Prosecuting Wall Street, pt. 2

if you looked at the financial statements of the major banks on Wall Street in the weeks leading up to the financial crisis of 2018 you wouldn't have guessed that most of them were about to crumble and require a trillion dollar bailout from the taxpayers it begs the question did the CEOs of these Banks and their Chief Financial officers withhold critical information from their investors if they did they can be subject to criminal prosecution under the sarbanes Oxley act for knowing ly certifying false Financial reports and statements about the effectiveness of their internal controls the justice department has not brought a single case against Wall Street Executives for violating sarbanes Oxley in spite of some compelling evidence tonight we take a look at City Group beginning with a former vice president named Richard Bowen the story will continue in a moment the there are things that obviously went on in this crisis and decisions that were made that people need to be accountable for why do you think nothing's been done I don't know until 2008 Richard Bowen was a senior vice president and chief underwriter in the consumer lending division of City Group he was responsible for evaluating the quality of thousands of mortgages that City group was buying from Countrywide and other mortgage lenders many of which were bundled into mortgage back Securities and sold to investors around the world Bowen's job was to make sure that these mortgages met City group's own standards no missing paperwork no signs of fraud no unqualified borrowers but in 2006 he discovered that 60% of the mortgages he evaluated were defective were you surprised at the 60% figure yes I was absolutely blown away this this cannot be happening but it was and you thought it was important that the people above you in management knew this yes I did I you told people did everything I could from the way I in the way of email weekly reports meetings presentations individual conversations yes how high up in the company my warnings which were echoed by my manager went to the highest levels of the consumer Lending Group Bowen also asked for a formal investigation to be conducted by the division in charge of City group's internal controls that study not only confirmed Bowen's findings but found that his division had been out of compliance with company policy since at least 2005 did the situation improve I started raising those warnings in June of 2006 the volumes increased through 2007 and the rate of defective mortgages increased to an excess of 80% so the answer is no the answer is no things did not improve they got worse Not only was City Group on the hook for massive potential losses Bowen says it was misleading investors about the quality of the mortgages and the mortgage security it was selling to its customers we managed to get our hands on a prospectus for a mortgage back security that was made up of home loans that Bowen had tested it says these loans were originated under guidelines that are substantially in accordance with City mortgages guidelines for its own originations its own mortgages is that a true statement no this is not some insignificant statement this is speaks to the quality of the of the mortgages that that investors are putting their money in yes and it's wrong yes and people at City Group knew it was wrong had been warned that it was wrong had been told that it was wrong yes in early November of 2007 with City's mortgage losses mounting Bowen decided to notify top corporate officers directly he emailed an urgent letter to the bank's Chief Financial Officer chief Chief risk officer and chief auditor as well as Robert Rubin the chairman of City group's executive committee and a former US Treasury secretary the letter informed them of breakdowns of internal controls in his Division and possibly unrecognized Financial losses existing within our organization why did you send that letter I knew that there existed in my area extreme risks and one I had to warn executive management and two I felt like I had to warn the board of directors you're saying there's a serious problem here you've got a big breakdown in internal controls you need to pay attention this could cost you a lot of money yes somebody needed to pay attention somebody needed to take some action the next day City Group CEO Charles prince in his last official act before stepping down signed the sarban Oxley certification endorsing a financial statement that later proved to be unrealistic and swore that the bank's internal controls over its financial reporting were effective I know that there were internal controls that were broken I serve notice in that email that they were broken um and the certification indicates that they are not broken uh would seem that the Chief Financial Officer and the people that signed the sarban Oxley certification disregarded those warnings it would appear we received a letter from City Group saying that the bank had acted promptly to address Richard Bowen's concerns and that the issues he raised were limited to his Division and had little bearing on the bank's overall Financial Health City Group also told us that it did not retaliate against Bowen for sending the email but not long after he sent it Bowen's duties were radically Chang changed I was relieved of most of my responsibility and I no longer was physically with the organization you were told not to come into the office yes Mr Bowen I'm very grateful to the commission to be able to give my testimony today the financial crisis inquiry Commission enough of Bowen's story to call him as one of its first Witnesses and he turned over more than a thousand pages of documents to the Securities and Exchange Commission nothing ever came of it but Bowen wasn't the only one to warn City group's top officials about its Financial weaknesses and breakdowns in the company's internal controls 3 months after Bowen's email City group's new CEO vicam Pandit received a blistering letter from the office of the controller of the currency its chief regulator it questioned the valuations that City had placed on its mortgage Securities and found internal controls deeply flawed the letter stated among other things that risk management had insufficient Authority and risk was insufficiently evaluated and that the City Bank board had no effective oversight yet eight days later CEO vickram panded and Chief Financial Officer Gary Crittenden personally signed the sarban Oxley certification they attested to the bank Financial viability and the effectiveness of its internal controls the deficiencies cited by the controller of the currency were never mentioned City said it didn't consider the problems serious enough that they had to be disclosed to investors and says the certifications were entirely appropriate but N9 months later City group would need a $45 billion bailout and $300 billion more in federal guarantees just to stay in business I don't think Wall Street senior people really think the'll lever end up in jail and they've been right Frank partnoy the Securities lawyer an expert on sarbanes Oxley law says the facts about City Group raised some troubling questions they certainly knew the internal controls were inadequate and the company was out of control from a reporting perspective and yet they signed the sarain Oxley letter saying that everything was fine I'm very surprised that the CEO and CFO would sign those letters I wouldn't have signed them under those conditions you're signing them under penalties of potentially 10 years in prison you're certifying that you designed and implemented effective internal controls in the aftermath of all this news about the company's problems how is that not a violation of sbang Oxley I don't know I think that it might be hard to establish knowledge that might be what prosecutors are thinking and not bringing the cases the letter was addressed to vicam Pandit the new CEO of City group and he had eight days to think about it from February 14th Valentine's Day he gets the letter and then February 22nd he sits down and signs his name certifying the financial statements are accurate and that he had designed and evaluated and reported any problems with internal controls 8 days is a long time on Wall Street I can't get inside his head but I would certainly think as a prosecutor that this would be something I'd be interested in asking some questions about we wanted to know what Assistant Attorney General Lanny Breuer thought about that and why no prosecutions have been directed at Wall Street we also wanted to know why sarbanes Oxley has not been used against big Banks like City Group you talk about sarbanes Oxley we have to know that you intended intended had the specific intent to make a false statement they knew there was a problem not only had they been told that there was a problem by one of their Chief Underwriters that the loans that they were buying were not what they claimed and that the federal government that the controller of the currency didn't think their internal controls were adequate either if a company is intentionally misrepresenting on its financial statements what it understands to be the financial condition of its company and makes very real representations that are false we want to know about it and we're going to prosecute it do you have cases now that you think that will result in prosecution against major Wall Street Banks we have investigations going on I won't predict how they're going to turn out has anybody at treasury or or the Federal Reserve or the White House come to you and said look we need to go easy on the banks that there are collateral consequences if you bring prosecutions that these some of these organizations are still very fragile and we don't want to push them over the edge Steve this department of justice is acting absolutely independently every decision that's being made by our prosecutors around the country is being made 100% based on the facts of that particular case and the law that we can apply it and there's been Absolut absolutely no interference whatsoever the perception I mean it doesn't seem like you're trying it doesn't seem like you're making an effort but the justice department does not have the will to take on these big Wall Street Banks Steve I get it I find the excessive risk taking to be offensive I find the greed that was manifested by certain people to be very upsetting but because I may have an emotional reaction and I may personally share the same frustration that American people all over the country are feeling that in and of itself doesn't mean we bring a criminal case if you had said two years ago that nobody was going to be prosecuted on Wall Street for the subprime mortgage Scandal I think people would think it's not possible sometimes it takes a number of years to bring these cases so I'd say to the American people they should have confidence that this is the department that's working hard and we're going to keep working hard so stay tuned

Channel: CBS News

Views: 47,223

Keywords: wall, street, whistleblower, finance, financial, mortgage, companies, crisis, housing, cbs, 60 minutes

Id: 84-U7F8XsmQ

Length: 12min 43sec (763 seconds)

Published: Sun Dec 04 2011