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For the banks that were in on the scam, liars' loans meant that "you tell us what your income is, you tell us what your job is, you tell us what your assets are, and we agree to believe you." We won't check on any of those things. And by the way, you'll get a better deal from us to the extent that you inflate your income and your job history and your assets. And in many cases this was specifically stated to borrowers before they filled out the loan applications. In the trade, they were called ninja loans -- No Income verification, No Job verification, no Asset verification.
Just one of these companies, IndyMac, by specializing in liars' loans, produced as many losses to its customers as the entire Savings and Loan debacle decades previously. In 2006 alone, IndyMac sold $80 billion dollars worth of liars' loans to other companies. And this was not confined to the sub-prime mortgage business. Even those making prime loans began to eliminate the requirement of verifying incomes, jobs and assets. In other words, many of the banks were making so much money that they decided, with regulation virtually nonexistent, to gut the verification process entirely. So the amount of fraud was absolutely enormous.
The one thing that made all this possible, of course, was that this junk was getting triple-A ratings from the supposedly independent rating agencies. Now, a triple-A rating is supposed to mean there is zero credit risk. So you take a loan that not only has significant risk, it has crushing risk -- that's why it's called toxic -- and you create the fiction that it has zero risk. That in itself is a fraudulent and therefore criminal exercise. But once again, there was nobody looking at any of this during the Bush years. And so the rating agencies were on the take, as well. They were in on the scam.
Finally, about a year ago, we started to have a Congressional investigation into some of these rating agencies, and that's when the true proportions of the scandal began to emerge. It was discovered that none of the rating agencies ever looked at a single loan file! And when they finally did look, after the markets had completely collapsed, they found, in the words of Fitch, the smallest of the rating agencies, "the results were disconcerting -- there was the appearance of fraud in nearly every file we examined."
We are therefore forced to conclude that the banks, the lending companies, and the ratings agencies that are supposed to test the value of these assets . . all colluded in creating this massive fraud on the thousands of people, companies and institutions around the world who purchased these securities that were comprised of packaged or pooled garbage mortgages divided into "securitized' marketable shares.
Simply stated, the investment banker that pooled (put together) these bad mortgages, these liars' loans, was essentially creating toxic waste securities and fraudulently selling them as if they were something of value. But instead of making money off their investments in this toxic waste, the buyers of these securities took 60 to 80 percent losses on them.
At the core, this was no different from what Bernie Madoff did, but Bernie did it to a comparatively limited number of people. In this much larger and systemic Ponzi scheme, the crime was carried out by literally hundreds of people working, in collusion, at a fairly large number of different companies. By comparison, Bernie was a piker. ...
Eventually, the larger part of our entire financial system became engulfed in this Ponzi-like scheme. Everybody was buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."
So why hasn't anyone been brought to justice over this?
The authorities didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to how we handled things in the Savings and Loan crisis. Even while the S&L institutions were still reporting that they were the most profitable savings and loan in America, we knew they were frauds, and were already moving to shut them down.
In this more recent caper, the Justice Department was warned, in 2004, by the FBI, that there was an epidemic of mortgage fraud in process! Specifically the FBI told the Bush Justice Department that if this epidemic was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle.
So why was it allowed to continue? After the 9/11 attacks, the Justice Department had to transfer 500 white-collar specialists in the FBI to national terrorism. But for some reason the Bush administration refused to replace the missing 500 agents who had been investigating and tracking mortgage fraud, thereby setting the stage for the financial catastrophe that was to follow. Even today, there are only one-fifth as many FBI agents looking at this problem as worked on the Savings and Loan crisis.
Think back to that famous photograph of some Bush administration regulators in 2003, who came to a press conference with a chainsaw suggesting that they're going to cut banking loose from regulation as it had never been cut loose before. Well, they succeeded. In that photograph, by the way, three other guys had pruning shears -- they were the trade representatives and lobbyists for the bankers. And everybody's grinning. Why? Because the government's working together with the banking industry to destroy regulation, and that means huge amounts of money are going to be made -- by the banks, the rating agencies, and any other financial institution fraudsters willing to get in on the scam. Which led to the biggest financial calamity in 80 years.
How could any government be so stupid?
There were two really big things, under the Clinton administration, that allowed this to happen. First, they got rid of the law that came out of the real-world disasters of the Great Depression. Some people learned a lot from the Great Depression. One of the things they learned is that you have to separate what's called commercial banking from investment banking. And they achieved that separation with the Glass-Steagall law. But by the time Clinton became president 70 years later, most people had forgotten that lesson. They thought they were much smarter than the creators of Glass-Steagall. So they got rid of it.
As Robert Scheer pointed out in a recent article at www.TruthDig.com, Ronald Reagan's signing off on legislation easing mortgage requirements back in 1982 pales in comparison to the damage wrought 15 years later by a cabal of powerful Democrats and Republicans who enabled the wave of newfangled financial gimmicks that eventually resulted in economic collapse.
