Janet Tavakoli: Fraud As A Banking Business Model

Guest post submitted by Janet Tavakoli.

There were many factors that contributed to our recent financial bubble: deregulation, cheap money from the Fed, failure to enforce remaining regulations, crony capitalism, hubris, speculation, leverage, and fraud among other problems. While fraud wasn't the only issue, it was and is a significant contributor to the credit bubble. Restraining fraud is a necessary but not sufficient condition for a sound financial system. Congressional investigations in recent years have put ample evidence of fraud in the public domain. 

To illustrate just one type of malicious mischief, Senator Carl Levin (D. Mich.), Chairman of a senate investigative panel, issued a memo stating that Goldman "magnified the impact of toxic mortgages." The Wall Street Journal reviewed data showing that a $38 million subprime-mortgage bond created in June 2006 was referenced in more than 30 debt pool causing around$280 million in losses to investors by 2008. In other words, Goldman kept repackaging, reselling or protecting (buying credit default protection on) losers. It took the wrong kind of nerve for Goldman's CEO to say he was doing "God's work."

Arianna Huffington pointed out that the financial system is rigged and that offenders get off lightly:

Until the Securities and Exchange Commission sued Goldman Sachs for fraud in April of 2010, it was easy to forget that we have a regulatory agency designed to protect the public from the pillaging of corporate America. Six months earlier, the SEC has arranged a settlement with JPMorgan that showed how rigged the system is. The banking giant agreed to pay a $25 million penalty and cancel $647 million in fees owed by Alabama's Jefferson County as the result of a complicated derivatives deal that blew up in the county's face. As part of the settlement, JPMorgan neither admitted nor denied wrongdoing--despite overwhelming evidence that it had engaged in plenty of wrongdoing.

On Friday, September 2, 2011, The U.S. Federal Housing Finance Agency (FHFA), the regulator for taxpayer-subsidized mortgage lending guarantors Fannie Mae and Freddie Mac, filed lawsuits against 17 of the world's largest banks over suspect mortgage loans which helped exacerbate the U.S. housing crisis. Both Fannie Mae and Freddie Mac were placed in conservatorship in September 2008 after they nearly collapsed. The FHFA claims banks misrepresented the value of the mortgage loans and mortgage securities they underwrote, arranged, and sold.

So far the banks being sued include Bank of America Corp along with its Countrywide Financial Corporation and Merrill Lynch & Company divisions, Goldman Sachs Group Inc., JP Morgan & Chase & Co, Citigroup Inc., Deutsche Bank AG, Barclays PLC, Nomura Holdings Inc., Morgan Stanley, Ally Financial Inc., Credit Suisse Group Inc., First Horizon National Corp, General Electric Co, the HSBC North America Holdings unit of HSBC Holdings, The Royal Bank of Scotland Group PLC and Société Générale SA. The FHFA is just getting started.

Critics of Fannie Mae, Freddie Mac, and their previous regulator, OFHEO, say that they were sophisticated investors, and they should have known better. William K. Black is a former bank regulator who played a role in hundreds of successful prosecutions after the Savings and Loan Crisis. He told the Wall Street Journal: "It's a great myth that you can't defraud sophisticated financial parties." Particularly when loans are fraudulent and material information was not disclosed.

The Financial Crisis Inquiry Commission published evidence from the testimony of officials of Clayton Holdings(among others), a due diligence firm, that underwriters and rating agenciesignored evidence of suspect loans and did not disclose this information to investors.

The FHFA's complaint involves tens of billions of dollars in potential recoveries that will benefit taxpayers. Yet, as Arianna Huffington points out, banks continue to find ways to get Americans to subsidize problems that the banks themselves were chiefly responsible for creating. Consumers struggle to keep up with payments as the unemployment rate rises along with prices for food, energy and healthcare. Meanwhile, job creation hovers near zero.

When consumers fail to keep up, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties--all of which makes it less likely consumers will be able to pay off mounting debts.

Money is being put in taxpayers' pockets in the form of "recoveries" while being extracted again in the form of subsidies and cheap funding to shaky banks that continue to award record pay and record bonuses as they gouge consumers. We can expect more of the same if we continue to let banks off with a slap on the wrist for malfeasance--along with a taxpayer subsidized fine--while banks neither admit nor deny wrongdoing.

Banks won't change until we follow the law and take "prompt corrective action." Banks that committed widespread fraud should be placed in receivership. Bank of America was cited by William Black and Randall Wray in their October 2010 post as the place to start, and I agree.

On December 8, 2010, I presented an analysis to the Federal Housing Finance Agency (FHFA) in Washington D.C. of key causes of our current financial crisis: "Repairing the Damage of Fraud as a Business Model." The phrase "fraud as a business model" comes from a comment referenced in the presentation made by Richard Cordray, then the Attorney General of Ohio and the current Director of the Consumer Financial Protection Bureau, when he discussed foreclosure fraud.

Repairing the Damage of “Fraud as a Business Model”

Originally appeared at the Huffington Post

Comments

[Dave Mowers]

State and Federal pension funds are only invested in blue chip stocks and bonds. When shares in those companies go down taxpayers have to make up the difference in fund value versus payments due retired employees. This has been this way for six decades now but traditionally we have only seen the market rise over time; partially due to never-ending demand for blue chip stocks and bonds by monthly purchases from State and Federal pension funds. These purchases create a permanent credit for blue chip companies who use their historical share price as a reason why new investors should purchase new share issues, so essentially taxpayers-via-pension funds bankroll blue chip companies capital requirements. The same taxpayers also accept State and Federal pension fund losses in the form of tax increases to cover those losses when the funds can't pay the promised retirement to employees. Now, your Congress is seeking another bail out for States which will be used to cover pension fund losses and will essentially cost every American directly due to corporate fraud and mismanagement of their own companies and investment bank fraud in the bond market. What a wonderful system for investment bankers, government employees and publicly traded corporations (of a certain size and classification).

The entire country is part of a ponzi scheme designed to provide retirement risk protection for one, very small segment of the country and government workers. Now that these funds are no longer "net buyers" but due to baby boomers retiring they are now "net sellers" the stock market will never recover and the only beneficiaries will be the same people and organizations that created this system which will ultimately have to be bailed out anyway. Capitalism is fraud. Nothing makes money in this country unless it is rigged, corrupt or outright theft. America has no morals.

[Harry Johnson]

Dave, my boy, did the public employees falsify loan documents? Did the public employees create slice and dice securities out of bad loans claiming they were good? Are the public employees receiving multi million dollar bonuses a couple years after their companies were ready to fail and got bailed out? I did not think so either. You need to quit drinking rush limpblobs kool ade and start looking at the real culprits. I know, I know it is hard and makes your head hurt but think man, think. Who created the money for nothing derivatives using leverage basically pulling money out of air? Who gets sweetheart loan deals getting government loans from the federal reserve at 0.25 percent which they then loan back to the government buying bonds at 4 percent? Who set up entire businesses and departments creating false documents with false notarization? Who gets a very favorable 15 percent tax rate before deductions and credits? Who pumped up the price of housing without adding a bit of value? I know you are in a hurry and trying to scapegoat public employees or for that matter anyone who works for their living. But all of these pesky facts keep getting in the way. Now for a serious question, why is it a working man, whether auto worker, street repairman, teacher, nurse, firefighter, construction worker,etc. is asking too much to get to retire someday but a snake oil sales boy in one of these hedge funds, who creates nothing of value, is automatically entitled to multi millions?

[S. Gompers]

Great comment Harry, the State and Federal employees also did not borrow from the funds with no intent to repay those "loans", and many of those fraudulently rated bundled "securities" are still sitting in pensions, 401k's, mutual funds, etc., still waiting to explode...

And yet the promotions, accolades, and bonuses, march on for the perpetrators of the fraud.

[usurykills]

Bank lending is a fraud from the git. None of this is hardly news.

Until people realize that charging interest is cutting off their own nose, fraudulent bankers will be given free reign to rob them blind. As long as you think interest can be charged on money created from thin air, you are doomed. End of story.

We could start by outlawing interest and move on to outlawing all sorts of usurious actions. Call it restoring ethics if you like.

Or, we can watch the world explode as we calculate the interest we hope to "earn" from the bondage of fellow human beings.

[robertsgt40]

Once a nation's finances are turned over to a central bank(privately held) and a debt based currency is created based on fractional reserve policy, the party is over. No matter how the currency is manipulated or regulated, the cancer can do nothing but evenyually consume the host. Just a matter of time.

[John]

Re-read Janet's article and then this update:

http://www.reuters.com/article/2012/05/07/us-allyfinancial-idUSBRE84603T20120507

[john]

MUST SEE VIDEO:

Wall Street Banks Have Still Never Been Held Accountable, Says Tavakoli

http://finance.yahoo.com/blogs/daily-ticker/wall-street-banks-still-never-held-accountable-says-165332251.html

[Barbara Durkin]

Great article, Janet. Thank you.

Back in 2002, Senator Carl Levin described the Enron business model that continues to erode public wealth today. "ASLEEP AT THE SWITCH..." (subject then FERC Chairman), was Ken Lay's recommendation to President G.W. Bush, Patrick Wood III, charged by G.W. Bush to clean up after Enron's energy market manipulation, and the CA Energy crisis. But, Wood was the fox guarding the hen house.

http://www.consumerwatchdog.org/node/9121

Former FERC Chair Pat Wood is today the Director of UPC First Wind, AKA (First Wind) ‘Hawaii Wind Developer tied to Largest Ever Asset Seizure by AntiMafia Police’

http://www.hawaiifreepress.com/main/ArticlesMain/tabid/56/articleType/ArticleView/articleId/4008/Hawaii-Wind-Developer-tied-to-Largestever-asset-seizure-by-antiMafia-police.aspx

Pat Wood is also the publicly subsidized Director of Xtreme Power, TPI Composites, Range Fuels, Wood3Resources, Quanta Services, the Chairman of the Board of Dynegy Inc., and the Director and part owner of SunPower, AKA ‘SunPower: Twice As Bad As Solyndra, Twice as Bad for Obama’

http://www.humanevents.com/article.php?id=46761

The Enron business model...

Senator Carl Levin US Senate Government Affairs November 12, 2002 ASLEEP AT THE SWITCH: FERC'S OVERSIGHT OF ENRON CORPORATION--VOL. I
107th Congress transcript states-

Senator Levin: “The Enron scandal began by exposing dishonest accounting at a number of major U.S. companies that, unbeknownst to most, had begun to eat away at the reliability of their financial statements. It has since exposed the conflicts of interest that have made investors distrust investment reports issued by leading U.S. financial firms. It has exposed how those firms have become unwilling participants in shell companies, phony trade deals, and complex financial transactions used to inflate earnings, hide debt, and increase stock prices..”

Levin: “corporate executives have walked away from corporate disasters with millions in their pockets, often from exercising stock options, while pension funds, investors, employees and creditors have lost everything.”

[cut, continue reading]. http://www.gpo.gov/fdsys/pkg/CHRG-107shrg83483/html/CHRG-107shrg83483.htm

[john]

Here is the latest from Janet Tavikoli. (MUST READ)

Why POTUS Allowed Bailouts Without Indictments

http://www.tavakolistructuredfinance.com/2013/09/potus-bailouts-without-indictments/

[snip]

In November 2008, President Obama was elected, and he was sworn in January 2009. The country was promised change and reform. Recently two democrats close to the top of President Obama’s administration made excuses to me for the lack of financial reform in the United States. Their separately related versions were remarkably similar, so similar they seemed scripted:

The administration made a bargain, and I’m not sure it was the right decision. The world was teetering on the edge of collapse. There was a crisis of confidence. There would have been unimaginable consequences. So bad even your imagination can’t handle the truth?......

[SKINFLINT]

In effect, this man made himself a czar with absolutely no limit on expenditures. Nice work if you can get it. Lets not forget to suspend actual accounting standards so that we may never know how much shit is on the balance sheets of these evil sons of bitches. No one can question this idiot? Is this section still in place?