William K. Black on Capitol Hill in April. (AP)
Nine stories the press is underreporting -- fraud, fraud and more fraud
ASK THIS | October 20, 2010
From liars' loans to liars' liens, the financial and foreclosure crisis has been one big story of banks defrauding their customers -- a vast criminal enterprise. You wouldn't know it from a lot of the media coverage, though. Regulatory hero and criminologist William K. Black helps connect the dots.
By Dan Froomkin
If it wasn’t already blindingly obvious that pervasive fraud was at the heart of the financial crisis and the ensuing foreclosure catastrophe, you would think that the latest news -- that banks have routinely been lying their heads off in the rush to kick homeowners off the properties they fraudulently induced them to buy in the first place -- would pretty much clinch it.
And yet the mainstream media still by and large hasn’t connected the dots.
What we are seeing all around us are the continued effects of a vast criminal enterprise that has never been brought to account, employing a process that, as University of Texas economist James Galbraith explains
, involved the equivalent of counterfeiting, laundering and fencing.
So the person with the right expertise to lead us here is a criminologist -- in particular William K. Black
, one of the few effective regulators in recent history (during the savings and loan crisis of the late 1980s), a notorious knocker of heads
, and currently professor at the University of Missouri-Kansas City and author of the book, "The Best Way to Rob a Bank Is to Own One"
I first interviewed Black in April
, and recently checked back in and asked him about this ongoing problem
of the mainstream media’s inability to properly cover this story. He responded with this breathless and breathtaking list of failings (slightly edited for publication):
The things I think are critical and badly underreported are:
1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.
2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice" to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit
3. The disgraceful lack of prosecutions which has resulted from regulators virtually ending the practice of making criminal referrals and the pathetic March 2007 "partnership
" that the FBI entered into with the Mortgage Bankers Association (the trade association of the "perps") that led the FBI and the Department of Justice to (implicitly) define out of existence fraud by the lenders (and to conceive of them as the "victim" -- which they are, but only of their controlling officers). Bush administration attorney general Michael Mukasey in June 2008 notoriously refused
to create a national task force against mortgage fraud based on his claim that mortgage fraud was analogous to "white collar street crime."
4. The "echo" epidemics of fraud set off by the primary epidemic of accounting “control fraud
". The fraud designed by CEOs in turn kicked off an epidemic of fraud among loan brokers and appraisers. Reporters should explore the concept of the Gresham’s-style
dynamic in which bad ethics were a competitive advantage and drove good ethics out of the marketplace.
5. The massive foreclosure fraud we are seeing now as another "echo" epidemic. To optimize their accounting control fraud, lenders gutted underwriting. That led to "fraud in the inducement" (vis a vis borrowers), endemic documentation problems, and an extraordinary numbers of defaults. The process required tens of thousands of real estate financing personnel to commit fraud on a daily basis as their core function. Some of these people are unemployed, but many are in the industry and are presently engaged in loan servicing. Now that their job is to foreclose on properties, there is no reason to expect that they would suddenly become honest, and they haven’t.
6. The ongoing massive cover up of losses on bad assets, particularly by the “too big to fail” institutions, which I call “systemically dangerous institutions
” (SDIs). Those institutions, along with Federal Reserve Board Chairman Ben Bernanke and Congress (at the behest of the Chamber of Commerce and with no opposition from the Obama administration) in April 2009 forced the Financial Accounting Standards Board (FASB) to change the rules
so that the banks do not have to recognize their losses unless and until they sell the bad assets. The implications of this cover up are large (and rarely reported). At the very least, it means that Treasury Secretary Timothy Geithner’s propaganda campaign about TARP saving the world at virtually no cost (perhaps even a "profit") is nonsense -- despite its success in influencing the Washington Post
and Los Angeles Times
A) The repayment of TARP funds does not mean the banks are healthy. Their asset values are often grossly inflated, which means their net worth is grossly inflated. That means that the claims that we have increased net worth requirements (and that Basel III
will further increase net worth requirements) are false. Net worth requirements have meaning only if the accounting is honest
B) The repayment of TARP funds does mean that the banks are freed from any meaningful restraint on senior officer compensation. Note that absent the accounting lies the banks would often be reporting losses (and failure to meet required capital requirements, or outright insolvency) and could not pay their senior officers bonuses and would be subject to mandatory closure under the Prompt Corrective Action (PCA) law.
C) No commercial entity would have ever signed the TARP deals on the terms that the U.S. drafted for itself. The U.S. provided not only fresh money but an unlimited de facto guarantee (along with permitting phony accounting). If the U.S. had negotiated competently it would have owned virtually all the shares of every TARP recipient (which, of course, was a political impossibility).
D) The accounting lies are stalling the recovery. Markets cannot clear promptly when one creates an incentive to hold massively overvalued assets for years.
E) The losses are still there, but the taxpayers are on the hook via Fannie and Freddie and the Fed (which has taken over a trillion dollars in toxic collateral at grossly inflated values).
7. The continued absence of effective regulation. It should be scandalous that Obama left in charge, or even promoted, the anti-regulators who permitted the Great Recession. The (failed) anti-regulator of Fannie and Freddie, for example, remains FHFA's acting director
. This is significantly insane as a matter of both economics and politics. (The administration doesn't even seem to realize the issue of integrity.)
8. The crises of state and local government and the lack of a rational basis for Republican and Blue Dog opposition to the proposed revenue sharing component of the stimulus bill. The compounding insanity of the administration failing to fight for its concept and failing to make explicit how badly its removal would harm the recovery, employment, and vital government services.
9. The insanity of accepting mass, long-term unemployment rather than having the government provide productive jobs for everyone willing to work (as the employer of last resort).
I have nothing to add.
Over 500,000 foreclosures
Sinking in Florida
10/20/2010, 02:08 PM
This fraud angers me so much we each now must put up a fight to save our homes.Honest people being defrauded by a system that wont work to try to save our futures.Goverment not standing-up to illegal foreclosures and keeping the rule of law inforce!Servicers creating documents because they cant produce any trail to the orginal loans.These are not isolated cases 75% most likely dont have standing.Ownership of property has become a joke,paying 30 years and not getting a clear title will be the stories of the future.The igorence of most people thinking this is just about making payments shows how trusting people are, just easy targets.Finding out these loans have been sold and commited to as many as 3 different pools ought to make everyone concerned they are paying the wroung people.I think each and every loan needs to be acounted for.These TBTF have played dangerous games with families futures seems like they all must acount for the deeds they have done.Pension funds are gone,futures destroyed,not anyone charged for allowing this to be done is a crime.We must look like fools to allow this to continue.Does anyone have the guts to challenge these thugs or has everyone been paid off to let it continue?Why are courts acepting these phoney documents.If this continues we are defeated,the very princibles our of country have been forever taken its only getting worse from this point forward.In God I Trust,never a Bank from this point forward.Where is the money from these stolen properties?Its a fact that they have sold many homes they never owned.Why is it allowed to continue who can stop the thefts from happening?Lets get to the bottom of this before it destroys us!
Connect the dots?
10/20/2010, 02:24 PM
"And yet the mainstream media still by and large hasn’t connected the dots."
I beg to differ. The mainstream media has absolutely no desire to "connect the dots." Our traditional media is no more and no less than the lapdog of our super-rich elites who would simply not tolerate having their hands bitten by an ungrateful pet.
There are myriad "dots" that remain unconnected by our media. The on-going financial coup d'etat so skillfully executed by the banksters with the able assistance of the media and their other faithful mascot, our elected officials, is but one of them.
Why we continue to pretend that the fourth estate and our publicly elected leaders serve the interests of the common good is beyond me. It's not only not true, it hasn't BEEN true for a good many years.
10/20/2010, 03:06 PM
I wonder how long it will be before The Banks/Wall Street put the hammer down on the Congress to either override Obama's veto or write even better legislation to have the dogs called off and stop having people ruin rich mens lives over paper work.
government providing jobs
10/20/2010, 04:30 PM
How on earth is government supposed to provide "productive jobs" to anybody who wants it? Maybe the media understands the economics of that idea. What are "productive jobs" and how do you pay for them? More taxes? That'll reduce the ability for others to create jobs. You're proposing robbing Peter to pay Paul.
resident genius ;)
10/20/2010, 06:04 PM
in this case, "blaming the media" is really unfair. Unless and until the justice department and relevant regulatory agencies start treating this like the criminal matter it is, the press really can't present it as "crime".
The blame lies squarely with the Bush AND Obama administrations here, both of whom are far too comfortable/deferential to wall street & bankster money, and far too unconcerned with the needs of average americans.
10/20/2010, 07:35 PM
Black has hit the nail on the head. It amazes me that the citizenry are tolerating a financial elitist agenda that was publicized more than a century ago (just Google "The Banker's Manifesto"). They told us what their agenda is, they executed on that agenda, and those who hold the power and positions to defend us against this tyranny are nowhere to be found, thus they are, by squandering the responsibilities they were elected/appointed to hold, are part of the problem. Jefferson warned us, Jackson fought the culprits, and Sen. Charles Linburg brought their manifesto to our attention, yet we continue to allow this sinister gathering tyranny to plague our lives and our nation. Shame on us for being so naive. Shame on our leaders for being so corrupt. Shame on the financial perpetrators for having no honor, compassion, honesty, and integrity. But "double shame" on us for not providing appropriate consequences for all involved.
Too crazy to care
You are not a pessimist
10/21/2010, 05:13 AM
Mortgages were handled for quite a long time by the Savings and Loans and by the insurance companies.
If anyone ever stumbles across a big bundle of fictitious mortgages held by the major insurance companies then the economy is going to implode.
There was a Ponzi scheme about 20 to 25 years ago when a hustler started an "insurance company." No real policies, he and his gang just counterfeited polices and deeds. Ran for several years. Bundled up batches of counterfeit papers and sold them all over the world.
I think the big insurance companies are dead and just won't admit it. Sure they have great balance sheets, but so did the S and Ls, Enron perfect books.
Why aren't CPAs going to prison for conspiracy to defraud under the laws covering illegal organizations - RICO fits all of these frauds like a glove.
10/21/2010, 08:04 AM
The insanity of accepting mass, long-term unemployment rather than having the government provide productive jobs for everyone willing to work
That worked so well in the Soviet Union.
10/21/2010, 11:47 AM
>9. The insanity of accepting mass, long-term unemployment rather than having the government provide productive jobs for everyone willing to work
Well, it worked just fine in the States when the WPA, Works Projects/Progress Admin, and CCC, Civilian Conservation Corps, were up and running. Both turned the drifters and hoboes of the '30s and early '40s into the disciplined workers behind the US war effort in WWII. The US is ready for a few billion trees to be planted and a lot of national infrastructure to be rebuilt.
#10 of the underreported story
10/21/2010, 12:26 PM
#10 - 9/11 was an inside job and resulted in endless Wars for Israel, it all started nearly a decade ago under a false flag attack.
9/11 and Israel, here:
10/21/2010, 05:22 PM
All the WPA did was take money (or create debt) to create non-sustaining jobs. That's exactly the point. You can have government arbitrarily decide you need a 40 foot mural somewhere and take taxpayer money for it, but all you get in the end is a painting, a one-off payment to an artist and money spent on something individuals likely would not have spent it on. That's artificial "job creation". You might like murals, but it doesn't mean we should go in debt to create it.
2003 Jury got it right with First Alliance against Lehman
10/21/2010, 11:00 PM
The jury of our peers got it right and slammed Lehman with big punitive damages in a 2003 case that uncovered all these fraudulent lending practices by 2003. The Federal Judge Clarke appointee by Clinton overturned their verdict and merely slapped wrist of the Ibank conduits. That was all the precedent the Ibank lawyers needed to OK the spigot which grew and grew through 2007! This circle of cause and effect starts and ends with Courts who are under no pressure to protect property rights of ordinary Americans, but boy will they allow divide-and-rule to protect generations of such ill gotten gains of the Top 1%!
Seems gouging Americans for wages and asset bubbles, and dividing and ruling them to keep them from fighting back, is fair game by this Judiciary and always has been called free market capitalism in the USA.
300M people duped...and the biggest generation of American kids left high and dry here just in time to be torn apart by divide and rule to be overrun by our own Plutocrats who want to use them to strip mine our minerals to sell to foreigners.
Finis Pax Americanus even if it only ever existed within our own borders, and we were well shielded from the real truth!
Just my take....
10/24/2010, 09:16 AM
Laid off 2 years ago - ageism. Had a duplicitous Quebecoise wife who was a mortgage loan officer - "stated" loans were the best thing since sliced bread; she was "helping" people lie. Saw "Inside Job" and cried alot at the greed and stupidity. It's all about money and greed in this American life and the Fed's a part of it, too. The fantastically rich are venerated and respected and are on one side, and the Fed's on the other and in bed with them - regardless of "party". There's no place to hide.
Shawna Murray M.D.
11/08/2010, 08:55 PM
There is an extraordinary amount of fraud, battery and other bad behaviors in health care as well. Very dangerous but little accountability.
try to solicit responses
11/16/2010, 07:53 PM
great article...but I would love to see you solicit responses from jouranlism profs and press why this should happen, won't happen, or hasn't happened yet. direct confrontation with facts seems to be the only real way to 'criticize media' getting people on the record, or getting people to never be on the record seems to have been the problem this whole time.
the internet and computers have just made responsibility easier to duck
11/21/2010, 11:45 AM
seems to me if the government paid each mortgage holder ( for their primary residence only ) $100,000 towards their mortgage, everyone would make out. The banks would still get billions and citizens would get some relief. It must make too much sense, the government can't grasp the concept.
11/21/2010, 08:10 PM
The only thing left out is that the same problems are occurring in other sectors of our economy including the health/insurance industry, military and antitrust violations that serve to maintain environmentally and economically destructive industries such as oil and hedge funds. Over 1/2 of all Americans are dying prematurely, yet the maintain media continues to focus on health care costs. The cost, ethics and effectiveness of our wars is ignored. Hedge funds continue to impose their own personal taxes on American's retirement accounts and oil companies continue to block successful eco-friendly alternatives. The total cost on the U.S.and the world is staggering in terms of the length and quality of their lives and even more so on their children's lives.
11/29/2010, 12:19 PM
While living in Pittsburgh, I was involved with a neighborhood business group trying to get it's business district back on its feet. The biggest damage was done by a "developer" who bought up the area with bank loans obtained by questionable methods. He fled the US for Brazil and left behind many unpaid loans. While our group was working on buying some of these vacant properties a title search on a vacant lot worth around $20,000, a title search revealed liens in excess of 2.75 million dollars. I can only assume that these loans were regarded as assets on the books of the various banks that held the mortgages. If one vacant lot worth $20,000 is worth over 2 mil on the books of the banks, what does the whole banking industry look like?
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