Will the Mortgage Industry Pay for Its Crimes?
There is a time in the life of every writer when you find yourself fearing that you have become a robo call phone machine -- repeating the same message over and over and with diminishing results.
That's how I felt after 8 months of silence after labeling the credit crisis a "subcrime" scandal, lashing out at the fraudulent activity at its core and calling for the investigation and prosecution of wrongdoers. Almost no media outlets accepted this way of framing the problem, although as usual, the British press was ahead of its American cousins in putting the blame on the bankers, not the borrowers.
When the FBI announced a probe of 14 mortgage companies, I thought that finally some investigators were on the case. But then, word leaked that they were only going after small fish even as big banks reported losses in the billions.
Bank robberies have always been up the FBI's alley, and after all, this is a bank heist case, perhaps one of the biggest in history. Only it was the banks that were doing the heisting.
The New York Times reported May 5th that a new criminal investigation was finally underway.
A G-Man explained anonymously: "The latest inquiry is broader and deeper. This is a look at the mortgage industry across the board, and it has gotten a lot more momentum in recent weeks because of the banks' earnings shortfall."
At last, institutional fraud may be on the agenda. At last, deeper questions are being asked. There have been some Congressional hearings but so far none have risen to a Watergate-type level prompting in-depth investigations fueled by subpoenas.
Slowly, oh so slowly, news outlets are recognizing this is a big crime story, one they missed for years, or at least since 2002 when subprime securities started being packaged for sale.
Reports the Washington Independent:
"As loans made to borrowers with decent credit begin to fail at a surprisingly rapid rate, it's becoming clear that widespread fraud helped support the entire mortgage system -- from borrowers who lied on their loans, to brokers who encouraged it, to lenders who misled some low-income borrowers, to the many lenders, investors and ratings agencies that conveniently and deliberately looked the other way as profits rolled in.
Despite its widespread role, fraud hasn't yet been at the forefront of proposed rescue plans, which center on refinancing people out of loans now resetting to higher rates."Why would reputable bankers and respected investment houses engage in these dishonest activities? The short answer: money, and lots of it.
Sales from Collateralized Debt Obligations (CDOs) jumped from $157 billion in 2004 to $559 billion in 2006 according to a study for the North Star Fund by Kevin Connor. Ten investment banks in all were underwriters for 70% of some $486 billion in securitizations in 2006.
The banks had a motto: "It's all about capital."
Subprime-related securities produced large multi-million dollar bonuses for traders and executives as well as high revenues for the firms. In the years when business was booming CEOs at big firms were making $10 to $50 million annually apiece. Collectively, in 2006, a year before their fall, the big banks earned a stunning $130 billion.
Even after these practices came to light, hefty bonuses continued. Wall Streeters walked away with $31 billion at the end of 2007, only one billion less than the year before. Executives who were fired still received multi-million dollar payoffs.
Most media outlets considered this business as usual, not shocking or illegal.
Not even when some of these loans were called "liars' loans" in the industry as when loan orginators colluded with or advised borrowers on how to lie on their applications. It was all done with a wink and a nod, reported the Washington Independent. They interviewed many insiders and experts who contended that:
" ... pervasive fraud was, indeed, a problem -- on the lender's side. At the peak of the housing boom, they say, the nation's mortgage system was set up to promote and encourage outright fraud in order to close a loan -- and everyone, from brokers to loan officers to Wall Street, looked the other way. Borrowers also were put into products like payment-option arms that were unsuitable -- and lenders knew it. "They were pushed like Vioxx, with very little regard for their dangers," said Kathleen Keest, senior policy counsel with the Center for Responsible Lending, a research group that investigates predatory lending.
Wall Street was not a passive player either because of all the money they made from "subcrime" transactions. In some cases they paid more for loans with predatory characteristics. Loan originators at the local level -- as sleazy as many were -- reported that it was the Wall Street firms that dictated the types of loans they wanted and their underwriting criteria. Thus the so-called "secondary market" was really in charge.
This is why I and others insist this was a Wall Street crime wave built around predatory practices. The people who had the most were deeply complicit in ripping off the people who had the least. What's worse, they had no legal liability in these unscrupulous deals.
How did America's leading business magazine respond after the credit crisis brought Wall Street to its knees? Fortune called the credit crisis "both totally shocking and utterly predictable." For them it was shocking not because of the human devastation or the millions of families who were cheated and faced foreclosure or because of the rippling effects on our society, but because the "best minds in the business ... managed to lose tens of billions."
And "predictable?" Again, not due to the lack of regulation or the enabling of shoddy products by our government but "because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes." What a contrast to the usual celebratory coverage, but also what a cop-out to explain it all away.
Warren Buffet, perhaps America's most successful investor, sounded disgusted:
"Wall Street is going to go where the money is and not worry about consequences; Wall Street is reaping what they've sown," he shrugs. Said his vice chairman: "If this were an Alice in Wonderland fable, you'd say it's too extreme. It wouldn't work as satire. Adults are not going to behave this way.''
But adults did -- and continue to. So far, they have been well rewarded as well. The question is: what are the rest of us, and our prosecutors, going to do about it?