On the prosecution of fraud following the Savings and Loan Crisis: Our agency filed over 10,000 criminal referrals that resulted in over 1,000 felony convictions. We worked closely with the FBI and the Justice Department, to prioritize cases—creating the top 100 list of the 100 worst institutions which translated into about 600 or 700 executives. We went after the absolute worst frauds.
On the prosecution of fraud following the current crisis: We now have appointed anti-regulators. The FBI warned in open testimony in the House of Representatives, in September 2004, that there was an epidemic of mortgage fraud, and they predicted that it would cause a financial crisis if it were not contained. It was not contained. Since then we have had zero criminal referrals. They completely shut down making criminal referrals. Both the Bush Administration and the Obama Administration have not made it a priority to prosecute these elite criminals who caused this devastating injury.
On the incidence of fraud : "Liars loans" means that there was no prudent underwriting of the loan. About one-third of all the loans made in 2006 were liars loans. The Anti-Fraud Specialist Unit of the Mortgage Bankers Association - the trade association of the perps - reported this to every member of the Mortgage Bankers Association in 2006. The Anti-Fraud Specialist Unit stated the following: 1. Liars loans are an open invitation to commit fraud, 2. Liars loans contain a 90% incidence of fraud, and 3. Loans that were named "Alt-A" were actually liars loans. So nobody can claim they did not know. After 2006, liars loans grew to comprise over half of all loans made.
On who was committing the fraud: It was overwhelmingly lenders and their agents that put the ‘lie’ in liars loans.
On whether executives knew: We have known for centuries that if you do not underwrite loans, or if you do not underwrite insurance, you will get something called "adverse selection". When it comes to loans, this means you get the worst possible borrowers. If you lend this way, you lose money. This is like betting against the house in Las Vegas. You could win some individual bets, but if you stay at the table for three years, you are going to lose everything. The CEO’s knew all about this.
On why the fraud has not been prosecuted: It is hard to prosecute sophisticated white-collar crimes. And the defendants do have the best criminal defense lawyers in the world. So it is not an easy thing to do. The real problem has been a lack of resources directed to this effort. Black likens the number of agents assigned to the investigations to going to a beach in San Diego, throwing handfuls of sand in the Pacific Ocean, and wondering when you are going to be able to walk to Hawaii. Every year, with a million plus cases of fraud a year, if you prosecute a thousand of them or two thousand of them or three thousand of them, you are a million cases further behind every year. At one point the FBI declared that it was time to start going after the big guys... at which point Bush’s Attorney General Mukasey said no. He refused to even create a National Task Force against mortgage fraud.
On the role money in politics has played: It's not just Congress. The President has said that he wants to raise a billion dollars in the reelection effort. Both parties are tremendously beholden to finance.
On Dodd Frank and legislation in general: Dodd Frank has some individual components that are useful and the Republican Party unfortunately is trying to kill each of them. Fundamentally, the Dodd Frank Bill was not created and designed to deal with the actual causes of the crisis. And so it most likely will not stop the next crisis. But the focus on legislation is a bit misleading. Under the existing laws and regulation, this was an easy crisis to prevent. People think of it as much more difficult and complex. But it was overwhelmingly driven by liars loans. Liars loans were easy to figure out. We, as regional regulators in 1990 and 1991, killed a wave of liars loans that was starting, especially in Orange Country Savings and Loans. And as a result, those lenders gave up their Federal Deposit Insurance precisely to escape our jurisdiction, and created mortgage banks. The Federal Reserve Board had authority from 1994 on - in other words, a long time before the crisis - to regulate anybody that did home loans. And it was an easy call that something called a liars loan had to be stopped. Alan Greenspan and Ben Bernanke refused to use their statutory authority to stop them, because they did not believe in regulation.
On what we need now: We need a completely new crew. Geithner needs to go, Attorney General Holder needs to go, and Bernanke needs to go. We need to put people in who will make a high priority ending the ability to loot institutions with impunity.
Link to interview (mp3)
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