Breakingviews- BofA trial could cut crisis accountability deficit

Tue Sep 24, 2013 11:20pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Reynolds Holding

NEW YORK, Sept 24 (Reuters Breakingviews) - Bank of America's (BAC.N) mortgage fraud trial could provide some financial crisis accountability. The bank, like its peers, has paid hefty settlements without admitting fault. Now it must answer to a U.S. jury for selling Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) dodgy loans. BofA could beat the charges, but it may finally have to come clean about its Countrywide unit's role in the 2008 meltdown.

The Justice Department says Countrywide, which BofA acquired that year, was recklessly speeding mortgage approvals in 2007 while assuring Fannie and Freddie it was tightening standards. As a result, the government-sponsored enterprises were duped into buying loans that defaulted to the tune of $850 million, prosecutors claim. The bank says it was working in good faith to streamline a prime-loan process after the subprime market collapsed, and it tried to fix glitches while keeping Fannie and Freddie informed.

Lawsuits like this usually settle, sometimes for billions of dollars. But the payouts are often viewed as a cost of doing business rather than an effective deterrent, and the facts behind the transactions rarely emerge.

That has prompted federal judges like Jed Rakoff to require admissions from the accused. After he blocked a $285 million Citigroup settlement with the Securities and Exchange Commission because the bank refused to admit or deny wrongdoing, the SEC has tried to extract confessions of guilt in more cases.

Even the watchdog's new policy has drawbacks. JPMorgan's (JPM.N) $1 billion "London Whale" settlement with the SEC and others, for instance, included admissions. But they were narrowly focused on record-keeping violations and skirted broader allegations like fraud.

Trials, on the other hand, air all the facts and reach clear resolutions. The public will probably never learn what really happened, for example, with Citigroup's (C.N) failed collateralized debt obligation. But under Rakoff's gaze the story of Countrywide's mortgages may now be told in full.

That's useful for lawmakers and regulators still grappling with the financial crisis. Determining whether the lender made honest mistakes or deliberately foisted bad loans on Fannie and Freddie could help define better rules and even avoid another crisis. Jury trials are a costly way to find answers. But they can be worth it.

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CONTEXT NEWS

- Bank of America is scheduled to go to trial on Sept. 24 over charges that its Countrywide unit defrauded Fannie Mae and Freddie Mac by selling them defective mortgages. The civil lawsuit filed by the U.S. Justice Department in 2012 alleges that the bank caused the two federally-backed organizations more than $1 billion in losses.

- It would be the government's first trial against a major bank involving mortgages linked to the financial crisis. It would also be one of the few times prosecutors have sued banks under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), a 1989 law enacted to protect financial institutions from wrongdoing by others.

- Starting with jury selection, the proceedings are expected to last about five weeks. U.S. District Judge Jed Rakoff is presiding over the case in New York.

- Reuters: Bank of America goes to trial over U.S. mortgage fraud charges [ID:nL2N0HF21O]

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(Editing by Richard Beales and Emily Plucinak)

((reynolds.holding@thomsonreuters.com)(Reuters messaging reynolds.holding.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS BOFA/MORTGAGE TRIAL

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