The financial fraud group that is investigating the market for residential mortgage-backed securities has already issued civil subpoenas to 11 financial institutions, Attorney General Eric Holder Jr. said today in formally announcing the team of lawyers and federal agents.
Holder and top Obama administration officials, speaking today with reporters at the Justice Department, declined to discuss the details of the pending investigations. The focus of the group is on the organization and securitization of home loans, not loan servicing.
Holder said the working group, which President Barack Obama noted in his State of the Union speech Tuesday, will include 55 U.S. Justice Department attorneys, in addition to resources from several state attorneys general and law enforcement agencies such as the FBI.
The group, Holder said, will identify, investigate and prosecute instances of wrongdoing in the packaging and sale of residential mortgage-backed securities. The first full meeting was scheduled to begin this afternoon.
“I am confident that this new effort will improve our ability to ensure justice for victims, help restore faith in our financial markets and institutions and allow us to answer the call that President Obama issued earlier this week, in his State of the Union address,” Holder said in a statement today.
Holder and Robert Khuzami, the enforcement director at the U.S. Securities and Exchange Commission, said that not every failure was a violation of the law. “We also have learned that behavior that is reckless or unethical is not criminal,” Holder said.
The officials fended off skepticism that the working group is getting off the ground too late in the Obama administration and that its work is not new at all. The Obama administration put together a Financial Fraud Enforcement Task Force in November 2009.
“The notion that there has been inactivity over the course of the last three years is belied by a troublesome little something called facts,” Holder said. “We have been doing a great deal. I am confident that with this new structure that we are putting in place today our efforts will be enhanced.”
Holder said the “the reality is that we’ve done a substantial amount.” The attorney general said the working group is targeting a specific financial fraud crime that has caused “great harm” to the economy.
“We are bound and determined and will hold people accountable in this sector,” Holder said.
Khuzami also said that investigations of components of the housing market have been ongoing for some time. The new working group, he said, will give investigators greater resources and a more streamlined ability to share information with state and federal officials.
“These families deserve justice. They deserve relief,” Housing and Urban Development Secretary Shaun Donovan told reporters today.
As payments are made to investors for accountability, Donovan said, “we need to make sure at the same time…that there is also relief that happens for the homeowners within those securities.” He said it would be a “tragedy” if only investors benefit.
The redoubled effort to investigate the market, Donovan said, is unlikely to harm ongoing settlement negotiations with financial institutions over home loan servicing. Donovan said problems over the servicing of loans compounded, but did not create, the inflation of the housing market bubble.
“We would not be standing here today if we weren’t absolutely confident that the releases that are being contemplated were quite narrow, focused on the conduct that was actually investigated, focused on the conduct that we have found significant problems with,” Donovan said. “Those releases are narrow enough to allow us to go forward aggressively with what we are describing today.”
Donovan also said it would be a “grave injustice” to have potentially hundreds of billions paid to private investors, pension funds and others but not have homeowners who held the loans made whole. He said he is hopeful the working group will provide a template not only for accountability but for “real relief” for homeowners.
New York Attorney General Eric Schneiderman, a co-chair of the group, said he is working closely with state attorneys general Martha Coakley of Massachusetts, Nevada’s Catherine Cortez Masto and Beau Biden of Delaware.
Conversations began months ago about the possibility of joining state and federal forces. “It didn’t take long for us to realize this was the only way we were really going to restore the public’s confidence in the financial services industry, which has been badly shaken,” Schneiderman said.
Schneiderman predicted actions in the coming days and weeks that he said will mark just how aggressive the new group is digging in to hold accountable financial institutions.
“I think there is a recognition that you have to have accountability,” Schneiderman said. Regarding the financial services industry, he said: “To put it bluntly, we know what they did. They know what they did. They know we know what they did.”
Federal rules of criminal procedure and confidentiality agreements will shape the extent to which state and federal prosecutors are able to share information with each other. “We are looking to share everything we can share,” Schneiderman said.
Holder said prosecutors can structure the sharing of information in a way that does not run afoul of the federal rule that mandates secrecy of grand jury investigations.