Ted Kaufman - United States Senator for Delaware

Opening and Closing Statements at Judiciary Committee Hearing on Investigating and Prosecuting Financial Fraud after the Fraud Enforcement and Recovery Act

September 22, 2010


I am honored to call to order this hearing of the Senate Committee on the Judiciary.  I thank Chairman Leahy for permitting me to chair this hearing. 

Today we’re going to examine the efforts of federal law enforcement to investigate and prosecute the financial fraud that contributed to our current economic crisis, in light of the Fraud Enforcement and Recovery Act (FERA), signed into law by President Obama in May 2009.

This is the second post-FERA oversight hearing that we’ve held.   The first was on December 9 of last year.

Today, the same three distinguished witnesses who testified at that hearing join us again to discuss these issues:  Assistant Attorney General Lanny Breuer, SEC Director of Enforcement Robert, and FBI Assistant Director Kevin Perkins.

My objectives for this hearing are several.  The first comes under the heading of FERA oversight.  In the time since that December 2009 hearing, what have the Department of Justice, the FBI, and the SEC done in terms of investigating and prosecuting fraud at the heart of the financial crisis?  Do they have the infrastructure, personnel, and strategies in place that they need to be successful?

All three entities have received significant additional resources, in part as a result of FERA, and I want to explore whether those resources are being deployed effectively.

I will say right now that I’m frustrated.  I know that the Justice Department, the FBI, and the SEC have all been working incredibly hard, reviewing countless transactions, interviewing myriad witnesses, poring over literally millions of pages of documents.  And yet we have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin.  Why is that?

Is it because none of the behavior in question was criminal?  Is it because too much time passed before investigators got serious, so the trail has gone cold?  Is it because the law favors the wealthy and powerful?  Or is the explanation more complex? 

Are there systemic challenges that the agencies are finding difficult to overcome?  Is there a foundational, targeted strategy at uncovering those instances of actual misrepresentation of material facts, which exist within a mountain of the “everyone was doing it” mentality on Wall Street?  Is the fine print exculpatory, or only chilling prosecutorial efforts that still deserve to move forward?

My second objective is legislative.  Are there changes in the law that would make it harder for people to construct and sell incredibly complex financial products without disclosing their own belief that the value of those products will soon plummet?  While I will be leaving the Senate before long, I’d like help my colleagues get started on making those changes to the law, if there are useful changes to be made.

In the last year or so, through the work of people both in and out of government, we’ve been learning more about the wide range of conduct that contributed to the collapse.

I’ve said from the beginning that much of that behavior, though terribly misguided, inexcusable, or morally bankrupt, was not criminal. 

But I remained convinced, by what we’ve learned through a host of sources, including hearings held by Senator Levin in the Permanent Subcommittee on Investigations, that it appears from the evidence that serious criminal behavior occurred as well.

Let me start a discussion about the difference between criminal behavior and behavior that is merely misguided with a hypothetical example.  Assume that there is a bank in the mortgage-origination business.  During the early- and mid-2000s, as home prices increase nationwide, the bank is able to make huge profits both by packaging these mortgages into bonds for sale to others and by holding onto them as investments. 

In the race to maximize market share and raise profits, the bank decides to relax its official underwriting standards to a greater and greater degree, until a large majority of even some of its riskiest loans to the least qualified borrowers were so-called “liars’ loans,” issued without even bothering to verify that the income stated by the borrower was accurate.

This behavior was unwise and dangerous, creating tremendous risk on many levels – to the bank extending the credit, to borrowers without the means to pay, to those who bought the loans from the bank. 

More important, it also created a grave risk to the broader economy.  As we now know all to well, extending credit without regard to creditworthiness can help fuel a speculative boom that ends only with a painful market correction involving crashing prices and foreclosed-upon homeowners. 

But without more, making loans that should never be made, even on a tremendous scale, is not a crime.  Particularly if the quality of those loans were disclosed.

Was there more?  In the lead-up to this country’s recent national housing market crash, did some banks and boardroom executives step over the line and commit actionable fraud?

For example, what if this hypothetical bank knowingly issues widespread exceptions to its published underwriting standards, while at the same time claiming to would-be purchasers of mortgage securities that the underwriting standards had been substantially complied with? 

Or suppose it determines that a class of mortgages that it has held for its own investment are likely to default in the near future and seeks to offload these mortgages onto third parties.  That might not be a crime, but what if the bank has claimed to purchasers that it has not selected mortgages for sale based on a belief that they are likely to default?

If criminal conduct contributed to the financial meltdown, then the people responsible should be investigated, prosecuted, and sent to prison.

If we fail to do so, I we’ll lose our chance to restore the public's faith in our financial markets and the rule of law.  Criminals on Wall Street must be held to account.  Otherwise, one of the great foundations of this country – our capital markets – may simply fade away.

This is why, very early in this Congress, I joined with Chairman Leahy, Senator Grassley, and others to help pass the Fraud Enforcement and Recovery Act. 

FERA was designed to ensure that additional tools and resources were provided to those charged with enforcement of our nation’s laws against financial fraud.

In the year plus since the passage of FERA, we’ve seen some important progress.  The FBI, the Department of Justice, and the SEC have all ramped up their efforts.

Last November, President Obama created an interagency financial fraud enforcement task force.  Its mission is not only to pursue crimes already committed, but also to deter criminal behavior that might lead to another financial crisis. 

But despite the new resources and renewed emphasis, despite the presidentially created task force, we’re now nearing the final quarter of 2010 without the sort of prosecutions that I had fully expected we would see by this time. 

Without successful investigation and prosecution, and meaningful punishment, deterrence is an illusion.

So where does that leave us?  That’s what I want to explore today in this hearing. 

Where is the line between conduct that is actionable and conduct that is not?  What are the disclosure obligations of the individuals and entities that select, bundle, securitize, and market groups of mortgages with characteristics that, at some point along the way, foretold their failure?  Do those obligations need to be strengthened, in terms of either what must be included or in terms of how prominent the disclosure must be?

Last Spring, Senator Specter and I offered an amendment to the Dodd-Frank bill that would have imposed on broker-dealers and banks the same sort of duty to their customers that financial advisors already have.  Had that amendment become law, these broker-dealers and banks would have been obligated to disclose not only their own conflicts of interest, but also their knowledge that a particular security is likely to underperform.

I want to get a sense from the enforcement community whether that sort of change in the law would make a difference in their world.

Many on Wall Street have argued that there was no criminality in this financial crisis, merely a collective delirium brought about by soaring profits and mistaken assumptions about risks.

I and others have disagreed, but so far have waited in vain for the sorts of prosecutions that we predicted would come.  I hope this hearing will help us understand why that is so, and also give us a better sense of what to expect in the future.

I also want to emphasize that the existence of criminality, or the lack thereof, should not be our only guiding star.  Our job is to focus on right and wrong, fairness and unfairness, and legislate accordingly.

Law enforcement officials, represented by these witnesses today, have to ask whether the conduct they are investigating violated the law.  If not, they move on to the next case.

As members of Congress, we have a different obligation.  We have to ask whether the law as it exists reflects sound public policy.  If not, if the law permits conduct that should be prohibited, then we need to change the law.

Ours is a government of laws, rather than men.  And, as Justice Brandeis reminded us, “If we desire respect for the law, we must first make the law respectable.”   Our laws are not a static code of received wisdom from on high.  They are an evolving reflection of public debate and national need.  Where laws let America down, Congress must remedy those laws so that they may not do so again.


Before we conclude this hearing, I would like to extend my sincere gratitude to the witnesses.  Your jobs are incredibly challenging, and the stakes of success or failure are critically high. 

As I have said repeatedly this Congress, the two most important pillars of American preeminence in the world are our free democracy and our capital markets.  Without confidence that our capital markets are fair and transparent, capital formation will slow and our nation’s ability to generate jobs will be crippled.

Widespread cheating and fraud, of the sort that drove the speculative housing and derivative securities bubbles, are anathema to public confidence in the markets.  In order to assure investors, and the public, that we have learned our lessons from the last disaster, we must have a full account of the criminality that led us there.

This November, I will leave the Senate and the task of oversight will fall to my colleagues.  I encourage each of you to keep up the hard work, to keep digging into offerings documents, emails, board minutes.  To keep developing leads through whistleblowers, plea deals and tip hotlines.  I am confident that you will.

Thank you.  This hearing of the Senate Judiciary Committee is adjourned.


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