Thursday, December 13, 2007

A Massive Bank Fraud that Calls for Jail Terms

Not a Mortgage Meltdown, Not a Sub-Prime Crisis

‘Tis the season to be jolly, but no one said it was a time to bail out criminals who properly belong in jail.

Not a Mortgage Meltdown, Not a Sub-Prime Crisis
Henrypaulson ‘Tis the season to be jolly, but no one said it was a time to bail out criminals who properly belong in jail.
I am sick to death of watching the hand-wringing on the part of our Treasury Secretary and Chairman of the Federal Reserve, when they ought properly to be searching for a special prosecutor and asking for indictments. Both Bernanke and Paulson came very late to this party, but they are misleading the country, perhaps criminally.
It is a federal crime (under the RICO Act) to aid, abet or participate in criminal activity as part of an ongoing criminal organization. What part of that does the Sec-Treas and Fed-Chairman not understand?
Benbernanke The balloon that has not yet gone up is public (and media) recognition of the extended and complicit fraud committed by lenders, mortgage packagers, hedge funds and others who, for purposes of personal greed, created a whole class of liar-loans. They were even called that in the trade—liar-loans. That complicity does not necessarily (but may well) include either outright collusion or a creative blind-eye on the part of federal regulating agencies.
Paulson runs one and Bernanke another.
The public is confusing (and being encouraged to confuse) the housing bubble of the last half-dozen years with the sub-prime mortgage fraud. They are different animals and the  criminals of the latter are trying mightily to cover themselves with the blanket of the former.
  • The ‘housing bubble’ is like other recent enthusiasms for investments that seemed ever to increase in value, to a point where they attracted a ‘bandwagon’ effect. You were a fool if you didn’t buy a second home, flip it for profit and buy another. Getting sucked in to a bubble may be bad judgment, but it’s not a crime. Like all other investments, you roll the dice, take a chance, maybe win and maybe lose.
  • The invention of the sub-prime mortgage as an investment vehicle, carried to the extremes it was, then sliced and diced into opaque securities to entice investors is quite obviously criminal. The purpose was not to create a broader base of homeowners. The intent was to fraudulently expose a new (and invented) class of borrowers. Those with no credit and no assets, would be introduced to a bait and switch of monumental proportion. The purpose was to steal money.
Whitecollarcrime What probably makes this a criminal activity under the RICO Act is the extent to which lenders colluded in the fraud, the interstate and international processing of those fraudulent loan documents, including the transfer of vast quantities of cash and (most damning of all) the intent to cover the fraud by salting otherwise worthwhile investments.
This blatantly criminal activity is being characterized by our president, Secretary of the Treasury, Fed Chairman and mainstream media as a “difficulty in which millions of Americans may lose their homes.”
It is not that. It is an extended and multi-level scheme whereby lenders extended fraudulent credit (in the form of mortgages) to un-creditworthy borrowers, for their own profit.  Conflict of interest doesn't even begin to describe their crimes against the corporate assets of third parties.
Lender These crooked lenders, in order to entice the creation of mortgages they knew to be worthless, hired salesmen on commission, ignored credit rating requirements and allowed borrowers to declare unsubstantiated incomes, all for the sole purpose of making the loan and taking the fees.
Willing participants are not hard to find in the pay-off chain among appraisers, homebuilders, loan-application ‘advisors’ and former shoe-salesmen sent out to hawk home-ownership to people too poor to buy their shoes.
Email Just like in the early stages of the Enron investigation, plea-bargainers will be found and exploited at the lower levels. The veracity of their sworn testimony will reflect their specific (and provable) knowledge of duplicity way up there in the plush environs of corner-suites. There's a lot of sweating going on up there at the moment about what e-mail went where and to whom.
Lenders thought these liar-loans wouldn’t come home to roost, because they packaged off the liability to others, knowing full well the paper was worthless. Repackaged into bonds, which were knowingly over-rated by bond rating agencies (for a cut), these worthless investments were priced according to faked risk assessments, made to look like high-return low risk investments.
(Wikipedia) Under RICO, a person or group who commits any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period and, in the opinion of the United States Attorney bringing the case, has committed those crimes with similar purpose or results can be charged with racketeering.
SenpatrickleahyFaked, insider dealing, co-conspirators and liar-loans. Securities fraud is a RICO offense. Easy to see why the Fed and Treasury are looking for anything but a special prosecutor.
Fortunately for them and unfortunately for the nation as a whole (which will end up picking up yet another trillion-dollar tab), this Congress is short on the courage to prosecute.
In a fascinating article in last Sunday’s San Francisco Chronicle, attorney Sean Olender writes;
Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
Whoa. Even the most cursory and disinterested evaluation of what actually went on, would admit that what’s lying out there, with its legs in the air, in the middle of the world’s financial road and stinking to high heaven, looks like fraud. Perhaps more damning, it smells like fraud to any prosecuting attorney with a nose.
Paulsonbernanke So the challenge for Paulson and Bernanke is to stay up late, pull in every marker they ever were owed, fly all over the world and try any possible charade to keep it from ever getting to a prosecuting attorney. That’s going to be tough. This criminal plot was dreamt up and hatched in the United States, but the liability was off-shored with a vengeance.
There’s hardly a major bank in the world that hasn’t taken a bath in sub-prime fraud loss. Billions have been written down and in some cases tens of billions, with the big, ugly chunk of yet-to-be-uncovered deceitful securities still under water. Banks may write down and shrug to maintain their reputation. Investors are steely-eyed and have no reputations, that’s why they are investors.
Bernanke Paulson & Company are trying desperately to keep lawsuits from flying, because the fraud is so widespread and the losses so enormous that we’re no longer talking about recession, but crash. There isn’t anyone in the investment community today who even knows what a crash is. But they have all heard the word (just as they have heard white-collar crime) and would like to avoid the experience.
So there will be an enormity of arm-twisting, some payoffs, herds and flocks and schools of early retirements and the steady night-and-day hum of shredders.
The truly super-wealthy survive crashes, at least they did seventy-five years ago, when we last checked. They lose half of what they have, but the other half is worth five times what it was and so life goes on quite nicely. No need to get rid of the Rolls.
What the super-rich do not survive all that well is prison. A number of them have toddled off in that direction recently and it’s not been a pretty sight—all those trophy wives twisting their handkerchiefs and salivating to start a do-over at the Hampton place, spruce up Central Park West a bit. The rich and famous pull their time at Fed country clubs in warm climates, but a cell is still a cell.
Olender again-- The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

. . . It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

. . . The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.
Sencharlesschumer This has been a Congress that has failed and failed and failed to hold anyone’s feet to the fire of responsibility in (or out) of government. Good luck with Chuck Schumer—one of the two deciding votes that allowed Mike Mukasey to be the man responsible for bringing charges.
There’s that word again, responsible.
Americans, swallowing the malarkey of the Fed and Treasury trying to work in the interests of homeowners, are going to find themselves picking up the tab. There are lots of tabs since George Bush came to be seated in the Oval Office—tabs for
  • trillions given away to the likes of Paulson and his buddies,
  • tabs for war profiteering,
  • for two unfunded wars and
  • for the privatization of government services along with
  • record deficit budgets.
Chickens The amazing truths that will finally be uncovered as this current generation is poked, prodded and forensically autopsied, will all be tales of trusting oblivion. Willingly, we trudged off into the blinding lights of consumerism, never asking why or where or how we were being led and by whom. If we end up broke and having to grow chickens and tend a garden to survive, there is not a single man or woman among us who will know how.
We will have lost it all and have only a confused look on our faces to show for it.
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