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New York launches probe into financial crisis
Foreclosure headline in a newspaper
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Kai Ryssdal: We'll use an economic factoid on housing that came out this morning as a way to get into the real estate news of this Tuesday. We learned, courtesy of the Commerce Department (PDF), that housing starts -- new groundbreaking, basically -- dropped 10 percent last month. So still an economic problem area.
Also troubling are some of the recent scandals over home mortgages. Banks have been in hot water for robo-signing and shoddy foreclosure practices. Now the new attorney general for the State of New York, Eric Schneiderman, is getting into the game with an investigation of how banks packaged those mortgages into the bonds they then sold out to investors.
Marketplace's Stacey Vanek Smith reports.
Stacey Vanek Smith: There is a lot of legal heat coming at the banks right now: federal regulators, homeowners, investors, a group of state attorneys general. But it's potential legal action from New York that has the banks shaking in their boots, says Georgetown law professor Donald Langevort.
Donald Langevort: No other state has anything like the Martin Act, which scares the banks immensely.
The Martin Act is a New York state securities law that's nearly a century old. And its power lies in its vagueness, says John Coffee, a professor of securities law at Columbia University.
John Coffee: It broadly authorizes the New York Attorney General to sue anytime there's been a misrepresentation or material omission in connection with the purchase or sale of securities. It's written very broadly and you don't have to show an intent to defraud.
Attorney General Eric Schneiderman has been looking into how banks created and marketed mortgage-backed securities. And the Martin Act relieves him of one burden of proof that's been a stumbling block for other prosecutors, says Georgetown's Donald Langevort.
Langevort: The banks have had reasonable luck thus far avoiding federal prosecution largely by arguing that it's hard to show that the senior executives of these banks knew that the market was about to melt down. The Martin Act doesn't require that kind of intent.
New York attorneys general like Eliot Spitzer have used the Martin Act to great effect in the past -- wrangling multi-million-dollar settlements out of financial giants. But the banks have some leverage too, says Langevort. He says Wall Street brings a lot of jobs and business to the Empire State, so prosecutors won't want to burn the banks too badly.
In New York, I'm Stacey Vanek Smith for Marketplace.
I would go further to say, as has Elliot Spitzer, that in fact the federal prosecutors actually have plenty of ammunition, and, as cited here by G. Hatt, omission is and a failure to investigate when there is a duty to is no defense against federal securities laws. Unfortunately, there seems to be some tacit approval by the DOJ and the SEC that a higher burden must be satisfied. Additionally, the knowledge of managers, per se, should not be the only knowledge that counts in investment banking organizations. There is plenty of evidence that certainly the traders at these firms knew the value of these securities, as they admitted as much in their emails calling them s#$%t. But it's an election year; what can you do?
After reading 13 Bankers, Greenspan's Bubbles, Age of Turbulence and Griftopia, I can tell you exactly how these banks did this. Also watched NPR's Frontline episode, "The Warning". All of this and more shows how they got regulations and laws either deleted or changed so they could try to work just with in the thin line of the law. But if you look closely you will see where they paid off the raters of bonds, etc. to rate them above what they were actually worth. Then they bundled these 'banking instruments', for want of a better term, knowing that they were ‘sub prime’ minus B rated actually if that, sold them off as if they were AAA rated Knowing they weren’t. They also knew that the FICO scores for those who had bought these mortgages were phony. Then bet against them by, buying ‘insurance on all of their deals, knowing they would fail. From what I read in Griftopia looks like Goldman Sachs pushed AIG over the edge because they basically had some inside knowledge that AIG was way ‘over’ drawn. Greenspan , et al moved back and forth between Wall Street and Washington, working both sides of the fence. They is dirty to the core and it is finally in writing…If they are not taken to task they will continue like they are now, there have been no changes yet. Just look at the bonuses they pay themselves.
