It's now a near certainty that Wall Street executives committed felonies.
The recently released audits of robo-mortgage activities by the Office of the Inspector General of the Department of Housing and Urban Development (HUD) details shocking behavior at the five banks constituting the Federal Housing Administration's largest mortgage servicers. At Wells Fargo, management quashed a midlevel manager's study of the foreclosure process as negative results began to emerge, and it gave an individual whose last job had been in a pizza restaurant the title of "vice-president of loan documentation" to facilitate robo-mortgage signing. Bank of America evaluated employees on the volume of foreclosure affidavits produced. JP Morgan Chase gave individuals titles such as "vice-president of Chase Home" where "the titles were given by Chase for the sole purpose of allowing individuals to sign documents and came with no other duties or authority." Citigroup and Ally similarly engaged in seemingly illegal practices.
Under federal law, the knowing filing of a false affidavit with the court is a felony offense of perjury, punishable by a prison term of up to five years. An individual violates laws against perjury whether he or she personally appears in court and swears to a false statement or provides the court with a false affidavit. Individual states have their own perjury laws, which were undoubtedly violated as well. The HUD report also suggests that individual banks may be guilty of obstruction of justice and the criminal violation of the False Claims Act for filing insurance claims without following HUD requirements.
Since the start of the financial crisis, federal and state officials have been struggling to change Wall Street behavior. To date, every effort has failed miserably, and the weak enforcement provisions of the robo-mortgage settlement are unlikely to meaningfully change this dynamic. Government officials have also relied, with a very few exceptions, entirely on civil enforcement when criminal laws appear to have been egregiously violated.
The greatest moral hazard now confronting the nation is what appears to be increasingly brazen criminal activity by financial industry executives. With each decision not to prosecute, Wall Street executives justifiably conclude that they are immune to the rules. As a result, it appears that Wall Street criminal activity is increasing in frequency and severity, as opposed to the reverse. The activities surrounding the collapse of MF Global are one example.
So what can be done about it? We can change the behavior in the financial service industry for a full generation in just seven days. This plan may seem to be tongue and cheek, but it hearkens back to a similar action in the era of the Great Depression. In the final months of Herbert Hoover's presidency, the Senate Banking Committee began an investigation into the causes of the Great Crash of 1929, and a young prosecutor named Ferdinand Pecora was appointed as Chief Counsel. Subsequently, the Roosevelt administration conveyed to Pecora that "the prosecution of an outstanding violator of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished, it will be helpful in restoring confidence." Ultimately, this investigation, which came to be known as the Pecora Commission, led to the indictment of one of America's most prominent financiers; demonstrated widespread self-dealing in the financial sector; and, as noted by historian Alan Brinkley, generated "broad popular support" for Roosevelt's reform agenda, including the creation of the SEC and the Glass-Steagall Act.
My seven day plan is based on a simple premise: When criminal laws are egregiously violated, the guilty parties should face appropriate punishment. Here's the plan:
Day One: Read the HUD Inspector General's reports and the public records of past mortgage foreclosure cases from across the nation.
Day Two: Meet with the team at the Office of the Inspector General at HUD that prepared the audits. Obtain the names of all the bank officials, lawyers, and notaries whose behavior, as cited in the audit reports or otherwise known to the investigators, represent clear and unquestionable criminal violations. Add to this list other individuals who have similarly demonstrated or testified to behavior unquestionably constituting criminal acts, as indicated by the public records of the mortgage foreclosure cases reviewed in day one.
Day Three: Indict all of the individuals on the list compiled on day two.
Day Four: Indict banks and financial institutions on criminal charges where criminal behavior by employees (as demonstrated by day three indictments) appears to be endemic. The Justice Department guidelines for prosecuting firms include: (1) the pervasiveness of such activity, (2) the compliance procedures in place, (3) attempts by the corporation to end bad behavior, and (4) cooperation with federal investigators. In 2008, the Justice Department adopted a policy of accepting "deferred prosecutions," involving agreements to change corporate behavior without damaging innocent third parties through prosecution.
Corporations receive the benefits of "legal persons," as demonstrated by Citizens United. But they must also bear the responsibilities of these privileges. A reading of the HUD reports, and other public records, suggests several banks should clearly be prosecuted.
Day 5: Discuss plea bargains with indicted lower-level officials in return for cooperating in investigations of higher-level officials.
Day 6: Consider plea bargains with indicted banks, which require the removal of all remaining officers and directors who were serving when egregious criminal activity occurred, as well as senior officials who were in a position to exercise appropriate supervisory responsibility but chose to look the other way.
Day 7: Indict any senior Wall Street officials implicated by new cooperative testimony resulting from activities on day five. Adopt and announce a policy that future criminal violations will be prosecuted in a similar fashion.
What is particularly disturbing is that a look at the evidence already in the public domain (much less what investigators already know) shows that none of the actions discussed above are entirely absurd. The purpose of prosecution not simply punishment. It acts to deter further illegal activity and to restore public confidence in our system of governance. The nation desperately needs both of these benefits today.
Moreover, these ongoing, almost certainly criminal activities are ultimately dangerous threats to our economy, the success of capitalism, and our democracy. In his column on MF Global, Joe Nocera noted that "customers need to be able to trust" the laws protecting their money. "Otherwise, the markets can't function."
Today, as in the era of FDR, we must send a message to the financial community that illegal behavior will not be tolerated. By prosecuting blatant felonies now, we will deter future misbehavior and begin the process of recreating a fair society where equal justice prevails.
Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.