Why the Banks Should Be Broken Up

The typical arc of this scam went as follows: Giant bank lends money to sleazy mortgage originator, mortgage originator makes lots of dicey home loans, the dicey home loans get sold back to the bank, the bank pools and securitizes the loans, and finally the bank sells the bad merchandise off to an unsuspecting investor.

The criminal scenario that was most common was a gigantic bank buying up huge masses of toxic loans from a Countrywide or some other fly-by-night operation and knowingly selling this crap as a good investment to some investor.

We chronicled an example of this in “The $9 Billion Witness,” the story of JP Morgan Chase whistleblower Alayne Fleischmann, who lost her job after trying to stop the bank from selling a parcel of bad mortgages. JP Morgan Chase ended up saddled with a $13 billion settlement after it admitted to making “serious misrepresentations” to mortgage investors.

What’s so baffling about Krugman’s column is that there is a massive amount of documentary evidence outlining this behavior, committed by virtually every major bank in America. There was a $7 billion settlement paid by Citigroup, which incidentally is the company that Bill Clinton originally repealed the Glass-Steagall Act to create. Citi admitted to hawking merchandise that violated their own internal credit guidelines.

Citi also bilked investors out of huge sums, and we know a great deal about its behavior because it too had a whistleblower, named Richard Bowen. Bowen sent the SEC over 1,000 pages documenting “fraud and false representations given to investors.”

There were virtually identical billion-dollar settlements involving Bank of America, Goldman Sachs (which is now a bank holding company, remember) and Morgan Stanley (ditto).

Wells Fargo’s settlement is another blunt repudiation of Krugman’s point, because in the case of Wells, the bank itself was engaging in predatory lending at the street level, not just selling crappy mortgages to investors.

Wells had to pay $175 million to settle charges of overcharging 4,000 minority homeowners in a case that saw evidence come out that the bank specifically targeted black customers (referred to in one office as “mud people”) for “ghetto loans.”

Let’s not forget also that not only were the big banks intimately involved in the signature fraud of the era — the creation and repackaging of toxic mortgage loans — they were also involved in wide-ranging foreclosure abuses.

Companies like Bank of America, Citi, Wells Fargo and Chase ended up being stuck with an additional $25 billion settlement just for the tawdry document-fudging “robosigning” scheme that helped accelerate the foreclosure crisis. 

And did Krugman miss the other headlines from this era? Did he miss HSBC being nailed for laundering hundreds of millions of dollars for Central and South American drug cartels? How about the money-laundering scandals involving Chase, the British Bank Standard Chartered, the German Commerzbank AG and others, in which banks washed cash for crooks and rogue states?