Nearly one month ago, I suggested that lawsuits
related to the 2007-08 financial crisis should begin to rise due to the existing statute of limitations for prosecution of specific crimes.
This week, U.S. Attorney General Eric Holder filed a suit against the Standard & Poor’s rating agency and its parent company, McGraw-Hill, seeking $5 billion in penalties. The complaint alleges that S&P knowingly understated the inherent risk on hundreds of billions of dollars of collateralized debt obligations of residential mortgage-backed securities, which were then sold to investors.
The charges include mail and wire fraud affecting federally insured financial institutions and financial institution fraud. Recently released court documents indicate there may have been internal e-mail communications as far back as 2004 that suggest S&P knowingly misrepresented risks to investors in an effort to maximize profit at the expense of others, according to The New York Times.
Along with 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, the U.S. Department of Justice has assembled a broad coalition of enforcement, investigatory and regulatory agencies to combat fraud. In fact, over the past three fiscal years, nearly 10,000 fraud cases have been filed against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants.
This fraud was enabled by the tremendous number and face value of mortgages in the system and the deregulation of the derivatives market under then-President Bill Clinton in 2000. The volume of mortgages has exploded
due to the excessive deductibility of mortgage interest — it was unlimited on or before Oct. 13, 1987 and limited to interest on loans of $1 million or less following that date.
Hence, the maximum annual deduction for mortgage interest in December 1987 was nearly $100,000 when the 30-year, fixed mortgage rate was roughly 10 percent. Today, that figure remains quite high, at approximately $40,000 with interest rates hovering near 4 percent.
With the statute of limitations beginning to wane for many prosecutions, lawsuit filings regarding the 2007-08 financial crisis will most likely rise in the near future.
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