Federal authorities have announced that they are opening an investigation into the collapse of Washington Mutual, the largest bank failure in America. This step is long overdue, and should be the start of a much broader investigation of potential criminal behavior throughout the financial system.
I have been calling for such an investigation since the financial crisis broke publicly. It is heartening to see at least two U.S. Attorneys, as well as the Attorney General of New York, take their responsibilities seriously.
While much of the blame for the current turmoil in our housing and financial markets can be blamed on bad policies advocated by the current and prior administrations, and the current and prior congresses, there appears to have been massive fraud and other misbehavior in the deliberate overvaluing of mortgage-backed assets, reinforced by the failure of ratings agencies to do their jobs. Well-connected VIPs and derivatives traders made money at the expense of common investors and the public. Yet the authorities so far have done little to bring those responsible to account. Markets must be carefully policed to detect and punish fraud and other criminal behavior.
Rather than ensure transparency and enforce laws and regulations to protect financial integrity, public officials manipulated the system to put more people into homes regardless of their ability to pay in order to win political support.
In particular, Congress pushed banks, like Washington Mutual, to make more and riskier loans to people with poorer credit histories. There was pervasive misuse of Fannie Mae and Freddie Mac by politicians, some of who have been leading efforts to stabilize the financial system. Even when problems became evident and analysts began raising the alarm, these same irresponsible politicians killed every attempt to limit taxpayer exposure to bad lending.
Once the entire house of cards collapsed, the Bush administration and Congress, supported by both Senators John McCain and Barack Obama, rushed to put trillions of dollars of taxpayer funds at risk to bail out Wall Street, the housing industry, banks, insurance companies, and many others—who did so much to create the current crisis. Instead, the administration and Congress should have been investigating financial fraud, developing targeted measures to restore financial transparency and encourage normal lending activity, and reforming laws and regulations which failed to protect investors.
Having unnecessarily put the taxpayers at risk, it is critical that Congress and the Justice Department ensure tough oversight of the trillion-dollar-plus bailout program.