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A Fraud By Any Other Name

Posted by Larry Doyle on April 6, 2009 4:30 PM |

A few loyal readers have graciously shared video clips of interviews with former banking regulator, William K. Black. These interviews address the fact that a tremendous amount of mortgage originations at the core of our current economic turmoil were fraudulently underwritten.  The borrowers were never qualified only then to fall upon hard times.  The loans were often NINJA (No income check, No job check or asset check) and the fraud was more often committed by the lender than the borrower.

Why and how did this happen? Let’s briefly revisit my writing from November 12th:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income, no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

That money SUPPOSEDLY being made left tremendous risks on the books of the banks. The pursuit of ever greater SUPPOSED profits incorporated the use of CDS (credit default swaps) as synthetic collateral for structured deals. These CDS allowed for an enormous increase in volume and SUPPOSED profits. Don’t forget, though, at the core of the process a large percentage of the underlying loans were fraudulently underwritten. 

Our American banking industry has literally dragged our economy to depths not seen in a very long time and hopefully never again. The government bailouts, as Black highlights and I concur, are being used to cover up these fraudulent loans.  Literally, the first paragraph I wrote as a financial blogger back in October addresses this point:

Much like that scene in the movie “Trading Places” when the wealthy tycoon says “turn those machines back on,” I view this bailout package as nothing more than the best of a litany of very bad alternatives. Without being overly pessimistic, though, if you want to reduce this package to layman’s terms, this package is the equivalent of a massive injection of capital/liquidity into a Ponzi scheme that was being played (whether they knew were playing it or not) by certain large financial institutions. 

From that initial bailout package to every single one since then, the money truly is being used to backstop institutions filled with fraudulent loans.

Black provides a comprehensive review of the fraud in the underwriting, rating, and distribution process. Black maintains that the executives at these originators (such as Ameriquest, Long Beach, New Century, et al) were fully aware of the fraud but did not dissuade it. At every point in the food chain, an entity had its hand in the till. 

Where were the regulators then and where are the authorities now? Why have no executives from the originators or banks been arrested and prosecuted? Where was the integrity then and where is it now? 

A house with no foundation can not stand. In order to rebuild a foundation, the cracks and corrupt contractors need to be exposed. Utilizing a different analogy, while the authorities may go after some local thugs pushing dope onto schoolkids, the focus should truly be on the major drug kingpins bringing the dope into the country.  

You may not enjoy the clips with Mr. Black, but I do think you will find them enlightening. I thank getfitnow and FiscalLiberal for providing them. The first clip is an interview of William Black on Bill Moyers Journal. Clicking on the screen below should bring you to the Bill Moyers page on Once there, just click on the video screen to begin playback of the video. The video clip runs for about 28 minutes, but well worth viewing. 


In addition to the Bill Moyers interview, I’ve also included a shorter, 6-minute clip of an interview of William Black from tech ticker:



  • fiscalliberal

    Boy – the Moyers interview of Black is one of the best summaries of the happinings available.

    This could get as good as the Saturday Night Massacre under Nixon. Have you alerted your Senator Dodd about this? It is his committee that is going to have to act.

  • Larry Doyle

    I honestly think the powers that be in Washington, both within the adminstration and Congress, will discount this story.

    The essence of this story is the point we were addressing yesterday–that being the difference between liquidity risk and capital risk. Washington would have us believe that a lot of these loans are money good, while the market (and Black) are saying they were fraudulently underwritten and will default at 40-50%.

    I am not sure the debate even occurs.

    Why do you think this will come in front of Senate Banking? Not that it shouldn’t!!

    • fiscalliberal

      Some how this is massive fraud and I would hope it cannot be ignored. If it is, in the end I do not believe it is sustainable. They will have to keep printing or borrowning money for the cover up.

      You might be right, but I sure hope not. I guess that if the economy recovers, it can be covered up. If it stays down or gets worse, I just do not see how they can cover this up.

      It is interesting in that Krugman is worried about this. A lot of Obama supporters are getting nervous. Mankiew has not really tipped his hand. Good news is that popcorn sale should be up to watch the show.

  • They keep putting plugs into a dike in hopes that it won’t break.

    Who is to say what percentage of loans were truly fraudulaent from the point of origination am dwhich faltered later, but the fraudulent loans were not a small percentage.

    I recall my brother telling me that loans he purchased would have already defaulted within 30 days of purchase. That was just outright theft.

    People have plenty of reasons to be nervous.

    I do think Black stretched it a little bit in certain areas but for the most part it was a solid analysis.

  • fiscalliberal

    Well – the next event is Elizabeth Warrens report. Repeating myself- this has all the attributes of the Nixon scandal in that the noose keeps getting tighter or the thousand cuts keep on comming.

    Off topic – did you see the story on how AP is going to protect its copyright on news aggregators naming Huffington post as a major violater.

  • I think it is going to be the death by a thousand cuts. That spells Japan.

    The more that I think about this overall situation, I believe there are still plenty of losses within the commercial banks but I think the biggest losses of alla re at freddie and fannie and the 12 Federal Home Loan Banks. The FHLB system purchased a LOT of Jumbo mortgage paper (Alt-A, between prime and sub-prime).

    Meanwhile your Spartans are down by 20 points only ten minutes into the game. Ouch.

    I did not see the AP story but I appreciate your sharing it. I do think a lot of blogs are nothing more than copy and paste.

  • fiscalliberal

    My Badgers lost a long time ago. I graduated in engineering at Madison.

    Detroit and Michigan is kind of a illusionary place. High auto salaries and Detroit corruption. Detroit is worse than Bridgeport. You have to live here to understand. I move here only because of a job. Most of my time was in Wisconsin and Schenectady area.

    I had a inkling the Alt A was going to get big, in part because of size, bad loans and the economy. My son lives in a very nice area. A neighbors house was purchased for about a million and sold for 500k. This is because a business went bad. However a lot of this is to to equity refinance loans paying for kids educations.

    The point I guess is that the financial incompetence/corruption is so pervasive from all angles.

  • TeakWoodKite

    LD, as far as “copy and paste” blogs, your humble site
    is a gem of original insight.

    from a newsy I get…wondered what you thought of the appraisal.

    Two fundamental issues divided the United States and Germany. The first was whether Germany would match or come close to the U.S. stimulus package. The United States wanted Germany to stimulate its own domestic demand. Obama feared that if the United States put a stimulus plan into place, Germany would use increased demand in the U.S. market to expand its exports. The United States would wind up with massive deficits while the Germans took advantage of U.S. spending, thus letting Berlin enjoy the best of both worlds. Washington felt it had to stimulate its economy, and that this would inevitably benefit the rest of the world. But Washington wanted burden sharing. Berlin, quite rationally, did not. Even before the meetings, the United States dropped the demand — Germany was not going to cooperate.
    The second issue was the financing of the bailout of the Central European banking system, heavily controlled by eurozone banks and part of the EU financial system. The Germans did not want an EU effort to bail out the banks. They wanted the International Monetary Fund (IMF) to bail out a substantial part of the EU financial system instead. The reason was simple: The IMF receives loans from the United States, as well as China and Japan, meaning the Europeans would be joined by others in underwriting the bailout. The United States has signaled it would be willing to contribute $100 billion to the IMF, of which a substantial portion would go to Central Europe. (Of the current loans given by the IMF, roughly 80 percent have gone to the struggling economies in Central Europe.) The United States therefore essentially has agreed to the German position

    • Larry Doyle

      These negotiations or lack therof between the U.S. and Germany are indicative of the Prisoners’ Dilemma. Despite what may be perceievd as in both parties best interest, each individual party will make a decision that is in their own best interest.

      It would certainly appear that Germany beat the U.S. like a drum.

      • TeakWoodKite

        A human trait of self determinism in motion.

        Ha!… now I am thinking of 2001.

        Dave Bowman: Hello, HAL do you read me, HAL?
        HAL: Affirmative, Dave, I read you.
        Dave Bowman: Open the pod bay doors, HAL.
        HAL: I’m sorry Dave, I’m afraid I can’t do that.
        Dave Bowman: What’s the problem?
        HAL: I think you know what the problem is just as well as I do.
        Dave Bowman: What are you talking about, HAL?
        HAL: This mission is too important for me to allow you to jeopardize it.
        Dave Bowman: I don’t know what you’re talking about, HAL?
        HAL: I know you and Frank were planning to disconnect me, and I’m afraid that’s something I cannot allow to happen.

        • Larry Doyle

          TKW…not familiar with this. Please enlighten me!! Thx

          • viking

            Its dialogue from the movie 2001, A Space Odyssey. HAL is the self-aware supercomputer that interfaces between the astronauts and the space station they live in. Though HAL was programmed to be a beneficial assistant to the astronauts it goes rogue. Dave is the only astronaut left on the station after HAL has successfully disposed of the others. Dave successfully disconnects HAL in the end.

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