One Of The Few Bank Fraud Cases Obama Prosecutors Took To Court — And Won — Just Got Ripped Up

President Barack Obama with former Attorney General Eric Holder in 2014 CREDIT: AP PHOTO/CAROLYN KASTER
President Barack Obama with former Attorney General Eric Holder in 2014 CREDIT: AP PHOTO/CAROLYN KASTER

Bank of America does not have to pay a $1.3 billion penalty assessed years ago, an appeals court ruled Monday.

A jury found the megabank guilty of fraud in 2013, after Department of Justice (DOJ) officials decided not to settle a case involving a program run by its subsidiary Countrywide.

Countrywide employees created a program known as “Hustle,” a bastardization of an acronym for “High-Speed Swim Lane,” and used it to knowingly sell substandard loans to Fannie Mae and Freddie Mac. Staffers packaged up low-quality mortgage securities and sold them to government-backed housing finance companies that later had to be bailed out by taxpayers.

After the jury’s verdict in 2013, a federal judge decided the bank would have to pay $1.27 billion — more than prosecutors had reportedly sought — to make the government whole and to dissuade it from cheating taxpayers again.


The bank immediately appealed, leading to Monday’s ruling voiding the penalty. Bank lawyers persuaded a three-judge appeals panel that Hustle amounted to mere breach of contract rather than outright fraud. (Bloomberg’s Matt Levine has a good plain-English rundown of the exasperating details of the bank’s successful argument here.)

Some financial observers credit the Hustle case for the government’s ability to win a series of high-profile settlements with megabanks over their mortgage crisis actions. The Wall Street Journal called the verdict “a weapon the Justice Department has used to push Wall Street to agree” to those deals, for example. in reality, the Hustle verdict was more important for what it persuaded prosecutors themselves to do than for any potential impact on bankers’ mindsets. Its collapse now is a major setback for those who have urged the White House to get more aggressive toward Wall Street.

The first of those big mortgage settlements came together a month before jurors found Bank of America guilty in October of 2013. JP Morgan was already afraid enough of a trial that CEO Jamie Dimon made an 11th-hour phone call to DOJ headquarters that September, suddenly offering concessions to avoid going to court.

Maybe Dimon sensed what the Hustle jury was about to decide. Maybe he feared giving the DOJ a chance to bolster its existing evidence in discovery, and chose to avoid a fight. Either way, the deal Dimon struck with then-Attorney General Eric Holder became the blueprint for a series of out-of-court settlements with other major Wall Street houses.

Those settlements amounted to far less than meets the eye, as ThinkProgress and other outlets have documented.

But although the banks got off easy, the settlements nonetheless stand as the most significant form of accountability the government was able to win over rampant bank misconduct in the mortgage-backed securities markets prior to the crisis. Countrywide’s “Hustle” scheme that Bank of America inherited when it absorbed the failed mortgage giant epitomized those abuses, and the combination of Dimon’s decision to play ball and the symbolic effect of the Hustle jury’s verdict may well have helped steer other banks to the settlement table. vacated verdict in the Hustle case won’t have any bearing on deals already struck. But it will only further discourage government regulators and prosecutors from pushing cases to trial in the future — something they are already notoriously reticent to do.


White-collar crime prosecutions fell to a 20-year low last year. Under a policy enacted just before President Obama took office and which continued to be official practice until last fall, federal prosecutors were encouraged to take a soft touch with the financial industry and allow Wall Street to look after itself.

The Obama administration finally toughened DOJ guidelines for white-collar cases late in September. The move followed years of pressure from Wall Street critics both inside government, like Sens. Elizabeth Warren (D-MA) and Sherrod Brown (D-OH), and outside it. Watchdogs like veteran white-collar criminologist William Black have urged the government to settle less since the crisis first broke.

Black, a scholar, author, and former federal regulator who helped expose the 1980s savings-and-loan scandal, has long argued that Wall Street head honchos knowingly engaged in vast accounting fraud before and during the housing crisis. He has called for criminal prosecutions, not merely civil charges like those that produced the initial Hustle verdict, and blasted the administration’s proclivity for settling cases rather than bringing them to trial., Black wrote in September, President Obama’s administration conducted an “experiment in refusing to prosecute the senior bankers that led the fraud epidemics that caused our economic crisis,” yielding “a wave of recidivism in which elite bankers continued to defraud the public after promising to cease their crimes.”

Throughout this time, supporters and advocates of Obama’s settlement-happy, trial-averse approach have argued that going to court is simply too risky and time-consuming. Settlements are a bird in the hand, the argument goes, and it’s better for the public to pocket that bird than grasp for two or three or four and potentially catch none of them.

The Hustle trial suggested that argument might be wrong. A jury verdict and $1.3 billion penalty stood as evidence that prosecutors could win cases like this, and achieve the greater deterrent effect that Warren, Brown, Black, and others have demanded.

But now, with the verdict rescinded and the penalty unpaid, the momentum swings back to the Let’s Make A Deal crowd. The odds of ending the “too big to jail” mindset among regulators and prosecutors were never all that good — the government was still cutting weak deals this spring, months after that partial reversal to the DOJ’s policy on white-collar cases — but they probably just got a lot worse.