Two days after the historic Citigroup settlement, Associate Attorney General Tony West outlined the Justice Department’s approach to resolving the remaining cases related to Residential Mortgage-Backed Securities (RMBS) misconduct that contributed to the financial crisis. West declared that the department would not hesitate to bring litigation against these firms if these principles were not met.
Associate Attorney General West detailed three general principles that will continue to guide the Justice Department’s approach in all future RMBS cases: accountability, transparency and redress. These principles will comprise of civil penalties, a robust statement of facts and consumer relief for the American people.
“If an institution is unwilling to admit its wrongful conduct in a statement of facts; or balks at paying a substantial penalty that reflects that conduct; or refuses to do right by those affected, then we will not shrink from litigating as long as we must to fulfill our law enforcement mandate,” said Associate Attorney General West.
Please see below for the Associate Attorney General’s prepared remarks:
Thank you, Mike [Bresnick] for the generous introduction. We miss your wise counsel at the department.
I am quite pleased to be with you here this afternoon at the Exchequer Club. For more than 50 years, this club has served as an important forum for the frank exchange of ideas on the most pressing economic and financial issues in the country. And, having spent more than two years as the nation's Associate Attorney General and more than five years as a member of this administration's Department of Justice, I particularly appreciate the opportunity to be with all of you -- an impressive group of leaders from the public and private sectors.
The people in this room are making important contributions that enrich our nation ’s economic life. You are grappling with the challenge of improving the financial health of this country -- in the work you do, the words you write, the ideas you debate and put forward. And in the wake of the Great Recession, I believe we share a common goal of ensuring that our nation is economically strong, fiscally sound and financially fair.
Today, I thought I would share some thoughts on the last of those three elements -- financial fairness -- and the Justice Department's role in helping to achieve that goal by targeting fraud in our financial system. First, I'll talk about some of our recent financial fraud efforts, and particularly the work of the Residential Mortgage-Backed Securities Working Group. Next, I'll share a couple of brief observations about how we approach these RMBS cases. And finally, I'll discuss some of the factors we consider when determining whether to sue or settle these large, often multi-billion dollar RMBS-related fraud matters.
Let me begin with the observation that much of my tenure as Associate Attorney General has been focused on executing the department's financial fraud priorities, particularly through the use of civil enforcement tools, as my office manages the civil litigation side of the Justice Department.
Part of this focus grows out of the precedent set by my predecessor, Tom Perrelli. He, along with HUD Secretary Shaun Donovan and several state attorneys general, negotiated a landmark $25 billion National Mortgage Servicer settlement with several financial institutions that was designed to bring some relief to consumers hurt by unfair and, in some cases, illegal loan servicing tactics.
And part of it comes from my own experience: I grew up professionally in the Justice Department, serving first as young lawyer on then-Deputy Attorney General Jamie Gorelick's staff in the early '90s, then for several years as a federal prosecutor in the Northern District of California where my caseload included white-collar crime.
When the president nominated and the Senate confirmed me as the Civil Division's Assistant Attorney General in 2009, I returned to the department and made, as one of my primary priorities, the aggressive use of the civil statutory authority Congress provided us to fight fraud in the pharmaceutical and health care industries. During that time, I also launched an investigation of Standard & Poor’s Ratings Services for allegedly issuing RMBS ratings that were not objective and independent.
And during 2009, that first year of the Obama Administration, you'll recall we were all preoccupied with addressing the wreckage left by the financial crisis. As part of that response, in November 2009, President Obama created the Financial Fraud Enforcement Task Force, or FFETF, on which I serve as a co-chair and which Mike Bresnick led as Executive Director before returning to private practice. And since its inception, the FFETF has brought together a broad coalition of agencies, enforcement tools and resources to fight fraud.
A critical component of the FFETF's efforts is a targeted group formed, as the president said in his 2011 State of the Union Address, to “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.” That group – the Residential Mortgage Backed Securities Working Group -- comprised of several state agencies and state attorneys general -- is charged with investigating fraud in the packaging, marketing, sale and issuance of these securities -- conduct that was a major contributing factor to the financial crisis.
To date, the efforts of the RMBS Working Group have secured $20 billion in penalties, compensation and consumer relief to investors, victims and the American people. Those results include the $13 billion resolution with J.P. Morgan last November -- the largest settlement against a single defendant in the Justice Department's history -- and a $7 billion resolution with Citibank announced just two days ago, which made history by including a record-breaking civil penalty of $4 billion.
Now, resolutions like these -- notwithstanding their record-breaking size or historic significance -- always seem to spark a debate between those who say we're being too easy on the big banks and those who say we're being too tough. To some, no penalty is high or harsh enough; to others, we insist on settlement terms that are unfairly punitive.
I welcome this debate because it is part of a long, democratic tradition of questioning the activities our government takes in the name of the people it serves. And while I am quite certain there is little I can say to persuade the most ardent partisans on either side of this debate, let me offer the following observations:
First, the RMBS Working Group settlements we have announced to date are civil resolutions; they do not preclude the possibility of criminal prosecutions. Importantly, neither the J.P. Morgan nor the Citibank settlement agreements absolve either institution or its employees from possible criminal charges. And as the recent criminal pleas of BNP and Credit Suisse – as well as the more than 37,000 individual white collar criminals we have prosecuted over the last five years – demonstrate, we do not hesitate to aggressively investigate allegations of financial wrongdoing, and, if the evidence warrants, to demand accountability. Because, as the Attorney General has said before, no institution, no matter how large, and no individual, no matter how powerful, is above the law.
Second, while most of the attention has been focused on these multi-billion dollar settlements, let me be clear: we do not investigate these matters intending to settle them. Through the RMBS Working Group, we have assembled an enforcement apparatus to vindicate those who fell victim to the financial crisis, and that apparatus continues to grow. Resolving these cases will require more than simply seeking a meeting with the Attorney General. It will require taking true responsibility for misconduct that contributed to the Great Recession, which I will discuss more in a moment. If an institution is unwilling to admit its wrongful conduct in a statement of facts; or balks at paying a substantial penalty that reflects that conduct; or refuses to do right by those affected, then we will not shrink from litigating as long as we must to fulfill our law enforcement mandate. Our RMBS-related cases against S&P in California and Bank of America in North Carolina demonstrate this, and I would not be surprised if we were to see additional RMBS lawsuits in the future.
And that observation leads me to the next topic I wanted to discuss today: those factors we consider when determining how and whether we will sue or settle a RMBS fraud case. And let me note here: I'm talking about whether we will pursue or settle a civil RMBS case against an institution, not a financial fraud case that's being considered for criminal prosecution against an institution or individual, so my comments are limited to that context.
Now, as a general matter, it should be no surprise that the primary drivers in any RMBS fraud case will be the facts and evidence of that particular case. The conduct at issue; the egregiousness of that conduct and who was involved; the quality of the evidence and what we can prove in court given the applicable law -- those are the scene-setters for any discussion about how we will resolve any given case.
And long before discussions get to my level, there have usually been months of back-and-forth conversations between the investigators and Assistant U.S. Attorneys who will try the case and the potential bank defendant to make sure our facts are right and our theory of the case is sound.
So by the time I am sitting across the table from a financial institution to discuss whether we will settle or sue, there aren't generally many facts that remain in dispute. The main question on the table is whether we will be able to satisfy three general principles that guide us in all of these cases: accountability, transparency and redress.
Let me discuss each one in turn.
First, accountability. The main question here, of course, is whether the financial institution is willing to be held accountable for the harmful conduct our investigation has uncovered. In other words, now that we have developed an evidentiary record of wrongdoing, is the institution willing to step up and accept responsibility for the unlawful activity, be it the conduct of the parent or a subsidiary?
In the RMBS-related cases we pursue, the only remedy under FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989) that the government can seek, besides injunctive relief, is a civil penalty. As many of you know, FIRREA was passed in response to the savings and loan crisis 30 years ago, and under that statute, civil penalties are our only recourse.
So it follows that in many of these cases, accountability has taken the form of record-breaking civil penalties. And our approach to calculating the appropriate penalty in any given case involves taking into account a number of factors, including but not limited to: the egregiousness and pervasiveness of the conduct, and amount of harm caused by that conduct; the strength of the evidence; whether the penalty is of such a level that it could be regarded by shareholders and management as merely the “cost of doing business”; whether the institution has failed to fully cooperate with our investigation; and whether any steps have been taken to remediate meaningfully the harm caused by the harmful conduct.
Now, some have argued that other considerations, such as a firm’s market share, should outweigh the facts and evidence in a given case. We disagree. While a firm's market share footprint may be among the informational data points we consider, it is not determinative. The facts and evidence of a particular case -- they are what will ultimately matter the most.
Let me turn to the second principle, transparency. In every RMBS Working Group case where there is a negotiated resolution short of trial, we will demand a statement of facts in which the institution admits the conduct at issue.
Attorney General Holder has made this a non-negotiable term of every RMBS Working Group settlement for two reasons: First, it's an important component of accountability. It requires the institution to articulate to its own employees, its shareholders and to the public that it engaged in conduct that is both unacceptable and wrong. Second, it explains to the American people what our investigation uncovered and allows them to see for themselves the building blocks of our case against the institution.
In both JPMorgan and Citibank, the Attorney General and I believed it was imperative for each institution to acknowledge publicly its conduct, and we believe that obtaining a statement of facts in any negotiated resolution is as important as any monetary penalty.
Finally, let's talk about redress.
As we all know, the packaging up of defective loans into mortgage backed securities, and the misrepresentations made to investors about the quality of those securities not only caused financial losses to investors; it contributed to the near-collapse of our entire economy. Millions of Americans who had no idea what an RMBS was felt the pain of this conduct. Families lost homes. Communities were ravaged by foreclosures. You had neighborhood streets that had vacant house after vacant house, like a mouthful of missing teeth. This debacle hurt everybody.
So when the president announced the formation of the RMBS Working Group, he gave it two main objectives: seek accountability where the facts warrant, and pursue efforts to remediate the harm where possible.
That is why the pre-trial resolutions of these cases to date have contained, as a major element, relief for consumers. In the J.P. Morgan resolution, we insisted on the bank providing $4 billion of relief to underwater homeowners and potential homebuyers, including those in distressed areas of the country. Half of that total will go towards forgiveness and forbearance of principal for qualifying homeowners who are currently paying a mortgage. The other half will go towards rate reductions or refinancing, low-to-moderate income and disaster area lending, and neighborhood stabilization programs.
In the Citibank settlement , we have required $2.5 billion in consumer relief. In addition to loan modifications and refinancing assistance, as we did in J.P. Morgan, we worked with Citibank and our colleagues at the Department of Housing and Urban Development to include innovative measures that will create affordable rental housing for families who were pushed into the rental market by the financial crisis; significant investments in community development and neighborhood stabilization efforts around the country; and interest rate reductions for those responsible borrowers who have responsibly kept current on their mortgages but for whom it's been a struggle because their rates are so high.
Now, we know these measures won't cure every ill or solve every problem created by the financial crisis; but they are significant steps, and we are optimistic that they will bring some much-needed relief to those who are still feeling the ill effects of what the president called "an era of recklessness" in our financial markets.
So let me close by saying that I believe we have achieved a great deal in fighting financial fraud since the formation of the RMBS Working Group: record civil penalties; factual statements that evidence an unprecedented level of accountability from the financial institutions and transparency to the marketplace; and consumer relief for the American people.
But equally important is the fact that we are not done yet. As I said on Monday, we're not letting up, and we're not going away. We will continue to pursue these cases and follow the facts wherever they lead and enforce the law fairly but aggressively should we uncover evidence of unlawful conduct. Because a level financial playing field requires that type of oversight and the American people deserve no less.