Americans still want to see some measure of justice for the misconduct that precipitated the financial crisis. But Monday’s decision by an appeals court to throw out a $1.27 billion civil penalty against Bank of America will surely generate some despair. So few cases have even been attempted that when a successful one gets reversed, it can raise questions about whether there were any good ones to make in the first place.

The truth is that there were cases out there—but the Department of Justice chose not to pursue them. The Bank of America case, though promising at first glance, wasn’t the most fertile ground for true accountability. When DoJ decided in the wake of the crisis to take the path of least resistance by engaging in this inadequate enforcement, what they really did was take a path to letting big banks and their executives off the hook.

The Justice Department initially won the case in U.S. District Court against Bank of America, though it primarily concerned conduct instigated by Countrywide Home Loans, which Bank of America purchased back in 2008. The year before, as the subprime market began to decay, Countrywide had initiated a lending program called the “High-Speed Swim Lane” or “HSSL” (pronounced “hustle”), designed to encourage its brokers to issue as many mortgage loans as possible, with no regard for borrowers’ ability to repay. Underlings told their superiors at Countrywide about the substandard quality of what were supposed to be prime loans, but the firm ignored the warnings and sold 17,611 of them to mortgage giants Fannie Mae and Freddie Mac, despite contractual guarantees that the loans were investment-grade.

The “hustle case” was brought by a whistleblower: former Countrywide vice president Edward O’Donnell, who argued that his ex-employer defrauded Fannie and Freddie. (O’Donnell later went to work for Fannie Mae.) A jury took about three hours to find Countrywide guilty, and Judge Jed Rakoff imposed the $1.27 billion penalty. Rakoff also ruled that Rebecca Mairone, the Chief Operating Officer of the division of Countrywide that initiated the HSSL program, must pay $1 million personally. That personal liability was a notable difference from other crisis-era cases, where banks, not their executives, make the payments.

A three-judge panel of the Second Circuit Court of Appeals overturned the lower court, ruling that while Countrywide breached its contract with Fannie and Freddie by selling them lower-quality loans than promised, the government did not prove what it had to: that Countrywide acted “knowingly and with a specific intent to defraud” at the time that the loans were sold. In other words, the Justice Department didn’t get sufficiently inside the minds of the executives to prove a deliberate scheme to defraud Fannie and Freddie.

This is not the end of the line for the case. The Justice Department can appeal to the entire Second Circuit or the Supreme Court. The three-judge panel included two appointed by George W. Bush and one by Barack Obama. By contrast, 8 of the 13 judges serving on the Second Circuit were appointed by Democrats—so it could get a better reception from the full panel.

But the case against Bank of America was a poor fit from the start—brought under a funky statute that, by its very design, could never have secured an acceptable punishment for the crime in question. There’s a bigger story here that gets to the heart of what the government hasn’t done to bring justice to the people who brought you the Great Recession.


The hustle case was all too typical of the way the Justice Department has approached the wrongdoings that precipitated the financial crisis. This was a civil case—meaning that DoJ did not not attempt to criminally prosecute anyone responsible. And federal prosecutors only sought a portion of the overall revenue Countrywide made from the sale of shoddy mortgages to Fannie and Freddie. While Countrywide received $2.96 billion from the sale, the government initially asked for a $2.1 billion penalty, and the judge granted $1.27 billion. No matter how this case turned out, all the DoJ was seeking was a portion of Countrywide’s ill-gotten profits.

Like many others, the case was prosecuted under a statute called the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which allows for a lower burden of proof and a ten year statute of limitations in cases of financial misconduct. But FIRREA comes with particular rules: The cases can only be civil in nature, and the fraud has to be seen as “affecting a federally-insured financial institution.”

The seeming legislative intent was to use FIRREA against individuals who rip off banks; the law came out of the savings and loan crisis, when executives often plundered their own banks for profit. But when the Justice Department pulled out the little-used FIRREA for crisis-era cases, it made the novel argument that misconduct by banks affected the bank itself. The Second Circuit chose not to rule on whether or not this passed muster, because the judges didn’t agree that the misconduct in the Countrywide case constituted intentional fraud.

But it’s clear that DoJ jumped through hoops to slot cases under FIRREA because it would be a little easier to prove them in court than standard securities or wire fraud cases. While that enabled the Justice Department to rack up some cash penalties, it constrained them from going full-bore after those who perpetrated fraud. FIRREA doesn’t allow for criminal charges. Evidence uncovered under FIRREA can be used in subsequent criminal cases, but DoJ never brought any of those. And as we’re seeing in the Countrywide case, the notion that FIRREA offered an ironclad way to impose some consequences on financial institutions was also wrong. Throwing away other avenues of exploration for the “sure thing” of FIRREA makes less sense if FIRREA isn’t as much of a sure thing.


What could the Department of Justice have done to bring some real justice to the perpetrators? There is an alternative set of cases that could have been brought, involving millions of pieces of documentary evidence of fraud. That’s the misconduct I detail in my new book Chain of Title, and it’s known as foreclosure fraud. Mortgage companies routinely delivered false documents to courts and county recording offices to show standing in foreclosure cases. Otherwise, they didn’t have the evidence necessary to prove they owned the loans.

Fraud upon state courts is in itself a violation of law, requiring no special statute or argument to bring the case. Any police detective would tell you that the way to prosecute the case would be to go up the chain, from who fabricated the document to who authorized it at their company, to which client asked for it, to who at that company authorized that. It would have been slow and meticulous, but if done properly, I have no doubt it would have implicated every major bank on Wall Street, because it was a standard industry practice. And it would have been informed by a paper trail, rather than insinuations about what was in an executive’s mind, as the Countrywide case hinged on.

There were a lot of frauds to choose from when determining how to prosecute post-crisis actions: origination fraud, securitization fraud, loan modification fraud, and foreclosure fraud, just to name a few. But only one of them included millions of pieces of false evidence passed off as real under penalty of perjury. Instead of making that the centerpiece of prosecutions, the Justice Department organized a state and federal settlement with the leading mortgage servicing companies over foreclosure fraud, whitewashing this misconduct for $25 billion, a dollar amount that looked good in headlines but was actually much lower than advertised.

The Second Circuit’s decision should not cause DoJ to retrench and shrink from prosecutions. It should spur the government in the future to think about the best way to provide the smoking guns the courts appear to want in these types of fraud cases. Sadly, when faced with millions of just such smoking guns on foreclosure fraud, the Justice Department put them all back in its holster.