In the State of the Union address, President Obama promised a fresh investigation into mortgage abuses that led to the financial meltdown. The goal, he said, is to “hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”
Could this be it, finally? An investigation that results in clarity, big fines and maybe even jail time?
There is good reason to be skeptical. To date, federal civil suits over mortgage wrongdoing have been narrowly focused and, at best, ended with settlements and fines that are a fraction of the profits made during the bubble. There have been no criminal prosecutions against major players. Justice Department officials say that it reflects the difficulty of proving fraud — and not a lack of prosecutorial zeal. That is hard to swallow, given the scale of the crisis and the evidence of wrongdoing from private litigation, academic research and other sources.
This new investigation could be the real thing. Eric Schneiderman, the New York State attorney general, will be a co-chairman of the group, and he has refused to support a settlement being worked out between big banks most responsible for foreclosure abuses and federal agencies and some state attorneys general.
He rightly objected to the fact that in exchange for providing some $20 billion worth of mortgage relief — mainly by reducing the principal on homeowners’ loans — the banks wanted release from legal claims that have never been fully investigated, including those related to potential tax, trust and securities violations in mortgage loans.
In the past year, the Obama administration has pushed back against Mr. Schneiderman, even as other attorneys general also left the settlement talks. By choosing him now to help run the investigation, the president appears to be embracing the call for a much broader inquiry that, properly executed, could result in a far bigger settlement.
For now, the administration is saying that the new investigation and the settlement talks will both proceed. It would be better to settle with the banks only after officials have a full picture of any and all violations.
There are reasons to be wary. Some of the federal officials who will also be involved with the investigation — including Eric Holder Jr., the United States attorney general, and Lanny Breuer, the leader of the Justice Department’s criminal division, who will be a co-chairman — have not distinguished themselves in the pursuit of mortgage fraud.
To win and retain public trust, both the administration and all the group’s co-chairmen — there are also four other officials from the Justice Department, the Securities and Exchange Commission and the Internal Revenue Service — must agree on several steps immediately.
The administration must ensure that the group has ample resources. The co-chairmen must hire a tough-as-nails prosecutor with a successful track record in financial fraud to drive the investigation forward. And the group must move quickly and vigorously, issuing subpoenas and filing cases. It is not starting from scratch; various agencies have all had separate investigations under way.
President Obama’s credibility is on the line. To restore public faith in the financial system, nothing less than a full investigation and full accountability will do.
