WASHINGTON (CN) – Attorney General Eric Holder told a panel investigating the causes of the financial crisis that the FBI is investigating 2,800 mortgage fraud cases, nearly a fivefold increase since 2004. The announcement mirrors the fresh push by the Obama administration to pursue government-aided financial institutions.
The numbers reflect a hard line approach the Justice Department is taking against fraud. Half of the mortgage cases involve losses of more than $1 million.
The hearing marks the second day that the Financial Crisis Inquiry Commission has met to question witnesses in preparation for a report it is scheduled to deliver by mid-December on the causes of the crisis.
The commission – composed of six Democrat appointed commissioners and four Republican appointed members – had heard testimony from the private sector the day before when banking leaders, whose companies had collectively received more than $100 billion in federal aid, apologized for their risky behavior.
Public officials – including Securities and Exchange Commission Chair Mary Schapiro and Federal Deposit Insurance Corporation Chair Sheila Bair – testified during the second day, and all proposed stricter government regulation of the financial markets to prevent a similar economic downturn from happening again.
President Obama has said the same day that he is committed to “recover every single dime the American people are owed” from financial institutions that accepted government aid.
Holder was joined by Assistant Attorney General Lanny Breuer, who head’s the Justice Department’s criminal division. Breuer took a firm tone, warning people involved in fraud or who know of fraud that the department will be vigorously pursuing such cases and urged them to come forward before the department comes knocking on their doors.
Holder said he hopes the efforts to fight such crime will boost confidence in the financial system.
Bair from the F.D.I.C. pointed to the disproportionate growth of the financial sector as one problem leading up to the crisis. The field made up less than 15 percent of the nation’s economy in the 1960s but grew to 34 percent by 2008. “The excesses of the last decade represented a costly diversion of resources from other sectors of the economy,” she said.
She noted that at the time, it was difficult to place limits on financial practices – like risky mortgage lending and the selling of over-the-counter derivatives – that were generating so much profit. “It is very difficult to take away the punch bowl,” she said.
A derivative is a financial contract that transfers to another party the risk that an asset’s price will change. In the case of American International Group, the company had sold protection against investment risks without adequate capital to back up its commitments, resulting in a $180 billion government bailout.
Commissioner John Thompson asked whether the United States would have been better off if it had one oversight entity like those in Japan, England and Germany, instead of “patchwork quilt” of multiple regulatory agencies it currently employs.
But both Bair and Schapiro said that eliminating the patchwork would do little to improve oversight.
Schapiro instead mentioned that the S.E.C. could use more stable funding levels, noting that it differs from other regulatory agencies in that it’s financed by Congress. It therefore lacks funding for long-term planning and flexibility in applying funds to new areas of concern.
The panel also discussed credit rating agencies, which have been blamed for igniting the recession by mislabeling pooled mortgage securities as secure.
Commissioner Byron Georgiou noted that the rating agencies have a “conflict of interest of gigantic proportions.” Credit issuers want their securities to earn top ratings, so they hire lenient rating agencies, resulting in ratings inflation. In addition, the rating agency is often paid only when the rated product is sold, and they usually earn a percentage of the sale.
Needless to say, well rated products are sold more often and at higher prices and there is no legal standard of rating.
Georgiou suggested that the agencies maintain interest in the rated product by tying their pay to the investment’s long-term success or failure.
Former Democratic Florida Senator Bob Graham said that some have attributed the crisis to too much government involvement and he asked what the regulators thought.
Bair and Shapiro replied that more regulation, not less, is needed.