In an interesting twist, the most recent regulatory development involving institutions like Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Bank of New York Mellon Corp. (NYSE:BNY) has not evolved out of new legislation. Instead, the case — a series of lawsuits filed by lawyers under Manhattan U.S. Attorney and Wall Street watchdog Preet Bharara — is based on an interpretation of Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
U.S. District Judge Jed Rakoff, who has worked his way into infamy as one of the top judges involving cases against major Wall Street firms, announced Monday that a “straightforward application of the plain words” of FIRREA allowed Bharara and the Justice Department to bring a case against Bank of America and others related to toxic mortgages sold during the financial crisis, Reuters reports.
The government’s case against Bank of America argues that a process to streamline the sale of loans to often unqualified people pretty much amounts to criminal neglect. The process, known as “hustle,” removed quality checks and resulted in the creation of thousands of toxic mortgages. FIRREA states that the government can prosecute firms that commit fraud against federally insured deposit institutions. The interesting part of the interpretation of the act is that the government may prosecute Bank of America for hurting itself as an FDIC-insured firm.