid out another $920 million in fines for misrepresenting their financial position related to these losses and not having adequate controls in place to prevent their staff from overvaluing assets.
The second was about the acquittal of a Brooklyn community bank, which had been charged with 184 counts of mortgage fraud by New York City’s District Attorney, Cyrus Vance, Jr., after self-reporting suspected improper lending among its staff related to 31 loans sold to Fannie-Mae.
Big fish, little fish
Beyond the irony of how these two banks were treated in the eyes of the law, the individual bankers at the heart of the “crime” were both apparently white-hats trying to do the right thing.
According to the NYTimes, Iksil was far from being the “rogue trader,” portrayed in early news coverage, and emerges in government documents and people familiar with the evidence as a conflicted figure on the trading floor. While troubled by conscience, he tried to please the bosses who pushed him to undertake the risky derivatives trading that proved his undoing and caused the great losses. Then, as the losses mounted, he repeatedly warned his colleagues that they should be more forthcoming about their extent, to no avail.
“Four regulators in two countries investigated this thoroughly and came to the same conclusion, which is that it wasn’t appropriate to pursue any charges against Mr. Iksil,” said Jonathan B. New, his lawyer, a partner at BakerHostetler. “He cooperated fully with every investigation, and the actual facts speak volumes. The facts are often lost in the initial publicity.”
Added Jonathan R. Barr, another BakerHostetler partner, “He was never a rogue trader. The trading strategy was approved and directed by higher-ups. Making him the face of this scandal was very unfair.”
Which begs the question as to why some of JPMorgan’s higher-ups were never investigated or charged with directing such risky trading or trying to conceal the results?
Tiny bank’s surreal trip through fraud prosecution
Contrast that story with a small bank. In the heart of New York’s Chinatown, the Vera Sung, Director of Abacus Federal Savings Bank, had questions about a residential mortgage loan closing mid-December 2009, around the extra checks that were requested to be distributed to the borrower. The bank’s loan officer was witnessed outside the closing room talking furtively with the borrower, and based on Ms. Sung’s suspicions, the deal was called off.
What soon became apparent was that she had stumbled on a fraudulent scheme involving false borrower income verification and documentation. The bank’s investigation quickly determined that there were many questionable loans already booked, and the loan officer was fired shortly afterward. The discovery put an end to the scheme at the bank, but was the beginning of a five-and-a-half-year odyssey through the New York State criminal justice system
Bank officials uncovered the fraud, fired the mastermind, investigated and reported it to regulators and provided New York prosecutors with over 900,000 pages of documents. Yet by May 2012, this 31-year old bank was under indictment by a grand jury. As reported in the NYTimes, the 184-count indictment against the bank and 11 former employees, the Manhattan district attorney said Abacus participated in “a systematic and pervasive mortgage fraud scheme” that resulted in the sale of hundreds of millions of dollars of fraudulent loans to Fannie Mae, the national mortgage security packager.
Prosecutors cited 31 loans issued from May, 2005 through February, 2010. Among the charges were conspiracy, grand larceny and falsifying business records. Facing indictment and the threat of long prison sentences, eight Abacus loan department employees entered guilty pleas and agreed to cooperate with the district attorney’s investigation.
But in June, after a 19-week trial, a Manhattan jury exonerated the bank and its top two officials, Yiu Wah Wong, its former chief credit officer, and Raymond Tam, former supervisor of loan origination. The jury threw out every one of the charges.
The bank spent more than $10 million to defend itself and had to post $10 million in collateral to Fannie Mae after the indictment. While Abacus continued servicing the loans Fannie Mae had already bought, its lending capacity was vastly diminished because Fannie Mae would no longer buy any new loans.
Kevin R. Puvalowski, the bank’s lawyer (Sheppard Mullin Richter & Hampton) characterized the prosecution as a trip through Bizarro World, a comic strip universe where everything is turned on its head. “When I was listening to this trial, I couldn’t help but thinking how backwards this prosecution has been from the very beginning,”
Who, for example, was the government’s star witness against the bank? It was the loan officer fired by Abacus when the fraud was discovered. As part of a plea agreement he struck with the Manhattan D.A., he provided testimony in the case and at trial, but the jury seemed unwilling to believe a man who had been terminated for being dishonest.
Even more perplexing, was that Fannie Mae, which had bought the 31 purportedly fraudulent Abacus loans, did not lose any money on them. Rather, trial transcripts show, by early May 2015 Fannie Mae and the investors who bought securities containing the loans had earned $2.5 million in interest. Nineteen of the 31 loans have been paid off and the rest are current, court documents show.
The victim in this case was Abacus itself. The bank’s Fannie Mae contract already required it to repurchase any loans that didn’t meet Fannie Mae’s quality requirements.
The prosecutors’ claim that the bank was driven by “greed” resulted in a modest $123,000 in servicing fees on the loans.
What do you think? Comment on this page or write me at Director@SBFI.org.