a full circle of fraud unlearned lessons from fraud in the financial crisis
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A FULL CIRCLE OF FRAUD Unlearned Lessons from Fraud in the Financial Crisis. Peter Goldmann, MSc., CFE White-Collar Crime 101 LLC 21 st Annual ECI Conference Potomac, MD October 19, 2010. “The defining element of fraud that distinguishes it from other forms of larceny is deceit. - PowerPoint PPT PresentationTRANSCRIPT
A FULL CIRCLE OF FRAUDUnlearned Lessons from Fraud in the
Financial Crisis
Peter Goldmann, MSc., CFEWhite-Collar Crime 101 LLC21st Annual ECI Conference
Potomac, MDOctober 19, 2010
21st Annual ECI Conference
“The defining element of fraud that distinguishes it from other forms of larceny is
deceit.-- William K. Black, former S&L senior regulator and thought
leader on mortgage fraud
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In the beginning…
Residential home prices rise…and rise…and rise from 1997 on, at double-digit rates until...
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Source: Federal Housing Finance Administration
In the beginning…
Lenders lend… and lend… and lend… confident that they were protected indefinitely against any risk of loss from borrower default…
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In the beginning…
And, making piles of money, living in blissful denial about the immutable law that what goes up…
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And then things got ugly…Mortgage brokers and appraisers, armed with
ARM’s, Alt-A’s and No-Doc loans, get into the act… seeing green in the form of every would-be homeowner, no matter how bad their credit…
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Was it illegal?With banks lowering lending standards to
bring in more and more mortgages, brokers and appraisers jump on the opportunity to fabricate borrower creditworthiness…
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Was it illegal?No one is around to monitor the activity of the
brokers and enforce generally lax regulations for selling risky mortgages to willing borrowers…Number of mortgage brokers goes from 14,000 in 1991 to 53,000 in 2006.
Result: Predatory subprime lending explodes
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Did the banks know?
So banks lend and lend and lend –with no controls -- to even more unqualified borrowers…
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The bad-mortgage gravy train
Bank executives start pressuring their underwriters to approve mortgage apps that contained patently false borrower information…Controls against risky lending discarded and quickly become financial road kill…
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Wall St. Stokes the Fire…Bank execs are motivated by
Wall Street’s bloated appetite for loans to pool together and package into securities that they sold off to institutional investors—sometimes under dubious terms and no controls…
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Fraud = Deceit 1
So lenders care little about truthfulness in mortgage apps because the approved loans would be quickly sold to Wall Street.
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Source: Federal Housing Finance Administration
Fraud = Deceit 2And the Wall St. firms care
little about the quality of the loans underlying the exotic securities they are peddling to pension funds and other institutional investors because the risk was being pushed off of their books.
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Dishonest “Investors” Pile On…
Fraud Conspiracy. “Investors” pay unscrupulous appraisers to overvalue a home and then use the false info to apply for a mortgage using a straw buyer. They obtain the mortgage, default and disappear.
Property Flipping. Short Sales Equity Skimming
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September 2008
Lehman crashes Wamu CrashesCountrywide crashesMerrill Lynch crashesAIG crashes AND….Too Big To Fail Spawns TARP
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Just when you thought…
Banks testify before FCIC. Jamie Dimon tells the
heartwarming “daughter story” about financial crises
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Lip Service from Bankers
Banks pledge to do a better job of “risk management”…
Reform’s effectiveness in preventing another banking crisis is questioned by skeptics
Pundits predict another bubble if reform isn’t tougher on bank capital requirements and risk management.
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2009-2010: Where are the Controls NOW????
Banks are now victims of loan origination fraud in the tens of millions.
FBI has never been busier chasing mortgage fraudsters
Banks screw up the post-crisis cleanup by fraudulently foreclosing on tens of thousands of the same people the sold crappy mortgages to. Several are forced to suspend ALL foreclosures
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Conclusion 1Questions for lawmakers regulators, financial services executives now:1)If big banks are TBTF but they can’t manage risk or prevent their own people from committing fraud, how do we restore prudent business practices AND integrity?2)Will MORE regulation help solve the problem?3)Do the TBTF banks need to be broken up?4)Whatever happened to the Volcker Plan?
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Conclusion 2The BIG questions now:Where were bank/lender controls in the years before
2008?Where were investment bank controls in the years
before 2008?Where were bank/lender controls AFTER 2008—
when the foreclosures began?Will the financial services industry EVER learn the
basic lessons of anti-fraud/risk controls?
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Your Questions
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