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California may join probe of Wall Street's role in mortgage meltdown

New York's and Delaware's investigation could lead to criminal charges against financial executives. 'California was disproportionately harmed by the mortgage crisis, and our homeowners badly need relief,' the state's attorney general says.

July 14, 2011|By Nathaniel Popper and Alejandro Lazo, Los Angeles Times
  • "If it will result in real accountability and real results, no option will be off the table, California Atty. Gen. Kamala Harris told The Times. Above, Harris in May.
"If it will result in real accountability and real results, no option… (Mario Anzuoni, Reuters )

Reporting from New York and Los Angeles — California is considering joining New York and Delaware in a wide-ranging investigation into Wall Street's role in the mortgage meltdown that could lead to criminal charges against financial executives.

California Atty. Gen. Kamala Harris met with New York Atty. Gen. Eric Schneiderman on Thursday in San Francisco to discuss cooperating on the investigation, which is already one of the broadest to probe how banks encouraged the financial crisis through the creation of risky financial instruments backed by mortgages.

New York and Delaware have more than a dozen attorneys working full time on the effort and have subpoenaed or requested information from 13 financial firms, including Goldman Sachs and JPMorgan Chase & Co., according to people familiar with the investigation. The people spoke on condition of anonymity because of the sensitivity of the investigation.

Schneiderman declined to comment on any specific investigation but told The Times, "We're taking a hard look because the American people are entitled to a full investigation that uncovers all the facts and holds those responsible to account."

Delaware Atty. Gen. Beau Biden declined to comment on the investigation.

California would represent a vital addition to the investigation because it was the location of a vast number of the mortgages and foreclosures that fed into the crisis. Since home prices peaked in 2007, California homeowners have lost $1.9 trillion in home equity, according to an estimate by the research firm Moody's Economy.com.

Harris told The Times: "California was disproportionately harmed by the mortgage crisis, and our homeowners badly need relief. We will critically evaluate every possible avenue of relief for Californians. If it will result in real accountability and real results, no option will be off the table."

The public has clamored for the scalps of financial executives who encouraged the real estate bubble, but most investigations so far have focused either on mortgage fraud by low-level brokers and appraisers or on the handling of foreclosures by banks and other lenders.

Prosecutors have had much more trouble pinning blame on executives at marquee firms such as Countrywide Financial founder Angelo Mozilo. The Justice Department shelved a criminal probe into Mozilo's activities. In end, federal regulators became involved, and Mozilo had to pay $22.5 million to settle their claims that he downplayed the risks of subprime mortgages.

The lawyers in the attorney general offices in New York and Delaware are looking at the role that Wall Street played in the buildup to the crisis: allegedly inflating the demand for subprime loans and then packaging them into shoddy bonds that triggered the financial meltdown, people familiar with the matter said.

"This is where all the bodies are buried," said Charles Geisst, a former banker who now teaches at Manhattan College. "This is where you could see fraud on an institutional level."

Biden and Schneiderman have separate but parallel investigations into the matter and have signed an agreement to share information, people familiar with the cases said.

Schneiderman's office is particularly feared by bankers because the state has unusually broad laws that have allowed past holders of the office, including Eliot Spitzer, to pursue cases that slipped through the fingers of federal prosecutors.

"It's a different ballgame when you are dealing with the New York A.G.," said Brad Bondi, a securities lawyer at Cadwalader, Wickersham & Taft.

One of the strengths of New York law is that, unlike under federal law, prosecutors can build a case without proving that fraud was intentional. Even with this easier standard, Douglas Elliott, a former banker who is now with the Brookings Institution, said Schneiderman and Biden will have a hard time securing the convictions for which the public has hungered.

"Investigations like these are very difficult because they often hinge on intent," Elliott said. "It's extremely hard to judge intent unless there's a smoking-gun email or something like that."

A special congressional commission and a Senate committee have both done industrywide probes of Wall Street and pointed to wrongdoing in the mortgage operations of banks, but neither had prosecutorial abilities. They did pass on their findings to federal prosecutors, but so far the Department of Justice has not announced any broad investigations of how banks stoked the mortgage meltdown.

This throws even more attention on the probes being conducted by the two states, which is being hailed by advocates of homeowners and critics of the banks.

"It's long past time," said John Taylor, the head of the National Community Reinvestment Coalition. "One key to getting our economy back on track is to make sure we have safe-and-sound lending practices.… But more helpful than enacting those is enforcing the laws that are on the books now."

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