Black: Fraud 'pervasive' at 'most reputable' banks

Bill Black has been vindicated by a new study of global financial institutions:

The central point we have been arguing for years is now admitted -- and treated as a universally known fact: "mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth." The crisis was driven by liar's loans. By 2006, half of all the loans called "subprime" were also liar's loans -- the categories are not mutually exclusive (Credit Suisse 2007). As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar's loans.

The incidence of fraud in liar's loans was 90 percent (MARI 2006). Liar's loans are a superb "natural experiment" because no entity (and that includes Fannie and Freddie) was ever required to make or purchase liar's loans. Indeed, the government discouraged liar's loans (MARI 2006). By 2006, roughly 40% of all U.S. mortgages originated that year were liar's loans (45% in the U.K.). Liar's loans produce extreme "adverse selection" in home lending, which produces a "negative expected value" (in plain English -- making liar's home loans will produce severe losses). Only a firm engaged in control fraud would make liar's loans. The officers who control such a firm will walk away wealthy even as the lender fails. 

And let's repeat: not a single officer of a major bank has been prosecuted or gone to jail for control fraud. 

'Pervasive' Fraud by Our 'Most Reputable' Banks

By William K. Black

February 28, 2013 | Huffington Post

URL: http://www.huffingtonpost.com/william-k-black/mortgage-fraud_b_2780896.html

Bill Black: Loan fraud caused the Great Recession

Sorry, I hate to be that guy who keeps bringing up stuff that happened, like, six years ago, but getting the history right on the financial crisis that caused the Great Recession matters, 'cos this is gonna happen again.

I'm just going to quote two-fisted regulator Bill Black verbatim, because there is only so much condensing I can do:

The ultra brief version is (1) by 2006 roughly 40 percent of total mortgage loans originated were "liar's loans," (fyi, roughly half of all loans called "subprime" were also liar's loans -- the categories are not mutually exclusive, (2) the incidence of fraud among liar's loans is 90 percent, (3) an honest real estate lender would not make pervasively fraudulent loans because doing so would inevitably cause the firm to fail (absent a bailout), (4) liar's loans, however, are optimal "ammunition" for "accounting control fraud", (5) investigations (and logic) have confirmed that it was overwhelmingly lenders and their agents who put the lies in liar's loans, (6) no lender was ever required or encouraged by the government to make or purchase liar's loans -- the opposite was true, the government discouraged such loans and industry documents confirm this fact, (7) liar's loans make an excellent "natural experiment" because even Fannie and Freddie were not encouraged to make these loans -- because they did not aid them in meeting the "affordable housing goals", (8) Fannie and Freddie, eventually, purchased enormous amounts of liar's loans for the same reason that the investment banks (not subject to the CRA or any affordable housing goals did) they created massive (albeit fictional) short-term accounting income, which flowed through to the bonuses of many Fannie and Freddie executives. Let me put these data in another format -- by 2006, lenders were making over two million fraudulent liar's loans annually. Fraudulent liar's loans grew massively because lenders (and purchasers) created perverse incentives to make and purchase massive amounts of these fraudulent loans.

This level of fraud is massively greater than during the S&L debacle, where accounting control fraud never became a dominant national lending strategy. Liar's loans grew so rapidly, and became such a large share of the market that they constituted the loans "on the margin" that hyper-inflated the financial bubble, which drove the Great Recession.

A liar's loan, by the way, is a low-documentation or no-documentation home mortgage loan. This is not the same as a subprime loan, where the lender (usually a bank) knows the borrower has bad credit, sketchy employment history, etc., and therefore gives the borrower a higher rate of interest to compensate the lender for taking such a risk.  

So, the whole line that "lenders were greedy" during the housing bubble is only half true. Mobsters and bank robbers are also greedy, you could say. I'm greedy. You're greedy. Children are greedy with cookies and crayons. The difference is that robbers and banksters are also criminals. Financial fraud and lending fraud are crimes.

Besides the media and of course Wall Street actively covering up this fraud, Dubya and especially Obama deserve the most blame and contempt for referring zero fraud cases to the Justice Department for criminal prosecution. Sums up Black:

One of our mantras in white-collar criminology is: "if you don't look, you won't find." The Frontline documentary begins the process of explaining what those of us who are aware of what a real investigation is and what it requires have been saying for years -- neither the Bush nor the Obama administration has been willing to conduct a real investigation of the elite banksters whose frauds made them wealthy and drove the financial crisis and the Great Recession. This is one of the hallmarks of crony capitalism. It cripples our economy, our democracy, and our integrity.

[...] Any bank that is too big to fail and to prosecute is a clear and present danger that should be promptly shrunk to the point that it can no longer hold the global economy hostage in order to extort immunity from the criminal laws for the controlling officers who became wealthy by being what Akerlof and Romer aptly described as "looters."

The OCC's Tragic Response to the Frontline Expose: The Untouchables 

By William K. Black

January 26, 2013 | Huffington Post

URL: http://www.huffingtonpost.com/william-k-black/frontline-banking-crisis_b_2557146.html

More cheating at U.S. business schools

Another entry in the "cheater nation" file. Notice how many of these stories happen at U.S. business schools, you know, those prepping grounds for our future business leaders, who are mythologized as the smartest and ablest among us. Yeah, right.  

Then these business whizzes go on to do great things like muni fraud, securities fraud, loan fraud, selective amnesia, and made-up LIBOR rates.

"Cheaters prosper," that's today's lesson.

Tulane University Sent False Information To U.S. News & World Report For College Rankings

January 2, 2013 | Huffington Post

URL: http://huff.to/S4VorX

Consumer Financial Protection Bureau sells out

Yeah, and the GOP says that Obama is so unfriendly to business.  My ass!  He's trying to help Wall Street banks re-inflate the housing bubble, that's what he's doing!  Unfortunately, the Consumer Financial Protection Bureau seems more like a fig leaf for advancing TBTF banks' interests.

The Consumer Financial Protection Bureau’s First Big Sellout

By Mike Whitney

October 18, 2012 | Counterpunch

So now we know why the banks fought tooth-and-nail to prevent Elizabeth Warren from heading the Consumer Financial Protection Bureau (CFPB). It’s because they were already planning their next big coup and didn’t want Warren in a position where she could make waves.

Here’s the story from the Wall Street Journal:

“Federal regulators are considering giving mortgage lenders protection from certain lawsuits…

The potential move, which would be a partial victory for mortgage lenders, is part of a broader effort to write new rules for the U.S. housing market in the wake of the mortgage meltdown. The proposal for the first time would establish a basic national standard for loans, known as a ‘qualified mortgage.’ (“Home Loans May Get Shield”, Wall Street Journal)

Why is this an issue? Have the banks suddenly forgotten how to write mortgages? Of course not. Historically, the ratio of defaulting mortgages has been very small, around 2%, mainly because the banks thoroughly investigate applicants before lending them money.

So, why do they want the government to clarify something they already know? Do they really want more “onerous regulation”?

More from the WSJ:

“As part of its deliberation, the Consumer Financial Protection Bureau is considering providing a full legal shield for high-quality loans that qualify, mandating that judges rule in lenders’ favor if consumers contest foreclosures, these people say….

The shield against lawsuits would be a welcome move for mortgage lenders. Seven major U.S. banks have spent more than $76 billion on mortgage-related costs and litigation since 2008, according to Credit Suisse Group.

Ahhh, so that’s it. The banks want blanket legal protection when they boot people out of their homes.  Nice.  They want the CFPB to stipulate what’s meant by “qualified mortgage” so they can twist its meaning like a pretzel and not be challenged in court. Of course, consumer groups don’t like the idea of immunity– the so-called “safe harbor” provision–because they think that it will pave the way to more reckless and predatory lending. But mealy-mouth CFPB director, Richard Cordray, disagrees. As he told the Senate Banking Committee last month,

“It doesn’t do anybody any good for us to develop an elaborate set of protections if nobody’s going to then lend money to consumers….We absolutely don’t want to make a judgment that’s going to freeze up or further constrict credit in the mortgage market.”

Huh?  I thought Cordray was the head of the CONSUMER Financial Protection Bureau? So why is defending the banks’ position?  The banks don’t need more defenders. They own the whole bloody system already.

More from the WSJ:

“Lawsuits aren’t the only worry for mortgage lenders. Banks have also kept underwriting standards tight in recent years due to uncertainty about whether they’ll be forced to buy back loans made in the housing boom.

This is ridiculous. No one has been picking on the poor-abused bankers. The banks have merely been asked to repurchase the crappy mortgages they made that exhibit “substantive underwriting and documentation deficiencies”. That’s all.  Similarly, if they lent money to people who clearly didn’t have the ability to repay the debt, then the borrower should be able to plead his case before a judge. That’s fair, isn’t it? Only the banks don’t want “fair”; they want immunity. And Cordray wants to help them get it.

Again from the WSJ:

“By law, the new mortgage rule will exclude exotic varieties of loans that fed the housing boom—such as ‘option’ adjustable-rate mortgages that allow the amount owed to increase even when borrowers makes payments, and ‘interest-only’ loans, which don’t require principal payments for several years.

Don’t kid yourself; if the banks get their qualified mortgage-safe harbor provision, we’ll see a whole new regime of “no doc”, “no down”, “E-Z-Pay”, “liar’s loans” that will send profits into the stratosphere and inflate another monster housing bubble faster than you can say Alan Greenspan.

Keep in mind, the big banks are already making record profits on their loan book. Take a look at this clip from the Los Angeles Times:

“JPMorgan Chase & Co. and Wells Fargo & Co., the nation’s largest home lenders, each reported double-digit quarterly earnings growth Friday. The big jump in profit was thanks largely to a surge in their mortgage businesses, fueled by low interest rates and waves of refinancing.

At Wells Fargo, mortgage business revenue rose 55% to $2.8 billion during the third quarter from $1.8 billion in the year-earlier period. …JPMorgan’s mortgage business posted a 71% increase to $2.4 billion from $1.4 billion last year. This led the bank to beat expectations with an overall profit of $5.7 billion.” (“Banks see a housing rebound”, Los Angeles Times)

Not bad, eh, and yet they’re still whining about legal immunity. Go figure?

Did you catch this in the LA Times:

“The U.S. attorney in Manhattan has accused Wells Fargo of defrauding a government-backed mortgage insurance program, in another major civil case brought in the wake of the housing bust and financial crisis.

The mortgage-fraud suit, filed by U.S. attorney Preet Bharara, seeks “hundreds of millions of dollars” in damages for claims the U.S. Department of Housing and Urban Development has paid for defaulted loans “wrongfully certified” by Wells Fargo.

The suit alleges the San Francisco banking giant falsely certified loans insured by the government’s Federal Housing Administration.

‘As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,’ Bharara said in a statement.

Adding ‘accelerant to a fire,’ Bharara said, was Wells Fargo’s bonus system that rewarded employees based on the number of loans it approved.

The lawsuit alleges the bank failed to properly underwrFite more than 100,000 loans it certified to be eligible for FHA insurance. When Wells Fargo discovered problems with the loans, it failed to notify HUD, which administers the FHA program, as required, the suit said. The action alleges more than 10 years of misconduct.

“The extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations — and the bank’s profits — rather than on the quality of the loans being originated,” Bharara’s office said in a statement.(“Feds hit Wells Fargo with mortgage-fraud suit”, Los Angeles Times)

There you have it; another heartwarming story about our good friends, the bankers, always looking out for the public’s interest.

The banks don’t need full legal immunity. What they need is tough-minded regulators breathing down their necks 24-7, ready to slap them into leg irons and drag them off to the hoosegow for the slightest infraction. That’s what they really need.

But, then, you already knew that.