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“WAMU Loan Fraud Should Have Been Easily Detected”

Posted by Larry Doyle on April 14, 2011 10:16 AM |

I have long believed and written extensively that I thought our nation experienced extensive fraud in the mortgage origination industry in the first decade of this century. That fraud was then conveyed throughout our markets and economy via the securitization process on Wall Street. Many people, divisions, departments and firms profited along the way while regulators were negligent, incompetent, or both.

While only a select few individuals in the mortgage origination industry have paid any type of price for engaging and promoting this fraud, our nation as a whole has paid a very heavy and steep price. I find this reality to be reprehensible and hold our nation’s banking regulators in contempt for allowing this gross injustice to transpire. Even to this day the banks and mortgage servicers involved in the initial fraud and having engaged in ongoing abusive business practices are poised to get a slap on the wrist and little more for their practices.

Frauds not properly adjudicated only serve as a precedent and example for future illicit and improper activities.

While many stories inside and outside of Washington grab the public’s attention, I firmly believe the mortgage fraud is central to the question as to whether Wall Street violated the RICO (Racketeer Influenced and Corrupt Organizations) Act. Bloomberg provides further color on this story in reporting, WAMU Hawaii Trips Drove Risk as Regulator Failed, Report Says,

Washington Mutual Inc. (WAMUQ), once the largest U.S. thrift, rewarded bankers for overcharging customers on subprime mortgages and selling the worst-performing loans to investors, a U.S. Senate panel concluded.

The lender gave its top producers free trips to places like Hawaii and the Bahamas in return for increasing mortgage volume, even as performance of the loans deteriorated, according to the Senate Permanent Subcommittee on Investigations report on the financial crisis.

“Loan officers and processors were paid primarily on volume, not primarily on the quality of their loans, and were paid more for issuing higher-risk loans,” the panel found. “Loan officers and mortgage brokers were also paid more when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate — a practice that enriched WaMu in the short term, but made defaults more likely.”

The report of more than 600 pages, released yesterday, is based on internal documents and testimony from executives and regulators. The subcommittee concludes that WaMu’s primary regulator, the Office of Thrift Supervision, identified hundreds of the lender’s failings without taking effective action and impeded the Federal Deposit Insurance Corp. from ordering corrective steps.

Who within the OTS failed to take effective action? Why did they fail? We need details and names. Where else may these details lead? What other organizations were engaged in similar practices? Were their conflicts of interest involved? Let’s continue.

Kerry Killinger, the former chief executive officer of WaMu, and another executive were sued by the FDIC last month. They were accused of taking extreme risks with the bank’s mortgage portfolio, causing billions of dollars in losses. Barry Kaplan, Killinger’s attorney, declined to comment yesterday when asked about the Senate report.

Killinger is being sued? Big deal. Why isn’t he being indicted if in fact there was an ongoing fraud at WAMU? Was there a fraud?

WaMu, which had $300 billion of assets and 2,300 branches when it collapsed, began a strategy of emphasizing high-risk loans in 2004, the subcommittee said. The panel found that the bank’s efforts to boost loan volume involved fraud.

Bingo!! Fraud is not supposed to be adjudicated by suing the individual. From where I come, fraud is supposed to be dealt with indictments and prosecutions.

“WaMu management was provided with compelling evidence of deficient lending practices in internal e-mails, audit reports, and reviews,” the panel said. “Internal reviews of WaMu’s loan centers, for example, described ‘extensive fraud’ from employees ‘willfully’ circumventing bank policy.”

Who knew what and when did they know it? Who facilitated and authorized the fraudulent activity? Who outside of WAMU was aware of the fraud and further enabled and profited from it?

Did the overall enterprise rise to the level of an organized and corrupt practice? If so, did WAMU and other firms violate the RICO Act?

Given the fact that ALL American taxpayers are paying for these previously highlighted business practices, we deserve to have the fraud properly adjudicated. We also deserve to know if firms violated the RICO Act.

I strongly believe that regulators, central bankers, and legislators who do not pursue this line of questioning have failed to uphold their responsibilities as public servants.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Larry Doyle

  • Matt Cornell

    Larry –

    There is a really good piece in today’s NY Times by Gretchen Morgensen on how and why there have been no indictments or prosecutions whatsoever from the financial crisis. You will find this article very interesting because it talks about auction rate securities, and how the General Counsel at the Federal Reserve pressed and pressed the SEC to significantly reduce the settlements the SEC was going to require banks to pay to ARS investors, basically lobbying on behalf of the big banks like Citigroup that if those big banks were required by the SEC to make all ARS investors whole, than the banks might run short on capital. The General Counsel for the Fed won the battle and the SEC only required a total of only eight banks to only make retail investors whole, and gave them no requirements for institutional investors, which was a much bigger dollar amount. Unbelievable. Also, the general theme of this article is that the reason there have been no prosecutions is that regulators and everyone in Washington were scared that prosecuting these banks would worsen the financial crisis and cause some of the banks to fail and our economy wouldn’t be able to handle that – basically the same argument the banks and Henry Paulson made about TARP. They also did not want taxpayer bailout money (that the banks had just received) to be used to pay settlements. Huh? But it was OK to use that bailout money for bonuses? Again – unbelievable stuff. As you’ve said before – you can’t make this stuff up. Here’s the article Larry – you’ll really find this fascinating:

    http://finance.yahoo.com/news/In-Financial-Crisis-No-nytimes-220824617.html?x=0&.v=1

  • wsm

    “I strongly believe that regulators, central bankers, and legislators who do not pursue this line of questioning have failed to uphold their responsibilities as public servants.”

    Well, duh. I don’t think anyone would disagree with you on that one.

    The more salient discussion would be how to reform the regulatory structure of such – seeing as that is the CAUSE of these massive lapses in controls. For years on end, we have had regulators appointed by legislators who are bought and paid for.

  • LD

    WSM,

    Can you tell me where else in the blogosphere or in the media you see anybody asking for an investigation as to whether Wall Street violated the RICO Act?

    “Duh”….?

    Are you kidding me?

    Try to add a little something better to the dialogue.

  • LD

    WSM,

    Congratulations. You know how to ‘spam’!!

    I do link to most of these other sites via the blogroll here. I am not looking for an assistant at this point but I will keep you in mind if that changes.

    I still think you have to be able to do better than this.

  • wsm

    Just making the point (as with a lot of your posts that I come across via interesting headlines in my blog aggregator) that many of the issues you address so passionately are simply symptoms of the true underlying problems.

    The more interesting and useful discussions are centered around understanding the actual CAUSES and incentive structures which result in these symptoms. It just so happens that these analyses are also prohibitively complex. Which explains the dearth of salient conversations on the topic around the net.

    I don’t claim to have the answers. I just take it upon myself to try to steer intelligent, passionate people to expend their efforts towards understanding and addressing the causes, rather than just lamenting the symptoms.

  • LD

    WSM,

    Understood. Your point is well taken and appreciated. I do believe a lot of what this encompasses is part and parcel of the ‘regulatory capture’ that encompasses Wall Street. While that technical term is the appropriate phrase I define it more as the “Wall Street-Washington Incest” and have written extensively on that topic.

    I believe a fair number of the commentaries in that compilation would address your point.

    Thank you for this engagement.

  • Beth

    Thanks Larry, I always check out your site… actually as a lay person…I had never heard of Auction Rate Securities until I started reading your website. This in turn has contributed to my reading more about the SEC, FINRA, the federal reserve and a whole host of other govt. bodies as well as Wall Street issues.

    Thanks again for this information source, much appreciated.






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