First Major Criminal Conviction Related to the Mortgage Meltdown

Lee Farkas in front of his private jet in 2005

The Justice Department is celebrating this week after finally landing a major criminal conviction in the aftermath of the mortgage meltdown. The Justice Department was able to stick 14 counts of fraud and conspiracy on Lee Farkas in what is reported to be a $2.9 billion mortgage fraud scheme. Mr. Farkas operated a huge mortgage business, known as Taylor, Bean and Whitaker.

Taylor Bean apparently sold billions of dollars of mortgages to Fannie Mae and Freddie Mac and obtained loans from large U.S. and foreign banks that were collateralized with fictitious mortgages or mortgages already sold to others.

As is common with many fraudsters, Mr. Farkas had an appetite for material possessions that led him to spend at least $20 million of other peoples' money on things like fancy homes, classic cars and even a private jet (see the photo to the right). According to the NY Times,

"The scheme began in 2002, prosecutors say, when Taylor, Bean & Whitaker executives moved to hide the firm’s losses, secretly overdrawing its Colonial Bank accounts, at times by more than $100 million. To cover up the actions, prosecutors said that the lender sold Colonial about $1.5 billion in “worthless” and “fake” mortgages, some of which had already been bought by other institutional investors. The government, in turn, guaranteed those fraudulent home loans."

 In another NY Times article, it was reported that:

The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.  

Much of what Farkas was convicted for was creating fictitious mortgage loans and use the fictitious loans as collateral for obtaining financing from major banks including two large European banks, Deutsche Bank and BNP Paribas. For example, these two banks "thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real." Apparently, the jury found that the scheme to create fictitious loans was ultimately Farkas's doing.

Interestingly, Farkas gave the jury a pretty clear cut case in that he essentially said that he thought he had the right to commit fraud. According to the NY Times, Farkas said the following:

Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.

“Yeah, I believe it does,” he replied.

“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”

Seriously?! I don't know how to respond to a statement like that. Maybe I will try for the "understatement-of-the-year award" and say Mr. Farkas has a problem with his ethical compass?!

It sounds like he'll probably have the rest of his life behind bars to try to get it worked out...