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 Ratings agency S&P on Tuesday agreed to pay $1.5 billion to settle
U.S. and state lawsuits over mortgage ratings issued in the run-up
to the crisis.
That brings to more than $38 billion the amount that U.S.
authorities have won in settlements from Wall Street firms since
November 2013 over crisis-related activities. Despite the ample
monetary settlements, U.S. prosecutors have been widely disparaged
for failing to convict many senior Wall Street executives.
Stuart Delery, the No. 3 official at the Justice Department and a
key negotiator in the S&P deal, said investigations tied to the
financial crisis "are continuing, and they are very active."
Officials are also drawing lessons from these cases "to turn our
attention to the next types of financial fraud, whatever they might
happen to be," he said in an interview with Reuters ahead of the S&P
settlement announcement.
Delery, pointed to investigations into the securitization of auto
loans as one such area.
He declined to discuss details of any of the ongoing cases stemming
from the financial crisis, but people familiar with the matter said
global bank Morgan Stanley and other banks are still expected to
face multi-billion dollar cases related to their mortgage securities
activity.
Both Morgan Stanley and rival Goldman Sachs Group Inc have disclosed
that they received subpoenas and requests for information from an
investigatory working group that includes the Justice Department and
several states.
Morgan Stanley said in a November regulatory filing that a probe
involving its crisis-era loan conduct was in "advanced stages."
A Morgan Stanley spokesman declined comment. A Goldman
representative did not immediately respond to a request for comment.
Delery also said the fact that seven years have passed since the
height of the crisis is not an issue, when asked if S&P rival
Moody's might be off the hook for any similar conduct.
Sources have said that a Justice Department investigation into
Moody's remains at an early stage.
"I don't think we're declining to bring cases just because of the
passage of time, if we thought we could make a case. Sometimes these
things unfortunately take a very long time," he said.
A Moody's spokesman declined comment.
It is unclear how many more big cases in the area are yet to come,
given that some of the largest have already been resolved, and the
government only has a few more years to bring additional actions
under a statute of limitations that is at most 10 years.
NEW TARGETS
Regarding new areas of focus, Delery said department lawyers are
using the investigative techniques and contacts from the mortgage
securities investigations to confront the next wave of potential
financial fraud.
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Delery said there were parallels between home loan securitizations
and auto loan securitizations, though he declined to discuss
specific investigations.
Las Vegas-based lender Consumer Portfolio Services Inc, disclosed
last month it received a subpoena from the DOJ requesting
information in connection with a probe into "subprime automotive
finance and related securitization activities." Ally Financial Inc,
Credit Acceptance Corp, Santander Consumer USA Holdings Inc and
General Motors Co's auto financing arm have disclosed similar
subpoenas since last August.
In an interview last week, Ally Chief Executive Michael Carpenter
told Reuters that comparisons between subprime auto lending and the
crisis precipitated by subprime mortgages were "complete garbage,"
and described the investigations as "fishing" and "a lot of digging
around to see what people can find."
Ally said on Monday that Carpenter was retiring and would be
succeeded by its head of dealer financial services, Jeffrey Brown,
effective immediately.
One focus of the Justice Department's inquiry is whether there was
appropriate disclosure made to investors about the quality of
securities that are backed by auto loans.
Unlike many of the mortgage bonds that were packaged and sold during
the financial crisis, auto loan-backed securities have continued to
perform well. The net loss rate for subprime auto loan securities
was 4.51 percent in November 2014, below the lowest loss rates
recorded before the recession, according to data compiled by Bank of
America Merrill Lynch.
But delinquencies on auto loans that have been bundled into
securities, which often serve as a leading indicator of losses, are
elevated.
Around 10 percent of the loans that back subprime auto bonds were at
least 30 days delinquent in November, a level that's 13 percent
higher than what Bank of America Merrill Lynch strategists consider
normal.
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