At the start of the financial crisis in 2007, my friend Chris Napolitano noted that the from the public’s point of view, the Indispensable Man had taken himself out of the battle. He was talking about Eliot Spitzer, whose work as Attorney General in exposing misdeeds on Wall Street certainly had certainly positioned him as the public’s most reliable watch dog. Spitzer, alas, destroyed himself.
Now he’s fighting back, and in his most recent article in Slate, he has illuminated a path that could lead to invaluable reform. “Since the early days of the current economic cataclysm,” he writes, “I have believed that we would, with some investigation, find the Rosetta stone that would demonstrate that the banks knew that the toxic mortgages they were packaging were, in fact, not viable financial instruments. . . .Some of these documents have emerged, and they tell quite a fascinating and appalling tale: These documents, from Clayton Holdings, a due diligence company retained by the banks, reveal that Clayton, after analyzing more than 900,000 mortgages, told the banks that about 30 percent of the loans being packaged into securitized products did not satisfy the banks’ own underwriting standards. This meant that the securitized products were almost bound to blow up.
“So what did the banks do? They essentially ignored this information. We all know why: The process of securitization shifted the risk to others, and the banks were making too much money by continuing to push the deals through the pipeline. But the critical aspect to this information is that it puts to rest the banks’ argument that they merely fell into the same econometric mistake that others had made in believing that the housing market was bound to keep rising. It wasn’t just that the banks were wrong about their forecast of the housing market; it is that they intentionally ignored critical information given to them by the very people who were supposed to perform due diligence. And then they apparently withheld from investors that critical information about the quality of the bonds they were selling. . . .
“[M]assive investigative resources should be put behind simple questions relating to the Clayton documents: Who saw these documents, and when? What was said about these documents to those up the chain of command at the banks? What efforts were made to verify the conclusions Clayton reached, to evaluate what the consequences would be if their conclusions were correct, and to notify federal authorities of the risk posed by securitizing so many substandard loans? What lawyers and investment bankers were told of this information, and what rating agencies had access to this information? And were major banks shorting their own securitized products after seeing negative due diligence information that they had not shared with the market? . . .
“It is not too late to use the Clayton information to claw back bonuses and hold the banks, rating agencies, and government enforcement agencies accountable.”
One more thing: answering these questions would go a long way to soothing the massive anger that is so disturbing American voters these days. They are lashing out in every direction. This is because they believe a massive crime has been perpetrated, that they are its victims, and that they, and not the perpetrators, are being asked to absorb the fallout. As we know, where there is no justice, there is no peace.