I just had to repost this part of an article I was reading. I had to reread the statement 1/70th of the S&L debacle wow. The author of the most brilliantly comedic statement ever written about the crisis is Landon Thomas, Jr. He does not bury the lead. Everything worth reading is in the first sentence, and it should trigger belly laughs nationwide. Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis. “The government,” as a statement of fact so indisputable that it requires neither citation nor reasoning, has been engaged in an “aggressive effort to hold banks accountable for their role in the housing crisis.” Yes, we have not seen such an aggressive effort since Captain Renault told Rick in the movie Casablanca that he was “shocked” to discover that there was gambling going on (just before being handed his gambling “winnings” which were really a bribe). There are four clues in the sentence I quoted that indicate that the author knows he’s putting us on, but they are subtle. First, the case was a civil case. “The government’s” “aggressive effort to hold banks accountable” has produced – zero convictions of the elite Wall Street officers and banks whose frauds drove the crisis. Thomas, of course, knows this and his use of the word “aggressive” mocks the Department of Justice (DOJ) propaganda. The jurors found that BoA (through its officers) committed an orgy of fraud in order to enrich those officers. That is a criminal act. Prosecutors who are far from “aggressive” prosecute elite frauds criminally because they know it is essential to deter fraud and safeguard our financial system. The DOJ refused to prosecute the frauds led by senior BoA officers. The journalist’s riff is so funny because he portrays DOJ’s refusal to prosecute frauds led by elite BoA officers as “aggressive.” Show the NYT article to friends you have who are Brits and who claim that Americans are incapable of irony. The article’s lead sentence refutes that claim for all time. The twin loan origination fraud epidemics (liar’s loans and appraisal fraud) and the epidemic of fraudulent sales of the fraudulently originated mortgages to the secondary market would each – separately – constitute the most destructive frauds in history. These three epidemics of accounting control fraud by loan originators hyper-inflated the real estate bubble and drove our financial crisis and the Great Recession. By way of contrast, the S&L debacle was less than 1/70 the magnitude of fraud and losses than the current crisis, yet we obtained over 1,000 felony convictions in cases DOJ designated as “major.” If DOJ is “aggressive” in this crisis what word would be necessary to describe our approach? Second, notice that only one of Bank of America’s (BoA) former officers, Rebecca Mairone, is being held “accountable” for the frauds they committed that made them wealthy. DOJ gives the word “aggressive” new meaning! To add to the humor, JPMorgan has hired Mairone despite her disastrous leadership at Countrywide. Third, for what exactly was DOJ “aggressively” holding BoA “accountable?” BoA “sold defective mortgages.” That phrase is one part euphemism and one part bizarrely incomplete. BoA first originated fraudulent mortgages and then sold fraudulent mortgages through fraudulent “reps and warranties” to the secondary market. It is passing strange that the lead sentence of an article that is archly portrayed as a triumphal report on “aggressive” “accountability” cannot bring itself to use the “f” word. But the incomplete nature of the sentence and the government’s “aggressive” non-prosecution of the elite banks and bank officers that led the frauds is revealed as soon as one asks why BoA and its officers were committing tens of thousands of frauds by making false reps and warranties about the loans they were selling to the secondary market. The answer, of course, is that BoA had fraudulently originated tens of thousands of loans. Because there is no “fraud exorcist,” a fraudulent loan remains a fraudulent loan and infects every step in mortgage chain: loan origination, the sale to the secondary market, and the creation of mortgage products (MBS and CDOs). Any competent investigation therefore would look at the process on an integrated basis. The DOJ, however, has no task force, and no lawsuits or prosecutions, against the twin loan origination fraud epidemics. The task force DOJ created looks only at fraudulent sales of the fraudulently originated mortgages – and ignores the origination fraud. Because “only” about 85% of the fraudulently originated loans were sold through fraudulent reps and warranties to the secondary market, the twin loan origination fraud epidemics represent the most destructive frauds in world history. (One does not have to make fraudulent reps and warranties about loans that were not fraudulently originated.) I’m not sure whether the DOJ consciously deciding not to investigate, bring civil suits, or prosecute the most destructive frauds in history represents “aggressive” or “accountable” to the DOJ. We do know, however, the fantasy that caused DOJ to give these control frauds a free pass. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said. “They” refers to the CEO. “Themselves” refers to the bank. “They” are not “defrauding themselves.” The lender’s CEO makes far more money, and obtains what George Akerlof and Paul Romer aptly termed a “sure thing” in their famous 1993 article – “Looting: The Economic Underworld of Bankruptcy for Profit.” By deliberately making enormous numbers of bad loans at a premium yield the bank’s CEO created three “sure things.” The bank was guaranteed to report record income in the near term, the senior officers were guaranteed to be made promptly wealthy by modern executive compensation, and the bank would eventually suffer severe losses. It is not simply Nobel Laureate economists like Akerlof who figured this out, published the results, and prosecuted the elite S&L frauds. Criminologists, S&L regulators, FBI agents, and prosecutors all understood the fraud “recipe” for a lender. While DOJ and the FBI have forgotten the recipe, bankers have not. As Jamie Dimon explained in his March 30, 2012 letter to JPMorgan’s shareholders: “Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.”
Posted on: Sat, 26 Oct 2013 04:34:00 +0000
Trending Topics
Recently Viewed Topics
© 2015