The federal criminal investigation into Washington Mutual’s lending practices has been closed. Further, it looks as if similar investigations into the mortgage lending of IndyMac Bancorp and New Century Financial are dormant and likely also to be closed. These three institutions were among the first to collapse under the weight of truly heavy subprime loan portfolios. Angelo Mozilo, former CEO of Countrywide (now saddled onto Bank of America), also escaped criminal prosecution when the investigation into his role in that company’s weighty subprime portfolio was also closed. Mr. Mozilo did pay a fine of $67.5 million and at least one IndyMac officer has settled civil charges.
We should not forget the derivatives of the subprime mortgage market and the players there. Ralph Cioffi and Matthew Tannin, the Bear Stearns hedge fund managers who were the first Wall Streeters to be charged criminally for their collapsed funds, were acquitted of all charges. However, the SEC announced this week that it will pursue civil charges against the two former managers.
We look at the financial carnage the mortgage lenders and the mortgage-based fund managers hath wrought and think, “Surely there was some crime here!†The proof of criminal intent and finding the fingerprints of crime are both tall orders. You look at the fact that a toddler’s remains were found in Hefty bags in a Florida swamp and conclude, “Surely there was something wrong here!†You glance at the carnage the subprime mortgage market caused and conclude the same. However, bad outcomes are not always the products of provable criminal conduct. Were the lenders and managers stupid? Nope. Were they ill-informed about the nature of the mortgages and CDO instruments? Nope. They based a business model on lending and selling practices that were developed, embraced, and expanded by herds of lenders and managers. They all went off the cliff together. Stupidity is not yet a crime. However, it can result in civil charges that stick, something we may have to settle for on this latest round of destructive business debacles.