Congressional fact-finding hearings are generally unedifying spectacles, involving as they do the weird rite of ritual public witness humiliation and accomplishing little except the suggestion of troubling questions about the kind of person who manages to get elected to Congress. Some might say that the series of hearings about Wall Street and the Financial Crisis recently launched by the Senate Permanent Subcommittee on Investigations represents no exception to these usual rules about Congressional investigations.
Whether or not the hearings accomplish anything of durable value remains to be seen, but at a minimum, public statements accompanying the hearings contain assertions that could provide at least rhetorical aid for plaintiffs in some credit crisis related lawsuits.
As reflected in the Subcommittee’s April 12, 2010 press release (here), the Subcommittee will be hosting four hearings in April, the first of which took place this past Tuesday, when former Washington Mutual executive were called to testify. The second session will convene on Friday, April 16.
Most press reports about the first hearing focused on the claims by WaMu’s chief executive that the bank was permitted to fail because it was not part of the "inner circle" of financial institutions that were "too clubby to fail." For example, the New York Times’ April 13, 2010 article about the hearings was headlined "Ex-Chief Claims WaMu was Not Treated Fairly" (here).
Whatever else you might want to say about the CEO’s statements, they did manage to shift media attention away from the perhaps equally provocative statements the Subcommittee published in advance of the hearing, some of which undoubtedly will make their way into complaints in litigation arising out of the financial crisis.
The Subcommittee’s press release not only asserts that "the bank [WaMu] contributed to the financial crisis by making hundreds of billions of dollars in shoddy, high risk mortgage loans, packaging them, and selling them to investors as mortgage backed securities," but it also quotes Subcommittee Chairman and Michigan Senator Carl Levin as saying that WaMu "built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison in a river."
A separate Committee document (here) purports to document WaMu lending practices that "created a mortgage time bomb."
Contrary to the immediate impression that might be conveyed, the hearings had a purpose other than to provide a forum for high-octane rhetoric (not to mention mixed metaphors). According Levin’s statements in the press release, the hearings are intended to "provide a public record of what went wrong, who should be held accountable, and the ongoing need to protect Main Street from the excesses of Wall Street."
The press release does not expressly address the question of "who should be held accountable," but the press release, the initial hearing itself and the committee documents do tend to isolate the Committee’s message, as was captured in the April 13, 2010 Seattle Times article about the hearings entitled "WaMu Execs Saw Warning Signs of Deteriorating Loans" (here).
The Committee’s press release suggests a number of ways the Committee faults the bank’s executives for its failure, and even perhaps for damage to the larger economy. First, again quoting Levin, the press release states that "examining how Washington Mutual operated, and what its insiders were saying to each other, begins to open a window into the troubling mortgage lending and securitization practices that took our economy over a cliff." This reference to what "insiders were saying to each other" is the very sentiment that often makes its way into securities class action lawsuit complaints.
The press release further targets the company’s management for its "conscious decision to focus on high risk mortgages, because higher risk loans offered greater profits." At the same time, the report claims, internal reports show that the bank’s loans "did not comply with the bank’s own credit requirements, contained fraudulent or erroneous borrower information and suffered from large numbers of early defaults."
The company’s management also comes in for criticism in the press release for the company’s compensation practices, which "rewarded loan officers and loan processors for originating large volumes of high risk loans, [and] paid extra to loan officers who overcharged borrowers or added stiff prepayment penalties." The press release dials all of these compensation problems back to management, noting that the company’s compensation system "gave executives millions of dollars even when its high risk lending strategy placed the bank in financial jeopardy."
These kinds of assertions undoubtedly could provide at least rhetorical support for investors pursuing claims against the company’s former executives. But there are additional assertions in the press release that could prove useful for claimants in cases filed against the financial institutions that were securitizing the WaMu-originated mortgages into mortgage-backed securities. Certainly the allegations about WaMu’s mortgage practices are very much like the supposed "systematic disregard" of underwriting guidelines by mortgage originators that has proven to be a relatively successful allegation in other lawsuits filed against mortgage securitizers (about which refer here).
The press release also asserts that "WaMu selected and securitized loans that it had identified as likely to go delinquent, without disclosing its analysis to investors who bought the securities." The press release also states that "an internal 2008 report found that lax controls had allowed loans that had been identified as fraudulent to be sold to investors." Investors who purchased securities collateralized by WaMu mortgages undoubtedly will be aggrieved to hear these kinds of assertions.
Whether or not the hearings lead to anything useful is a story yet to be told. However, it does seem that the process is calculated to identify (and even vilify) purported culprits. As my review of the press release suggests, this process may have implications for continuing credit crisis-related litigation, whatever else may happen.
In any event, it looks like the cast of culprits will be expanding. According to an April 16, 2010 Wall Street Journal article entitled "Spreading Around the WaMu Blame" (here), further Subcommittee hearings to take place on Friday (April 16) will include testimony that a turf war between banking regulators contributed to WaMu’s collapse. Apparently the report will suggest that the Office of Thrift Supervision failed to follow up on deficiencies and resisted FDIC efforts to be more aggressive.
Lerach: Coming Back?: At least according to Ben Halliman in the AmLaw Litigation Daily (here), former securities class action attorney and convicted felon Bill Lerach may have launched his comeback tour. As Halliman notes, Lerach recently sat for an interview in the San Diego Union-Tribune, here.
It seems fair to say that Lerach is bloody but unbowed. He remains "very proud of the work we did representing people who were taken advantage of by rich and powerful interests. We recovered substantial sums for these people and, more importantly, gave them a sense that someone in the legal system cared about them." More pointedly, he says that "I would not have done anything differently," noting that the system of paying plaintiffs predated his involvement, yet conceding that "we were wrong to think the ends justified the means."
The interviewer did also ask him about the recent book focused on his professional career, "Circle of Greed" (which I reviewed here). Lerach said:
The book is very tough on me, and it certainly exposes a lot of my faults and mistakes. I guess we all wish we were perfect but we are not, and when you have two very good investigative reporters comb through 35 years, it comes out with some blemishes for sure. On the other hand, the book presents how hard my law firm worked on behalf of our clients and how much we achieved against extremely powerful and influential interests. So, I can’t complain about the way the book came out even if I might want to change some things.
For those who may be interested, my interview of the authors of "Circle of Greed" can be found here.
PLUS Webinar: On April 22, 2010, at 2:00 P.M. EDT, I will be participating in a free webinar sponsored by the Professional Liability Underwriting Society (PLUS) entitled "D&O Insurance and the Outcome and Timing of Securities Class Action Resolution: What New Data Shows." The purpose of the webinar is to discuss recent research completed by Stanford Law School Professor Michael Klausner on the impact of D&O insurance on securities class action resolutions. Professor Klausner’s research also addresses the timing of case resolution and factors affecting the eventual outcomes.
Joining me on the discussion panel, in addition to Professor Klausner, will be Steve Anderson of Beecher Carlson and Todd Greeley of C N A. The session will be moderated by Paul Lavelle of LVL Claims Services. Additional Information and Registration Instructions for this webinar can be found here.
My Nomination for Funniest Roomate Ad of All Times: Where to go if you are looking for a place to live in Santa Cruz, and you happen to be a tetrahedron? No worries, find it here.