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Matt says this is a potentially gigantic story. How so? A federal court has recently ruled that about half of the mortgage market has indeed been run as a criminal enterprise, for years -- which may well invalidate any potential foreclosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer system used by the private company MERS -- a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market -- is fundamentally unreliable, and any mortgage sold and/or transferred through MERS can't be foreclosed upon, at least not in Kansas.
All over the country, lawyers are now contesting foreclosures because of similar chain-of-custody issues. Matt will report more about this in his next Rolling Stone story, so stay tuned. At the very minimum, lenders and the banks were extremely sloppy about their paperwork -- perhaps there is instead an issue of fraud here? -- jamming up the system with missing and/or mismarked mortgage notes. Since a sale isn't legal unless there's full transfer of the physical note, a lot of the sales of mortgage-backed securities were not entirely legal, since the actual notes were often not transferred. So what are these millions of mortgage-backed securities now worth if the mortgaged houses in question cannot be foreclosed upon? Could their worth be negligible, or nearly negligible? And if so, what are the implications for the U.S. economy?
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William Black is the former Director of the Institute for Fraud Prevention who recently explained to Bill Moyers how we got into this mess, who is to blame, and how it can be fixed. Black now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, which ultimately cost American taxpayers about $500 billion, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for campaign contributions and other perks. The senators got off with a slap on the wrist. But so enraged was one of those bankers, Charles Keating -- after whom the senate's so-called "Keating Five" were named -- he sent a memo that read, in part, "get Black -- kill him dead." Metaphorically speaking, one must assume.
Now William Black is focused on a much larger scandal, and he spares no one -- not even the president he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparisons to Al Capone and the mob, and thus the nickname "banksters."
The entire Moyers-Black interview can be found at: http://www.pbs.org/moyers/journal/04032009/transcript3.html?print
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This economic and financial meltdown originated from, and is even now being driven by, fraud, says Black. Massive fraud. The essence of fraud is, "I gain your trust so as to get you to give me something of value on the promise that I will provide something of greater value for you, and then I betray your trust." And there's no more effective way to destroy trust in an entire society than by way of fraud systemically perpetrated by top elites. Sadly, that's exactly what we have happening in America today, he says.
Calculated dishonesty, by the people in charge, is at the heart of our largest corporate failures and scandals, including, of course, those of the S&Ls. And it was in America's boardrooms and CEO offices where this fraud began again, but this time on a scale much much larger than before.
Some of the first part of the report that follows is old news, but it's very important that we thoroughly understand what happened initially, before we proceed to understand the immensity of the implications, consequences and fallout that our society and our world are about to experience.
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As long as the market for them continued to grow, liar loans paid much better than loans based on truth. Not surprisingly, the banks that issued them most rapidly grew most rapidly, and profited most rapidly -- just like with a Ponzi scheme. Then too, lots of leverage (lots of borrowed operating capital) helped. The combination of lots of borrowed money, to make the many many loans that could not have been made were they not founded on lies, created a situation where you had guaranteed record profits in the early years -- again just like with a Ponzi scheme. The people making the loans got rich, of course, provided they could find enough suckers to buy these "securitized' garbage loans after they were pooled and packaged into securities marked triple-A, then sold far and wide. Inevitable was the disaster down the road, when housing finally stopped appreciating in value, and when new suckers stopped buying into this grand Ponzi-like scheme.
Whether you call it a Ponzi scheme or not, it's an undeniable fact that the CEOs of many of these banks and mortgage firms, in order to increase still further their own personal income, deliberately set out to make as many bad loans as they could. But how did they get away with it? Yes the federal regulators under Bush had been taken away or otherwise "neutralized,' but what about the normal corporate system of checks and balances? What about their accounting divisions of those very firms?
The answer, of course, is that all of those "checks and balances" report to the CEO, so if the CEO goes bad, all of the normal checks and balances in the company are easily overcome. The art form for the CEO was to suborn these employees, turning them into his greatest allies. And it was through the very generous bonus programs that they went about doing this.
Liar loans and the extraordinary profits they produced
