Editor’s Comment: There can no longer be any doubt about the complicity of regulators with banks in both the Libor and mortgage scandals. In fact, it should not called a scandal. That implies that a few people went off the reservation. We have something more fundamental at stake here. It is the revolving door, bribery and influence going both ways between the people who work for regulators and the people at the banks who made the decisions to go ahead with the largest economic crimes in human history.
We all know that both scams (Libor and mortgage fraud) went hand in hand. The banks were controlling commerce taking themselves out of the role of being intermediaries and inserting themselves as the principals in transactions involving other people’s money (pensions etc.) and other people’s property. Now I’m reading well-written articles about changing our strategy to counterclaims rather than attacking the initial claim. I think that is wrong.
The issue is that we don’t simply have a crime at hand. The consequences of those crimes are so far-reaching that they are changing the entire landscape of World politics and finance and that includes the United States. Prosecutions and regulation to reassure the marketplace are lacking, and not surprising the bond markets and stock markets are lacking that certainty in the marketplace that is essential for free market forces to mean anything.
The reasons are pandemically diseased. Immunity often covers regulators who are complicit in such misbehavior and fear stops those who even consider doing something about these people. Ritholtz is dead-on right when he says that our policies, lack of guts and bank-operated governments are compounding problems that will lead to at best stagnation in the commercial marketplace, and at worst a great depression that might make the first one look good to us or even nostalgic.
We should NOT give up on attacking the origination of mortgages because that is exactly where the fraud started. There is no doubt what would happen if you went into a bank and asked for a loan, got approved and then showed up to sign as John Smith, authorized signor for XYZ Corp., as attorney in fact for ABC Corp. as assignee of DEF Corp, nominee payee on the promissory note and designated lender for MERS, the secured party. Not only would you be thrown out of the bank, you would be reported to authorities as operating some sort of scam. It is a scam.
Why do we have such defective paperwork and why are the banks and servicers s fighting so hard against revealing the facts of each financial transaction recited in each fabricated document? The reason is simple. There was not a financial transaction involving the borrower and the lender that is recited in those documents. The banks inserted themselves into the process by complicating the transactions with false claims of securitization.
The result is that the real transaction in which the pension fund loaned money to the borrower is completely undocumented, for the sole purpose of enabling the banks to claim ownership as the “Loan” went up the securitization and was sold a dozen times under the heading of securitization, assignment, allonge, endorsement, credit default swap, insurance etc. The proceeds, thus far, have gone solely to the banks and servicers and never to the investor who is owed the money.
Both the lender and the borrower are stuck with an undocumented loan leaving the lender without adequate information or protection and the borrower owing all the money borrowed on terms that cannot be determined: the terms expressed in the securitization documents do not match the terms of the note. Even if the terms of the securitization documents did match the terms of the note, it doesn’t matter because the money trail shows that the investment bank ignored the REMIC trusts just as they ignored the laws regarding transfer of interests in loans and recording.
Thus the investor/lender advances money believing that it will be used in the way described in the prospectus and PSA, when in fact, nothing of the sort occurred. And the borrower believing that he was entering into a standard mortgage within the rules of industry standards for lenders, is left with signing documents that state DEF Corp is the lender, when DEF was a shill — paid for use of its name in the transaction and thus limiting the ability of the borrower to either rescind or make claims under predatory or deceptive lending practices.
Neither the borrower nor the lender know each other, meet each other or share any documents on which both of their signatures appear based upon fair bargaining. Then the banks and servicers simply step up to the plate and hit one out of the park every time they foreclose because they are getting property based on a non-existent loan in which they neither funded nor purchased the loan.
Those are the documents that are recorded and that is why any buyer of real property needs expert guidance on how to do it, lest the old homeowner come back and reclaim their property.
Those who Benefited from Wall Street Fraud Must be Prosecuted … Including Rogue Government Officials who Aided and Abetted the Crimes
Yet the government has more or less made it official policy not to prosecute fraud, and instead to do everything necessary to cover up for Wall Street. For example, the Obama administration is prosecuting fewer financial crimes than under Reagan or either Bush.
For example, we pointed out in 2010:
The government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are.
But it is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud.
Here are just a few of many potential examples:
- The Treasury department allowed banks to “cook their books”
- Regulators knew of and allowed the use of debt-hiding accounting tricks by the big banks
- Tim Geithner was complicit in Lehman’s accounting fraud, (and see this), and pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”
- The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
- The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen
- Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not
- Arguably, both the Bush and Obama administrations broke the law by refusing to close insolvent banks
- Congress may have covered up illegal tax breaks for the big banks
Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:
The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….
This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.
The government that permits this to happen is complicit in a vast crime.
In other words, the fraud started at the very top with Greenspan, Bush, Paulson, Negraponte, Bernanke, Geithner, Rubin, Summers and all of the rest of the boys.
As William Black told me today:
In criminology jargon: they created an intensely criminogenic environment.
The government’s special inspector general in charge of oversight of the Troubled Asset Relief Program (the “TARP” bank bailouts) – Neil M. Barofsky – said today:
It was a “message to the banks ‘if we commit fraud, we break the rules, don’t worry, we’re too big — they’ll never bring the appropriate steps against us,’” Barofsky says in an interview with The Daily Ticker. “And that is why we’ve had scandal after scandal after scandal.”
This was a “global conspiracy to fix one of the most important interest rates in the world,” Barofsky continues. “[Geithner] heard this information and looked the other way. Geithner and other regulators should be held accountable, they should be fired across the board. If they knew about an ongoing fraud, and they didn’t do anything about it, they don’t deserve to have their jobs. I hope we see people in handcuffs.“
Government regulators have become so corrupted and “captured” by those they regulate that Americans know that the cop is on the take. (Even top justice officials are incredibly cozy with Wall Street fraudsters.)
Institutional corruption is killing people’s trust in our government and our institutions, which is one of the reasons the economy is faltering again.
Indeed, polls show that very few Americans believe that the U.S. government has the “consent of the governed”, a higher percentage of Americans liked King George during the Revolutionary War than like Congress today, and people are publicly discussing whether it’s a good or bad idea to “hang bankers”.
I noted 7 years ago:
I am NOT calling for the overthrow of the government. In fact, I am calling for the reinstatement of our government. I am calling for an end to lawless dictatorship and a return to the rule of law. Rather than trying to subvert the constitution, I am calling for its enforcement.
The best way to avoid all types of revolution would be for the government to start following the rule of law. I passionately hope it will do so.
While conservatives tend to view government as the problem, and liberals tend to view corporations as the problem, the real problem is the malignant, symbiotic relationship between corrupt officials and criminal corporate leaders. Without the cancerous relationship, neither side could cause so much damage. If America returns to the rule of law, we might have a fighting chance.
The justice system may be the only thing which stands between peace and violence. All of those who benefited from Wall Street fraud must be prosecuted … including corrupt government officials who aided and abetted their crimes, helped cover them up, or have blocked prosecution.
Iceland should be a role model:
Indeed, even evangelical leader Pat Robertson agrees:
Pat Robertson discussed the banking crisis and glowingly spoke about how Iceland jailed many of the bankers who devastated their nation’s economy by taking out fraudulent loans. Robertson hailed the Nordic nation for its actions and said that Americans should deal with the financial crisis in the same way.
“They are putting people in jail. Prime ministers are being indicted. They are going after banks. The people said the banks are ripping us off. We don’t like what they did, and they brought our country to ruin. Suddenly, Iceland is turning around and they look like a big success story!”
“We could start putting all of those bankers in jail. There was not one banker prosecuted and so many people were lying, and so-called “no-doc loans” and liars’ loans, and none of them have been held accountable.
Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!”