Posts Tagged ‘Law Enforcement’
A recent study confirmed that control fraud was endemic among our most elite financial institutions:Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market. Tomasz Piskorski, Amit Seru & James Witkin (February 2013) (“PSW 2013″).
The key conclusion of the study is that control fraud was “pervasive.”
[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions.
Finance scholars are not known for their sense of humor, but the irony of calling the world’s largest and most harmful financial control frauds our “most reputable” banks is quite wondrous. The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of “white-collar” crime. It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.
The PSW 2013 study confirmed one form of control fraud and provided suggestive evidence of two other forms that I will discuss in a future column. The definitive evidence of control fraud that PSW2013 identifies is by mortgage lenders who made, or purchased, mortgages and then resold them to “private label” (non-Fannie and Freddie) financial firms who were creating mortgage backed securities (MBS). The deceit they documented by the firms selling the mortgage loans consisted of claiming that the loans did not have second liens. The lenders knowingly sold mortgages they knew had second liens under the false representations (reps) and warranties that they did not have second liens. (The authors confirm the point many of us have been making for years — the banks that fraudulently sold fraudulent mortgages did have “skin in the game” because of their reps and warranties. The key is that the officers who control the banks do not have skin in the game — they can loot the banks they can control and walk away wealthy.) The PSW 2013 study documents that the officers controlling the home lenders knew the representations they made to the purchasers as to the lack of a second lien were often false (pp. 2, 5 n. 6), that such deceit was common (p. 3), that the deceit harmed the purchasers by causing them to suffer much higher default rates on loans with undisclosed second liens (pp. 20-21), and that each of the financial institutions they studied — the nation’s “most reputable” — committed substantial amounts of this form of fraud (Figure 4, p. 59).
The most interesting reaction to the PSW 2013 study is that of a fraud denier, The Economist‘s “M.C.K.” In his January 25, 2013 column, (“Just who should we be blaming anyway?”) M.C.K. argued that we should blame the victims of the fraud (“the real wrongdoers were not those who sold risky products at inflated prices but the dupes who bought them….”).
Only three weeks later, in his February 19, 2013 column discussing the PSW 2013 study, M.C.K. admitted that fraud by banks had played a prominent role in the crisis.
BUBBLES are conducive to fraud. Buyers become less careful about doing their due diligence when asset prices are soaring and financing for speculation is plentiful. Unscrupulous sellers exploit this incaution. The victims are none the wiser as long as the bubble continues to inflate.
I will explain in a later column why I believe this passage is badly flawed, but my point here is that the fraud denier and “blame the victim” columnist has recanted.
During America’s housing bubble, mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth. Many argue that the banks that bundled those loans into securities deliberately and systematically misled investors and private insurers about the risks involved. It is easy to be unsympathetic in the absence of hard evidence. As I argued in a previous post , ‘investors were not forced to take the losing side of so many trades.’While I stand by that view, a new paper by Tomasz Piskorski, Amit Seru, and James Witkin convincingly argues that banks deliberately misrepresented the characteristics of mortgages in securities they pitched to investors and bond insurers. The misrepresented loans defaulted at much higher rates than ones that were not — a result that would not be produced by random errors. Moreover, the share of loans that were misrepresented increased as the bubble inflated. The authors estimate that underwriters may be liable for about $60 billion in representation and warranty damages (emphasis in original).
These two paragraphs are worth savoring in some detail. The central point we have been arguing for years is now admitted — and treated as a universally known fact: “mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth.” The crisis was driven by liar’s loans. By 2006, half of all the loans called “subprime” were also liar’s loans — the categories are not mutually exclusive (Credit Suisse 2007). As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar’s loans.
The incidence of fraud in liar’s loans was 90 percent (MARI 2006). Liar’s loans are a superb “natural experiment” because no entity (and that includes Fannie and Freddie) was ever required to make or purchase liar’s loans. Indeed, the government discouraged liar’s loans (MARI 2006). By 2006, roughly 40% of all U.S. mortgages originated that year were liar’s loans (45% in the U.K.). Liar’s loans produce extreme “adverse selection” in home lending, which produces a “negative expected value” (in plain English — making liar’s home loans will produce severe losses). Only a firm engaged in control fraud would make liar’s loans. The officers who control such a firm will walk away wealthy even as the lender fails. This dynamic was what led George Akerlof and Paul Romer to entitle their famous 1993 article — “Looting: the Economic Underworld of Bankruptcy for Profit.” Akerlof and Romer emphasized that accounting control fraud is a “sure thing” guaranteed to transfer wealth from the firm to the controlling officers.
M.C.K. now admits that liar’s loans were endemically fraudulent and that it was lenders and their agents who “deliberately” put the lies in liar’s loans. Given the massive number of liar’s loans and the extraordinary growth of liar’s loans (roughly 500% from 200-2006) it is clear that that they were the “marginal loans” that caused the housing markets to hyper-inflate and created the catastrophic losses (in the form of loans, MBS, and CDOs) that drove the financial crisis. The key fact that must be kept in mind is that once a fraudulent liar’s loan begins with the loan officer or broker inflating the borrower’s income and suborning the appraiser into inflating the home appraisal the subsequent sales of that mortgage (or derivatives “backed” by the mortgage) by private parties will be fraudulent.
The authors of the PSW 2013 study expressly cautioned that their data allowed them to examine only two of the varieties of fraud. Lenders’ frauds in originating and selling liar’s loans were far more common, and far more harmful, than the two forms of fraud the PSW study was able to study. The many forms of mortgage frauds by lenders and their agents, of course, were cumulative and the frauds interact to produce greatly increased defaults.
The greatest importance of the PSW 2013 study is that even the fraud deniers have to admit that our most prestigious banks were the world’s largest and most destructive financial control frauds. Given this confirmation that the banks engaged in one form of control fraud in the sale of fraudulent mortgages (false representations about second liens), there is no reason to believe that their senior officers had moral qualms that prevented them from becoming even wealthier through the endemic frauds of liar’s loans and inflated appraisals. Appraisal fraud is almost invariably induced by lenders and their agents. Given the “pervasive” willingness of the officers controlling our most prestigious banks to enrich themselves personally by lying about the presence of second liens, they certainly cannot have any moral restraints that would have prevented them from creating the perverse incentives that caused loan officers and brokers to put the lies in liar’s loans and to induce appraisers to inflate appraisals — two other control fraud schemes that were far more “pervasive” (and even likelier to produce severe losses) than the two forms of fraud studied by the PSW 2013 authors.
Once the fraud deniers have to admit that one form of control fraud involving mortgages was “pervasive” among our most prestigious banks, it becomes untenable to ignore the already compelling evidence that other forms of control fraud involved in the fraudulent origination and sale of mortgages and mortgage derivatives were even more pervasive at hundreds of financial institutions. The PSW 2013 study destroyed the myth of the Virgin Crisis. It also exposes the falsity of the ridiculous “definition” of mortgage fraud that the Mortgage Bankers Association (MBA) foisted on the FBI and the Department of Justice that implicitly defines control fraud out of existence for mortgage lenders. Attorney General Holder and President Obama have no excuse for their faith in the Virgin Crisis, conceived without fraud and should repudiate the MBA definition immediately and train the regulators and agents to spot and prosecute the epidemic of control frauds that drove this crisis (and the S&L debacle and Enron-era frauds).
Huffington Post – William K. Black
Now I think I’ve seen it all.
Let’s cut the crap — colleges market themselves to young men and women on the premise that their educational services will provide you a means to get a better job than you would otherwise obtain. That’s the entire purpose of a career-focused education and the only justification for the outrageous tuition charges they assess.
Well, as it turns out if you fail to benefit from the alleged “education” that these people sold you, and in the process you borrowed money using Perkins loans, the college is very likely to come after you, including in court!
Oh, and lest you think they’ll just sue to the principal and accrued interest, nope.
As I’ve pointed out to a number of High Schoolers contemplating going to college and taking out loans, there are statutory penalties that apply if you default. In the case of Perkins loans these amount to an additional 30% of the principal, increasing to 40% on a second collection attempt and another 40% on top of that if they sue.
That basically doubles the amount you owe.
Of course colleges don’t talk about this before you matriculate. After all, “education” as offered in these edifices is only partial, and the representations, both expressed and implied are many — but the warranties few.
My advice to young adults stands: DO NOT BORROW MONEY TO GO TO COLLEGE.
My advice to parents stands: DO NOT, UNDER ANY CIRCUMSTANCES, CONTRIBUTE TO YOUR NOW-ADULT KIDS BEING BAMBOOZLED BY THESE FINANCIAL TRAINWRECKS KNOWN AS “UNIVERSITIES” AND “COLLEGES.”
Discussion (registration required to post)
I am not the author of today’s catchy headline. No, that was Gretchen Morgenson writing in the New York Times on January 5, 2013.
If you were hoping that things might be different in 2013 — you know, that bankers would be held responsible for bad behavior or that the government might actually assist troubled homeowners — you can forget it. A settlement reportedly in the works with big banks will soon end a review into foreclosure abuses, and it means more of the same: no accountability for financial institutions and little help for borrowers.
Last week, The New York Times reported that regulators were close to settling with 14 banks whose foreclosure practices had ridden roughshod over borrowers and the rule of law. Although the deal has not been made official and its terms are as yet unknown, the initial report said borrowers who had lost their homes because of improprieties would receive a total of $3.75 billion in cash. An additional $6.25 billion would be put toward principal reduction for homeowners in distress.
Gretchen was reporting a few days before the official announcement. The deal was done, and the settlement turned outto be $8.5 billion, with $3.3 billion of that set aside for cash relief for homeowners.
The settlement Bank of America, Citigroup Inc, JPMorgan Chase & Co, Wells Fargo & Co and five other banks entered with regulators pays out up to $125,000 in cash to homeowners whose homes were being foreclosed when the paperwork problems emerged.
Remember that $125,000 number. That’s pure propaganda, given the size of the group of aggrieved mortgage holders.
About $3.3 billion of the $8.5 billion settlement with the Office of the Comptroller of the Currency will be in cash, with the rest in changes to the terms of loans or mortgage forgiveness.
In April 2011, the government required banks that collect payments on mortgages, known as servicers, to review whether errors in the foreclosure process had harmed borrowers.
Gretchen did some “back of the envelope” math for us. I am too lazy to correct it for the lower cash settlement.
Some back-of-the-envelope arithmetic on this deal is your first clue that it is another gift to the banks. It’s not clear which borrowers will receive what money, but divvying up $3.75 billion among millions of people doesn’t amount to much per person. If, say, half of the 4.4 million borrowers were subject to foreclosure abuses, they would each receive less than $2,000, on average. If 10 percent of the 4.4 million were harmed, each would get roughly $8,500.
Gretchen then did a follow-up on January 12, 2013 called Paying the Price, but Often Deducting It, which I will not quote. She notes that these unimpressive settlements are usually tax-deductible for the banks.
And then FRONTLINE (PBS) ran yet another hour-long documentary about why no bankers have gone to jail. It’s called The Untouchables, and contains this quote from Lanny Breuer, who has been the head of the Department of Justice’s criminal division in the 1st Obama administraton, and who was still in that position when the documentary was made.
MARTIN SMITH — You gave a speech before the New York Bar Association. And in that speech, you made a reference to losing sleep at night, worrying about what a lawsuit might result in at a large financial institution.
LANNY BREUER — Right.
MARTIN SMITH — Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?
LANNY BREUER — Well, I think I am pursuing justice. And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand.
This is as candid a statement as you’re ever going to read that the banks in question are considered too big to fail, and, as such, they are above the law. And now we learn that Lanny is resigning, having done his job to protect those banks, and having been exposed as a fraud.
Lanny Breuer is leaving his position as head of the Justice Department’s criminal division, The Washington Post reported Wednesday.
As assistant attorney general, Breuer led the effort to pursue allegations of fraud and corruption at major banks in the wake of the financial meltdown. The Post said it was unclear when Breuer will leave, and didn’t offer a reason. A DOJ spokeswoman told FRONTLINE that the department wouldn’t comment on the report.
Breuer was featured in FRONTLINE’s documentary The Untouchables, which aired on Tuesday and explored the reasons why no Wall Street executives have been prosecuted for fraud in connection with the financial crisis. Breuer told FRONTLINE that the DOJ had pursued charges when officials found evidence of fraud. “But in those cases where we can’t bring a criminal case — and federal criminal cases are hard to bring — I have to prove that you had the specific intent to defraud. …If we cannot establish that, then we can’t bring a criminal case,” he said.
And now I will make a few remarks.
I find it telling that humans, in this case Americans, continue to pretend that they live in a legitimate, fair society, despite massive and compelling evidence to the contrary. Or a society which—once again?—things might be set right. As usual, that observation tells us a lot more about humans (and Americans) than it does about the specific injustices and corruption in these pro-forma ”prosecutions” of the banks, which are merely typical examples of how elites control complex human societies. As such, this kind of behavior is exactly what we would expect to see, independent of the messy details about how elite control is implemented.
As usual, if you research this particular manifestation of typical human corruption, of elite control, you will find much wailing and gnashing of teeth, for example, at places like Naked Capitalism.
I mean, why does FRONTLINE (video below) even bother to make these documentaries? So I’m here to ask disconcerted “progressives” and do-gooders some simple questions—
What the fuck did you expect to happen with the banks?
What is it, exactly, that you are complaining about?
Do you actually expect that this typical human corruption might be eradicated?
If you have not already seen PBS Frontline’s The Untouchables, I encourage you to do so.
Dave Cohen – Decline of the Empire
Will “they” ever be prosecuted? You know “they”. “They” created the derivatives monster that threatens to destroy our economy. ”They” got their profits, while sticking “us” with the bill for bailing them out when their bets went South. Some of “they” have merely a year left to wait out the statute of limitations that would free them from the possibility of future prosecution for their role in the economic collapse. Will “they” all escape justice entirely?
In this 25 minute video, People & Power: Prosecuting Wall St., this question is explored in detail, as Bob Abeshouse of AlJazeera explains:
Americans across the political spectrum believe that financial executives should have gone to jail for the practices that led to the collapse, but there have been no significant prosecutions. People & Power investigates why Wall Street has not been held accountable for crimes connected to the deepest recession since the Great Depression.
Abeshouse further explains:
Sheila Krumholz of the Center for Responsive Politics, which tracks campaign expenditures and lobbying expenditures, says it is hard not to associate “the incredible clout that Goldman Sachs wields in Washington with decisions that favour their interests”.
Krumholz says it is both the money and the connections – the financial industry has spent more than $5bn on lobbying and campaign contributions to both Democrats and Republicans in the last decade. And the revolving door means that government officials find it difficult to view the leaders of companies where they have worked or have friends “as being capable of criminal acts”.
Former Securities and Exchange Commission investigator Gary Aguirre argues that the main reason there have been no prosecutions is because of the revolving door.
Regulators are reluctant to pursue cases that could cost them a private sector job with a starting salary of $2m – 10 times their salary with the government.
“If you are a team player and these cases don’t get brought,” he says, “then maybe there’ll be room for you at one of the big law firms or Goldman, or one of the big banks.”
This “revolving door” is at the core of the problem with our financial system and associated regulatory apparatus, and is facilitating the pillaging and plundering of the American treasury, as well as enabling it to continue at an ever-accelerating rate.
We will not have justice under this system, until this revolving door is closed forever, then the regulators will start regulating again.
Actually that title was misleading: there will be no disclosure of “how“, because we don’t know. What we do know is that thanks to the magic of JPM’s definition of “Mark-To-Market” accounting, a $5 million prop trading loss (and thus forbidden by the Volcker Rule) funded by depositor cash as it took place in the infamous CIO unit whose job was to manage “excess deposits” in a prudent manner, became a $400 million prop trading loss in the span of 88 minutes. But not during trading – the market was long closed. The adjustment was purely on paper.
April 10 was the first trading day in London after the “London Whale” articles were published. When the U.S. markets opened (i.e., towards the middle of the London trading day), one of the traders informed another that he was estimating a loss of approximately $700 million for the day. The latter reported this information to a more senior team member, who became angry and accused the third trader of undermining his credibility at JPMorgan.At 7:02 p.m. GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict indicating a $5 million loss for the day; according to one of the traders, the trader who circulated this P&L Predict did so at the direction of another trader. After a confrontation between the other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, this time showing an estimated loss of approximately $400 million. He explained to one of the other traders that the market had improved and that the $400 million figure was an accurate reflection of mark-to-market losses for the day.
And that, ladies and gentlemen, is how “mark-to-market” is implemented in the current commercial bank prop trading units – through a “confrontation between traders.”
We learn all this in the Task Force report. What we don’t learn is why there was a confrontation, what was the basis for the mismarking, and most importantly, how it is possible that in JPM’s wacky Schrodinger world, a Marked to Market loss can be $5 Million and $400 Million at the same time, depending on who a “confrontation” takes place between. Perhaps in JPM, Mark to Muscleis a more appropriate estimation of what is going on.
Why should readers care? Because this 80-fold delta in potential losses is funded, and thus impacts, something dear to all those who have savings at JPM. Their money. Money, which should not be used to speculate in fashion that means an a full wipe out of capital is purely in the eye of the beholder.
What it also means for all other “mark to market” estimates of JPM, and all other banks’ profitability, we leave to readers to infer.
Finally, some much more deserved criticism of the JPM’s Task Force “report” comes from Bloomberg’s Jon Weil:
[H]ow did JPMorgan’s chief investment office, which manages deposits that the bank hasn’t lent, go from being a conservatively run risk manager to a profit center speculating on higher-yielding assets such as credit derivatives? The company’s report, conveniently, said this pivotal question was outside the inquiry’s scope. It’s worth noting that it was Dimon who pushed for the transformation several years ago, as Bloomberg News reported last spring.
“Although the task force has reviewed certain general background information on the origin of the synthetic credit portfolio and its development over time, the task force’s focus was on the events at the end of 2011 and the first several months of 2012 when the losses occurred,” the report said.
The head of the task force that produced the report, Michael Cavanagh, is the co-CEO of JPMorgan’s corporate and investment bank. So it isn’t as if there was a pretense that this was some sort of independent review. The company didn’t disclose the task force’s other members.
The report dodged important disclosure issues. The facts in the report suggest there were serious shortcomings before 2012 in the internal controls over JPMorgan’s valuation processes. Some employees manipulated the numbers to make the trading losses look smaller. And when JPMorgan restated its first- quarter 2012 results last summer, the company acknowledged it had a material weakness in its controls as of March 31. Yet the bank hasn’t amended past disclosures to show control weaknesses in any earlier periods. Why not? This week’s report didn’t address the question.
Another example: During an April 13 call with analysts, about a month before JPMorgan began acknowledging the magnitude of its losses, Douglas Braunstein, JPMorgan’s since-demoted chief financial officer, said “those positions are fully transparent to the regulators” and that the bank’s regulators “get the information on those positions on a regular and recurring basis as part of our normalized reporting.” The statement wasn’t credible then. There’s no reason to believe he had any basis for the remark. Yet the task force’s report didn’t touch it.
The report also included this bizarre disclaimer: “This report sets out the facts that the task force believes are most relevant to understanding the causes of the losses. It reflects the task force’s view of the facts. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on facts not described in this report, and may also draw different conclusions regarding the facts and issues.” In other words, we haven’t been told the whole story.
And this is the opacity that one gets when a firm sets off to expose what should otherwise be perfectly public information in the first place. One does start to wonder: if America’s banks go to such great lengths to mask how ugly the behind the scenes truth really is, is the true undercapitalization of the US banking sector in the trillions… Or tens of trillions?
The following is a list, provided by the White House, of executive actions President Obama plans to take to address gun violence.
1. Issue a Presidential Memorandum to require federal agencies to make relevant data available to the federal background check system.
2. Address unnecessary legal barriers, particularly relating to the Health Insurance Portability and Accountability Act, that may prevent states from making information available to the background check system.
3. Improve incentives for states to share information with the background check system.
4. Direct the Attorney General to review categories of individuals prohibited from having a gun to make sure dangerous people are not slipping through the cracks.
5. Propose rulemaking to give law enforcement the ability to run a full background check on an individual before returning a seized gun.
6. Publish a letter from ATF to federally licensed gun dealers providing guidance on how to run background checks for private sellers.
7. Launch a national safe and responsible gun ownership campaign.
8. Review safety standards for gun locks and gun safes (Consumer Product Safety Commission).
9. Issue a Presidential Memorandum to require federal law enforcement to trace guns recovered in criminal investigations.
10. Release a DOJ report analyzing information on lost and stolen guns and make it widely available to law enforcement.
11. Nominate an ATF director.
12. Provide law enforcement, first responders, and school officials with proper training for active shooter situations.
13. Maximize enforcement efforts to prevent gun violence and prosecute gun crime.
14. Issue a Presidential Memorandum directing the Centers for Disease Control to research the causes and prevention of gun violence.
15. Direct the Attorney General to issue a report on the availability and most effective use of new gun safety technologies and challenge the private sector to develop innovative technologies.
16. Clarify that the Affordable Care Act does not prohibit doctors asking their patients about guns in their homes.
17. Release a letter to health care providers clarifying that no federal law prohibits them from reporting threats of violence to law enforcement authorities.
18. Provide incentives for schools to hire school resource officers.
19. Develop model emergency response plans for schools, houses of worship and institutions of higher education.
20. Release a letter to state health officials clarifying the scope of mental health services that Medicaid plans must cover.
21. Finalize regulations clarifying essential health benefits and parity requirements within ACA exchanges.
22. Commit to finalizing mental health parity regulations.
23. Launch a national dialogue led by Secretaries Sebelius and Duncan on mental health.