Bank of America Found Liable for Fraud in Historic Judgment

Photo by Brian Negin.

The issue of whether mortgage originators committed systematic fraud during the crisis has been settled once and for all. Earlier today, a jury concluded that Countrywide Financial, now a unit of Bank of America (NYSE: BAC  ) , defrauded Fannie Mae and Freddie Mac by selling them tens of thousands of defective mortgages.

Although numerous banks have settled similar claims out of court -- it was reported last week, for instance, that JPMorgan Chase (NYSE: JPM  ) is in the process of concluding a $13 billion settlement with the U.S. government -- this is the first time a bank has actually been held liable by a court for misleading the government about activities relating to the financial crisis.

This distinction seems nebulous, but don't let that fool you. Until now, banks have adamantly denied that they intentionally deceived anyone. Sure, their models and assumptions about the housing market were wrong. But so were everybody else's. And being wrong about something is a far cry from committing fraud.

At least for Countrywide and therefore Bank of America, however, a lack of knowledge or intent to deceive is no longer a viable defense. The formal legal definition of fraud is the "intentional use of deceit, a trick, or some dishonest means to deprive another of his or her money, property, or legal right." It turns, in other words, on culpability -- that is, intent.

In this case, which involved a program known within Countrywide as the "Hustle," it means that executives at the nation's then-largest mortgage originator purposely dismantled controls meant to ensure compliance with Fannie Mae and Freddie Mac's underwriting standards. It means that they knew that U.S. taxpayers would be left holding the bag for upwards of 30,000 toxic mortgages underwritten in a last-ditch effort to squeeze out a profit as the housing market came tumbling down in 2007 and 2008.

At this point, it's hard to say what the decision will cost Bank of America in terms of damages. The presiding judge, U.S. District Judge Jed Rakoff, announced previously that he would determine the amount when the jury delivered a judgment, which it now has.

The U.S. is seeking between $131 million and $848 million in damages from the program. But regardless of what it gets, this case will go down in history for much more than the amount of any civil penalty. When students and historians look back decades from now, it will serve as tangible evidence of the behavior that led the country into the worst financial crisis and recession since the Great Depression.

It will, as they say, go down in the history books.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2013, at 10:53 AM, pondee619 wrote:

    I'll note that the picture at the top of your story paints BoA in a poor light as if Bank of America committed the fraud. BoA didn't commit this fraud, did they. They bought Country Wide, the perpetrator, perhaps falling for the same mis-statements for which they are now charged with attoning. AT best (worst?) BoA failed to in their due diligence prior to buying Countrywide. Wasn't that during a time when the world was looking for "White Knights" to save the financial world from ruin?

  • Report this Comment On October 24, 2013, at 10:56 AM, kusinitz wrote:

    This is a good example of "buyer beware". Apparently the transgressions occurred before BOA absorbed Countrywide. BOA took on the potential liabilities as well as the assets of countrywide. So in taking on acquisitions, one had better avoid taking on a company without thoroughly understanding whether their internal standards match your own! Maybe they did match the internal standards of BOA, maybe not. And stockholders had better appreciate the culture of the company they are part owners of as an act of financial prudence.

  • Report this Comment On October 24, 2013, at 11:29 AM, TMFBane wrote:

    I agree that it's interesting to consider precisely what the Countrywide acquisition tells us about Bank of America.

    In January 2008, Ken Lewis was pretty excited about the deal. In the announcement, he said,

    "we view this as a onetime opportunity to acquire the best mortgage platform in the business at a time when the value is very attractive."

    Later Lewis told Maria Bartiromo that "we did extensive due diligence, probably twice as long as we've ever done on a deal."

    Yesterday, U.S. Attorney Preet Bharara presented it differently:

    "In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow. That profit, however, was built on fraud, as the jury unanimously found.

    In this case, Bank of America chose to defend Countrywide’s conduct with all its might and money, claiming there was no case here. The jury disagreed."

    How much did Bank of America know about Countrywide's operations at the time? I suspect they knew a lot more than they want us to believe.

    Foolishly,

    John Reeves

  • Report this Comment On October 24, 2013, at 12:16 PM, Kirk42 wrote:

    What we need next is some jail time for the people involved. Without that, there is zero motivation for anyone to avoid this kind of thing again. Sure BoA will pay out some cash, but the Countrywide management will keep their bonuses and liberty.

    Kirk

  • Report this Comment On October 24, 2013, at 12:38 PM, Risky88 wrote:

    I believe the quotes of these big banks at the time was

    If we dont pay these people what they ask they will go else where and we will be screwed.

    I say

    They're the ones that screwed up the whole thing, if this was china they would be hanging from a rope in middle of the city on display for future generations of executives.

  • Report this Comment On October 24, 2013, at 1:17 PM, anasianjew wrote:

    Interesting read. It is nice to see private corporations being dinged for outright fraud.

    Wonder if this standard has ever applied to government employees/politicians that knowingly waste hundreds of billions of dollars on defunct services/products (i.e. Obama care website). Spending millions of dollars developing a website that knowingly doesn’t work while going on the TV circuit saying “it will be a wonderful experience” is fraud no?

  • Report this Comment On October 24, 2013, at 1:36 PM, Sicb wrote:

    Question: How many days does it take to read each and every mortgage contract and all the references definitions, validations, authors, current laws, amendments, additions to ... need I say more. People are not Reading much of anything anymore. It seems like "Speed of Completion" is making all of use stupid.

    ... Imagine how many more institutions are waiting to fail due to 'not reading & understanding'. We seem to be becoming a race of 'clicks' syndrome candidates.

  • Report this Comment On October 24, 2013, at 1:55 PM, dogedook wrote:

    So does this mean that Agent Orange (Angelo Mozilo, former orangish head honcho of Countrywide) will now be a target for criminal prosecution?

  • Report this Comment On October 24, 2013, at 3:39 PM, jasenj1 wrote:

    Meh. Wake me up when SCOTUS rules. You know this ruling will be appealed instantly. I bet they had the filing ready to go before the ruling came out.

    And I agree that jail time is warranted. Until then, it's just people playing with other people's money.

  • Report this Comment On October 24, 2013, at 6:15 PM, xetn wrote:

    Wasn't BofA sort of forced into the acquisition of Country Wide?

    If so, the phrase of "buyer beware" was not operable. If not, they should have completed the purchase sans liabilities.

    There's that 20/20 hindsight.

  • Report this Comment On October 24, 2013, at 7:12 PM, cmalek wrote:

    "Until now, banks have adamantly denied that they intentionally deceived anyone."

    What about the thousands of mortgage documents fraudulently signed by hired signers purpurting to be bank officers??? That is not "intentional deception"?!

  • Report this Comment On October 25, 2013, at 1:13 AM, Rolfmeister wrote:

    For anyone that has been paying attention, the former Fleece Bank that morphed into Bank of America was run by crooks then and continues that fine tradition to their latest scandal. Next they will become Galatic Bank and start fleecing aliens at which point, hopefully, they will finally be eradicated by a Ray-gun.

  • Report this Comment On October 25, 2013, at 1:54 AM, RVBJ wrote:

    xetn in his 10/24/2013 comment prompts this query:

    "Who was responsible for regulating Country Wide prior to the B of A purchase?."

  • Report this Comment On October 25, 2013, at 3:33 AM, HeyPacketMan wrote:

    848 million in damages is like the bonus pool for the top ten executives at BoA. They'll hardly feel anything other than ten seconds of regret for buying Countrywide.

    Now let's talk about the special mortgages and other favors that Chris Dodd got form Countrywide. Or how about the corrupt practices at Fannie and Freddy and how they profiteered off of these SIVs.

    There's a really good whodunit book that takes apart the dealings between politicians of both parties, Freddie, Fannie and the corrupt financial institutions. I can't recommend it highly enough: "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon" by the Pulitzer Prize winning NYT business reporter, editor and columnist Gretchen Morgenson and cowriter Joshua Rosner.

  • Report this Comment On October 28, 2013, at 3:14 PM, dmiles2 wrote:

    Check out The Case Against the Fed by Murray Rothbard. A pdf can be found at mises.org

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