The Wall Street Journal reported today that several State Attorney Generals continue their investigation of mortgage practices. At issue is whether banks committed fraud by originating loans and then packaging them into securities for resale. While the investigation of mortgage companies is not new, the attorney generals have issued subpoenas for bond insurance companies who insured the securities. The attorney generals hope to get an idea of what settlements these companies have made with investors who were burned by their purchase of these securities.
While I applaud the effort of government officials to make sense of the securities mess, these efforts seem to be aimed to placate the public rather than hold anyone responsible. For example, Goldman Sachs has already paid nearly half a billion dollars to settle claims that they sold collateralized debt obligations that were designed to fail. Further, there have been claims that Goldman Sachs later shorted the CDO’s being sold to their clients. At this point, I think it is clear that the mortgage meltdown was largely driven by fraud and a lack of accountability. The effect this fraud has had on communities like Riverside County is immeasurable and will take Riverside years to recover. However, the more difficult question is who to hold accountable and how to enforce any penalty. Not surprisingly, the greatest feat of mortgage lenders has been their ability to avoid the risk of loss and spread the cost of their malfeasance on the American Public.