ECONOMICS JULY 30, 2013
The unstated purpose of reality television is for viewers to feel superior to the poor saps on screen. And this week it is also apparently the purpose of the Department of Justice, which indicted two of the stars of “The Real Housewives of New Jersey” on Monday. In a case involving the Federal Deposit Insurance Corporation (FDIC) Inspector General, the IRS, the U.S. Bankruptcy Trustee and the U.S. Attorney’s office in New Jersey, Teresa Giudice and her husband Joe stand accused of cheating on their taxes, hiding assets from a bankruptcy court and, in what is described as a “mail and wire fraud conspiracy,” fraudulently obtaining several home mortgages with false applications from 2001 to 2008.
“The Giudices falsely represented on loan applications and supporting documents that they were employed and/or receiving substantial salaries when, in fact, they were either not employed or not receiving such salaries,” reads the indictment.
Far be it from me to get in the way of a stampede of schadenfreude. But before we move straight to delighting in the misfortune of obnoxious pseudo-celebrities, let’s note that this case actually feels like a rerun. Since the financial crisis, the Justice Department swears it’s made strides in prosecuting financial fraud. What it means is that it has found defendants like Teresa and Joe Giudice, who commit the crime of lying to a bank. Meanwhile, the banks—who have lied to homeowners, courts, investors, and bankruptcy trustees—have escaped prosecution entirely.
Consider the disparity in offenses here. According to the indictment, the Giudices would fill out loan applications claiming Teresa drew a salary as an executive assistant or owner of a stucco company. The couple would even submit fake pay stubs and IRS forms to this effect. In actuality, Teresa was not employed at all; she was actually a real housewife. The Giudices pulled off this mortgage loan scam six times in seven years, securing mortgage loans or home equity lines of credit totaling around $2.4 million (they used a similar scheme to acquire $2.5 million in loans for a pretend construction business).
These sound like big numbers, and they are until you remember that 11 leading banks illegally foreclosed on as many as 244,000 borrowers, who had either not actually defaulted on their loans, were approved for a loan modification or were supposed to be protected by various federal laws. And in nearly all of these cases, the banks proved their standing to foreclose in court by presenting false documents, exactly what the Giudices stand accused of.
Assuming an average loan value of $200,000, that puts the bank haul at $48 billion, some 20,000 times the value of Teresa and Joe Giudice’s mortgage take. Keep in mind that this is not a comprehensive number; the amount of false documents peddled by the banks in various foreclosure fraud scandals easily number in the millions, if not tens of millions. And yet no bank executive faces a maximum penalty of 180 years in prison for mortgage fraud, the way the Giudices do.
Another part of the Giudice indictment alleges that they lied to the U.S. Bankruptcy Trustee, by hiding income made from “The Real Housewives of New Jersey” and other sources during a 2009 bankruptcy filing. Yet mega-banks like JPMorgan Chase have been accused in class action lawsuits of producing false evidence in “tens of thousands” of bankruptcy proceedings. In one celebrated case, bankruptcy judge Elizabeth Magner hit Wells Fargo with a $3.1 million fine on one loan, for routinely misapplying payments and overcharging the borrower. In the course of the trial, Judge Magner learned that “Wells Fargo admitted that these actions were part of its normal course of conduct, practiced in perhaps thousands of cases.” Banks have been found to systematically lie to bankruptcy courts, yet their executives don’t appear on TV shows tossing over furniture and getting into slap fights, so they commit these crimes with impunity.
It would be one thing if the Giudices were an anomaly in this two-tiered system of justice. But during the Obama Administration’s two terms, a commitment to fighting mortgage fraud has mostly meant a commitment to prosecuting people who lie to banks. Here are some highlights from just the past several months. In June, executives from American Mortgage Specialists were sentenced for lying to obtain $28 million in funds from BNC Bank of North Dakota. The chief executive of U.S. Mortgage, a loan servicer, pled guilty last month to defrauding Wells Fargo of $8 million. In March, an Orange County couple was sentenced to prison for bilking seven banks out of $5 million. Here’s another. And another. And another. And another. And another. In fact, the only top executive to go to jail for foreclosure fraud is Lorraine Brown, the CEO of a document processing company, convicted for passing off those false documents to banks, as if she just committed that conspiracy on her own without any direction, duping the poor Wall Streeters.
Are these legitimate sentences? They appear so. But are the resources spent on prosecuting them outsized compared to the resources spent on prosecuting bankers for defrauding homeowners, investors and courts? I don’t see how you could say no. In the case of the Giudices, four separate agencies contributed to their indictment. And all of the individuals in the above cases received prison time. But no bank executive has spent a day in jail for systematic abuses which, by the way, helped sink the economy and prolong the misery of the foreclosure crisis. If banks get cited for their myriad crimes at all, they buy their way out of trouble with settlements for negligible sums.
The focus on small fry in financial fraud enforcement serves two purposes. First, it gives the Justice Department a talking point, however cockeyed, to prove their worthiness in prosecuting financial malfeasance. They can claim that “mortgage fraud is a top priority of this Administration.” More important, this sends a subtle yet chilling message, that the federal government will throw its weight at anyone who dares to defraud a bank, rather than securing justice against banks that defraud customers. A high-profile indictment like the Giudices will produce lots of headlines and send that message loud and clear, that cheating banks is not tolerated in America. The real “irresponsible” parties of the financial crisis, in this reading, are homeowners who lied on loan applications, not mortgage brokers who sold what were actually called “liars’ loans,” and committed documented falsification of applications to fool underwriters. Most of those brokers avoided jail, too.
I recognize I’m in the unenviable position of defending two stars of the “Real Housewives of New Jersey,” who appear to be fairly terrible people. But when U.S. Attorney for New Jersey Paul J. Fishman said in a statement Monday, “Everyone has an obligation to tell the truth when dealing with the courts, paying their taxes and applying for loans or mortgages… That’s reality,” he should be honest and recognize that said reality comes with an asterisk. In fact, everyone except the largest financial institutions in America holds that obligation to tell the truth. We don’t have a justice system with the courage to convict everyone, regardless of wealth and power.
David Dayen is a contributing writer at Salon.