Wall Street's Fraud of the Week Club

In April 2006, while Goldman was preparing an RMBS backed by Countrywide loans for securitization, a Goldman mortgage department manager circulated a "very bullish" equity research report that recommended the purchase of Countrywide stock. Goldman's head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded "If they only knew ..."
- Annex 1, "Statement of Facts," Goldman Sachs/U.S. Department of Justice, April 11 2016

"In his capacity as Vice President of Credit-Risk -- Quality Assurance at Wells Fargo, Lofrano executed on Wells Fargo's behalf the annual certifications required by HUD ... Moreover, Lofrano received Wells Fargo quality assurance reports identifying thousands of FHA loans with material findings -- very few of which Wells Fargo reported to HUD."
- Department of Justice press release, April 8 2016

A $5.1 billion fraud settlement from Goldman Sachs, a $1.2 billion fraud agreement with Wells Fargo - and that's just from the past week. Over the last several years banks have paid an estimated $200 billion in fraud fines and settlements. How many settlements, how many billions, will it take to convince some fact-resistant pundits and politicians that there is an epidemic of fraud on Wall Street?

When a gullible equity research outfit recommended that investors buy into Countrywide, a Goldman executive who knew what was being kept secret wrote: "If they only knew."

No matter how hard some politicians and press try to persuade us otherwise, the evidence shows that the banking community is rife with unpunished fraudsters. Its political influence, however, apparently remains undiminished.

The latest Goldman Sachs settlement is a case in point. While the settlement documents are somewhat obscure and difficult to read (as is typical in agreements of this kind), the facts are incontestable.

Simply put, the people at Goldman Sachs lied - a lot - to investors. The settlement included "a statement of facts to which Goldman has agreed," meaning that its high-priced lawyers aggressively negotiated each and every word. Despite those efforts, at least some of the ugly truth comes through loud and clear. Some excerpts:

"Between December 2005 and 2007, Goldman, Sachs & Co ... securitized thousands of prime, Alt-A, and subprime mortgage loans and sold the resulting residential mortgage-backed securities ("RMBS") for tens of billions of dollars to investors nationwide ... Goldman ... made representations to investors in offering documents about the characteristics of the underlying loans and Goldman's process for reviewing and approving loan originators ...

"As described below, in the due diligence process, Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized, and Goldman also received certain negative information regarding the originators' business practices ...

"Between September 2006 and 2007, certain Goldman-sponsored RMBS included a number of loans purchased from conduit originators that, at the time of securitization, had been "suspended" by Goldman. Goldman's offering documents for those RMBS transactions did not inform investors that loans purchased from suspended conduit originators had been included in the RMBS."

Translation: Goldman Sachs repeatedly sold mortgage risk to investors by claiming that it was making sure these mortgages were being written according to strict rules - even when it knew that they weren't, and that a lot of the mortgages were in fact not what they claimed.

That's fraud, plain and simple. And it gets worse. In the case of Fremont Investment & Loan, a loan originator, Goldman Sachs didn't just fail to disclose Fremont's bad underwriting to investors. When it learned there was a problem, Goldman "undertook a significant marketing effort" to tell investors exactly the opposite - that Fremont had a "commitment to loan quality over volume."

A lot of people must have colluded in that fraud, but no executives have been indicted at Goldman Sachs. Nor have its leaders exhibited any shame. They have participated in charity events (including the Clinton Global Initiative), and Goldman has a strong presence in the presidential race. One candidate was paid six-figure sums to give speeches at Goldman Sachs. Another received a Goldman Sachs loan for his Senate campaign and is married to one of its executives.

Apparently fraud doesn't carry as heavy a stigma as it once did.

Goldman Sachs still seems to have political clout, too, because that reported $5.1 billion settlement isn't all it's cracked up to be. As the New York Times reports, that figure is overstated by an estimated $1 billion. The watchdog group Better Markets estimates that as much as half of this settlement will be tax-deductible - meaning that taxpayers will once again foot the bill for Goldman Sachs fraud. And, as Alan Pyke reports in Think Progress, some of the actions called for by this agreement will actually benefit the bank.

As Better Markets' Dennis Kelleher noted, "a $5 billion settlement is meaningless unless it is publicly disclosed how much money was made from the illegal conduct and the total amount of investor losses." Kelleher also points out that the statement of facts is incomplete, that the settlement amount is trivial when compared to Goldman's net revenue, and that "every single individual at Goldman who received a bonus from this illegal conduct not only keeps the entire bonus, but suffers no penalty at all."

There's not much deterrent effect in that.

Wells Fargo's $1.2 billion fraud settlement seems almost small compared to Goldman's. But the real world damage is big enough. The settlement agreement outlines a pattern of fraud and deception in Wells Fargo's administration of a government plan called the "Direct Endorsement Lender" program. Wells Fargo made certain promises in return for the right to directly underwrite and certify mortgages for FHA insurances. Then it systematically broke those promises.

The Justice Department's fraud agreement with Wells Fargo says that a bank executive named Kurt Lofrano failed to report underwriting problems, as he was required to do, despite being told about thousands of such problems. But Lofrano still works at Wells Fargo, according to his LinkedIn page, with the same responsibilities.

But then, it's not unusual for government settlements of this kind to identify culpable individuals without any follow-up or prosecution. In a 2009 settlement with GE, after that company misled investors, the SEC concluded that "GE, acting primarily through senior corporate accountants, engaged in knowing or reckless fraudulent activities resulting in numerous materially false and misleading statements," and that "the conduct of GE involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements ..."

No indictments followed, despite the SEC's identification of unnamed "senior corporate accountants" who participated in GE's fraud.

The fraud committed at these companies contributed significantly to the 2008 financial crisis, and led to countless foreclosures and other household tragedies. Yet their CEOs still hobnob with the powerful, and even lecture the rest of the country on economic matters. The public sees them every day on television and in the newspapers.

Why? For one thing, these institutions are all "too big to fail" - with all the economic and political power that phrase implies.

Despite the evidence, many people still see these banks and the people who run them as respectable corporate citizens. In the words of that unnamed Goldman Sachs executive: If they only knew.