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The Housing Bubble Was Based On Fraud

2010 June 26
by Ian Welsh

Once again:

Recent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

Half of them were fraudulent.

Half

There would have been no housing bubble without widespread fraud.  None.

Virtually every major bank executive in the US should be indicted for fraud.  The fact that there aren’t even serious investigations, let alone indictments, tells you everything you need to know.  Everyone in the system knows it was all fraud, they knew it at the time, and that is exactly why there are no real investigations.

6 Responses
  1. Tom Hickey permalink
    June 26, 2010

    This is what Bill Mitchell claimed some time ago (Dec 30, 2009). Bill Black calls it “control fraud,” companies being managed from the top using fraud as a business model (remember Enron?). Black claims that the gib banks were and are Enron redux. They are getting away with it because of their bribes aka campaign donations.

    http://bilbo.economicoutlook.net/blog/?p=7003

    Without close scrutiny, the sub-prime boom then bust was, in part, clearly the result of mortgate brokers using fraudulent appraisals and fraudulent income statements to maximise their commissions, knowing that the assets were being chopped and bundled by the likes of Goldman and Citigroup and on-sold to unsuspecting investors who had no idea of the inherent risk in the securitised assets they were buying.

    Further MMT tells us that monetary policy is the least effective of the aggregate policy tools available to government. So it is no surprise that a low interest rate did not set off chaos. This finding is also important because it should provides noe comfort for those who consider a zero short-term interest rate policy, which is implied by MMT, is likely to set off dangerous asset price bubbles.

  2. Ian Welsh permalink
    June 26, 2010

    Been saying it for years, but it bears repeating, since they’re getting away with it.

  3. anon2525 permalink
    June 26, 2010

    Bill Black calls it “control fraud,”

    1) As Black has pointed out, the Prompt Corrective Action law requires that the problem banks be taken over (firing the management) because without prompt corrective action, the management will take greater and greater risks as they attempt to dig themselves out of their holes, which, in turn, increases the costs of any gov’t. takeover/rescue/shutdown.

    Of course, we live in the age of “We’re going to look forward, not back” when looking back would apply to members of Obama’s socioeconomic class, such as

    – bush&cheney
    – goldman-sachs&jpm

    (Even BP would have been given a pass if they had managed to cap the oil&gas blowout within thirty days, but when they are not able to guarantee that even the “relief” wells being drilled will stop the blowout, the video caused Obama’s class to cut BP loose.)

    2) There was the recent report* that the FBI had arrested over 1200 people for mortgage fraud (an improvement from the bush&cheney days when the FBI’s report of an “epidemic” of mortgage fraud was followed up with “leave those white-collar criminals alone”). This may change the calculus of lenders’ employees, who will need to decide whether the quarterly bonus is worth some years in jail. The bank CEOs (dimon, et al.) won’t change because they will continue with their “a few bad apples” defense and “who could have known?”

    *http://www.latimes.com/business/la-fi-mortgage-fraud-20100618,0,1262422.story

    3) “IBGBT” — “I’ll Be Gone By Then”. Doesn’t a 50% fraud rate provide statistical proof that “securitization”* inevitably fails because it separates the loan originator from the loan’s risk?

    And aren’t lenders/”securitizers” in the same relationship to their customers that the ratings agencies are to investors, that is, don’t they both sell a “high” rating, regardless of the underlying actual risk? And if so, shouldn’t Buffet (principle owner of Moody’s rating service) be arrested for fraud?

    * Would Orwell have been astonished by how well he has described the use of language since he has died?

  4. anon2525 permalink
    June 26, 2010

    The Housing Bubble Was Based On Fraud”

    Let’s recall Ian Welsh’s post “Worth more dead than alive—why and how credit default swaps need to be insured”*

    Can’t it be argued that CDSs are fraud, too? They are ostensibly designed to be “insurance,” but are given another name so that they are not regulated as insurance is. But because there is no actuarial evidence about the “insured” risks, no one can objectively determine the rate at which they will fail/succeed. And since no one knows the rate of failure/success, no one knows how much money needs to be held to pay off claims in the event of failure.

    My guess is that this is what Brooksley Born saw when she attempted to get CDSs regulated as insurance, but was defeated by the diabolical criminal geniuses Rubin, Greenspan, and Summers (with their junior henchman, Kissinger protege Geithner).

    *http://www.ianwelsh.net/worth-more-dead-than-alive%E2%80%94why-and-how-credit-default-swaps-need-to-be-insured/

  5. anon2525 permalink
    June 29, 2010

    (Even BP would have been given a pass if they had managed to cap the oil&gas blowout within thirty days, but when they are not able to guarantee that even the “relief” wells being drilled will stop the blowout, the video caused Obama’s class to cut BP loose.)

    Apparently, I was wrong about BP’s not being given a pass:


    BP oil spill: Barack Obama and David Cameron agree BP must not collapse

    BP must not be allowed to implode in the wake of the Gulf of Mexico oil spill disaster, Barack Obama and David Cameron have declared, as the company starts the week with its shares at a 14-year low.

    link

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