Fraud and the Mortgage Meltdown
Dec 11, 2007
The San Francisco Chronicle has run a very revealing article on the "fraud" of the mortgage industry in selling worthless or risky mortgages to foreign investors in recent years. One of the kingpins of this fraudulent industry is said to be Secretary of the Treasury, Henry Paulson, who was the CEO of Goldman Sachs during the heyday of the fraud years (2004-2006). Recall that Paulson did not become Treasury Secretary until July 10, 2006.
Now Paulson and other bankers have met in closed-door sessions and have come up with a new way to save their own skins: by proposing to set up a "freeze" on interest rates. The SFO Chronicle gives its view about what this is really about, saying in a Dec. 9 article:
"The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value--right now almost 10 times their market worth.
"The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
"And, to be sure fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies--all the way up to senior management--knew about it.
"I can hear the hum of shredders working overtime, and maybe that is the new 'hot' industry to invest in."
It used to be said, "You can't convict a million dollars," meaning that if anyone has enough money to get good enough lawyers and pay enough bribes, or put out contracts on witnesses, he cannot be convicted of any crime he might have done.
But it is not just about having that kind of money. It is not so much about the system itself as it is about the people who run it. The system may be unjust, but it is as neutral as a machine and will work only as the operator tells it to work. What happens if the perpetrators of financial fraud are the ones running the government or the justice system? Of what if the treasury system is run by those who are guilty of fraud, but are also of the same political party found in the department of justice and the executive branch?
From their perspective, it can often seem right--and even good for the country--to save their political parties (and their own skins too, by the way) by thwarting the normal course of justice and the law. After all, government gave itself the right to lie to the people a long time ago. The people grumbled, but accepted it in the end. We see many TV programs today, where the admirable detective lies to the suspect in order to induce him to confess. But if the suspect lies to the detective, it is a terrible crime. We tend to accept double standards, not realizing that once accepted, where does one draw the line? Where does it end? The people assume that it ends with little white lies, but in fact, the employees of power politics draw the lines far from where the people would agree with it.
And so the government has lied to get the American people to fight in virtually every war in the past century. We have sunk our own ships in order to blame the "enemy." We have forced the enemy to attack us, in order to make them the aggressors and justify our counter-attacks. All of this has been done "for the good of the country," they have said. Leave it to the experts. They know best, because they have the "real" scoop that is hidden away in Intelligence circles, and the average person on the street is ignorant and must be induced by fraud to fight these "necessary" wars.
They take the young people and make them soldiers before they have had time to learn about the real world of politics. The soldiers are not the problem; they are the primary victims and usually do an awesome job in spite of it. The same might be said about the little people who buy houses and obtain mortgages. They live in a different world from the secretaries of the treasury and those in high finance, who use the mortgages to defraud others.
But in today's inter-connected world, American mortgage lenders are more accountable to foreign banks and investors than ever before. We can no longer defraud foreign investors by selling them high-risk loans with an AA rating made by people who knew exactly what they were doing. We can no longer thumb our noses at them on the grounds that they have no right to sue "us" in our own courts. We do not have the patriotic right to defraud foreigners or anyone else.
It seems to me that the mortgage meltdown problem has just begun. We will see the economic impact first, and this will be followed in the years ahead by the judicial fallout. The shredding machines will cut back on the number of big fish to be fried, but it will leave all of us talking about the big fish that got away.