corporate fraud

Was Bernie Madoff the Exception Or the Rule?

Robert Borosage — Wed, 14 Apr 2010 11:57:55 -0400

Were the big banks all knowingly running Ponzi schemes? That's the question that arises from the stunning hearings held this week by the Senate Permanent Committee on Investigations, chaired by Senator Carl Levin, on the collapse of Washington Mutual, the largest thrift failure in the U.S.

Faced with looking like fools or knaves, the barons of the big banks— from Robert Rubin to Lloyd Blankfein to WaMu's Kerry Killinger—have chosen, not surprisingly, the fool. But the WaMu hearings—and Zach Carter's stunning running commentary on them—suggest that while Bernie Madoff may have been the extreme, he wasn't the exception. (Note: Carter blogs for the Campaign for America's Future, which I co-direct.)

The Levin hearings show that WaMu systematically peddled loans to people it knew could not pay them back. This wasn't an accident. Levin exposed a WaMu internal audit that reviewed 132 loans, and found 115 involved confirmed fraud, with 80 having "unreasonable" income—meaning the income listed on the loan was so preposterous that any reasonable person, much less a trained loan officer, would have called it into question. The audit resulted in no—zero, nada—changes in WaMu's lending practices. Fraud wasn't a problem; it was the business plan.

As Carter summarizes:

According to the FBI, 80% of mortgage fraud is committed by the lender. We're not talking about stupid loan officers allowing borrowers to get away with something crazy that is bad for the bank. We're talking about clever loan officers pushing fraudulent documents in order to score bigger paychecks, and bank executives looking the other way so that they can keep getting big paychecks from the securitization machine. This isn't a problem unique to WaMu. This is how the U.S. mortgage system operated for half a decade.

WaMu particularly pushed predatory option-ARM loans, loans with an initial monthly payment so low that it often didn't even pay off the interest on the loan. Then after a couple of years, the monthly payment explodes—and the loan becomes unaffordable.

WaMu actively trained its personnel to convince skeptical borrowers to take these loans because option ARMS received a very high yield when packaged into securities. So WaMu's compensation schemes rewarded loan officers for the number of loans sold, not the quality of the loans. Stunningly, Levin cited internal memos showing that even loan officers under investigation for fraud were rewarded with trips to Hawaii and the Bahamas for their high production.

WaMu packaged the fraudulent loans into securities and sold them to investors, or peddled the loans to investment banks that did the same. Even after WaMu's own internal audits reported that a high percentage of the loans were fraudulent, WaMu still sold them to investors. Worse, even after WaMu's own study showed that the default rates on option ARMS were going to be staggering, WaMu rushed to peddle even more of these loans to investors on an "urgent" basis. As Carter reports, "They not only packaged existing option-ARM loans into securities, they issued as many new option ARMs as possible, in order to score securitization profits before the market collapsed." CEO Kerry Killinger testifies that he doesn't know if it would have been appropriate to tell investors what the company knew about default rates. "I don't know what actually happened," says Killinger.

As Carter summarizes, this was essentially a Ponzi scheme, similar to Madoff's:

Making truckloads of fraudulent loans can only end in disaster, but WaMu [executives weren't] really interested in the long-term picture. They were only interested in their ability to book these loans for big, short-term profits. Even when those bad loans finally took the company under, it had been, in a sense, a success. Its executives had already made millions.

WaMu's [executives were] in many ways operating a simple Ponzi scheme. Their risky loans were going bad, but the company was trying to counter those inevitable losses with the short-term profits from issuing more risky loans. That's basically how Bernie Madoff's scam worked, except he wasn't using make-believe loan profits, he was using make believe stock returns. So long as the bubble keeps growing, the scam could keep moving. But when the bubble burst, there was no way to keep issuing lots of loans in an economy where home prices were plunging.

The one divergence from the Ponzi scheme is securitization -- if WaMu could dump the bad loans off its books, then it wouldn't have to eat the inevitable losses. But that doesn't reflect well on WaMu-- it means [the executives] were deceiving and abusing investors.

Why run this scheme that would lead to the ruin of the bank? Because the executives were making out like, well, like bandits. Killinger, the CEO of WaMu, was taking home $11 million to $20 million a year during the housing boom.

As Carter ponts out, what WaMu was doing in mortgages—originating mortgages that they knew would default, cutting them up into securities, and marketing them to investors without notice—isn't much different than what Goldman Sachs was doing in synthetic subprime CDOs: creating securities that it knew would fail in order to bet against them, while selling them to investors without notice.

These guys weren't fools. They knew what they were doing. They knew that the music would stop some day, and the reckoning would come, or more likely, the Feds would step in and bail them out. (Amazingly, Killinger is still outraged that WaMu wasn't bailed out rather than put out of business.) But they kept dancing because they were cleaning up along the way.

In the last two weeks, the Financial Crisis Inquiry Commission and the Levin hearings provide a stunning picture of the industry. The good cop, FCIC, treats the bankers as experts, listens to their opinions, and lets them claim the role of fools. "We didn't know." "We didn't realize housing prices wouldn't always go up". " We weren't responsible."

Then yesterday, the bad cop—the Levin committee—exposed the inner working of what former bank regulator William K. Black calls "control fraud," a business model based upon fraud as central to its profitable operations. It is hard to believe that WaMu or Madoff is an exception. Levin should probe every major bank engaged in the securitization of mortgages.

Is it likely that their bank officers were fools? Or that they were prepared to turn their heads or hold their noses because the rewards were so great? Ignorance is their defense, not their condition. They knew what they were doing. The rest is for a prosecutor to sort out.

2044 on FireDogLake

Eric Lotke — Wed, 01 Jul 2009 11:02:38 -0400

I’ve blogged about my novel, 2044, here and here. 2044 is a future tale that starts where George Orwell’s 1984 left off. The problem in 2044 isn’t Big Brother and the leviathan government. The problem is Big Brother, Inc., and the all-powerful marketplace.

This post broadens the horizons. FireDogLake will feature 2044 on its book salon on Sunday.

If you weren’t familiar already, FireDogLake’s book salon is a terrific forum where authors discuss their work. It’s an on-line conversation and a chance for direct Q&A on important subjects. This Sunday’s forum will put me in the company of James Galbraith (about the economy), Tom Ricks (about Iraq) and Eric Boehlert (about blogging on the bus), who have all been on Firedog’s book salon. Of course, I’ll be talking about 2044, my new novel where the government doesn’t take over. It gets taken over.

The salon takes place every Sunday evening.
I’ll be on this Sunday, July 6 from 5:00 to 7:00 p.m. EDT. Right after we celebrate our independence.

Please join us. And ask me a question. A hard one.
It’s not necessary but of course it’s more than okay if you buy a book.

PS: Chapter one is available on my web page.

The Fed and the Fix

Philip Palij — Sun, 01 Jun 2008 20:37:09 -0400

The fix has been in since 1913 and the Federal Reserve Act. Basicaly the scam works like this.

The Fed creates money(notes) out of nothing and loans it to the US Government at interest, your taxes pay the interest. Its called the national debt.

Step 1Fiat "money" creation begins when the U.S. Congress is ready for more debt. They instruct the Federal Reserve Bank to raise the debt limit by $1 billion.

Step 2 Congress instructs the U.S. Treasury to print $1 billion interest bearing bonds and sell them to the Federal Reserve Bank of New York.

Step 3 The U.S. Treasury prints the $1 billion interest bearing bonds and sells them to the Federal Reserve Bank!! As security or collateral they offer the INCOME TAX collected from the taxpayers. The U.S. Treasury prints only the Principal . . . not the usury or interest.

Step 4The "Federal" Reserve buys the usury bearing bonds and credits the U.S. Treasury for $1 billion. The government must now pay back the bonds with interest. As the interest was not created, it can NEVER be repaid with "Federal" Reserve Dollars

The US Government pays interest on the principle. The people pay the interest via taxes. On their own money. Money created out of nothing.

Franklyn, Jefferson, Jackson, Washington, Lincoln, JF Kennedy AND signer Woodrow Wilson recognised it for what it was a fraud. It would lead to poverty, loss of property and enslavement of the American People and the world by degree over the coming centuries.

Bankers make money by creating boom and bust periods. They do this by creating booms with easy money (S&L, sub prime,Roaring Twenties) expanding the amount of money in circulation then busts (The Depression, foreclosures) by restricting money with high interest and reducing the amount of money in circulation.

In busts they buy your assets for peanuts, then start the next cycle then sell out at the top. This is the business cycle.

International Bankers do this simply because they can. It appeals to their vanity and greed to control the world this way. The Federal Reserve is allied to International Bankers who control the worlds central banks, its supply of money, the governments of those countries, and in the end you.

The founding fathers understood this scam, they had watched the Bank Of England's progress from 1694 and put a clause in the constitution to say the US is entitled to print its own money at NO interest, God bless em because here is the solution.

Issue USN's notes at no interest to pay off the National Debt held in interest bearing Federal Reserve Notes. (Yes the government can do this!) at the same time issuing enough USN's to the regional banks to safeguard the amount of money in circulation. There is a precedent President Jackson in 1836 did just that. Abraham Lincoln wanted that. JF Kennedy wanted it with decree 11110, which is still in force but never implemented.

Easy isn't it? America has had this money in circulation from time to time, periods of wealth and prosperity.

The process of 'fleecing the flock' has been under way for centuries. This is what International Bankers do. Service debt (National Debt) created by wars, which they finance and it doesn't matter which side. Boom and Bust is a policy.

Now this to some extent explain why the financial engineers like Cayne get such big payoffs, they are doing their job. They manage the booms or the wreckless and immoral expansion of the money supply, get fired, booted out along with the blame and recriminations and are replaced by the managers of the next boom. These guys know what they are doing it doesn't happen by chance they are just juniors.

What you and America's life plan looks like. Why an increasing number of families need two incomes to get by.

Create and increase National debt. Finance the wars that create it through an international central banking system (USA the Fed). War=Profit, debt=profit,

Create personal debt with cheap money and deregulation (Free Trade)

Create bubble with expansion of money supply. (Inflation)

Burst the bubble with contraction of money supply (deflation)
Buy assets, property, shares under value. Throw as many as possible out of their homes and off their land.
Skulk in the background of international finance for a prudent period. Endure a period of public self rightous wrist slapping. Start all over again

Understanding is one thing, however I can't help you with your justified outrage and helplessness as your country, you and your children become slaves.

Homeless and impoverished debt Slaves.

Greg Palast

Greg Palast2 — Wed, 27 Feb 2008 18:05:00 -0500

Greg Palast is the author of the New York Times bestsellers, “Armed Madhouse" and The Best Democracy Money Can Buy. When Palast, investigator of corporate fraud and racketeering, turned his skills to journalism, he was quickly recognized as, “The most important investigative reporter of our time” [Tribune Magazine] in Britain, where his first reports appeared on BBC television and in the Guardian newspapers.

Conservative Judges to Enron Retirees: Drop Dead

Robert Borosage — Wed, 16 Jan 2008 09:44:39 -0500

Remember the Enron employees who watched their retirement savings evaporate as the Enron ponzi scheme, chaired by George Bush’s best buddy, “Kenny Boy” Lay, went up in smoke?

The conservative majority on the Supreme Court just told them all: “Drop Dead.” Forced to choose between protecting the rights of the small investors who got defrauded and the companies, banks, accountants and vendors who conspired in creating and profited from the fraud, the Court protected the crooks and skewered the victims.

No surprise. That was the entire point of stacking the court with right-wing, activist judges. Sure the nomination battles over the judges focused on Roe v. Wade and civil rights. But the intent all along was to choose judges who would protect corporate interests and presidential prerogatives. Roe v. Wade is still standing. But consumers, workers, small investors, and the freedoms of Americans are taking it in the ear.

The conservative majority’s decision yesterday held that companies that conspired to help Stoneridge report fraudulent profits could not be held liable to the investors who got fleeced. Unless the co-conspirers communicated with the investors directly, investors could not be said to have been misled by them.

The case was widely seen as a precursor of the decision in the suit by Enron investors against the Wall Street banks –including JP Morgan Chase, Merrill Lynch and Citigroup – that worked with Enron to create fake sales that enabled Enron to report mythic profits and hide significant losses.

So now does fraud becomes a profit center for Wall Street banks? With their catastrophic failures in mortgage lending, they need something. The majority noted that the Securities Exchange Commission could pursue the co-conspirators on criminal charges, but needless to say, the toothless SEC won’t disturb any fraud peddler’s sleep.

The rationale of the decision was to reassure third party lenders and vendors that they couldn’t be held liable to unfounded lawsuits against corporate fraud. But these weren’t folks just doing business with a crooked company. These were principals in the fraudulent schemes designed to mislead investors. The decision can only undermine investor confidence in US markets at the very moment the reputation of US banks and markets has been savaged by the subprime mortgage debacle, the coming credit card and auto loan defaults, and the terrifying vulnerability of the 40 trillion unregulated and unfathomable credit-default swaps market.

The conservatives on the Supreme Court have just defined that free markets mean free for fraud. If this keeps up, pillows will once more be a popular place for small investors to park their savings.