Two whistleblowers offer a rare window into the root causes of the subprime mortgage meltdown. Eileen Foster, a former senior executive at Countrywide Financial, and Richard Bowen, a former vice president at Citigroup, tell Steve Kroft the companies ignored their repeated warnings about defective, even fraudulent mortgages. The result, experts say, was a cascading wave of mortgage defaults for which virtually no high-ranking Wall Street executives have been prosecuted.
The following is a script of "Prosecuting Wall Street" which aired on Dec. 4, 2011. Steve Kroft is correspondent, James Jacoby, producer.
It's been three years since the financial crisis crippled the American economy, and much to the consternation of the general public and the demonstrators on Wall Street, there has not been a single prosecution of a high-ranking Wall Street executive or major financial firm even though fraud and financial misrepresentations played a significant role in the meltdown. We wanted to know why, so nine months ago we began looking for cases that might have prosecutorial merit. Tonight you'll hear about two of them. We begin with a woman named Eileen Foster, a senior executive at Countrywide Financial, one of the epicenters of the crisis.
Steve Kroft: Do you believe that there are people at Countrywide who belong behind bars?
Eileen Foster: Yes.
Kroft: Do you want to give me their names?
Kroft: Would you give their names to a grand jury if you were asked?
But Eileen Foster has never been asked - and never spoken to the Justice Department - even though she was Countrywide's executive vice president in charge of fraud investigations. At the height of the housing bubble, Countrywide Financial was the largest mortgage lender in the country and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud.
It was Foster's job to monitor and investigate allegations of fraud against Countrywide employees and make sure they were reported to the Board of Directors and the Treasury Department.
Kroft: How much fraud was there at Countrywide?
Foster: From what I saw, the types of things I saw, it was-- it appeared systemic. It, it wasn't just one individual or two or three individuals, it was branches of individuals, it was regions of individuals.
Kroft: What you seem to be saying was it was just a way of doing business?
In 2007, Foster sent a team to the Boston area to search several branch offices of Countrywide's subprime division - the division that lent to borrowers with poor credit. The investigators rummaged through the office's recycling bins and found evidence that Countrywide loan officers were forging and manipulating borrowers' income and asset statements to help them get loans they weren't qualified for and couldn't afford.
Foster: All of the-- the recycle bins, whenever we looked through those they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the-- you know, the creation thrown-- thrown in the recycle bin.
Kroft: And the incentive for the people at Countrywide to do that was what?
Foster: The loan officers received bonuses, commissions. They were compensated regardless of the quality of the loan. There's no incentive for quality. The incentive was to fund the loan. And that's-- that's gonna drive that type of behavior.
Kroft: They were committing a crime?
After Foster's investigation, Countrywide closed six of its eight branches in the Boston region and 44 out of 60 employees were fired or quit.
Kroft: Do you think that this was just the Boston office?
Foster: No. No, I know it wasn't just the Boston office. What was going on in Boston was also going on in Chicago, and Miami, and Detroit, and Las Vegas and, you know-- Phoenix and in all of the big markets all over Florida.
After the Boston investigation, Foster says Countrywide's subprime division began systematically concealing evidence of fraud from her in violation of company policy, and Countrywide's internal financial controls system. Someone high up in the top levels of management - she won't say who - told employees to circumvent her office and instead report suspicious activity to the personnel department, which Foster says routinely punished other whistleblowers and protected Countrywide's highest earning loan officers.
Foster: I came to find out that there were-- that there was many, many, many reports of fraud as I had suspected. And those were never-- they were never reported through my group, never reported to the board, never reported to the government while I was there.
Kroft: And you believe this was intentional?
Foster: Yes. Yes, absolutely.
Foster, with the support of her boss, took the information up the corporate chain of command and to the audit department, which confirmed many of her suspicions, but no action was taken. In late 2008, with Countrywide sinking under the weight of its bad loans, it merged with Bank of America. Foster was promoted and not long afterwards was asked to speak with government regulators to discuss Countrywide's fraud reports. But she was fired before the meeting could take place.
Kroft: What would you have told 'em?
Foster: I would have told 'em exactly-- exactly what I've told you.
Kroft: Did you have any discussions with anybody at Countrywide or Bank of America about what you should say to the federal regulators when they came?
Foster: I got a call from an individual who, you know, suggested how-- how I should handle the questions that would be coming from the regulators, made some suggestions that downplayed the severity of the situation.
Kroft: They wanted you to spin it and you said you wouldn't?
Foster: Uh-huh (affirm).
Kroft: And the next day you were terminated?
Foster: Uh-huh (affirm).
Kroft: I mean, it seems like somebody at Countrywide or Bank of America did not want you to talk to federal regulators.
Foster: No, that was part of it, no, they absolutely did not.
Kroft: Do you feel like you were a victim of criminal activity?
Foster: It's a crime to retaliate against someone for making reports of mail fraud, bank fraud, wire fraud, mortgage fraud, things that would harm stockholders and investors. And that's what I did and that's why I was terminated.
Kroft: Were you offered a settlement?
Foster: They asked me to sign a 14-page document that basically would buy my silence in exchange for a large amount of money.
Kroft: But you didn't sign it?
Kroft: Why not?
Foster: How many people can they-- can they buy off? They just pay for it. They commit the crime and they buy their way out of it. And just do it over and over and over again. I wanted them to have some sleepless nights thinkin' about what they would say to a federal investigator and worry about being exposed and being held accountable for committing a crime.
Eileen Foster spent three years trying to clear her name. This fall she finally won a federal whistleblower complaint against Bank of America for wrongful termination and was awarded nearly a million dollars in back pay and benefits.
You can read the rest of the transcript here and watch both parts of the report below. I feel for Eilleen Foster, Richard Bowen and other whistleblowers. They are the real heroes of a corrupt system where people are routinely "bought off" to keep quiet. It's a crime that Countrywide's disgraced CEO, Angelo Mozilo, and Wall Street sharks, made hundreds of millions and were never prosecuted after knowingly defrauding millions of subprime borrowers.
But as I wrote in my last comment on Hank Paulson's crony capitalism, the entire system is corrupt at its core. This is the cancer of capitalism that will ultimately kill the system. It's so rampant that it pervades every single financial institution.
And what is even sadder is what is going on in public and private pensions. How many CEOs , CFOs and board of directors have signed off on financial statements knowing they were hiding something? Shouldn't it concern us when a federal pension fund sells CDS and the Government of Canada's Chief Auditor covers it up in a special sham examination? Shouldn't it concern us when Quebec's media focus on language politics at Canada's largest pension fund instead of uncovering the truth behind the $40 billion train wreck?
Where are the architects of these massive losses now? How come none of these people have been held accountable after losing billions? Why do some of them continue reaping millions by beating their bogus pension benchmarks while others got huge (hush money) settlements and landed in 'cushy' jobs? Why was Canada's best pension analyst wrongfully dismissed twice and blacklisted after warning them of the looming 2008 credit crisis? Why was he subjected to constant psychological bullying before and after being fired a from former employer who knew he suffers from multiple sclerosis? Should the Canadian and Quebec Human Rights tribunals get involved to rectify this gross injustice and pay him millions in damages?
When I tell you I got a story for 60 Minutes that will blow them away, I mean it. The gross mismanagement, utter nonsense and fraudulent activities I've witnessed at Canada's biggest pension funds is just unbelievable. What I realize is the truth is always covered up, whistleblowers "bought off" to "protect" the reputation of the organization. That's why it's next to impossible to prosecute Wall Street crimes and why pension weasels continue scamming their clueless plan members. Watch both parts of the 60 Minutes segment below.