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ANALYSIS | Neil Macdonald: 'Liar loans' and American justice

There is a pattern emerging to the prosecution of those responsible for the financial meltdown four years ago, Neil Macdonald writes: The small fry go to jail while the really big boys and girls hide behind corporate anonymity, pay fines and admit no wrongdoing.

The statue of Lady Justice that towers over the foyer of the Robert F. Kennedy Department of Justice building here in Washington is most famous for her one bared aluminum breast, which was covered up a few years back when Republican attorney-general John Ashcroft, a pious evangelical Christian, was in charge.

But what really distinguishes the statue is that it wears no blindfold, unlike its many counterparts around the world.

This Lady is not blind, as justice is presumed to be and is most often depicted. And given that she represents American justice, that is perhaps appropriate.

Because it's increasingly apparent that justice here does see, and consider, precisely what it is meant to ignore: power and wealth.

How else to explain the differing fates of, say, Charlie Engle and Angelo Mozilo? Or all the other small fry and big fish whose financial shenanigans sent the world into a tailspin four years ago?

Liar loans

To be sure, Charlie Engle broke the law. During the orgy of stupid borrowing and even stupider lending that characterized the boom years early last decade, he took out "stated income loans" to buy properties.

U.S. runner Charlie Engle, currently in a West Virginia prison, and Canadian Ray Zahab, are shown here during day 109 of their 111 days Sahara desert journey in February 2007. An IRS agent saw Engle's training video and tricked him into a confession about his investments. (Nasser Nasser/Associated Press)

These loans were more commonly known as "liar loans." They worked like this: If you were willing to pay a point or two more in interest, you didn't have to provide any proof of income.

Millions of Americans took advantage of them to buy heavily leveraged properties. America's mortgage broker industry knew exactly what was going on, and encouraged it.

Common sense would suggest that the big Wall Street banks, securities re-packagers and ratings agencies also knew what was happening, unless they really were the gullible idiots they pretended to be in order to escape prosecution after it all blew up.

Anything nicknamed a "liar loan" is a pretty obvious symptom of something rotten, no?

But for some reason, of all those millions of borrowers, Charlie Engle was the only one the federal government decided must go to prison, where he now resides, in West Virginia.

An IRS agent noticed Engle in a documentary about elite marathon runners and wondered how this guy could afford to spend so much time training. Agents then went through Engle's trash, and eventually sent in a female undercover officer, to whom he confessed his crime.

His father, Richard Engle, called his son the "number one political prisoner of the IRS" in an email to CBC News.

In a statement to the New York Times, U.S. Attorney Neil MacBride declared that "The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority."

Really?

Chump change

Now consider the case of Angelo Mozilo, CEO of the company that gave Charlie Engle his liar loans.

Countrywide Financial was among the most enthusiastic purveyors of the subprime loans that very nearly brought down the American economy when their worthlessness became fully apparent in 2008.

Mozilo, who had cultivated "friends of Angelo" on Capitol Hill, is widely regarded here as one of the most culpable figures in the whole debacle. He sits, for example, at the top of Time magazine's "25 people to blame for the financial crisis."

But, in 2010, he reached a settlement with the Securities and Exchange Commission, which had accused him of securities fraud and insider trading.

He paid $67.5 million in fines, chump change for a guy who made nearly half a billion dollars a year when his company was selling liar loans to people like Charlie Engle. (More recently, the Bank of America, which took over Countrywide's assets, agreed to spend $8.7 billion to settle predatory lending charges against the now defunct lender.)

In his settlement, Mozilo admitted no wrongdoing and the justice department subsequently dropped its investigation.

Mozilo can no longer work as an officer or director of any publicly traded company, but that just frees him up to enjoy his retirement.

Anita McLemore

Now consider the case of Anita McLemore, a 47-year-old mother of two teenagers, who was sent to prison earlier this month for lying on her application for food stamps.

McLemore had several drug convictions that she failed to declare and, in Mississippi, such a felony disqualifies you from the food stamp program.

In short, this woman lied to obtain groceries to feed her kids. She collected $4,637 worth of edible benefits, all of which she repaid, and admitted wrongdoing. The judge sent her to prison for three years.

That is more than a year longer than Charlie Engle is serving and virtually three years longer than anyone else in the meltdown hall of fame.

There is a pattern here: Small-time losers, and even a few of the meltdown's medium-size culprits, go to prison. The really big boys and girls, meanwhile, hide behind corporate anonymity, perhaps pay fines, and admit no wrongdoing.

Perhaps this is a result of Americans' boundless respect for big-time moneymakers; or it may be that the government, which has its own debt problems, just needs the settlement money.

Whatever the reason, it all looks bad and smells awful.

Impartial justice

Earlier this week, though, in Manhattan, a beam of impartial justice shone through.

District Court Judge Jed S. Rakoff rejected a, yet another, admit-no-wrongdoing SEC settlement, this one with Citigroup.

One of the largest banks in the world, Citigroup had, back in 2007, created a $1-billion mortgage fund filled with securities that, according to the SEC, it knew would fail.

The banking giant then placed bets against customers who bought these funds, so as to profit from their losses, which turned out to be another common practice during the subprime meltdown.

You'd think Washington would consider that at least as heinous a transgression as Charlie Engle's or Anita McLemore's lying.

But no. The SEC struck a deal in which Citigroup agreed "never again to breach the law" (at the same time admitting no wrongdoing) and to payment of a $285 million fine. No prison time for its executives.

Judge Rakoff, clearly a maverick, pointed out that Citigroup is a "recidivist," a repeat offender that has settled other such cases in the past (while admitting no wrongdoing, of course).

The judge then rejected the deal and ordered that this case go to trial. The SEC immediately accused him of ignoring the tradition by which such cases are settled.

Remember that name. Jed S. Rakoff. A judge who wears the blindfold his own government has discarded.