by By Jonathan Weil
The Justice Department accused Bank of America Corp this week of defrauding Wachovia Corp and the Federal Home Loan Bank of San Francisco in a 2008 mortgage-bond deal. Here’s the funny part: Neither one has claimed it was defrauded by BofA.
If it is true they were ripped off, shouldn’t they have complained by now? Or sued? The government’s allegations make them seem like victims. However, they have not said publicly whether they believe there is merit to the prosecutors’ claims.
Perhaps most interesting of all, the Federal Home Loan Bank of San Francisco is suing BofA over a bunch of other soured mortgage bonds that it bought during the credit-bubble years.
Yet it hasn’t sued over the deal, called BOAMS 2008-A, that was cited in the Justice Department’s civil lawsuit.
From the looks of things, the home-loan bank reviewed various bonds it purchased and decided it didn’t get fleeced on that particular one. You would think its lawyers should know. Yet prosecutors took up the cause anyway. I asked a spokeswoman for the government-chartered home-loan bank, Amy Stewart, if it thought it had been defrauded. She declined to comment.
As for Wachovia, which was bought by Wells Fargo & Co in 2008, it hasn’t sued BofA over BOAMS 2008-A, either. Wells Fargo spokeswoman Mary Eshet also declined to comment.
The Justice Department filed its suit against BofA under a statute called the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which Congress passed in response to the 1980s savings-and-loan crisis.
The Securities and Exchange Commission filed a parallel lawsuit the same day. Another curiosity: The Justice Department accused BofA of committing fraud intentionally. The SEC alleged that BofA violated securities laws, but the sections it sued under only require it to prove negligence.
It all makes for a strange case. The Firrea statute imposes civil liability for violations such as mail fraud and wire fraud that affect “a federally insured financial institution.”
Last year, the US attorney’s office in Manhattan used Firrea to sue Wells Fargo in a case that’s pending. In that matter, Wells Fargo supposedly was the perpetrator.
There have been stranger applications of this statute by the government. In February, the Justice Department used Firrea to sue credit-rating company Standard & Poor’s. Prosecutors in that case alleged that BofA was defrauded by S&P ratings on subprime mortgage bonds that BofA itself created and sold.
The bank also invested in the bonds. And, the theory goes, S&P’s ratings were to blame for its losses. Citigroup Inc. allegedly was defrauded by S&P in the same way. (I realize this doesn’t make much sense.)
The Justice Department said there were five investors in BOAMS 2008-A, although it identified only Wachovia and the San Francisco home-loan bank. The buyers paid about $850m and lost more than $100m. The suit says BofA “knowingly and willfully misled investors about the quality and safety of their investments” by “making materially false and misleading statements” about the mortgages that were the collateral for the securities.
It’s worth pointing out that Wachovia settled fraud claims by the SEC after the housing bubble burst over mortgage bonds, auction-rate securities and bid-rigging in municipal-bond sales.
Almost all of the bonds cited in this week’s Justice Department complaint carried AAA ratings when they were issued. But this time, we’re supposed to believe S&P was innocent and that BofA was the culprit rather than the victim.
So let me get this straight: On one deal that S&P rated, it duped BofA, but in another almost identical situation, S&P was a blameless party when BofA duped someone else. No wonder prosecutors have trouble bringing successful cases tied to the financial crisis. You can’t tell who’s on first.
Good luck convincing a jury on this one. It would be great to see BofA take the case to trial.
Maybe then we could see if anyone employed by the allegedly defrauded banks will get on the witness stand and point a finger.
WP-Bloomberg
