The FBI, left without expert guidance on the finance industry because the banking regulators destroyed their criminal referral process under President Bush, formed a "partnership" with the Mortgage Bankers Association (MBA) in 2007. The MBA foisted a faux definition of "mortgage fraud" on its partners -- who pretend to believe it without any critical thought. The MBA is the trade association of the mortgage fraud "perps," so it is no surprise that it defines bank CEOs as incapable of leading any fraud. The bank is always the victim. DOJ, under Wagner's leadership, chants this faux definition repeatedly without any critical thought. The "smoking gun" article is a prime example of this.
"Now let's change this non-fraud scenario into a fraud-for-property scheme.
C. Money flow in a fraud-for profit scheme
Now change the money flow from a fraud-for-property to a fraud-for-profit scheme. The fraud for property scheme worked so well that we can just escalate the same scheme."
The MBA claims that all mortgage fraud can be divided into two mutually exclusive categories -- "fraud-for-property" v. "fraud-for-profit." As the "smoking gun" article implicitly admits, however, the "fraud-for-profit" scheme is purportedly simply an "escalated" version of "the same scheme" as the "fraud-for-property" scheme. The proverbial bottom line is that the banks and their CEOs are always the victim and never fraudulent.
DOJ Gets "Money Flow" Wrong and Ignores Accounting Flows
The "smoking gun" article cites this passage as its core advice to AUSAs.
"Because mortgage fraud is all about the money, explaining to the jury how a fraudster can scam a bank by buying property and taking out loans is the key to a successful mortgage fraud prosecution.
Understanding the money flow is also a necessary starting point to any investigation."
First, the worst cases of mortgage fraud are not "all about the money." Frauds led by senior officers are also about ego, fame, reputation, and sometimes sex.
Second, the DOJ author ignores entirely the two vastly larger money flows arising from the fraud "recipe" for a lender. The most important money flows are executive and professional compensation. The latter suborns supposed "controls" and perverts them into the CEO's most valuable fraud allies. Executive compensation promptly makes the CEO wealthy through the "sure thing" of accounting fraud.
Third, all of this is driven by non-cash accounting flows. The record reported profits that are the "sure thing" of the fraud recipe are fictional. The bank will suffer terrible losses (unless it is bailed out), but the controlling officer can walk away wealthy.
The DOJ article misses all three points. The "money flow" she discusses is not "a necessary starting point to any investigation." It is useful in cases of external fraud by borrowers, but such frauds (1) would rarely occur if the bank were run prudently and (2) produce only a miniscule proportion of total mortgage fraud losses. It is essential to understand that external frauds overwhelmingly target lenders that are controlled by fraudulent CEOs. Sophisticated fraudulent borrowers understand that the CEOs have gutted the bank's normal underwriting protections and other internal and external controls that are exceptionally effective in preventing external mortgage fraud in order to aid the CEO's ability to loot the bank. This makes banks controlled by fraudulent managers the most tempting fraud targets for sophisticated borrowers.
Conclusion: "They've Got to be Carefully Taught"
The subtitle is an homage to South Pacific. At the end of Wagner's training program the AUSA or FBI agent will be far less effective than before the training. They are being taught to hunt for mice and to believe that lions and hyenas do not actually exist. They are taught that the bank CEO is their invariably honest friend and the bank is the helpless victim of the fiendishly clever hairdressers, minor real estate agents, and 20 year old loan brokers whose prior job was flipping burgers. It is all a sick perversion of justice and a squandering of our grotesquely inadequate resources for prosecuting elite white-collar criminals. Holder and Wagner exemplify every warning Edwin Sutherland made 75 years ago when in his presidential address he announced the concept of white-collar crime and gave his examples showing the vastly greater ability of elites who control seemingly legitimate firms to do immense damage to society because apologists define their crimes out of existence.
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