Would you take out a loan from this guy, even if he was your "friend"? Photographer: Jay Mallin/Bloomberg News
Would you take out a loan from this guy, even if he was your "friend"? Photographer: Jay Mallin/Bloomberg News

In my previous post, I explained why Justice Department lawyers believe the Dodd-Frank Act gives them an extra year -- until about the summer of 2014 -- to bring criminal cases against banks and senior bankers involved in the financial crisis.

Assuming prosecutors can clear legal challenges against applying retroactively the law's longer statute of limitations -- from five years to six -- the next step will be deciding whether to reopen the investigative files of top banking executives.

One "closed case" possibility is Angelo Mozilo, the founder, chairman and chief executive officer of Countrywide Financial Corp. Perhaps more than any other senior financial executive, Mozilo is viewed as most responsible for the shoddy home loans that poisoned the financial system. His "Friends of Angelo" program helped lawmakers to obtain speedy mortgages at favorable rates -- and may have shielded Mozilo from pesky inquiries.

Countrywide dominated the subprime market in the mid-2000s as the U.S.'s largest mortgage lender and the biggest supplier to Fannie Mae and Freddie Mac. Bank of America acquired the bank in 2008 as it was about to collapse. Through it all, Mozilo maintained that his bank was blameless, even testifying in March 2008 to a House committee that Countrywide followed strict guidelines to make sure borrowers qualified and could repay their loans.

A Los Angeles U.S. attorney's investigation of Mozilo wound down in 2011 with no indictment. Mozilo, however, settled a civil Securities and Exchange Commission case in 2010 for $67.5 million, of which he personally paid only $22.5 million, for misleading investors about his company's financial condition and insider trading. The amount was a mere droplet in his compensation, which totaled $525 million from 2000 to 2008, according to consultants at Equilar.

"Countrywide was writing increasingly risky loans and its senior executives knew that defaults and delinquencies in its servicing portfolio as well as the loans it packaged and sold as mortgage-backed securities would rise as a result," according to the settlement. Mozilo didn't have to admit to the SEC's charges, yet he can't refute them.

Defense lawyers said the government would keep an eye on private litigation against Countrywide and could bring criminal charges if fresh evidence appeared. But no criminal charges ever materialized.

At the time, many legal experts in and out of government concluded that proving Mozilo intended to deceive investors would be difficult for four reasons. One: The markets knew full well there were risks in Countrywide's loan portfolio. Two: Many others were involved in the process, from ratings companies to Wall Street bond packagers to yield-seeking investors, all of whom failed to see or blinded themselves to the risks. Three: Greed, stupidity and negligence were abundant, but those aren't the same as fraud and intent to commit it. And four: Financial crimes are inherently complex and difficult for juries to understand.

I, for one, mostly agreed with these sentiments. But knowing what we do now, could a criminal case be brought against Mozilo? News flash -- the just-completed Bank of America/Countrywide trial casts a potential Mozilo case in a whole new light. It undermines every reason for not prosecuting him, beginning with the fact that a jury has found that Countrywide committed fraud when it made substandard loans.

The trial aired evidence that Countrywide's standards greatly deteriorated under what the company called the HSSL program. HSSL stands for high-speed swim lane (pronounced "hustle" internally; no, I'm not making that up). It was installed in 2007 to speed up mortgage approvals from 60 days to a single day in many cases.

Using the HSSL protocols, underwriting checks and balances were eliminated. Bonuses were paid to loan specialists just because they reduced their turnaround times. Defective loans no longer resulted in penalties. By early 2008, defect rates reached 70 percent for stated-income loans (in which a borrower's income isn't verified), making them ineligible for sale to Fannie and Freddie. They were sold to the companies nevertheless.

The jury concluded that Countrywide hid many of these details from Fannie and Freddie. So much for the "Fannie Mae knew what it was getting" excuse. Or the "it can't be a crime because everybody did it" rationale. Or the "greed and stupidity aren't crimes" pretext.

Even the justification that "juries can't understand financial complexity" falls flat. The Countrywide jury figured out that the fraud was really quite simple -- it cleverly disguised just how risky its mortgages were -- then focused on that deception to reach a guilty verdict.

So is a criminal case against Mozilo possible? That will be the subject of the next post in this series.

(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter: @paulaEdwyer.)