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.