Fraud and Folly: The Untold Story of General Electric's Subprime Debacle
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Roman and Argueta weren’t alone in their concerns, according to other ex-employees who spoke on the condition they remain anonymous, because they still work in banking and fear being blackballed within the industry.
“It was ugly,” one former fraud investigator at WMC recalls. “I would have nightmares about some of the things I’d find in a file. I’d wake up in the middle of the night going, ‘Oh my God, how did this happen?’ ”
A former manager who worked for WMC in California claims that company officials transferred and essentially demoted her after she complained about fraud, including the handiwork of a sales rep who used an X-Acto knife to create bogus documents, cutting numbers from one piece of paper and pasting them onto another, then running the mock-up through a photocopier.
“They knew I had a lot of crap on them and I wasn’t going to shut up,” she says. “And the easiest way was to pay me off. Create a job where I could just sit and collect my money.”
Both Riedel and another former WMC employee confirm the woman’s account.
Two other ex-employees say that, in their experience, WMC managers didn’t condone fraud. When he identified fraud-tainted loans, one of the two recalls, his managers killed them.
Both add, though, that the lender did push loans that were likely to land borrowers in trouble in the long run. The desire to keep sales numbers growing often trumped good judgment, the other ex-employee recalls. “It was like hitting your head against a brick wall, trying to make sure the right thing was done,” she says.
By early 2006, Dave Riedel had begun to rebuild his career inside WMC.
He helped put together a presentation in May 2006 aimed at giving GE officials a sense of how serious WMC’s fraud problems were. Riedel says an audit of soured loans that investors had asked WMC to repurchase indicated that 78 percent of them had been fraudulent; nearly four out of five of the loan applications backing these mortgages had contained misrepresentations about borrowers’ incomes or employment.
Riedel also helped work on a computer program designed to dig out fraud across the company’s loan portfolio. It sifted through a swarm of data, including evidence that many borrowers submitted multiple applications with income figures that mysteriously grew from one application to the next. Then it spit out a fraud alert flagging applications that appeared to have false information.
Riedel hoped that the company would use the data-tracking program on a real-time, wide-scale basis, he says.
It was at a meeting about the computer program, Riedel says, that an executive declared “fraud pays” — explaining that it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.
The anti-fraud algorithm was never put into regular use, Riedel says.
In October 2006, Dave Riedel changed his computer password to “finaldays107!” — reflecting his expectation the company would be out of business by October 2007 (10-7).
As home values were starting to fall and subprime loan defaults were starting to rise across the industry in late 2006, Amy Brandt stepped down as WMC’s top executive. She told a trade publication that her contract with GE was ending and, rather than re-enlist, it was time for her “to move on.”
“This was really my baby, and I wanted to wrap up this era because I really love the company,” Brandt explained.