Angelo Mozilo, the former head of Countrywide Financial, isn't going to jail. In fact, he won't even face a trial in which there's a chance of going to jail -- nor will he experience the stress of being charged.

Countrywide's vast numbers of fraudulent mortgages -- which were created to feed a securitization machine, not to secure repayment of properly underwritten loans -- may still doom Bank of America (BAC), which purchased Countrywide in 2008. Countrywide was such a bad actor it was sued by 11 attorneys general, leading to an $8.7 billion predatory lending settlement.

Sufficient evidence of Mozilo's knowledge of -- indeed, his direction of -- Countrywide's bad deeds existed for him to accept a record $67 million settlement with the Securities and Exchange Commission. As large as that was, from the point of view of anyone looking for justice, the deal was entirely unsatisfactory. First, because Bank of America picked up most of the tab. Second, because even if Mozilo had paid the full amount, it would only have been about half of the $132 million he took home in 2007.

The New York Times reported this weekend on a Countrywide whistle-blower -- Michael Winston -- who wouldn't play ball with the company's practices, and was fired as a thank you. A jury awarded him $4 million as compensation for the firing. Surely Winston could have been a witness for the prosecution. But the prosecutors have dropped the case.

Mark Malone, a former federal and state prosecutor who spent eight years prosecuting the mob, white collar criminals and political corruption, said:
"Mozilo was the boss of bosses of predatory lending. He was the inspiration for MERS, the electronic database used to facilitate much of the fraud surrounding predatory lending, mortgage securitization and fraudulent foreclosure practices. If prosecutors are not going to go after low-hanging fruit like Mozilo, the rest of the bankster bosses can sleep well, assured that their fortunes are secure.
Why No Bankers Have Been Charged

Mozillo is just one of a line of financial crisis titans -- in my opinion, crooks -- who are not being criminally charged. And in the little civil justice pursued so far, not only have judges questioned the lightness of the settlements, but the SEC's top cop, Robert Khuzami, is being investigated for overruling prosecution-minded SEC staff and cutting a sweetheart deal for a couple of Citibank (C) executives.

So what is going on? After all, we're a nation that takes fighting crime so seriously we use SWAT teams and submachine guns to pursue marijuana possessors and dealers. And we go after some white-collar crime aggressively, such as targeting insider trading with wiretaps and informants. We even convicted some of the Enron guys, and jailed a big law partner for facilitating the Refco fraud.

But not a single architect of the financial crisis that brought America to its knees has yet been charged. And of all the crimes against "the People," the financial crisis ranks as one of the all-time worst.

As Yves Smith at business blog Naked Capitalism touched on, one reason prosecutors aren't acting has to do with the laws and attitudes of the enforcers. Another reason, detailed by Matt Taibbi in Rolling Stone, is the revolving door between the U.S. Attorney's office in the Southern District of New York and the SEC on the prosecution side, and the big firms that defend the crooks. (The SDNY has Wall Street in its jurisdiction. Although the SEC can't bring criminal charges, it investigates and sends cases to the SDNY.) To that list, it's important to add the revolving door between big corporate law firms and the Justice Department in Washington.

When the Cops And Crooks Are Pals

Smith notes in part that the U.S. Attorney's office in New York has set a ludicrously high bar for itself: If conviction isn't 100% certain, don't even bother filing the charges. One result of the must-be-able-to-guaranty-victory standard, Smith says, is that the prosecutors are inexperienced and don't do a good job when they do prosecute, like in the Bear Stearns traders case. Another result is that the criminal statutes have no deterrent effect on white collar crime. Deterrence is based on the certainty of getting caught and prosecuted, not on whether the prosecution will be successful or how severe any punishment would be.

In a follow up, Smith highlights both the lack of resources given to the SEC -- surely a factor -- and the resume-building incentives of SEC staff to go for a bunch of quick settlements rather than a big, time- and resource-consuming jury trial.

Taibbi's piece, if your blood pressure can take it, is worth reading in full. I'll impart only one example of the anti-justice relationship between the SDNY prosecutors and their erstwhile targets, and that's the tale of Gary Aguirre, an SEC staffer wrongfully fired shortly after he tried to investigate an insider trading case.

In the summer of 2005, Aguirre had enough evidence that then-Morgan Stanley (MS) CEO John Mack had supplied inside information to a trader to want to interview Mack. But Aguirre' boss tried to discourage him, citing Mack's political connections. Within a few days, Mack's power was on full display. First, Morgan Stanley had a former top staffer of the "Sheriff of Wall Street" Eliot Spitzer try to dissuade Aguirre. Then the SEC's director of enforcement told Mary Jo White, a Morgan Stanley attorney who was once the U.S. Attorney for the SDNY, that the evidence didn't amount to much, reassuring White.

As Taibbi explained:
Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive -- not handcuff the guy or impound his yacht, mind you, just talk to him. [But] his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division ... Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

... A month after [Aguirre] complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. ... [Aguirre] had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal."
Observe the switch for White, Lynch and the Spitzer aide, as they jump from policing Wall Street to apparently nipping a worthy insider trading investigation in the bud, and prompting the firing of the person who dared initiate it. Taibbi has more examples in his piece, including, as Smith discusses, Khuzami making inappropriately defense-friendly comments at a high-priced schmooze-fest between Wall Street enforcers and the white collar defense bar.

As Taibbi notes, "over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions."

Attorney General Eric Holder and his top staff have spun through that revolving door too.

The Front Door at Justice Leads into Covington & Burling

Prior to becoming attorney general, Holder was a litigation partner at Covington & Burling in its D.C. office for eight years. In particular, his practice involved "high stakes civil litigation and white collar criminal defense." In 2008, Holder was one of six Covington attorneys ranked top in the country in white collar criminal defense. Another awardee -- and co-chair of the white collar criminal defense department at Covington -- was Lanny Breuer, now the assistant attorney general in charge of the criminal division. The Best in America White Collar Criminal Defense award was one both attorneys had received multiple times. The firm as a whole was "recognized by Chambers USA (2010) as one of the nation's leading firms in the field of Financial Services Enforcement and Investigations."

But the Justice-Covington connection reaches past Holder and Breuer. It includes Holder's recent deputy chief of staff, James Garland, who just rejoined Covington, where he defends white collar criminals. Until rejoining Covington, Garland
"advised Attorney General Eric Holder on a range of enforcement issues, with an emphasis on criminal...matters, and helped to spearhead the Department's response to the ongoing economic crisis. He was deeply involved in the creation of President Obama's Financial Fraud Enforcement Task Force... He worked closely with senior officials at the White House, Main Justice, the U.S. Attorneys' Offices, and other federal, state, and local enforcement agencies." [Bold added]
Remember, folks: "President Obama established the Financial Fraud Enforcement Task Force (FFETF) in November 2009 to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening."

Nor is Garland the only Covington connection to that task force. Partner Steve Fagell was
"a member of the Criminal Division's senior leadership team, [and] a key advisor to Assistant Attorney General Lanny A. Breuer ...[Fagell] was integrally involved, for example, in the formulation and communication of Division policy in connection with...corporate and securities fraud, and other forms of financial fraud. ...Mr. Fagell also coordinated the Division's work with the Financial Fraud Enforcement Task Force and the Financial Crisis Inquiry Commission, and he routinely represented the Division in meetings with the SEC, the FBI, and other key regulators and law enforcement agencies." [Bold added]
Another notable player who recently rejoined Covington is John Dugan, the recent head of the Office of the Comptroller of the Currency. The OCC regulates the big banks. As Covington explains:
"During his five-year term, he led the Office of the Comptroller of the Currency (OCC) through the financial crisis and ensuing recession that resulted in extraordinary regulatory and supervisory actions for national banks of all sizes, including government assistance provided under the Troubled Asset Relief Program (TARP)..."
Partner David Kornblau was the Chief Litigation Counsel for the SEC's Enforcement Division from 2000-05, and then went to Merrill Lynch for four years. At Merrill, Kornblau:
"oversaw the firm's responses to regulatory and law enforcement investigations by the SEC, DOJ, FINRA, New York Attorney General's Office, and other federal, state and foreign regulators. These matters concerned all of the firm's business areas, including subprime mortgage securities..."
Kornblau went from Merrill to Covington. One of his representative matters is "Defend[ing] Merrill Lynch in investigations concerning disclosure and valuation of the company's inventory of subprime mortgage securities."

The Credibility of the Revolving Door

And the list goes on. Indeed, Covington itself notes that:
Our white collar practice includes 30 partners, most of whom are former prosecutors and SEC enforcement attorneys who have held senior positions in United States Attorney's Offices, the U.S. Department of Justice, the White House, the Securities and Exchange Commission, and other government agencies involved in white collar criminal and regulatory enforcement.
Covington claims that its experience has paid dividends: it has " a deep and invaluable reservoir of credibility with courts, prosecutors and regulatory agencies nationwide."

In addition Covington boasts of a deep, decades-long relationship with the financial services industry. That relationship is encapsulated by another recent Covington hire: Edward Yingling, the just retired president and CEO of the American Bankers Association. Covington points out that "The breadth of Ed's experience will be a tremendous asset to our clients" in all types of enforcement actions.

Covington has represented the financial industry in ways relevant to the prosecution of the mortgage fraud and related securities fraud at the center of the meltdown. Check out Covington's "Financial Institutions Investigations" subdivision of its white collar criminal defense division, and its broader "Financial Services" practice descriptions.

Specific matters include representing (taken from various Web pages at Covington except the last):
Freddie Mac in enforcement inquiries initiated by its federal financial regulator (OFHEO) and SEC ...

Two former national bank officers in formal investigations before OCC regarding loan underwriting ...

The former CEO of IndyMac Bancorp in matters arising out of the failure of IndyMac Bank ...

Wells Fargo in litigation ... with respect to securitization of subprime mortgage loans on properties located in Cleveland."

Underwriting syndicate [that is, investment bankers] in a class action alleging securities fraud.

A global financial services firm in an action brought by companies that insured principal and interest payments for a collateralized debt securitization.

MERS
(at p. 5.) The presentation by MERS notes its registry was "Supported [by] Covington & Burling legal opinion."
More Than the Appearance of Conflict of Interest

But why does the tight relationship between Covington and Main Justice matter if I'm not alleging specific impropriety of the types Taibbi described? And I'm not. Indeed, as a general matter, outside of prosecuting financial fraud by Wall Street titans, I'm not suggesting that the relationship matters at all.

But within that narrow but important context, how happy are you that your top prosecutor (Holder) and his key deputy (Breuer) were award-winning white collar defense partners for the same law firm that their recently departed staff (Garland, Fagell) just joined as partners? That's quite a bridge between enforcers and targets, isn't it? And what did Holder and Breuer learn, and what relationships with the banks and their execs did they develop, while practicing at Covington?

Does it give you a warm and fuzzy feeling to realize that those same two ex-staffers were deeply involved with what is supposed to be the key system for holding the architects of the financial crisis accountable? Are you thrilled that the top bank regulator for the past five years (Dugan) is now working for the banks? And after finishing their turns at Justice, where do you imagine Holder and Breuer will end up? After their previous turns at public service, they returned to Covington.

Malone noted: "Since becoming Attorney General, Holder's Justice Department has been extraordinarily passive in pursuing criminal and civil remedies against the mortgage bankers, securities firms and mortgage servicing businesses at the heart the 2008 collapse of our economy. ... The Covington & Burling relationship provides a glimpse into why the Department of Justice has been so passive."

What should be done about this situation? Well, attorneys are supposed to sit out cases where there's a conflict of interest, even with former clients. The model rule says an attorney is prohibited from representing a client -- and in this hypothetical instance, that client would be "The People" -- whose interests are "materially adverse" to a former client of that attorney or of the attorney's law firm -- that would be Covington's clients -- unless the former client consents. And if consent is given, the attorney can't use information from the former client to the disadvantage of that client, even if it would help the current client. That is, if Holder or Breuer knew some dirt, they couldn't use it.

Given their tenures at Covington, how likely is it that Holder and Breuer are free of conflicts when it comes to pursuing the titans of the financial crisis? Personally, I'd be a whole lot happier if they'd recuse themselves from such matters and name someone else with a strong prosecutorial background but no tenure -- no recent tenure at least -- representing the big banks or Wall Street.

But that's about as likely, I imagine, as criminal indictments of Wall Street.


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