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DOJ Trains AUSAs to Chase Mice While Lions Roam the Campsite

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Message William K. Black, J.D., Ph.D.
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In researching my series of articles on the critical omissions in Attorney General Eric Holder's press release about the settlement with Citi I realized that I need to write multiple articles about the destructive role played by Benjamin Wagner. Holder made Wagner DOJ's leader on mortgage fraud because Wagner was so willing to propagate the single most absurd, destructive, but so very useful (to the administration and the banksters) lie about mortgage fraud.

"Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. 'It doesn't make any sense to me that they would be deliberately defrauding themselves,' Wagner said."

This column addresses a single article Wagner's shop published in a journal volume entitled "Mortgage Fraud" to train Assistant U.S. Attorneys (AUSAs) on how to investigate and prosecute mortgage fraud. 32 UNITED STATES ATTORNEYS' BULLETIN MAY 2010. The title of the article is "Finding the Smoking Gun," and the author is Barbara E. Nelan, Assistant United States Attorney, Northern District of Georgia.

This article exemplifies three decisive DOJ failures led by Wagner. AUSAs were trained by Wagner to believe three lies:

  1. The "bank," by which he really meant the bank CEO, was always the victim of mortgage fraud and never the leader of those frauds
  2. Banking regulatory agencies had no meaningful role to play in detecting, investigating, and aiding the prosecution of frauds that was worth mentioning in the training, and
  3. Whistleblowers had no meaningful role to play in detecting and aiding the prosecution of frauds that was worth mentioning in the training

Those three lies guaranteed de facto immunity for the senior bank officers who led the three most destructive financial fraud epidemics in history. Wagner has defined out of existence the three financial fraud epidemics that drove our crisis, trivialized the critical need to restore the criminal referral process at the banking regulatory agencies, and failed to train AUSAs to understand the critical need to have whistleblowers come forward -- particularly given the destruction of the criminal referral process at the banking regulatory agencies.

As I will explain in a future installment, DOJ's cases against the three largest U.S. banks that it has settled with or is about to settle with were largely handed to DOJ by whistleblowers. I have noted the shameful and self-destructive (if the goal of the administration were to prosecute elite banksters) approach of Holder and DOJ to these whistleblowers -- they refuse to even praise their service to the Nation. President Obama and Holder should, in February 2009, have made a national call for thousands of whistleblowers to come forward with information about the elite banksters whose frauds even Holder now admits were "mightily" to blame for the crisis. No one not employed by the administration believes that the administration wants to prosecute the elite banksters who grew wealthy by leading the record fraud epidemics that caused the crisis.

DOJ's Phony War against the Fraudulent Mice

Holder made Wagner DOJ's leader of the deliberately misdirected prosecutorial effort against the mortgage fraud "mice" rather than the fraud "lions" that were -- to quote DOJ -- "devastating" the global economy not "despite" Wagner propagating these three crude lies throughout DOJ, the FBI, and the media, but because Wagner was willing to spread these lies. That is also why Holder keeps Wagner DOJ's top guy on mortgage fraud. As I explained to Bill Moyers in his 2009 interview of me, one of the lowest common denominators of the Bush and Obama administrations was that their senior officials dealing with the crisis "were all promoted because they failed."

Wagner is at one of the epicenters of the three mortgage fraud epidemics, but he has failed to prosecute a single senior officer of the major lenders that drove the crisis. He is batting .000 against the fraud lions. As I explain in this piece, he has trained AUSAs to ensure that they also bat .000 against the lions by training them that the lions don't exist. Wagner claims the mice caused the crisis. It is a lie so crude, and so preposterous that it leaves one breathless.

Wagner is a classic example of this turbo charged variant of the Peter Principle. He was good at prosecuting, over the course of six years, 250 of the millions of fraud mice. The best estimate is that lenders originated over two million fraudulent "liar's" loans in 2006 alone. There have been zero prosecutions of the elite bankers (the "lions") who led this epidemic of fraudulent mortgage loan origination through liar's loans or the companion epidemic of appraisal fraud.

There are hundreds of prosecutions annually of the "mice." My (cheerfully mixed) metaphor is that these prosecutions are akin to throwing handfuls of sand into the Pacific Ocean from a San Diego beach and wondering when one will be able to walk to Hawaii -- it will never happen. The prosecutions are worse than useless because they divert critical, scarce DOJ and FBI resources away from dealing with the lions. As I noted above, DOJ finally admits that the mortgage frauds by the lions contributed "mightily" to causing the crisis. Prosecuting what is literally less than one minor mortgage fraudster in 100,000 (figurative) fraud mice cannot possibly provide any deterrent value or produce any meaningful remedy to victims. A strategy that prosecutes less than one in 100,000 of the mice and grants massive bonuses to the fraud lions makes a mockery of justice.

Worse, the fraud lions invited the mice into the campsite. The banksters that looted "their" banks through accounting control fraud deliberately eviscerate underwriting and other internal and external controls because the fraud "recipe" that produces the "sure thing" of making them wealthy leads them to cause the bank to make enormous numbers of bad and fraudulent loans. Absent leadership by fraudulent senior managers, banks have shown the consistent ability for decades to reduce external fraud to tiny levels (well under one percent) through time-tested underwriting standards and controls. If we prosecute the lions and remove them from positions of power in our banks we will produce the bank reforms that will cut the number of mice from millions to tens of thousands.

DOJ Fights Mortgage Fraud by Fraudulently Inflating Its Fight against Mortgage Fraud

DOJ is fighting a "wholesale" catastrophe through a "retail" strategy that DOJ knows must fail. The prosecution of the mice is purely symbolic and undertaken to provide cover for Obama and DOJ's leadership. Because it is a cynical PR exercise we should not be surprised that Wagner's national "mortgage fraud" shop has recurrently -- and enormously -- inflated the number of prosecutions of the mice and the harm that they claim the mice they prosecuted caused. An audit by the Department of Justice's Inspector General revealed that Wagner's national shop continued to use the wildly inflated numbers (DOJ inflated the number of defendants five-fold and the damages ten-fold) to hype their supposed success even after it knew the numbers were false. The same audit revealed that the DOJ and the FBI have not made prosecuting mortgage fraud a top priority (contrary to their public claims) and have actually cut back materially on the number of FBI agents assigned to such cases.

Even after the fraud hyenas and other carrion eaters (the elite bank foreclosure frauds) entered the campsite to crush the bones and eat the marrow of the remains of the victims left behind after the fraud lions had gorged on them, Wagner continues to deny that the lions and hyenas exist. Wagner, Breuer, and Holder ensured that none of the elite banks and banksters that committed epic numbers of foreclosure frauds was prosecuted. Things have become so pathetic at DOJ that its leadership is too afraid to prosecute even the carrion eaters.

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William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)
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