Individuals Causing the 2008 Housing Crisis Receive No More Than a Slap on the Wrist

Following the 2008 housing crisis, several of the banks involved paid large settlement fines. JPMorgan Chase was one of those banks. The Justice Department used evidence from an anonymous whistleblower in the prosecution, but until recently the whistleblower remained anonymous. Matt Taibbi recently released an article in Rolling Stone describing why the whistleblower, Alayne Fleischmann, has gone public with what she knows. Ironically, the Justice Department wasn’t committed to bringing “justice” to those individuals who contributed to the fall of the economy through fraudulent activities. In fact, Attorney General Eric Holder said the following:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

What is the Justice Department doing if they aren’t bringing justice to those responsible for major crimes? When Fleischmann realized that much of what she reported to the SEC and the Justice Department was not being fully pursued, she decided she had to go public with what she knew.

More on Fraud and the US Department of Justice

In several recent posts, I've been critical of the US Department of Justice's extremely poor record of prosecuting Wall Street executives who were a big cause of our current economic crisis. The executives of numerous large financial institutions took home hundreds of millions in compensation while pushing their firms to commit illegal business practices. It's obvious that basic mortgage fraud was rampant in many organizations and yet virtually no one has gone to jail yet.

Surprisingly, the lack of vigilance by the current administration is so blatant that even the NY Times has published an editorial by one of its columnists that says the current Democratic administration panders to business more than past GOP administrations did! I'd like to see a study of how often the NY Times has compared a Democratic administration to a Republican one and found the scale tipped to the GOP side of things. It has to be rare.

I recommend reading the analysis that this editorial gives and see if you agree with the bottom line that this editorial makes:

Amazing, isn’t it? George W. Bush has turned out to be tougher on corporate crooks than Barack Obama.

Wow--from the NY Times no less! Can Eric Holder and President Obama fall any further than that?!

Fraud and the Mortgage Meltdown

Charles Ferguson, the person who created the documentary on the mortgage meltdown "Inside Job," has written a book on the topic titled "Inside Job: The Financiers Who Pulled Off the Heist of the Century." I can only seem to find it on Amazon's UK website so I don't know if it will be available in the US. In any case, this article in the Guardian, written by Ferguson, has some interesting comments about the fact that the Obama administration and the US Justice Department is not prosecuting anyone. Ferguson also names several banks that he claims were complicit in the meltdown and committed various forms of fraud. He says that It's pretty disheartening to think this much corruption exists in the financial industry and the government isn't doing much to hold anyone accountable for it. Here are a few excerpts:

Free Markets, Families and Regulating Fraud

I’ve been reading several calls for prosecution of fraud on Wall Street lately. No, these aren’t coming from the Occupy Wall Street crowd. Instead, top economic and business commentators and scholars are noting the dearth of prosecution and the role this is playing in our economic challenges. This is a fascinating debate and I only have time to capture enough to spark your interest in hopes that you will check out some of the sources I post. For starters,

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,

Foreclosure Fraud and the Economic Recovery

Real estate industry analysts are looking at the foreclosure fraud allegations and saying that this is a huge game changer in the economic recovery that is (or was) under way. If you've heard a bit about this and have been wondering what is going on, here is a short overview from what I can gather.

First, anyone who was foreclosed on during the past three years has a chance that the bank that foreclosed on them did not cross the i's and dot the t's during the foreclosure process. According to one article:

The latest news on the investment banks

If you're tuned into the news these days, you probably have heard today that the SEC has charged Goldman Sachs with fraud regarding the subprime mortgage fiasco that is blamed for the "great recession." Some observers are speculating that this fraud case could be as significant as Enron was. If so, I would expect Goldman's stock to tank over the next few days as a complete picture of the fraud comes to light.

As for now, here is what we know. Both the WSJ and the LA Times reports that Goldman was essentially passing profits to a hedge fund known as Paulson & Co. The LA Times article explains Goldman's fraud as follows:

The SEC's lawsuit alleges that Goldman did not tell investors in the securities that they were based on a portfolio of mortgage bonds selected by a hedge fund. The investment bank subsequently helped the hedge fund, Paulson & Co., place bets against the same bond portfolio, the suit says.

Meanwhile, earlier in the week, The NY Times reported that Lehman's accounting methods are looking shadier by the minute. In particular, the Times article explains:

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

I wonder which investment bank will be in the news for fraud tomorrow?

Catching Up: A Few Links

Another reminder that tax incentives and poor oversight are a great recipe for fraud (via WSJ):

...Des Moines, population 200,000, is dealing with a nasty hangover. A lavish tax-incentive program that brought Hollywood to its doorstep has come to a halt amid allegations of faulty oversight, poor record-keeping and potentially criminal abuse.

Charges were brought against 41 individuals allegedly involved in a widespread mortgage fraud scheme (via NYT):

“The fraud schemes alleged in the cases unsealed today reflect a veritable smorgasbord of scams,” Mr. Bharara said during a news conference in Lower Manhattan. “Whether the economy was going up or the economy was going down, these alleged fraudsters were working feverishly to game the system.” 

Other Madoff Aides Said to Be Tied to Fraud:

The trustee, Irving H. Picard, citing his own findings, asserted that 245 of the almost 5,000 active Madoff accounts were directly managed by other Madoff staff members, not by Mr. DiPascali.

Like Mr. DiPascali, these employees created records of fictional trades that maximized the reported profit in the accounts, the trustee’s filing asserted. Indeed, it claimed those accounts showed bogus profits in excess of the fictional gains recorded in the DiPascali accounts, which ranged from 10 to 17 percent.

According to the filing, the accounts included those set up for Stanley Chais, a Los Angeles investment manager whose clients lost millions in the fraud, and Jeffry Picower, a professional investor who withdrew billions from his Madoff accounts.

The special accounts also included ones set up by members of the Madoff family and employees at the firm, according to the document.

And finally, PCAOB Announces Ambitious Agenda; May Be Time to 'Dial Up' on Fraud, Silvers Says (HT FASRI):

In response to questions, Silvers said, "We should not expect that every audit is a forensic audit... that's absolutely not what I'm saying." However, he added, "I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud."

"This was subject to some extensive discussion in the Treasury committee (Treasury's Advisory Committee on the Auditing Profession or ACAP]," said Silvers, adding, "some people, [e.g.] Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don't find fraud, it's the auditors fault; but it's also not my view that looking for fraud is not related to the audit, that doesn't parse with the public's [perception] of the audit profession."

Mortgage fraud and bailing out the banks

As the government has been bailing out banks that are the "victims" of a crazy boom in housing, an investigative report shows that banks in Florida were looking the other way when property flippers were getting fraudulent loans from them. Here are a few quotes:

A yearlong Herald-Tribune investigation into thousands of suspicious Florida flip deals found that lenders of all kinds approved risky deals and ignored obvious red flags for mortgage fraud.

...

When a Sarasota home builder was unable to sell his newly built houses, mortgage companies lent him and his family nearly $2 million so they could purchase four themselves. Three of those properties are now bank-owned.

Washington Mutual loaned a Sarasota resident $2 million three months after it had foreclosed on a previous $2 million loan. The new loan went into default less than a year later, about the same time WaMu's crush of bad loans put it out of business.

...

Banks and mortgage companies dug an even deeper hole for themselves by continuing to lend money for suspicious deals long after the real estate boom ended. In 2007, more than a year after the market started falling in mid-2005, flippers arranged more than $1 billion in sales involving suspicious price increases.

...

What makes the flipping fraud so egregious is not just that it happened, but that it would have been so easy to stop.

It makes you wonder what happened to the huge commissions that the loan officers took home as they signed away good money for bad loans.