The U.S. attorney's office in Manhattan yesterday accused Wells Fargo (WFC) of improperly underwriting home loans over a decade, in effect defrauding a government-backed mortgage insurance program of hundreds of millions of dollars. The charges come in the wake of a $20 billion suit filed by the New York AG accusing JP Morgan (JPM) of similar practices.
PR-friendly lawsuits aside, the government has done little in terms of prosecution in the four years since financial crisis began. No upper level banking or mortgage executive has gone to prison or even been indicted. All America has to show for surviving the meltdown is a 900-page piece of legislation. Nothing in history suggests Dodd-Frank will prevent the next disaster.
Wall Street isn't going to fix itself and the government clearly isn't up to the task. Restoring confidence in Big Money is going to take real change. The question is: What would a better system look like?
Chasing the Problem
Terri Duhon, author of How the Trading Floor Really Works says it boils down to the futility of trying to craft laws designed to address every variant of malfeasance. Like Sarbanes-Oxley before it, Dodd-Frank attempts to be a comprehensive list of prosecutable offenses. All Wall Street firm has to do is come up with something not covered by the rules and run with it until something goes horribly wrong.
"Regulators, unfortunately, are not at the cutting edge of finance," says Duhon, dramatically understating the problem. The SEC's budget in 2012 is $1.2 billion, the same as last year. In 2011 JP Morgan alone made $19 billion. The cops have neither the resources nor incentives to find questionable activities and the banks certainly aren't going to help.
The Spirit of the Law and Accountability
Nothing will change on Wall Street as long as anything outside of the specific parameters of the laws are legal. Duhon says regulators need to be educated in terms of what really happens in the murky catacombs of the Street. The housing crisis resulted from banks profiting wildly from the process of creating cheap mortgages. That was seen as a good thing right up until Washington figured out how chopping up mortgage-backed securities really work.
"We need to be a bit more realistic" about who's accountable for the shell game. Goldman Sachs' (GS) 31-year old glorified broker Fabrice "Fabulous Fab" Tourre wasn't the evil genius behind MBS. The top executives who made scores of millions off the system need to be responsible for what they created.
When the 1929 stock market crash and the Depression that followed threatened to take down Wall Street, FDR turned to infamous trader Joe Kennedy to root out corruption. It was relatively easy for Kennedy because he'd been part of creating the scams in the first place. Until DC finds another "poacher turned gamekeeper" in the same mold, the regulators don't stand a chance in the fight to protect Main Street.