Former Deutsche Bank exec sued for subprime lending that led to the financial crisis

Inside Subprime: September 13, 2017

By Caroline Thompson

Ten years after the start of the financial crisis, both the industry and the world at large are still recovering from its devastation. But the people responsible for the crash, the bankers who loosened lending standards and pushed subprime loans on both borrowers and investors, have mostly escaped punishment for their crimes.

In fact, virtually none of the decision-making banking executives who profited off the crisis have served even a day behind bars. These executives have largely been able to hide out behind the billion dollar payouts the banks they worked for have been forced to pay to settle the fraud charges brought against them by the Department of Justice.

According to Fortune, Deutsche Bank’s $7.2 billion payout earlier this year was one of the biggest in the history of the industry, but now the U.S. government has set its sights on a smaller target: former Deutsche Bank executive Frank Mangione.

According to the initial filing from the U.S. District Court of Eastern New York, Mangione is being sued “on account of his participation in the Bank’s fraudulent and illegal scheme affecting financial institutions and other investors in connection with two residential mortgage-backed securities, which Deutsche Bank sponsored, issued, underwrote and offered on or about April 30, 2007, and June 29, 2007, respectively.”

The suit alleges that Mangione knowingly pushed these mortgage-backed securities, worth $1.4 billion, on investors all the while knowing the borrowers who took out these mortgages were at a high risk of default.

“The government’s complaint alleges that Mr. Mangione knew that certain of Deutsche Bank’s RMBS contained unsound mortgages that did not meet the credit or appraisal standards that the bank represented,” said Chad Readler, an acting assistant attorney general in the US Justice Department’s civil division. “By allegedly misleading investors about the riskiness of these securities, Mr. Mangione prioritized his and his employer’s bottom line over principles of honesty and fair dealing. The Department of Justice will continue to pursue those who engage in fraud as a way to conduct business.”

According to MarketWatch, an average of 78 percent of the loans in both securities sold by Mangione defaulted and lost money. But lawyers for Mangione say it’s not fair to hold him solely accountable.

“The decision to sue Paul Mangione for civil penalties in this case is both wrong and unfair,” a lawyer for Mangione wrote in a statement. “It’s wrong because the facts show that Mr. Mangione never agreed to mislead any investor. And it’s unfair because Mr. Mangione is being singled out for blame on two ten-year old securitization transactions on which numerous other participants had more input and responsibility.”

The court seeks an undisclosed monetary payout from Mangione, and will push for a jury trial. Whether this will be the beginning of a slew of similar lawsuits holding other banking executives accountable for the crash, remains to be seen.

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