By William K. Black
Quito: March 24, 2015
In this second column about Richard M. Bowen, III, I discuss the failure of the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to make use of his expertise and testimony. Bowen was the Citi SVP who blew the whistle on Citi’s senior managers’ strategy of knowingly buying massive amounts of fraudulently originated loans sold to Citi through fraudulent reps and warranties and then reselling those toxic mortgages (primarily to Fannie and Freddie) through false reps and warranties. My first column described that strategy and the failures of the Financial Crisis Inquiry Commission (FCIC) to understand how damning Bowen and Clayton’s testimony was. Clayton was the dominant “due diligence” firm for secondary market mortgage sales and was designed to be an easy grader. The two great epidemics of mortgage origination fraud (appraisal fraud and liar’s loans) were so endemic and so crude that even Clayton found a 46% incidence of false reps and warranties by the sellers to the secondary market who fraudulently originated the loans. That incidence grew to 54% by the second quarter of 2007.