Credit Crisis the Result of Greatest Financial Crime in World History

Where are all the convictions?

Fri, Sep 16, 2011 - 12:00am

The S&L Crisis was the last major case of domestic fraud resulting not only in major U.S. bank failures but also thousands of convictions across the financial industry. However, today's crisis is vastly bigger, with many more players involved, and yet, not one person has been convicted or gone to jail. In the following transcript, William Black gives a behind the scenes look at events leading up to our current situation, who in the government needs to go, and other key details that will probably suprise you.

Jim Puplava: Joining me on the program is Professor William Black. He is both a Lawyer and an Associate Professor of Economics and Law at the University of Missouri, Kansas City. He was a Director of the Institute for Fraud Prevention from 2005 to 2007. He taught at the LBJ School of Public Affairs at the University of Texas. He was also a Litigation Director for the Federal Home Loan Bank Board. He is also author of the book “The Best Way to Rob a Bank Is to Own One.”

And Professor, you played a critical role during the S&L crisis in exposing congressional corruption. During that period of time, a lot of corruption was exposed; a lot of people in the financial sector went to jail, including Charles Keating. I wonder if you would contrast that to the last credit crisis, let us say from 2007 to 2009 where a lot of money was lost, a lot of things went wrong, but nobody went to jail. Instead they walked out with multi-million dollar bonuses. What was the difference and what was behind this in your opinion?

William Black: Well, I say that both of them were driven by fraud. The Savings & Loan crisis was a tragedy in two parts. First part was not fraud, it was interest rate risk. But the second phase, which was vastly more expensive was to defraud, and the National Commission that looked into the causes of the crisis said that the typical large failure fraud was invariably present. And there were real regulators then. Our agency filed well over 10,000 criminal referrals that resulted in over 1,000 felony convictions and cases designated as nature. And even that understates the grade in which we went after the elite. Because we worked very closely with the FBI and the Justice Department, to prioritize cases—creating the top 100 list of the 100 worst institutions which translated into about 600 or 700 executives—and so the bulk of those thousand felony convictions were the worst fraud, the most elite frauds.

In the current crisis, of course they appointed anti-regulators. And this crisis goes back well before 2007 and of course it is continuing, it does not end at 2009. So the FBI warned in open testimony in the House of Representatives, in September 2004—we are now talking seven years ago—that there was an epidemic of mortgage fraud, their words, and they predicted that it would cause a financial crisis, crisis being their word, if it were not contained.

All right so you have massive fraud driving this crisis, hyperinflating the bubble, an FBI warning, and how many criminal referrals did the same agency do in this crisis? Remember it did well over 10,000 in the prior crisis. Well the answer is zero. They completely shut down making criminal referrals and whichever administration you hate the most, you can hate because while most of this certainly occurred in the Bush Administration, the Obama Administration has obviously not changed it. Obviously it did not see it as a priority to prosecute these elite criminals who caused this devastating injury.

Another way to look at it is, how much fraud is there, and we know the following: There are no official statistics on sub-prime and similar categories because there are no official definitions. So it's a little wishy-washy but the best numbers we have are that by 2006, half of all the loans called sub-prime were also liars loans. "Liars loans" means that there was no prudent underwriting of the loan. And total, about one-third of all the loans made in 2006, were liars loans.

Now that's an extraordinary number, especially when you look at the studies. And here I am going to quote from the Mortgage Bankers Association. That is the trade association of the perps and this is their Anti-Fraud Specialist Unit, and they reported this to every member of the Mortgage Bankers Association in 2006. So nobody can claim they did not know. They found three critical things, first they said this kind of loan where you don't do underwriting is, and I am quoting again, “an open invitation to fraudsters.” Second, they said the best study of this found a 90% fraud incident. In other words, if you look at 100 liars loans, 90 of them are fraudulent. And third they said, therefore these loans—where the euphemism is "stated income" or "Alt-A" loans—actually deserve the title that the industry calls "Behind Closed Doors", and that is liars loans. The other thing we know from other studies and investigations, is that it was overwhelmingly lenders and their agents that put the ‘lies’ in liars loans. Now that is obvious when you look at the lies about appraisals, because homeowners cannot inflate appraisals. But lenders can and how they did it was shown in an investigation by then New York Attorney General Cuomo, now Governor, who found that Washington Mutual, which is called WAMU, and is the largest bank failure in the history of the United States, and indeed the history of the world, had a black list of appraisers. But you got on the black list if you were an honest appraiser, and refused to inflate the appraisal.

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jim [dot] puplava [at] financialsense [dot] com ()