The Incredible Con the Banksters Pulled on the FBI

By William K. Black

This is the second in my series of articles based on the FBI’s most (2010) “Mortgage Fraud Report.”

In my first column I began the explanation of how many analytical conclusions one can draw from a close reading of what is left out of the FBI report.

In particular, I emphasized the death of criminal referrals by the SEC and the banking regulatory agencies.  The FBI report implicitly confirms the investigative reporting of David Heath that first quantified the death of criminal referrals by the banking regulatory agencies.

Because banks will not make criminal referrals against their own CEOs, this means that criminal referrals have virtually vanished against the “accounting control frauds” that drive our recurrent, intensifying financial crises.  As George Akerlof and Paul Romer explained in their famous 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) the death of prosecutions of the controlling officers of banks will lead to accounting control fraud becoming a “sure thing.”

[M]any economists still seem not to understand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution? (1993: 4-5).

In criminology jargon, the death of criminal referrals has created an intensely criminogenic environment which creates incentives so perverse that accounting control fraud can become epidemic.

The central puzzle is how the largest epidemics of elite white-collar crime in history, frauds that drove the ongoing financial crisis and made the Wall Street banksters wealthy beyond their most avaricious dreams, resulted in not a single conviction of those elite frauds.  The FBI report allows us to figure out some of the key missing puzzle pieces that explain this tragic mystery.

This article (and the next) focus on the brilliant con that the mortgage lending industry was able to pull on the FBI because the banking regulatory agencies and the SEC failed to provide the FBI with the expertise and investigative findings of fraud essential for the FBI and the Department of Justice (DOJ) prosecutors to succeed in investigating and prosecuting the officers controlling complex frauds.  Three key facts are essential for the public to understand the FBI’s total dependence on criminal referrals from the banking regulatory agencies.  First, “control frauds” cause greater financial losses than all other forms of property crime – combined.  “Accounting control frauds” must gut their underwriting process and internal controls in order to make massive amounts of bad loans.  That is equivalent to hanging a sign on the front door inviting thieves to rob the bank with impunity.

Second, the FBI has roughly 2,300 white-collar specialists and our Nation has over 1,300 industries.  That means that the FBI “specialists” will rarely have expertise in the industry they are investigating.  It also means that FBI agents do not “walk a beat.”  They only investigate when they receive a criminal referral alerting them to a possible white-collar crime.  The only sure (and generally safe) means by which they can gain the essential expertise about the industry and its fraud schemes is from the federal regulators.

Third, banks virtually never make criminal referrals against the people who control them.  This means that only the regulators will make criminal referrals against the elite banksters.  If the regulators do not make criminal referrals the FBI agents will never learn of the control frauds.  The (minor) exception is whistleblowers.  Whistleblowers, however, are rare and typically are too low in the food chain to have direct evidence of the controlling officers’ frauds.  Whistleblowers cannot stop or even impede materially an epidemic of control fraud.  Only the regulators can bring the necessary expertise, resources, relentless attention, and vigor to make the criminal referrals (and take a vast range of other actions) essential to stem an epidemic of control fraud and prosecute many hundreds of elite white-collar criminals.  In the vastly smaller S&L debacle our agency, the Office of Thrift Supervision (OTS), made over 30,000 criminal referrals and produced over 1,000 felony convictions in cases designated as “major” by DOJ.

So we return to the question this column addresses – how could the DOJ make zero criminal prosecutions of the elite banksters that caused this crisis through the twin epidemics of accounting control fraud by lenders (appraisal fraud and fraudulent “liar’s” loans)?  The FBI Report shows (indirectly) that the answer is an exceptionally effective con run by the mortgage industry on the FBI.  The con could have never succeeded had the banking regulators not ceased making criminal referrals and providing their expertise to the FBI and DOJ on accounting control fraud schemes.  The OTS was supposed to regulate Countrywide, Washington Mutual (WaMu), and IndyMac – three of the most notorious fraudulent lenders in the world.  The OTS made zero criminal referrals in this crisis – which was over 70 times worse than the S&L debacle in terms of losses and fraud.

The FBI’s Perverted “Partnership” with the Perps’ Lobbyists

In the absence of the banking regulators providing the essential criminal referrals and expertise, the FBI took two seemingly logical, but disastrous steps.  First, they focused on the criminal referrals they did receive – from the lenders.  My fourth column in this series will explain why that proved so harmful.  Second, in 2007 as the fraudulent mortgage lenders began to collapse on a twice weekly basis the FBI formed what it called a “partnership” with the Mortgage Bankers Association (MBA) – the trade association of the “perps.”

The bottom of the MBA press release, in small print boilerplate, revealed the financial tsunami that was devastating the industry.  In April 2006, the same boilerplate stated that the MBA had over 3,000 members employing over 500,000.  By the March 8, 2007 press release the number was “over 2,200” lenders employing over 280,000.  The industry and the MBA were being crushed by the twin (appraisal and “liar’s” loans) epidemics of mortgage fraud origination that became endemic in the industry and that the MBA fought tenaciously to protect from effective regulation.

The FBI was desperate to address the mortgage fraud catastrophe in 2007.  The irony was that it was vulnerable to political attack because it had been so right, so early about mortgage fraud.  The FBI warned publicly in September 2004 that mortgage fraud had become “epidemic” and predicted that it would cause a financial “crisis” if it were not stopped.  By 2007, however, the FBI had assigned only 120 FBI agents nationwide to investigate the epidemic of mortgage fraud that had grown massively since the FBI warnings.  As I have explained on many occasions (and will reprise briefly in my fourth column in this series) that pittance of agents was assigned to relatively minor mortgage frauds because, as I describe below, the MBA conned the FBI into defining out of existence the control frauds.  With no assistance from the banking regulators, and an industry collapsing in an orgy of mortgage fraud that the FBI had warned about but could not understand or effectively stop given the death of criminal referrals by the financial regulators an overwhelmed FBI turned for industry expertise to the MBA.  It was a disastrous choice – and the FBI has refused to end the partnership with the perps.

The partnership’s output consists of two products.  This column explains “the Poster.”  The next column discusses the MBA’s faux definition of mortgage fraud that defined control fraud out of existence and transformed the fraudulent loan originators into saintly fraud victims.  It is the greatest con of modern U.S. history in its pure audacity.

Be Afraid, be very Afraid: the FBI/MBA Mortgage Fraud Poster

The MBA and the FBI’s vaunted partnership produced a poster.  The poster only addresses mortgage frauds against banks by the bank’s customers.  The MBA provides the poster to lenders so that they can display it to its evil, ultra financially sophisticated customers and warn them not to defraud the poor, virginal, honest, and too-trusting lender.

Fraud against lenders is a rapidly growing problem. It can affect not only lending institutions, but innocent homeowners and the community at large. It is a problem that requires the close cooperation of law enforcement and the real estate finance industry. That cooperation includes educating the general public as to what constitutes mortgage fraud and what the consequences of mortgage fraud are.

To that end, the Federal Bureau of Investigation and the Mortgage Bankers Association have jointly produced a Mortgage Fraud Warning Notice. This Warning Notice makes clear that mortgage fraud is a federal offense with serious penalties, and will be fully investigated and prosecuted by the appropriate authorities. The FBI and MBA strongly encourage lenders to consider integrating the Warning Notice into their loan processes.

You too can print out your very own warning poster.

Please do not alter the FBI seal, and note that the FBI threatens to prosecute you if you create a satirical sign using their seal or name that explains their failure to prosecute the banksters or promises to start prosecuting them.  You can, however, provide us at New Economic Perspectives with your proposed revised text that would warn the lenders and their CEOs that some [unstated] entity will investigate and prosecute the control frauds (as soon as we get a real Attorney General).

The poster’s existing language talks solely about “person[s]” and warns that it is a federal felony to commit appraisal fraud (“to willfully overvalue any land or property”).  How about banks?  Borrowers rarely are able to inflate appraisals.  Lenders and their agents are the ones that extorted and bribed appraisers to “overvalue” appraisals – and they did so at least hundreds of thousands of times.  Only a fraudulent lender would overvalue the collateral.  As the poster says, the banks and controlling officers could have been sentenced, respectively, to pay a fine of up to $1 million for every act of mortgage fraud and to 30 years in prison for a single, relatively small act of mortgage fraud.  Consider the mirth this poster prompts among the senior officers of the lenders who caused the twin epidemics of appraisal and “liar’s” loan frauds, then committed contract and securities fraud by fraudulently selling their fraudulent loans to the secondary market, and topped it off by committing hundreds of thousands of cases of foreclosure fraud.  You know – the mortgage fraud “victims” according to the MBA and the FBI.

Given the fact that the CEOs of large fraudulent lenders are criminally liable for tens or even hundreds of thousands of acts of mortgage fraud we should be seeing our prisons overrun with elite white-collar criminals.  Instead, the DOJ has no convictions of the elite bankers who led the control frauds that caused the crisis.

Note that in the second paragraph of its statement quoted above the MBA conflates “mortgage fraud” with “fraud against lenders” by their customers.  The concept that the controlling officers of banks defraud customers through mortgage fraud (and that such frauds massively outweigh in magnitude and harm the frauds by mortgage applicants against their lenders) disappears under the MBA/FBI poster.  Remember that only fraudulent lenders are vulnerable to material fraud by customers because such lenders must gut their underwriting and internal controls – systems that had proven for many decades that they prevented any material fraud by mortgage borrowers.  The largest “victims” of mortgage fraud, therefore, are victims because they are enormous perpetrators of mortgage fraud.  The MBA/FBI warning poster might have made sense if it were put in the office of every mortgage lender’s CEO.  Doing so, however, would have exposed the missing asterisk in the MBA’s statement above that should have read “mortgage fraud … will be fully investigated and prosecuted” * (* “except where it is led by the lender’s controlling

12 responses to “The Incredible Con the Banksters Pulled on the FBI

  1. Charles Fasola

    Mr. Black,

    The rule of laws no longer pertains to the FIRE sector or it’s upper management positions. The government is a bribed pawn of the 0.1%. Until the stupid complacent amerikan public awakens from it’s 40 year stupor and revolts against the corrupt crony capitalist system the same game will continue. Your hey day was over three decades ago. It’s time you wake up to the world as it exists today as well. Appealing to government or its FBI puppets no longer is the way to go.

  2. Pingback: Bill Black: The Incredible Con the Banksters Pulled on the FBI « naked capitalism

  3. «the senior officers of the lenders who caused the twin epidemics of appraisal and “liar’s” loan frauds, then committed contract and securities fraud by fraudulently selling their fraudulent loans to the secondary market,»

    As I have often remarked, this is one major reason why they will not be prosecuted: all contracts for the sale of those loans have clauses that if the loans are fraudulent the sale is nullified and the seller has to refund the full price paid to the buyer, thus triggering the formal bankruptcy of all major banks.

    «The government is a bribed pawn of the 0.1%. Until the stupid complacent amerikan public awakens from it’s 40 year stupor and revolts against the corrupt crony capitalist system the same game will continue.»

    That’s the usual misunderstanding that makes Bill Black’s and your statements faintly ridiculous… It is not that the politicians are corrupt and the voters are naive victims.

    The voters are corrupt and continue to re-elect politicians who do their corrupt bidding. Voters want massive fraud to continue because they not only admire it, but mostly because they think that they profit from it, as it boost the prices of the assets (401ks, houses) that they own.

    When voters start to write campaign donations to anti-fraud politicians, instead of massively re-electing those politicians who run on a record of helping fraud etc., things will change.

    That will only happen well after most voters realize that they have been conned by being deluded that a cut of the proceeds of those frauds woul go to them, because most delusionary voters are bitter-enders.

  4. @Blissex – Interesting perspective. Never thought of it that way. Thanks for sharing.

    • Oops, I put my previous reply under the next comment. Too bad.

      But to continue it, I cannot recommend highly enough Galbraith’s short and splendid “The Great Crash 1929”, in which he describes so many things that sound so contemporary. For example, it is a book written in 1954 about events in 1929 and has a whole chapter entitled “In Goldman Sachs we trust”, to show certain things change very slowly :-).

      Galbraith’s book has plenty of observations on how corrupt and deluded or malicious were “dumb-money” middle class speculators in 1929 and still in 1954. Those are a majority of voters today.

      What Bill Black does not do is produce a compelling argument of why honesty is the best policy for middle class voters.

      I personally doubt that he can, because those Real American voters are totally invested in fear and greed, in the delusion that they will make money fast and join the 1% and everybody else is a loser.

  5. Bill,

    Typo? By “death”, don’t you mean “dearth”?

    • «Interesting perspective. Never thought of it that way. »

      I have posted many times before in comments to Bill Black’s informative, reasonable, realistic, but futile articles some quotes from old and recent sources, most notably deTocqueville, Galbraith, Gingrich, Norquist, who amply realize that. I’ll reproduce here again the Gingrich and Norquist quotes:

      «If you have a society where almost every middle class person routinely fudges the law, that’s telling us something.

      We have laws that matter – murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?

      The first thing that every good American says each morning is “What’s the angle?” “How can I get around it?” “What does my lawyer think?” “There must be a loophole!”

      Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs to stop him. America is the most incentive-driven society on the planet.»

      «And that is, in 2002, on the investor class stuff … you could have said, just drop $7 trillion in stock market value with the collapse of the bubble … $7 trillion, trillions with a T … Americans had $7 trillion less than they used to have, you can expect them to be very irritated and in trouble. [ … ]

      They were mad at having lower stock prices and 401(k)s, but they didn’t say Bush did this and that caused this. Secondly, the Democratic solution was to sic the trial lawyers on Enron and finish it off. No no no no no.

      We want our market caps to go back up, not low. The 1930s rhetoric was bash business — only a handful of bankers thought that meant them.

      Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher.

      And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.»

      We may disagree that these guys are right, but perhaps the above is «the mythos underlying society» in the USA (and the UK).

      But that mythos while old was not a mass belief in the USA (and the UK) until the 1980s. It was astutely social engineered into becoming a mass mythos by rightwing thinktanks and propaganda agencies, using well designed propaganda and also very astute policies.

  6. Professor Black,
    I am a “junior” colleague in the KC area, and I have enjoyed and recommended your commentary for some years now and will continue to do so. Indeed, your appearance on Bill Moyers has been an EC item in my 20th c. U.S. history class for years now.

    I would just like to say that, as a historian, I argue that such corruption as you routinely call out is built into the system and has always been there. I know you know this, but I feel compelled to say that there was a brief time — about a generation, maybe two — where a serious attempt to control otherwise reckless bourgeois profiteering that has characterized imperial expansion since the 13th century. (And no, I’m not a doctrinaire Marxist, I’m just an admirer of his analysis of capitalism.) New Deal liberalism may have been the best way to minimize these excesses through regulation, but it’s still corrupt at base. How much of this is the human condition and how much can be overcome be embracing a morally sound mythos? And if the latter is possible, how would this transpire? I know these are abstract questions, but we’re talking about a society that has long embraced an amoral mythos. New Deal liberalism, as I point out to my students, IS the middle ground between fascism and communism — and it’s effectiveness was admirable but fleeting. The Liberals began their decline when they turned their back on the working class. And although this is outside my expertise, it seems that trading in Henry Wallace for Harry Truman was a crucial moment in the decline. But ultimately, the decline is due to a loss of a rhetorical war by the center left to the right in the U.S. (there not being any functional “left”). The rhetoric is rooted in the myths by which most Americans conduct their lives, knowingly or otherwise. We can change the people in the system (marginally effective); we can change the system (more difficult); and/or we can change the mythos underlying society (impossible, I think, to contrive). So, I will continue to speak out, educate, write, play my guitar, and enjoy life as best I can — come what may. Hey, I think I’ll use this to begin an essay . . . all best Bill — keep up the good fight!

  7. Peter Lance just published his latest book “Deal with the Devil”. The jury completed its deliberation in the trial of Whitey Bulger, last week. What both sources of information have in common is that the FBI is not an innocent to be duped, but in fact has been suffering from internal corruption for quite sometime now. So, perhaps they were also not ‘conned’ as you posit in the recent report cited above? The question that no one appears to be able to answer is who is responsible for oversight of the FBI? Considering the recent testimony of the Boston FBI secretary (in the matter of USA v Bulger), who in fact confessed to obstructing justice upon the orders of 18 bosses for the span of 62 years, I would suggest the issue of internal corruption would be a top priority for the newly appointed FBI director.

  8. Paul DeSanctis

    All an accurate accounting but how come we rarely hear about “the devils advocate” here. That was the real estate agent. They held the product and they drove these effects in large part. Among the worst violators were the home builders and not surprising it was the states where home building was most active that we saw the most gross and severe accounts of fraud and overinflated values. A home builder owning a mortgage company? What nut job allowed that convenient set up. To me, looking at appraisal fraud is problematic because too many appraisals were done “by the book” but having only a few instances of true fraud will poison whole areas. There were two small triggers that drove the market to mayhem in my experience. The rent/mortgage multiplier on “liar loans”, sometimes called payment shock, were removed and took over. Insane. And the worst and most damaging trigger was disposition of property. Allowing an unseasoned lease to be provided to offset the mortgage of a primary residence that was to become a “rental” while the borrower went out buying up new “primary residences”. Obviously this individual leverage was monstrous. One individual borrowing from one property to pay another, and another and when it came down – well. Nobody I knew actually believed their income could support the payments of these bloated stucco behemoths, but they were “investors”, house flippers extraordinaire. I don’t know where the FBI comes in when this was the guidance set out by Wall St. banks. A better idea is to price bad players out and I’m pretty sure that’s where the structure of mortgage origination is going given that every loan is now identified by the loan officer and institution. Seen it done before and it works.

  9. John Anderson

    I would never expect too much from the FBI. After so many proven acts of coverup and corruption.
    Only a true revolution, will expose the truth of the drug war, 9/11, the war on terror, the phony economic crisis, and the erosion of our rights.
    I do not know the impetus that will trigger this revolution, and neither do the despots who control both major parties in the USA, the FED, the Bank of England, and what we call the military industrial complex, the Rothschild Banking Cartel.
    They want control over the Internet. They fear it after the Arab Spring uprising.
    We must protect the freedom and access to this instrument of freedom.