Required reading for participants in the workshops in San Francisco and Anaheim.
Should Bankers Go to Jail? by Neil F Garfield, Esq., August 20, 2012
New York Attorney Marc Dreier was sentenced to jail (20 years) for economic crimes in which he defrauded hedge funds out of $400 Million, some of which was recovered by the sale of seized assets acquired during his lavish lifestyle. Bernie Madoff was sentenced to 150 years in prison for a different type of Ponzi scheme, with the same effects. Drier’s case is more useful in describing the crimes of the banks, assuming the facts are presented and accepted into evidence. When Drier and Madoff were presented to the court as thieves, nobody had any doubt that they were thieves deserving punishment. But the same facts alleged against the Banks are characterized in the media and in court as being far-flung theories.
This article puts some perspective on the crimes of the banks and the people in those banks who directed a vast Ponzi scheme with creeks of additional Ponzi schemes fed by the river of the playbook called “securitization.” The banks securitized nothing, stole from the investor-lenders, stole from the homeowners and stole from the taxpayers, and they continue to do so with apparent impunity.
Drier actually participated in a documentary called “Unravelled.” As I watched him describe his own crimes quite honestly and openly I was struck by two things: First, the similarity between his acts of deception and that of the banks in the world of securitization myths and second, the culture of corruption on Wall Street where the crimes of Dreier and Madoff could go unnoticed even as some very knowledgeable and respected people raised red flags and shot off cannons as an alert.
Drier’s history explains a lot about how the crimes of the banks could have gotten so far out of control. Until Madoff, Drier had pulled off the largest fraud. I couldn’t help thinking that Madoff at $60 billion in fraud, was an excellent foil for the banks who are raking in 3000 times that amount at $18 trillion. Yet they are perceived differently with the banks cloaked in the appearance of authenticity. Perhaps the sheer magnitude of these crimes is daunting and unthinkable, since it would point to the massive dysfunction in our financial sector, our society and our government.
Marc Drier made an observation at the end of the documentary filed during his house arrest. He said that there are people who are truly virtuous and would not do what he did simply because it was wrong and their conscience could not bear the weight of the consequences upon the victims.
But, he said, most people probably don’t do it because of lack of opportunity and fear of getting caught. He had opportunity and the thought that somehow he would repay or cover up his misdeeds. Given the history of the banks, who have both opportunity and the belief that they cannot be caught, and if caught cannot be punished, what is the basis of any policy based upon the assumption that the continuing fraud by the banks will change? On what basis can we say with any sincerity that the banks won’t make the situation worse?
If Drier had hidden his Ponzi scheme, based upon fictitious loans, inside the Ponzi scheme of securitization, also based upon fictitious loans, he might never have been detected, much less convicted and imprisoned, being under the protective cloak of Wall Street’s financial and political power. And if he was thrown under the bus, would his sentence have been nearly as long if it was part of an over-all bank scheme based upon the myth of securitization?
More importantly for this Blog, this comparison should serve as an aid for attorneys who at present are too timid to actually come out and challenge the thieves and call them out for what they have done. It runs to the core of whether and to whom the homeowner’s debt is owed. But even more importantly it highlights the reason why most of the “loans” were never secured and thus could not be foreclosed despite the willingness of the judiciary to allow it.
Drier was one lonely easy fruit to pick off the tree and make a big splash. Same goes for Madoff. The principal differences between Dreier and the Wall Street titans were first, that the persons involved on Wall Street were acting under the guise of an institution and not personally, even though the benefits accrued to them personally and second, these persons of interest are a group that collectively have acquired not only wealth, but political power.
The facts of the Dreier case are simple. He “borrowed” an existing relationship with a wealthy client (he was the attorney for an extremely wealthy real estate developer) and used it to create a Ponzi scheme.
It started when he created an entity bearing the surname of Solow, his client. Solow by all accounts had no idea that his lawyer was embarking on a fraudulent scheme. Dreier “borrowed” his client’s name (i.e., identity theft) and closed a loan to the company created in Solow’s name for $1 million. Seeing how easy that was he began creating more entities and more deals until he had borrowed more than $400 million from hedge funds, pension funds etc.
Dreier forged, fabricated and delivered documents as being signed by authorized persons within the Solow organization. He even went as far as impersonating actual people with authority and then having in person meetings with representatives of the managed funds he was defrauding. Naturally the money did not go to Solow. It was used to pay himself, employees and those who demanded repayment, but the bigger he got in the world of finance the more the managers of pension or hedge funds were happy to rollover his loans at higher interest rates.
As with all Ponzi schemes (including Joe Banker), his collapsed when the market started to crash and the authenticity of the documents started being questioned. He was arrested, convicted, and sentenced all of which is recorded in a compelling documentary called “Unravelled.” Drier is serving time while Joe Banker is not only free but sitting on the regulatory boards of agencies.
Since the facts of Drier’s guilt are recited by the person who committed them, there is no reason to disbelieve his recital. The Judge made references to Drier being capable of redemption and that he “was no Bernie Madoff.” Hence the lower sentence.
He offered no exculpatory explanation for his acts and admits that what he did was illegal and that his 20 year sentence was just. He feels bad that what he did hurt his family and he offers some display of remorse as to the institutions that were defrauded, but he still tends to minimize the severity of the crime because he stole from institutions not widows and orphans. His own lawyer shot down that theory when he reminded Drier that such an argument to minimize the sentence he would receive would inflame the Judge who understood perfectly well that all of these funds were managed for the benefit of widows and orphans, retired people etc.
So now let’s look behind the curtain and see the facts as we know them, as summarized below. Instead of using institutional names I am simply referring to the entire group of “Wall Street” entities, companies and people as “Joe Banker.”
You might remember the torrent of advertising for borrowers at unbelievable terms to refinance or purchase a home. The cost of such advertising is easily far beyond the benefits that would accrue to a lender from loaning money at or about 5%. A quick glance at those numbers should dispel any notion that conventional loans with conventional risk of loss could possibly sustain such a promotional campaign, much less the enormous profits reported by Joe Banker.
It can be fairly asked how institutions managing vast pension funds could not wonder how Joe was making so much money. But Joe did have legitimate other businesses like Drier did in his law firm. And on Wall Street where many deals are done with a nod of the head and a handshake, such a culture was bound to attract people like Joe into a milieu where moral hazard was an empty phrase. If anyone gets caught doing something illegal they pay a fine or get acquired by some other investment bank or securities broker. It is all very gentlemanly where Joe polices himself and gives himself a slap on the wrist when he is caught doing something illegal. He knows he is not going to jail like Drier did.
JOE BANKER’S STORY
Joe Banker went to the same institutions that Drier went to, asking to borrow money the way Drier did — based upon false representations and documents.
Like Drier, Joe’s first act was the creation of entities, some legally formed and some existing only on paper as “common law trusts” most of which did not have a bank account or trustee bank account. Joe never had any intention of establishing such bank accounts, trust accounts or using the money in the way that the funds thought they would be used. But like every Ponzi scheme he was confident that he could keep this elaborate scheme going indefinitely.
Like Drier, Joe fabricated the necessary documents —- mortgage bonds issued by the “trusts.” Interest and principal would be paid by borrowers seeking to finance the purchase or equity in their homes. Joe had his lawyers write up a Prospectus and a Pooling and Servicing agreement to make it all look like common offerings of securities, including ratings and insurance from the best and most trusted names in the financial world..
Like Drier’s financial statements, Joe’s Prospectus did not contain real mortgages from real people. It contained spreadsheets of non-existent loans. But Joe was smart, so he inserted wording in the prospectus that the attached list of loans was not the complete list and that either many or all of those loans would be replaced by real loans. It is not known whether any institutional fund investor ever noticed this, but it is known that they thought their money was going to fund mortgage loans giving a level of diversification in mortgage loans that reduced risk of loss to nearly zero.
More importantly the investor-lenders thought their money and their expected payout was safe. The reason that it was safe was that it wasn’t Joe asking them for money it was millions of borrowers. That is what Joe told them. Instead Joe took the money and paid out only when the demand for funding was unavoidable in order to keep the scheme going. Just like Drier and Madoff.
Hence, like Drier, the institutional fund investors believed that the money would in fact be used to fund or purchase mortgage loans. The documents presented assured the investors that the loans would be underwritten by established lenders using the standards of underwriting and due diligence that has always prevailed when someone would go to a bank and ask for a home loan. Joe’s real intention though was to create and force an environment where bad loans would be made based upon fraudulent property appraisals and fraudulent underwriting changing the applications to look like a real person with a reasonable credit history would be the source of repayment, collateralized by the property itself if the borrower did not repay. All of that was a lie.
THE STRUCTURE OF FRAUD
None of those things were true. Insurance was made payable to Joe Banker who represented himself as the lender, when like any other banking transaction he was really only the intermediary to facilitate the transfer of funds. The loan documents created fictitious transactions in which Joe was the lender. Joe made sure there were no documents for the actual transaction in which the loan was funded. This undermined the ability to foreclose legally, but Joe was convinced that if he presented himself as a banker that any Judge would presume he was the lender and continue processing foreclosures as Judges have done for hundreds of years — largely as a clerical function in which no critical thinking was required.
The property appraisers were given instructions to present an appraisal report that put a value on the property $20,000 above the contract amount despite abundant evidence that prices were out of line with median incomes, specific earnings of the borrowers, and very recent sales activity that showed values far lower than those used in the loan. With no underwriting committee (normal lender procedure) demanding verification of the appraisal, it was easy. And if the appraiser balked at those instructions he would never work again.
The facts now known are that some loans were the result of proper underwriting but that most loans had no underwriting standards applied at all — with the removal of committees of Boards of Directors verifying the appraisal value and the ability of the borrower to repay the loan.
The loans that were conventionally underwritten were used to show the rating agencies and insurers the quality of the mortgage bonds. The others, constituting the vast majority of all loans were unverified as to value or viability, with many such loans were clearly headed for default the moment they were funded. Hence the rating agencies were made part of the conspiracy, knowingly or unknowingly. The same applied to insurers who would guarantee the interest and principal of the mortgage bond.
Armed with the highest possible safety rating and insurance for repayment of interest and principal, it was easy to sell the mortgage bonds to the investors who gobbled them up for their higher than the normal yields available to such managed funds.
An objective analysis of the facts now reveals that the ratings and insurance were procured by lies, fabrication and forgery of non-existent borrowers, or existing borrowers with non-existent credit histories and nonexistent incomes.
The managed funds were sitting ducks. If they did not buy these higher yielding bonds then their performance would be out-paced by the reports of other managed funds. They were compelled to buy. And so they did buy some $13 trillion in mortgage bonds, most of which were never even printed: instead they were confirmed by reports from Joe.
Joe had a virtually unlimited supply of money based upon the performance driven managers of the managed pension, retirement and other funds. Everything was in place — just like Drier when he took his first step and created fictitious financial statements for an entity that had no money but which bore the name of a wealthy successful real estate magnate in New York.
The similarity also is revealed in that Drier forged names and fabricated supporting documents. The difference is he did it himself instead of hiring employees through layers upon layers of corporations and instructions to sign documents they knew nothing about on behalf of entities they didn’t know on behalf of persons whom they did not know. They would be the patsy if it came out that the documents were fabricated, forged and lacked any semblance of authenticity or value. The arrest warrants, if it came to that would be directed at the signors.
In the snowstorm of false documents the fact that the documents were all based upon nonexistent financial transactions was lost. Joe had created the perfect crime which created the perfect storm. The real transaction in which money exchanged hands was hidden from the investors and borrowers. Like Drier, as the intermediary for his client Solow, it appeared as though Joe had the proper authority from the depositor/client investors, and that the documents were valid and “self-authenticating.” It would all work out until anyone demanded to see the actual people and the actual monetary transactions — just like Solow and Madoff’s investment firm that never made a single trade. In litigation, that demand for the real facts and the disclosure of actual monetary transactions is called discovery.
The most important similarity is the intent to use a few good borrowers’ credit history and use them in ways that could not be imagined by those borrowers. Joe “borrowed” (ID Theft), the names and reputations of the actual borrowers who had credit scores over 800 and used them to sell Mortgage Bonds that were supposedly composed entirely of such high-quality loans and borrowers. It was all a lie.
I can see no difference between Drier borrowing Solow’s name and Joe borrowing the identity of thousands of innocent and ignorant borrowers. Neither Solow nor those borrowers knew the facts. The only difference being that Joe had no relationship with the borrowers (unless they were already doing business with Joe as depositors in Joe’s Bank) and Drier did have the attorney client relationship with Solow.
The sale of the bonds resulted in huge infusions of cash which Joe held in escrow, without regard to the “common law trusts” nor was any “trustee” of such trust even allowed to see the money much less manage or distribute it. Those “trustees” acted from outside their trust divisions because there simply was no trust account. Thus from the start, Joe took the money into his own account and control and never delivered it to the “trust.” We now know that the named trustees not only knew their names were being used but were being paid for it even though there were duties to perform.
Joe created his own “mortgage origination” business and sponsored others to do the same in order to move the money around and justify, at least in part, taking all that money from the managed funds for pensioners, retirees, and other institutions depending upon the safety of the investment and the interest it would generate, knowing that the flood of money and the removal of underwriting standards would allow real estate prices to rise even as values were unchanged. The higher the price, the more money that could be moved.
DOCUMENTING NON-EXISTENT TRANSACTIONS
When you boil it down the notes and mortgages were made payable to nobody. The payees were never lenders and never had a loan receivable account for the loans — even if they were an established institution that also made legitimate loans. It was the ultimate cover story. The “secured party” was not the lender either and in many cases wasn’t even the lender named on the note. This would inure to the benefit of Joe, not the investor. Instead of directly naming himself he created entities that would be the equivalent of an empty space (MERS, e.g.) where the payee’s name would appear and another empty space where the mortgagee or beneficiary’s name should appear in order to perfect a valid lien against the property. The notes and mortgages appeared valid on their face and so were accepted for filing in the county records and later for use in foreclosures.
Joe used his own bank to originate many of the loans. In those cases he was in fact named as the lender and payee and secured party. Thus Joe was able to trade and move loans around as though he owned them despite the fact that all the money for the loans came from the investors. 96% of the documented “loans” were fictitious, with the lender being an innocent investor, left without any documentation except the Prospectus and Pooling Servicing Agreement which of course was never recorded.
Amongst these trades were the “sale” of loans that were alter deemed “toxic waste” in which the interest was as high as 16%. With a promised rate of interest of as little as 5% to the managed fund, Joe could lend out $100,000 and then take $200,000 as profit in the sale of the loan to the “trust.” It worked as long as one did not notice that hidden in the bundles of documented loans were toxic waste worthless “loans.” The price of the sale of the bundle of “loans” was based upon the average interest rate, so a 16% worthless loan for $100,000 could be sold for much more as a 5% conventional loan.
The only hitch would be that the borrower actually paid off the loan, but this was so rare that Joe was able to cover up the pay-off under the cloak of a reported sale or refinancing. The extra money Joe was making just by funding toxic waste loans was staggering, amounting to as much as three times the actual loan.
Neither the lender-investors nor the borrowers knew the real facts, each having been promised entirely different terms. If Joe had not interfered in the lending process with which he was entrusted by the managed funds, the existence of the loan and the difference in terms would have come to light. Real Questions would have been asked and Real Answers would have been required. Like Drier, the scheme would unravel in the same way as all Ponzi schemes unravel.
Had the borrower been aware of the existence of Joe in the transaction and of his enormous “compensation” (required to be disclosed under federal and state lending laws), no reasonable borrower would have completed the deal. If the investor-lenders knew, they would have demanded their purchase of the “mortgage bonds” be rescinded and possibly sued for fraud, which they now doing in increasing numbers. It may be fairly stated that in nearly all cases, no fund manager knew that his managed funds were being used to fund toxic waste mortgages and the rating agencies would have withdrawn their ratings, which they eventually did. And the insurance companies would have rescinded the insurance contract and demanded repayment for anything they paid, which they too are doing in increasing numbers.
The above-described unravelling is eerily similar to Drier’s case and in some ways like the Madoff case who was sentenced to 150 years in prison. Eventually, the pyramid falls when people start asking real questions and demanding real answers and proof. The loss falls on innocent investors and homeowners who like in most Ponzi schemes include people who are completely wiped out financially.
The irony and brazenness with which Joe reported to government officials that the loss on loan defaults was causing the entire financial system to fail resulted in an additional $700 Billion Troubled Assets fund being given to Joe to keep afloat while he was already floating in money. Befuddled bureaucrats and elected officials eventually gave Joe $17 trillion in loans or bailout to cover “the loss.” This created an even larger number of losers — the taxpayers.
FRAUD UPON FRAUD
The ironic twists that have emerged is first, that Joe “borrowed” the loss and identity of the investors to receive payment of insurance, bailouts and the proceeds of the bets Joe made. Then he reported to the investors that the loan was theirs, now that it had failed — exactly the opposite of what was stated in the Prospectus and Pooling and Servicing Agreement. So Joe stole the identity of the borrower and the stole the identity of the investors all to his enormous profit showing up frequently as pornographic sized bonuses for people to keep their mouths shut, thus interfering with criminal investigations.
As to intent, the facts now reveal that Joe knew exactly what he was doing and the consequences because he entered into “bets” in the securities markets that the mortgage bonds would fail even as he was selling the bonds with great assurances to the investors as to their quality, rating and insurance back-up — payable to Joe instead of the investors.
Joe was betting that the housing market prices would collapse to real values and that he would make a fortune on each loan that failed. Joe bet as much as 40 times on the same loans that they would fail. Thus a loan of $300,000 was worth $12 million when it failed. Failure of the loans could only be proven by foreclosure, auction and losses reported to investor-lenders. If they were modified or settled, Joe would not get his $12 million, he would get nothing. This is why Joe created the elaborate scheme on top of the existing scheme where he would appear to be considering modifications while he was in fact leading the borrowers down the path to certain foreclosure.
Drier got 20 years, Madoff got 150 years, how much should Joe get?
The government seized all of Drier’s assets and all of Madoff’s assets and gave as much back as possible to the inured parties. Seizing the mortgages by eminent domain might seem like a good idea, and maybe it is, but it pays Joe even more money than he already has made. And it appears to legitimize the menu of illegal activities in which Joe was engaged. I think full seizure and auction is a better idea. What do you think?
Filed under: foreclosure |