U.S.: Will Wall Street Ever Face Justice?

Last week, Attorney General Eric H. Holder Jr. proclaimed in a speech that when it comes to fighting financial fraud, the Obama administration's "record of success has been nothing less than historic." Such self-congratulation is not only premature, but it also reveals a troubling lack of understanding about what is required to win the war against financial wrongdoing.

Four years after the disintegration of the financial system, Americans have, rightfully, a gnawing feeling that justice has not been served. Claims of financial fraud against companies like Citigroup and Bank of America have been settled for pennies on the dollar, with no admission of wrongdoing. Executives who ran companies that made, packaged and sold trillions of dollars in toxic mortgages and mortgage-backed securities remain largely unscathed.

Meager resources have been applied to investigate the financial assault on our country, which wiped away trillions of dollars in household wealth and has resulted in 24 million people jobless or underemployed. The Financial Crisis Inquiry Commission, which Congress created to examine the full scope of the crisis, was given a budget of $9.8 million - roughly one-seventh of the budget of Oliver Stone's "Wall Street: Money Never Sleeps." The Senate Permanent Subcommittee on Investigations did its work on the financial crisis with only a dozen or so Congressional staff members.

Despite their limited budgets, both inquiries turned over rocks and exposed disturbing financial practices, and both entities referred potential violations of law to the Justice Department. The final reports from the two investigations were completed last year, but the resources that were needed to dig deep beneath those rocks - or the rocks turned over by private litigants or other investigatory efforts - weren't mobilized. One example: The Financial Crisis Inquiry Commission's report contains evidence about Clayton Holdings, a company hired by more than 20 major financial institutions to perform "due diligence" on mortgage loans those companies were buying, bundling and selling. Clayton sampled 2 to 3 percent of those mortgages and found a significant number of defective loans. Yet the other 97 percent were not sampled, and that fact and the information about loan defects were never disclosed to investors - "raising the question," the report noted, "of whether the disclosures were materially misleading, in violation of securities laws."

In numerous court cases, plaintiffs, including the Federal Housing Finance Agency, have cited this evidence to support their claims of fraud and misrepresentation. But, inexplicably, there is no indication that the Justice Department promptly convened a high-level investigation to thoroughly examine who knew what when at these banks. In contrast, after the savings-and-loan debacle of the late 1980s, more than 1,000 bank and thrift executives were convicted of felonies. But today the rate of federal prosecutions for financial fraud is less than half of what it was then.

The belated creation of a Residential Mortgage-Backed Securities Working Group, led by federal officials along with New York State's aggressive attorney general, Eric T. Schneiderman, offers hope that the needed surge of investigation and enforcement may finally be initiated. But for it to succeed, the Obama administration must give the group the wherewithal to do so.

First, the working group must have a strong and independent staff with the budget, expertise and training to do the job. This is vital given the bureaucratic inertia so far. Mr. Holder's commitment of 55 lawyers, investigators and other staff members is a start, but far short of what is needed. Keep in mind that the Dallas Bank Fraud Task Force from the savings-and-loan era, cited as a model at the time, had more than 100 law enforcement professionals on the job. And the new working group also needs to be free from political meddling, including from the House Republicans who have regularly run interference for their big-bank allies.

Second, bank regulators, who are currently not part of the group, should be. During the savings-and-loan crisis, regulators aided law enforcement by filing more than 30,000 suspicious-activity reports, making referrals and sharing expertise. During the deregulatory mania that led up to the crisis, regulators like the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (since abolished) made next to no referrals. Regulators can begin to atone for their past laxity by helping the working group now.

Third, the working group's scope needs to be broader - it should include mortgage origination, not just securitization. It should eschew a narrow view of mortgage fraud that focuses primarily on borrowers in favor of one that also encompasses the wholesale creation, sale and packaging of defective mortgages led by corporate executives.

Finally, the working group needs to prioritize the cases that caused the biggest losses and damage, moving with the creativity and flexibility that state attorneys general like Mr. Schneiderman have urged. The clock is ticking. During the S.&L. crisis, Congress extended the statute of limitations to 10 years from 5 for financial fraud affecting banks and some other types of financial institutions, but it's already been nearly eight years since the F.B.I.'s now famous warning of an epidemic of mortgage fraud. Congress should review the law to ensure that the 10-year period applies to the range of activities and institutions under investigation by the working group. And it should extend the statute of limitations if needed to permit a thorough investigation.

No one should seek or condone prosecutions for revenge or political purposes. But laws need to be enforced to deter future malfeasance. Just as important, the American people need to believe that a thorough investigation has been conducted; that our judicial system has been fair to all, regardless of wealth and power; and that wrongs have been righted.

Phil Angelides, a former state treasurer of California, was the chairman of the Financial Crisis Inquiry Commission.

• 208 Regulation