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 PBS.org. 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: