Wall Street Bankers Whine That They Shouldn’t Have To Pay For Their Fraud

Our guest blogger is Peter Swire, the C. William O’Neill professor of law at the Moritz College of Law of the Ohio State University and a senior fellow at the Center for American Progress Action Fund.

Here’s another reason for the rest of us to get mad at Wall Street. Even where the government can prove massive fraud in the mortgage market, the finance folks are saying the suits should be dropped.

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The suits were announced last Friday by the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac. FHFA sued 17 major banks and a number of individuals for fraud in the issuance and sale of mortgage backed securities during the buildup of the housing bubble.

In response, a columnist for the Motley Fool has called the suits a “misguided search for vengeance” and “an unnecessary distraction.” An investment banker told Bloomberg that the government should “stop punishing banks.” The mortgage fraudsters should get away, they say, because we don’t want to shake confidence in the big banks that FHFA says committed massive mortgage fraud.

But there are so many reasons why the people who perpetrate fraud should pay for it. To pick two often voiced by conservatives, take “personal responsibility” and “property rights.”

The personal responsibility part is that individuals and companies that signed fraudulent securities filings are responsible for the fraud. That punishes fraud, and deters the next generation of Wall Street financiers when they get tempted to do it again.

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The property rights part is that fraud is theft — the fraudster took money from the other party. The banks are trying to argue that Fannie and Freddie were “sophisticated purchasers” who should have known better. But even sophisticated companies can be the victims of fraud — the suits allege that the defendants had detailed facts about the bad mortgages that were simply unknown to the purchasers.

Nor should we accept the idea that the government should stop the suits and forgive all the fraudsters because the markets might otherwise lose confidence in the big banks. Fortunately, this is not the fall of 2008 when financial markets froze and even the best borrowers could not get capital. The economy is not what we want it to be, but U.S. banks have raised many tens of billions of dollars of capital and financial markets are functioning.

Where evidence exists for fraud, the suits should go forward. Charles Keating went to jail after the S&L; mess. Where the facts warrant it, this generation of wrongdoers should pay as well.