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The U.S. Is Going After a Subprime Mortgage Banker—10 Years After the Financial Crisis

Sep 12, 2017

Ten years after the financial crisis exploded, is the government finally going after the individual bankers who helped cause it?

The Department of Justice filed civil suit Monday in a Federal Court in Brooklyn against Paul Mangione, the man who had headed Deutsche Bank's subprime mortgage trading, alleging that he "systematically and intentionally" misled investors about the quality of the mortgages underlying two separate bonds he sold. Over 75% of the loans underlying those bonds ultimately defaulted.

The move is exceptional: there have been virtually no prosecutions or civil suits against decision-making executives over the last 10 years. Hardly anyone has gone to jail for a series of frauds that, as former Attorney-General Loretta Lynch said, not only misled investors but "contributed directly to an international financial crisis." Instead, the banks themselves have paid tens of billions of dollars to settle charges of fraud brought by the DoJ. The $7.2 billion settlement paid by Mangione's employer earlier this year was one of the biggest.

Prosecutors argue in the filing that Mangione knew that the mortgages originated by Californian lender Chapel Funding LLC and resold by Deutsche were "crap." When Deutsche's diligence director informed him in detail about their defects, he had replied that "knew all that," and later told others that Deutsche should "f***ing fire all those guys at Chapel," and that "the guys at Chapel should be arrested for the s**t they were doing," according to the complaint.

Reuters quoted Mangione's lawyers as saying that "Mr. Mangione is being singled out for blame on two ten-year old securitization transactions on which numerous other participants had more input and responsibility."

Whether the DoJ intends to go after any other individuals in the subprime scandal isn't clear. The narrative arc of the subprime scandal was such that any banker selling such bonds likely had an epiphany similar to Mangione's at some stage between 2006 and 2008. The difficulty, from a prosecutor's point of view, has been in proving ex ante knowledge of fraud.

Chad Readler, an acting assistant attorney-general in the DoJ's Civil Division, said in the DoJ's press release that it "will continue to pursue those who engage in fraud as a way to conduct business,” but that statement appears to be directed more at future misdeeds than past ones.

The U.S. is seeking financial penalties and a jury trial, according to the filing.

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