How Elite Economic Hucksters Drive America’s Biggest Fraud Epidemics
Continued from previous page
How damaging was Greenspan’s dogmatic and delusional defense of elite financial frauds in the case of Enron? If you look closely, you can see that Enron brought together all the critical elements of a financial crisis: big-time accounting control fraud, derivatives, cartels, and the use of off-balance sheet scams to inflate income and hide real losses and leverage. On top of all that, many of the world’s largest banks aided Enron and its extremely creative CFO Andrew Fastow to create frauds. The Fed could have responded by adopting and enforcing mandates to end the criminal practices that were driving the epidemic, but it didn’t. Instead, Greenspan and other Fed economists championed Enron’s leadership and cited the company as proof that regulation was unnecessary to prevent control fraud. They were so extreme that they attacked their own senior supervisors for daring to criticize the banks’ role in aiding and abetting Enron’s activities.
Later, when risky derivatives activities and control frauds at large financial institutions were pushing us toward the catastrophic crash of 2007-2008, the Fed took no meaningful action based on the lessons learned from Enron. Greenspan and the senior leadership of the Fed had learned absolutely nothing, which shows how disabling economic dogma is to regulators – making them worse than simply useless. They become harmful, again attacking their supervisors for criticizing the banks’ fraudulent “liar’s” loans. When Bernanke placed Patrick Parkinson (an economist blind to fraud by elite banksters) in a supervisory role at the Fed, he sealed the fate of millions of Americans whose financial well-being would be sucked right into that regulatory black hole – and removed the ability of the accursed supervisors to criticize the largest banks.
How to protect predatory lenders
Finally, we come to the mortgage meltdown of 2008, when the entire housing industry went into freefall. Central to this crisis is the story of the liar's loan -- mortgage-industry slang for a mortgage that a lender gives without checking tax returns, employment history, or anything else that might reliably indicate that the borrower can make the payments.
The Fed, and only the Fed, had authority under the Home Ownership and Equity Protection Act (HOEPA) to ban liar’s loans by all lenders. At a series of hearings mandated by Congress, dozens of witnesses representing home mortgage borrowers and state and local criminal investigators urged the Fed to do this. The testimony included a study that found a 90 percent incidence of fraud in liar’s loans.
What did Greenspan and Bernanke do? Exactly nothing. They consistently refused to act.
Greenspan went so far as to refuse pleas to send Fed examiners into bank holding company affiliates to find the facts and collect data on liar’s loans. Simultaneously, the Fed’s economists dismissed the warnings from progressives about fraudulent liar’s loans as “merely anecdotal.” In 2005, the desperate Fed regulators, blocked by Greenspan from sending in the examiners to get data from the banks, resorted to simply sending a letter to the largest banks requesting information. The Fed supervisor who received the banks’ response to that letter termed the data “very alarming.”
If you suspect that the banks would typically respond to such requests by understating their problem assets significantly, then you have the right instincts to be a financial regulator.
By 2003, loan quality was so bad that it could only be explained as the inevitable product of endemic accounting control fraud and it continued to collapse through 2007 until the bubble burst. By 2006, over two million fraudulent liar’s loans were originated annually. We know that it was overwhelmingly lenders and their agents who put the lies in liar’s loans. Liar’s loans make the perfect “natural experiment” because no governmental entity ever required a lender or a purchaser (and that includes Fannie and Freddie) to make or purchase a liar’s loan. Banks made, and purchased, trillions of dollars in liar’s loans because doing so lined the pockets of their controlling officers.