The officers heading our “Reputable” banks are the fraud risk

A recent study confirmed that control fraud was endemic among our most elite financial institutions…“Although there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions”…

Finance scholars are not known for their sense of humor, but the irony of calling the world’s largest and most harmful financial control frauds our “most reputable” banks is quite wondrous. The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of “white-collar” crime. It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.

…The definitive evidence of control fraud that PSW2013 identifies is by mortgage lenders who made, or purchased, mortgages and then resold them to “private label”…financial firms who were creating mortgage backed securities… The deceit they documented by the firms selling the mortgage loans consisted of claiming that the loans did not have second liens. The lenders knowingly sold mortgages they knew had second liens under the false representations…and warranties that they did not have second liens. [The key is that the officers who control the banks do not have skin in the game – they can loot the banks they can control and walk away wealthy.] The PSW 2013 study documents that the officers controlling the home lenders knew the representations they made to the purchasers as to the lack of a second lien were often false…that such deceit was common…that the deceit harmed the purchasers by causing them to suffer much higher default rates on loans with undisclosed second liens…and that each of the financial institutions they studied – the Nation’s “most reputable” – committed substantial amounts of this form of fraud…

The central point we have been arguing for years is now admitted – and treated as a universally known fact: “mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth.” The crisis was driven by liar’s loans. By 2006, half of all the loans called “subprime” were also liar’s loans – the categories are not mutually exclusive…As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar’s loans…

The greatest importance of the PSW 2013 study is that even the fraud deniers have to admit that our most prestigious banks were the world’s largest and most destructive financial control frauds. Given this confirmation that the banks engaged in one form of control fraud in the sale of fraudulent mortgages…there is no reason to believe that their senior officers had moral qualms that prevented them from becoming even wealthier through the endemic frauds of liar’s loans and inflated appraisals…

Though I sometimes labor to edit and sort Ritholtz’s paragraphs, his choice of words matches laughter with indignation. His conclusion to this piece calls out President Obama and Attorney General Holder for their faith in a “virgin” crisis, e.g., although we all are fuckees as a result of this crisis – there are no fuckers among the bankers.

Barry Ritholtz continues his campaign for the arrest and prosecution of Wall Street criminals.

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4 comments

  1. Pingback: The officers heading our “Reputable” banks are the fraud risk | digger666

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