The Department of Justice filed civil charges against Bank of America on Tuesday for purposely inflating the value of mortgage-backed securities they sold to investors, a move they say helped precipitate the devastating 2008 financial crisis.
The New York Times reports that the lawsuit is being pursued by the Obama administration’s Financial Fraud Enforcement Task Force, a group formed by the president to “hold accountable those who helped bring about the last financial crisis as well as those who would attempt to take advantage of the efforts at economic recovery.”
The DOJ claims that $850 million worth of securities backed by residential mortgages were assembled by Bank of America and sold to investors in 2008, despite the bankers’ knowledge that they did not meet underwriting guidelines.
The toxic mortgages represented over 40 percent of the bank’s portfolio of mortgage-backed securities.
“Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors,” said U.S. Attorney Anne Tompkins, who is prosecuting the case. “Now, Bank of America will have to face the consequences of its actions.”
Attorney General Eric Holder also weighed in. “As this action proves, President Obama’s Financial Fraud Enforcement Task Force will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential mortgage-backed securities market,” he said in the same statement.
A Bank of America spokesman disputed the allegations. “These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” he said, according to The Wall Street Journal.
The lawsuit represents the first time Bank of America’s own actions have come under legal scrutiny since the financial crisis. In October 2012 the DOJ sued Countrywide Financial for a fraudulent mortgage lending scheme prosecutors called “spectacularly brazen in scope.” Bank of America purchased Countrywide in July 2008, just before the crisis erupted.
In June, Bank of America agreed to settle the suit for $100 million.
The lawsuit may be the first of many coming down the DOJ pipeline. Fox News reported last week that the New York attorney general’s office will soon file suit against Merrill Lynch over their own mortgage-backed securities operation. The SEC may also target Merrill Lynch following an investigation into the firm’s collateralized debt obligation.
The Bank of America lawsuit is noteworthy for being a civil case, not a criminal one. Despite Eric Holder’s assertion in 2009 that the DOJ would “not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives” involved in the 2008 crisis, no banker has yet faced criminal charges.
Last fall Lanny Breuer, the now-retired head of the DOJ’s Criminal Division, explained the department’s reasoning.
“I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects,” he said. “Sometimes — though, let me stress, not always — these presentations are compelling.”
In a recent Forbes op-ed, financial analyst Ted Kaufman expressed his skepticism. “Perhaps the key reason [for the lack of criminal charges],” he wrote, “is that those most responsible for indicting and prosecuting Wall Street executives seem to believe that, just as there are banks that are too big to fail, there are people who are too big to jail.”
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