“To hear some on Wall Street tell it, no one saw the financial crisis coming. As Jamie Dimon, the chairman and CEO of JPMorgan Chase, explained to the Financial Crisis Inquiry Commission, “In mortgage underwriting, somehow we just missed … that home prices don’t go up forever.”
Others were less confident. In fact, well before the housing bubble burst, alarm bells were starting to sound among key players in the mortgage industry: due diligence underwriters.
Due diligence underwriters are paid by banks to assess the risk of buying mortgage portfolios. In the run-up to the crisis, they were among the first to suspect that loosening loan standards could pose a potentially catastrophic threat to the economy.
Several due diligence underwriters — most speaking publicly for the first time — told FRONTLINE correspondent Martin Smith that it wasn’t uncommon to see school teachers claiming salaries of $12,000 a month on their mortgage applications, or electricians moving from $500 a month in rent to homes worth $650,000. The only problem — their supervisors didn’t seem to want to hear about it.
“Fraud in the due diligence world, fraud was the F-word or the F-bomb,” said Tom Leonard. “You didn’t use that word,” — Jason Breslow, PBS
Editor’s Comment: Most of the questions and answers are over and they lead straight to the top of the mega banks. If there was any actual risk of loss as opposed to the illusion of a risk of loss, most of the loans would not have been approved.
Since the banks were playing with investor money and essentially stealing it they had created a labyrinth of paperwork that was vague enough to enable them to claim plausible deniability and even the outright lie that Jamie Dimon told when he said that they never saw the meltdown coming because they too thought the market would always go up.
They stacked and compounded the risk elements such that the banks would be paid, the investors would lose their entire investment and the homeowners would be lured into deals that could not possibly work — especially when you factor in the known fact that the prices were spiked higher than anytime in the history of record keeping relative to actual value and the median income required to pay the mortgages. At the heart was fraud: fraud in the appraisal, fraud in the “underwriting,” fraud in the ratings, and fraud in the way the money chain and document chains were handled.
What has escaped most media analysts is that the higher the risk, the more money the banks made. By increasing the risk elements as high as they could go, the nominal interest rate on the loan was as high as it could go. By increasing the interest rate, less money was funded for loans than what was expected by the investors.
In order to achieve the expected return of $50,000 per year, the loan could have been a 5% loan, which is what the investors expected, and the Principal funded would be $1 million. If the interest rate was 10%, meaning the probability of repayment was low at best, then the funding goes down to $500,000 creating the illusion of satisfying the goal of $50,000 per year. If the interest rate was 15%, meaning there was no likelihood at all that the loan would survive, then the funding would have been $333,000.
But in both the 10% loan and the 15% loan, the investor advanced $1 million expecting the loan to be a safe loan to a credit worthy person on a piece of property that was truly worth more than the loan. Thus a yield spread was created and the premium on that yield spread would have been $500,000 for the 10% loan, and $667,000 for the 15% loan. Where did the money go? Into the profits of the banks as proprietary trading activity that were all fictitious transactions.
The banks were supposed to provide triple-A rated bonds backed by good performing loans in which the viability of the deal had been underwritten, verified and confirmed as to income, value of the property etc. — and not just on the first day of the loan where the borrower paid a teaser rate.
Ask any banker doing conventional loans whether he or she would have approved any of the loans taken at random from the piles at Countrywide or WAMU. The answer is NO. I know because I did ask. Real loans have real risk. These were neither real loans nor did they carry any risk of loss to the purported players who were mere intermediaries violating the blueprint set forth in the prospectus and pooling and servicing agreement.
The mega banks, knowing that the loans were completely void for a variety of reasons, and knowing that the banks would some day need to create the illusion of an accounting, needed a state document (deed on foreclosure) to close the book or else the investors and borrowers would end up owning the bank.
But they went further. Having tasted the red meat of astonishing profit margins they sought to increase their gains to astrophysical levels. They bought insurance and credit default swaps betting against the the very same loans they had underwritten and the very same bogus mortgage bonds they had underwritten and sold.
The results are well known. Banks collected 100% on the dollar repeatedly on the same loans and bonds even though none of the loans or bonds confirmed to the requirements of the disclosures to both the investors and the borrowers.
From http://www.pbs.org—–by Jason M. Breslow
One of Leonard’s peers, Eileen Loiacono, saw much of the same.
“You couldn’t say the word ‘fraud’ because we couldn’t prove that it was fraud. … Even if we suspected, we had to say, ‘This appears to be incorrect.’ You would never say, ‘This looks fraudulent.’”
In The Untouchables, premiering tonight, FRONTLINE examines why not one Wall Street executive has been prosecuted for fraud tied to the sale of bad mortgages. Through interviews with prosecutors, government officials and industry whistleblowers, the film raises new questions over whether senior bankers either ignored or contributed to fraud while inflating the bubble through the purchase and securitization of shoddy loans.