By Guest commentary Friday, August 23rd, 2013

By Steven Mintz on August 23, 2013

The crackdown on financial institutions whose disgraceful actions in the subprime mortgage mess triggered the 2008 financial crisis have finally hit Bank of America.

On Aug. 6, the Department of Justice and the U.S. Securities and Exchange Commission sued BofA for alleged securities fraud. The DOJ and SEC accused the bank of defrauding investors when it sold $850 million in mortgaged-backed securities in 2008 without informing them of the risks of default.

The sale of subprime mortgages that were grouped as securitized investments (i.e., secured by the home) and that triggered the Wall Street meltdown was brought on by excessive risk taking. Some have blamed moral hazard — where one party is responsible for the interests of another, but has an incentive to put his or her own interests first — as a major contributing factor. Research by Atif Mian and Amir Sufi of the University of Chicago’s business school provides evidence that securitization of mortgages fostered moral hazard among mortgage originators, which led them to issue loans to uncreditworthy borrowers. Mian and Sufi concluded they were motivated to do so because the securitized assets were sold off to unsuspecting investors and so the risk of default then shifted from the banks to third parties.

Bank of America said it is fighting the lawsuit, arguing that the investors who bought the securities were sophisticated and that the securities actually performed better than similar loans from other banks. “We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates, and these securities to lose value as a result,” BofA spokesman Lawrence Grayson told CNN.

Bank of America ought to step up and do the right thing. It has already been implicated in bank fraud through its Countrywide Financial unit, now part of Bank of American Home Loans. In what is the largest settlement so far of a mortgage-backed securities class action lawsuit, the parties agreed, on April 17, to settle the litigation for $500 million.

That is just the tip of the iceberg.

The 2012 National Mortgage Settlement between five banks, including BofA, provides extensive relief to borrowers in the form of loan modifications, refinancing, and even cash payouts as a result of “robo-signing.” That practice led to the banks signing foreclosure documents without always verifying the accuracy of the forms and existence of supporting documents. The settlement required the banks to pay a total of $25 billion to the federal government, states and borrowers.

BofA, in a statement to the media following the settlement, said it has reviewed its policies and corrected any improper procedures: “The agreement references activities from over a year ago that have been addressed as we do all we can to modify loans when possible and to ensure foreclosures are fair when they are unavoidable.”

It’s not just Bank of America that has come under scrutiny. The same day BofA was sued, the Swiss bank UBS said it is paying an additional $50 million to settle SEC charges that it misled investors into buying mortgage bonds sold in 2007. UBS, which did not admit nor deny wrongdoing, said the settlement marks the end of the SEC’s probes of its collateralized debt obligations backed by home mortgage securities.

The list of settlements goes on including Citigroup ($285 million in 2011); JP Morgan ($153.6 million in 2011); and Goldman Sachs ($550 million in 2010).
Bank of America, however, has become the poster child for fraud. It allegedly committed almost $1 billion of mortgage fraud on its own and another $500 million through the former Countrywide operations.

The bank has never cooperated with the government on any of the charges, choosing, instead, to fight those with the result that the government will have to spend millions of our hard-earned tax dollars to pursue its claims. BofA will spend millions of shareholder dollars fighting the government’s charges thereby failing to meet its fiduciary responsibilities to its shareholders.

In my view, Bank of America appears to be acting with impunity and it has failed to consider the public interest in its banking actions. The company culture is marked by deception and a failure to accept responsibility for its actions. BofA needs to come clean and admit wrongdoing in the  subprime mortgage crisis.

The bank, which exists largely due to the fact that the federal government acts as ultimate guarantor for its deposits, knows or should know it will be forced to admit its failings sooner or later and settle with the government.

Why not retain some modicum of dignity and respect by doing the honorable thing now?

• Steven Mintz is a professor in the Orfalea College of Business at Cal Poly, San Luis Obispo. He has an ethics blog at www.ethicssage.com.