Out of court

Thursday, February 25, 2010

Why don't more bankers get indicted?

In the previous blog I discussed identity theft cases. I will now discuss bank fraud and why it is so hard to charge the very greediest bankers at the top. Although such identity theft cases can involve hundreds of thousands of dollars, they are small beans compared to bank fraud, specifically fraud surrounding real estate loans--called mortgages.. To begin with, the average single mortgage here in Seattle is nearly a half million dollars.. If a house is flipped, that is sold quickly over and over, millions can mount up in no time..

In the last 10 years, during the housing bubble, this crime was rampant.. Since banks or lenders assumed that real estate values would continue to go up, they got lazy and failed to scrutinize the ability of the borrower to pay back the loan.. The stupid assumption was that if the loan was below the inflated 'market value' of the house, and even if the buyer could not afford it, the bank could recoup its loss by foreclosing and selling at that ever-increasing market value..

So in the frenzy to earn those fees and points, lenders, banks and mortgage companies failed to perform any due diligence in examining the borrower's assets and income.. In a fraudulent mortgage loan, the borrower's assets and income would be fictional, or confirmed by a confederate.. Instead of really examining the borrower's ability to repay the loan, too many lenders were in a rush to sell and close the loan, and then move on to the next one.. And anyway, the lender never held the paper, i.e., kept the loan to collect the monthly payments; someone else bought that as an investment (one type known as a "derivative..") And lo and behold, we are in the Great Recession of 2008-now!.

The question is then, why haven't the people at the top been charged more for making these loans or selling these terrible investments? Previously I talked about how high the proof standards are for federal charges. In most cases, at least here in Seattle, federal prosecutors do not indict people unless they have a lot of proof of wrongdoing.

Bankers who made reckless loans, stupid investments or overpaid themselves have not necessarily committed a crime. They may have been negligent or reckless with other people's money and certainly overpaid themselves. But it takes fraud to commit a crime. Fraud typically involves intentional lies that other people rely on in parting with their money. Or intentional misstatements about the health of a company or intentional omissions to investors or stockholders. The latter is what got the Enron execs in trouble..

In mortgage fraud cases, the perpetrators typically lie about the borrower's assets and income on the loan application form. That makes for an easy case. Frequently, there are many people involved in these cases and only the top people who run the scam and tell a lot of easily proven lies are charged. I know of cases where only 3 or 4 people are charged, but there may be 20 or 30 who told lies along the way but don't get charged because the proof is not strong enough..

And if you think about the top people--those who earn 10's of millions of dollars--they tend to be smart and careful. They have lawyers review what they say and write to avoid misleading statements. Right now there are investigations involving former top people at Bank of America and the now defunct Washington Mutual. Whether they are charged will depend on how much evidence there is. I constantly shake my head at the fact that many people at these companies made tons of money, even though their companies later went bankrupt or begged for government aid. But that is a flaw of our economic system since greed alone has never been a crime..

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