Smoking Loans Prove Wall Street Committed Fraud

By Alain Sherter | September 28, 2010

A central question in the financial crisis is whether Wall Street simply made errors of judgment that led to a housing bubble or whether it knowingly broke the law. Did the gun go off accidentally, in other words, or did the shooter aim at the victim’s head? That’s critical to find out because it informs our approach both to fixing the banking industry and to deterring such conduct in future.

New evidence increasingly points to murder, rather than manslaughter. D. Keith Johnson, former president of Clayton Holdings, a company that assessed the quality of mortgages for banks and credit rating agencies, recently told the Financial Crisis Inquiry Commission that he warned these firms that nearly half the loans were duds. Investment banks used them anyway:

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service (MCO).

“We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” Mr. Johnson testified last week. But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street.

Among investment firms, some of the biggest offenders in deliberately using dodgy loans were Deutsche Bank (DB), Morgan Stanley (MS) and Freddie Mac (FMCC). Clayton found that roughly 37 percent of the mortgages Morgan wanted to buy in 2006-07 failed to meet their own underwriting standards. Nevertheless, the New York bank used more than half of those loans in building mortgage-backed securities, apparently without disclosing that to investors. Freddie, which is unlikely ever to repay the billions of dollars it was forced to borrow from taxpayers, used 60 percent of the defective loans.

Wall Street firms didn’t merely ignore such information; they also used it as intel to negotiate better prices on the loans they bought from originators for packaging into CDOs and other mortgage-backed securities, said another Clayton employee.

Such disclosures go beyond undermining financial executives’ claims that they didn’t see the crash coming. They illustrate a pattern of intent by big banks to sell financial products they knew were defective. That’s not a misjudgment — it’s fraud. As a former white-collar prosecutor recently told me:

If you lie to somebody to get them to give you money, you have stolen money from them.

Johnson’s testimony supports other evidence suggesting Wall Street defrauded investors. Banks like Citigroup (C), Goldman Sachs (GS) and Merrill Lynch faked demand for CDOs, or mortgage pools, by creating yet other CDOs to buy up the securities. They also colluded with ratings agencies to misrepresent the creditworthiness of these investments. On the back end of this chain of deception, JPMorgan Chase (JPM) and other industry players appear to be rushing to seize people’s homes by illegally rubber-stamping foreclosure documents.

If it’s hard to accept that fraud was central to the crisis, it’s largely because the monumental scale of the deception is hard to process. See those trees over there? That’s a forest, and it’s burning like cordwood. It’s also because, during the boom, some of the key operating principles underlying the financial system itself were inverted.

Ordinarily, growing demand for mortgages is what creates demand for mortgage-backed securities. During the housing boom, however, that dynamic got reversed — surging demand for securities by Wall Street and investors led to an orgy of bad lending. The cart took the horse on a merry old gallop.

That pattern became hardwired into a financial system, encouraging bad behavior. Laws are broken, ethics (if they exist) smashed to bits. Here’s how the anonymous financial exec who writes over at The Fourteenth Banker put it:

The profits that were generated by this activity dwarf the potential cost. Executives’ incentives are to produce gains today and they do not pay for the risks that are left for tomorrow. The decision to have individual employees sit and sign affidavits that are false was made consciously. Someone decided to save the expense of doing it right. Or someone figured out that the chain of title had already been broken and it is better to whistle past the graveyard and defraud a court, a debtor, an investor, or a shareholder, than it is to do the right thing.

[T]he truth is that decisions to cut corners, commit fraud, abuse clients or mislead investors are generally cognitively rational given the position in which the individual employee is put.

In short, guilty.

15 Responses

  1. Since the jail would have to protect the de-frocked judges from regular inmate populations, any such former judges would get assigned to the ‘country-club’ version the ‘steel colleges’.

    I doubt it will happen at all.

  2. A lot of robo-signer judges need to go to steel college too.

  3. I hope that we will see some of these people charged with a crime and then do some time. Wall Street is still doing these type of loans–when will that stop? Some banks are apparently not doing them, but the major damage has been done. I have sued the lender because they did not modify my loan. They want to settle now. Check out Commonwealth of Mass. v. Countrywide Financial No. 10-1169. The Mass AG sued Countrywide over not helping homeowners modify their loans under HAMP. We have a small law firm to help homeowners with foreclosure, just before foreclosure with Quiet Title Action and with a motion to dismiss in Judicial states. Pls check out our website. We charge $600 for a legal document you file in court pro se.

  4. So, once again. Let me get this clear, The banskters and their foreclosure mill attorneys have foreclosed on almost 7,000,000 American Homes, mostly using fraud and illegal acts and an efficiency tool for increase performance and in less than three weeks they have ROBO-CHECKED every single one they have done and claimed they are all OK?

    Did they use the same people to ROBO CHECK all the GRAVEYARD of FRAUD and CRIMES against the AMERICAN PEOPLE?

    Who can check 56,000 documents in three weeks and do a full accounting, proper title search and all the other crap they have to to to make you homeless?

    I am very positive that we will prevail at the end, however, I am now a total hawk when ti comes to these thieves. I get nauseous every time I see their adds on the media telling people how great and honest they are.

    They have put so many families under the gun unnecessarily. On what financial model do they base their assertions that if they foreclose on the next 9,000,000 homes that are in process, the economy will rebound?

    I never thought that economically depressed and emotionally scarred communities thrive, a clear example of the is Trenton, New Jersey, Detroit, Michigan, etc. It takes a great deal of money and better opportunities, a shift in mentality to break with the legacy of destruction. I just wonder if we will ever look at history to find the answers and stop believing in these financial “SHAMANS” or “WITCH DOCTORS”.

    They have already ruined the life of over 15% of the American population, and we are still taking it.

    I am tired of it!

    I want justice.

  5. TV Show we’d like to see next:

    Thank you. Thank you very much for joining us this evening. Tonight, on “LOCKUP RAW”, we’ll be going inside Club Fed to interview……….

    John Stumpf


  6. Please clarify this for me. When served by the process server, can anybody at the residence sign for it or the summons must be served and signed by the actual defendant?

  7. Servicers are the first one on my list to go after.
    Mine’s Ocwen, and they are parasites !!!

    A must read for everyone.

  8. This is exactly what happened. If they can start from there, and come forward to today, arrest all the fraudsters in between, then we will be largely on our way out of this nightmare.

  9. Your facts are off base. See the second HP article that publishes this companies letter to FCIC basically calling its former officer a liar in pretty good detail. Apparently the RA’s did not get this data. Freddie Mac barely used TP firms. Should really be more careful. Yes, lots to be angry about here. But data and facts matter before you declare guilt..or at least they used to in America.

  10. HILARIOUS – must watch video

Contribute to the discussion!

%d bloggers like this: