This summer, an anticlimactic epilogue to the financial crisis played out as the government failed to make stick a fraud lawsuit against two of the men who were at the helm of Santa Fe-based Thornburg Mortgage when it hit the rocks in 2007 and slowly sank two years later.
Lawyers for the Securities and Exchange Commission could not persuade a jury that former CEO Larry Goldstone and CFO Clarence G Simmons III misled investors about the seaworthiness of their ship as it began to spring alarming leaks.
The jury deliberated in Albuquerque for several days in late June, but in the end it couldn't come to a unanimous decision on charges of fraud or lying. It cleared the two on five other counts. The company's former Chief Accounting Officer Jane E Starrett settled with the SEC in June.
Thornburg's 2007 torpedoing and subsequent slow sinking was a shock. The company had been a Titanic of the industry, the second-largest independent mortgage company in the US, after Countrywide. When Thornburg filed for bankruptcy in May 2009 it became one of the 10 biggest bankruptcies in US history, just after Chrysler.
But if the wreck of Thornburg came as a shock, the denouement of this case was not. While the savings-and-loan crisis of the 1980s put more than 1,000 bankers behind bars, only one person has gone to jail for his role in the more recent crisis. One guy. And he was a pretty small fish.
The more common scenario is that financial institutions have settled the lawsuits brought against them by investors and the government. About 50 have done so in the last seven years, but the nearly $200 billion they paid out came from the shareholders' pockets. For example, the SEC settled with Starrett for a $25,000 fine and a three-year ban on working high-level job in a SEC-regulated firm.
Thornburg was known for dealing in high-dollar "jumbo" mortgages made to people who could afford them. "They weren't predatory lenders. They were a national firm that did jumbo loans and then put them in private label securities," says Jim Stretz, who led the New Mexico Mortgage Finance Authority for 14 years. "You knew when you bought into a pool of Thornburg mortgages that they were underwritten to certain standards."
Or you thought they were. In 2009, some Thornburg investors filed class action suits saying Thornburg actually didn't follow its own rules and the investments were riskier than they'd been lead to believe.
Albuquerque attorney William Carpenter helped put together a suit on behalf of a public pension fund in Michigan. (Lawyers out of state eventually took it over.) He recalls collecting evidence that Thornburg was engaging in some of the same risky practices that brought down the industry.
Thornburg was much more liberal in giving out mortgages than they said they were, Carpenter's clients believed. "There were some examples of giving mortgages to people who were way over their heads. One was a young couple just out of college and Thornburg mortgaged something like a $2 million home for them," he tells SFR.
The company had kept cash flowing by borrowing money against the mortgages it held—and those mortgages had always been considered, well, safe as houses. But when it became apparent that the market was full of mortgage-backed securities that had been built on a foundation of toxic subprime mortgages, fear began to spread.
As the value of real-estate plunged, in just three months Thornburg was asked to cough up close to $2 billion in margin calls, a mechanism that lets banks collect on the difference between a debt and the value of the asset it's supposed to pay for. But they didn't have the money. They were more than $600 million short.
For its part, Thornburg Mortgage maintained that Wall Street screwed the company, and a court-appointed bankruptcy trustee sued several banks along those lines. In 2014 Barclays Capital settled one of those cases by agreeing to pay $23 million. The suit claimed that Barclays had improperly issued the margin calls, undervalued Thornburg's collateral, and unfairly seized and sold the financial instruments that Barclays had financed.
The SEC had argued that Goldstone, Simmons and Starrett knew the company was in trouble but painted a much rosier picture to investors and the public.
"The financial system is based on confidence and when confidence is lost the whole thing collapses," says William D Cohan, a former investment banker who has written several books about the financial crisis, including House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
In the end, Santa Fe took a hit with the closure of the mortgage company and job losses that accompanied it. A separate Thornburg entity in the investment sector remains in business.
The fact that the government failed in its effort to prosecute Thornburg executives comes as no surprise to observers of the financial crisis and its fallout.
"This fits into an overall pattern of behavior that's quite mysterious, frankly," says Cohan, who didn't follow the SEC's case against the Thornburg executives, but has tracked many others.
"Basically, the government has shied away from bringing these cases to trial because they are complicated," he says. "There's been plenty of evidence of wrongdoing, and for some reason they choose either not to bring them, which is astounding, or they lose them, which is equally astounding."
After the hung jury, the SEC issued a terse statement on the Thornburg case, saying, "We believe strongly in our case and we will continue to explore all options, including a prompt retrial."
Mistrials have been an uncommon occurrence for the SEC, so it's possible they will bring the case back and argue it again.
Meanwhile, the country continues to feel the effects of the crash. The effect of the resulting skittishness felt by lenders is most visible on low-income buyers. "We've cut a lot of people out of the market who, in the past, could have had the value of home ownership but can't now," Stretz says.
Home sales in Santa Fe bottomed out in 2009. Although they have steadily risen since then, they haven't reached the pre-crash level.
"If I were to blame anybody, it would be Wall Street," Stretz says. "They created the environment of easy money and then the crisis cut everything off. The system was cooked."