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Panel Told of FBI Efforts to Fight Financial Crime

Source: NY Times


Posted on 14 Jan 2010

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Attorney General Eric H. Holder Jr. told a panel created to examine the reasons for the financial crisis on Thursday that the Justice Department was working to hold accountable those who had contributed to the meltdown and to prevent similar conduct in the future.

In that vein, Mr. Holder said, the FBI was investigating more than 2,800 mortgage fraud cases, almost five times the 534 inquiries in 2004. The efforts to fight financial crime, Mr. Holder said, will foster confidence in the system.

Mr. Holder was the first witness to appear as the panel, the Financial Crisis Inquiry Commission, began its second day of hearings on Capitol Hill. Included in the second day of witnesses were Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, and Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, who both spoke of the need for regulatory reform.

In his comments, Mr. Holder identified several of the agency’s recent successes: the conviction of Bernard L. Madoff for running a giant Ponzi scheme; the arrests of Raj Rajaratnam and Danielle Chiesi, who have been accused of perpetrating the largest insider-trading ring in the history of hedge funds; and the sentences meted out to officers of National Century Financial Enterprises after their convictions on conspiracy, fraud and money-laundering charges.

Of the 2,800 mortgage fraud investigations under way at the Federal Bureau of Investigation, most — 1,842 — were classified as major cases, which meant they involved more than $1 million in losses. As of November, federal mortgage fraud-related charges were pending against 826 defendants.

Mr. Holder, who was joined by Lanny A. Breuer, the assistant attorney general for the Justice Department’s criminal division, said that federal authorities were determined to bring to justice “businesses or individuals whose disregard for the law has hurt the pocketbooks” of ordinary Americans.

In his remarks, Mr. Breuer said the fraud cases included loan origination schemes, property flipping, foreclosure rescue schemes and loan modifications. The culprits, he said, range from real estate brokers, appraisers, and bank insiders, to borrowers and “plain old fraudsters who gravitated to mortgage fraud.”

Ms. Bair,, who has been outspoken in her assessment of the regulatory system’s failings, told the commission in her prepared remarks that it was essential to create a way of breaking up large banks without resorting to government support.

“The financial crisis calls into question the fundamental assumptions regarding financial supervision, credit availability, and market discipline that have informed our regulatory efforts for decades,” she told the commission. “We must reassess whether financial institutions can be properly managed and effectively supervised through existing mechanisms and techniques.”

But Ms. Bair also said that the underlying causes of the crisis were deep-rooted.

“This crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from investment in our industrial base and public infrastructure and toward housing, away from the real sectors of our economy and toward the financial sector,” she said.

Ms. Schapiro also spoke of the need for broad regulatory reform, but she added a plea for more stable budget resources. She pointed to problems in the regulation of asset-backed securities, an excessive reliance on credit rating agencies, inadequate regulation of over-the-counter derivatives and executive compensation that encouraged unhealthy risk-taking.

And she expressed sympathy for the idea of a council of regulators “with the power to evaluate risk across the financial sector,” and added, “Large, interconnected institutions should be supervised on a consolidated basis.”

The House last month adopted a broad overhaul that would give the government new powers to break up huge companies, create a new consumer financial protection agency and tighten oversight of derivates trading. The Senate has yet to vote on the measure.

Ms. Schapiro added a plea for more stable budget resources.

Unlike other regulators, she said, the commission depends for its financing on the president’s budget and Congressional appropriations.

“As a result, the S.E.C. has been unable to maintain stable, sufficient long-term funding necessary to conduct long-term planning and lacks the flexibility to apply resources rapidly to developing areas of concern,” she said in prepared testimony.

As the second day of hearings proceeded, varying priorities among the 10 commission members — 6 appointed by Democratic lawmakers, and 4 by Republicans — emerged.

For example, the commission’s chairman, Phil Angelides, a Democrat and a former California state treasurer, asked Mr. Holder about reports that the head of the Justice Department’s criminal division had warned in September 2004 of an “epidemic” of mortgage fraud that, if unchecked, could match the savings-and-loan crisis of the 1980s in magnitude.

Mr. Angelides also spoke of complaints that after 9/11, hundreds of Justice Department investigators who had been dedicated to white collar crime investigators were transferred to counterterrorism work. Implicit in Mr. Angelides’s questions was criticism of the administration of President George W. Bush.

In contrast, Bill Thomas, the commission’s vice chairman, a California Republican and a former chairman of the House Ways and Means Committee, pressed Mr. Holder on whether the Justice Department would share information with the commission — as much as is legally possible — as regulatory agencies had done.

“We’ll certainly work to make such an agreement possible,” Mr. Holder replied, while noting that prosecutors are sometimes barred by the Privacy Act and federal rules of criminal procedure from divulging information.

“O.K., I don’t interpret that as yes,” Mr. Thomas cut in, saying that “we simply cannot conclude our job in the timeframe Congress has assigned us” if timely information is not provided. The commission is to submit a final report to President Obama and Congress by Dec. 15.

During the question-and-answer session, Mr. Angelides homed in on credit rating agencies, saying there had not been enough competition. “Isn’t the whole system essentially broken?” he asked Ms. Schapiro. “It was proved to be worthless, broken, and it remains so today.”

Ms. Schapiro said the S.E.C. had taken steps to tighten standards for the rating agencies since 2006, when it gained powers to regulate them.

When Mr. Thomas asked Ms. Bair why the F.D.I.C. did not collect insurance premiums from many large banks “for a decade before the crisis,” Ms. Bair replied that the agency lost its ability to charge such premiums on well-capitalized banks (about 98 percent of banks) in 1995 and only regained it after she took office in 2006.

Later on Thursday, the commission will hear from a panel of state and local officials, including two attorneys general, Lisa Madigan of Illinois and John W. Suthers of Colorado; Denise Voigt Crawford, commissioner of the Texas Securities Board; and Glenn Theobald, chief counsel to the Miami-Dade County Police Department.


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