The WSJ today covers the legal battles surrounding Countrywide Financial. The story is about the effort to hang somebody for the financial crisis. It also reveals much about the problems of criminalization of corporate agency costs, the politicization of criminal justice, and financial reform.
The case against Countrywide and its former ceo Angelo Mozilo is that Countrywide hid the subprime risks in its loan portfolio. The government is leaving nothing to chance. First the SEC gets a bite at the apple in a civil fraud case, which gives it a lower burden of proof on sticky issues like intent to defraud than the government would face in a criminal case. But waiting in the wings is a criminal prosecution. A former prosecutor is quoted as saying that “if the defendants are found culpable [in the civil case], the government gets momentum.”
The depositions of Mozila and others in the civil case can be used to attack the defendants’ credibility in the criminal case. This happened to an earlier defendant with a bulls eye painted on him, Jeff Skilling. Also, the WSJ quotes a former prosecutor as saying the civil case gives “a gift to prosecutors” by enabling them to evaluate defense strategy, evidence and witnesses. Of course the defense in the criminal case has a similar advantage regarding the government’s case, but overall the defendant is worse off with two trials than with one.
And then there’s the question of why all this effort to bring Mozila and his crew to justice? Well, it does help the public decide why we had a financial crisis. Mozila’s going to jail would go a long way toward showing the public it was all about greedy, lying financiers. The appropriate response, of course, is that we need more financial regulation to ensure that these creeps can never do this to us again.
Meanwhile, there’s another Countrywide investigation, into VIP loans that Countrywide made to Congressmen who might be considered Countrywide’s enablers. This investigation points to a different slant on the financial crisis, one that implicates the very regulators who are supposed to be protecting us from the financiers. This one is only an ethics probe, and the government has been less enthusiastic about this case than the prosecutors have been about Mozila. According to the WSJ:
The . . . probe has also raised questions about an investigation by the Senate ethics panel, which last year cleared Sens. Christopher Dodd (D., Conn.) and Kent Conrad (D., N.D.) of any rule violations in the VIP loans they obtained. In its public letter last year to Mr. Dodd, the committee said it interviewed former Countrywide employees, looked through thousands of pages of documents and examined the senator’s dealings with Countrywide back to 1999. But the letter referred specifically to only two VIP loans from 2003 that were the subject of a complaint by a watchdog group. Records obtained by the House probe show that Sen. Dodd received as many as six VIP loans, including refinancings, dating back to 1999.
This seems important. Just as Countrywide was supposedly lying to its shareholders it also may have been, in effect, bribing Congressmen to look favorably upon its business. These include a certain Senator Dodd, whose name is on the recent financial reform bill. Last year’s ethics probe suggests the government hasn’t been quite as aggressive on this front as it has been in pursuing Mozila.
In other words, the battle is really one to use the criminal justice system to define the narrative of the financial crisis. The Countrywide case might hand the government the victory in this battle it has been seeking.