7 of the Nastiest Scams, Rip-Offs and Tricks From Wall Street Crooks
7 of the Nastiest Scams, Rip-Offs and Tricks From Wall Street Crooks
By Dave Johnson, AlterNet, 12/27/2011, original
How many high-level Wall Street players have been put in jail for the crimes that led to the financial crisis? Not. Even. One.
Last week several executives from the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, known as “Fannie Mae and Freddie Mac,”were sued by the Securities and Exchange Commission (SEC) for civil fraud. They were charged with misleading investors about the quality of the loans they were buying. But this is a civil suit, not a criminal prosecution, so they face no possibility of jail time. And the SEC is notoriously ready to settle these cases, accepting fines without admission of guilt. Meanwhile, last month Bloomberg News revealed that the Federal Reserve secretly loaned $1.2 trillion to banks on Dec. 5, 2008, their neediest day, even as some of their CEOs were assuring investors their banks were healthy. Are these CEOs facing prosecution or even civil fraud suits for doing the very same thing? Not so much.
These stories barely even reveal the tip of the iceberg of financial malfeasance. We have been hearing for years now about the scams, frauds, rackets, schemes, tricks and various other ways that people on Wall Street made gazillions while crashing the economy. The one thing we haven’t heard anything about is anyone at the top being held criminally accountable … for anything!
Given these recent developments, the end of a bad year seems like a good time to take a look back at just a few examples of what was, and in too many cases, still is going on. So here is a little holiday-season nudge to all the attorneys general who may be hesitant to take them on -- if not with jail time, then at least The banksters still have faced no accountability.
They got bailed out … will We, the People continue to get sold out?
After the housing bubble collapsed, and the “innovative” mortgage “products” that were created by the financial industry began to blow up, with people’s payments rising into the stratosphere just as housing prices dropped and people were losing their jobs, the banks were faced with literally millions of foreclosures to process. But, being Wall Street outfits, they didn’t want to be responsible for doing any actual work themselves. Best to outsource the work to someone … cheap. And that is what they did – and are still doing.
The banks hired “robosigning” outfits to process the foreclosures, which resulted in accusations of documentation fraud, where the outfits file affidavits claiming to have documents they do not have. The original mortgages often did not include proper paperwork to clearly prove who signed the loans or who had title, etc. These firms would forge signatures, sign affidavits saying they had proper paperwork when they did not, and a number of other ruses to speed foreclosures. And courts set up what were called “rocket dockets” to assist the process. David Dayen at Firedoglake (Sept 2010): Foreclosure Fraud as Cover-Up for Mortgage Fraud,
Banks never had the proper documentation for these loans, after handing them out to anyone with a pulse, and slicing and dicing them through securitization. The fraud allows banks and the state and local governments explicitly facilitating this by setting up special, speedy foreclosure courts the ability to paper over these objections. If the lenders had to obey the law and use a deliberative process to affirm the title ownership, practically nobody would get evicted. If enough of those struggling can be forced out of their homes, and the fraudulent mortgages thrown in the dumper, the banks can save their balance sheets.
This fraudulent process caught up with the banks, and once again the government offered “settlements” that, instead of prosecuting the fraud, offered immunity from prosecution before the states even had a chance to fully investigate charges. California’s Attorney General Kamela Harris backed away from this deal. Several other state Attorneys General, including New York’s Eric Schneiderman and Delaware’s Beau Biden are independently investigating foreclosure fraud, along with those in Nevada, Minnesota, Massachusetts and Kentucky.
We’ll see if the “settlement” comes through, blocking a more comprehensive investigation and possible prosecutions. Recently Massachusetts filed the first foreclosure-fraud lawsuit, followed by Nevada.
2. Pushing Subprime Loans
The initial wave of mortgages to go bad were the “subprime” mortgages that were given to people barely able or even unable to make their payments. Why were there so many of these mortgages in the system? These mortgages were pushed on people by “predatory lenders” who would make a quick buck on upfront fees and commissions and then sell the loans to Wall Street to be repackaged into “CDOs” – the “toxic assets” that took down much of the financial system.
You may have come across the recent story in the news about the Sheriff and movers refusing to evict a 103-year-old woman and her 83-year-old daughter from the home they have lived in for 53 years. So here is a question: Why does a 103-year-old woman who has been in her house for 53 years even have a mortgage? Because many banks were pushing minority borrowers into expensive subprime loans, even if they qualified for standard mortgages.
According to Think Progress, “Wells Fargo had perhaps the most horrifying practices in this department, calling the subprime loans that they pushed in poor, black neighborhoods “ghetto loans.”
Predatory lending isn’t just about steering borrowers into very expensive loans, it is also about hard-selling people into borrowing money in the first place. According to The Leadership Conference, “Predatory lending occurs when a lender uses unfair, deceptive, or fraudulent practices when selling a loan to a consumer. Borrowers are steered toward unaffordable loans, or charged higher fees or interest rates than those they qualify for. “
Predatory and subprime lending has died down, thanks to some degree of a restoration of sanity and new lending standards. But no one stepped in and stopped it when the practice was at its … prime.
Meanwhile yet another “settlement” with no criminal charges is occurring. On Wednesday the government announced a $335 million settlement with Bank of America’s Countrywide Financial unit for overcharging minorities and pushing them into subprime loans.
3. Betting Against Designed-to-Fail Bonds
Even in collapsing markets there is money to be made by placing bets against assets that are overvalued, and then when their price drops the bets pay off. And if you know where the toxic assets are, in advance, you can make a ton of money. The best way to know where toxic assets are is if you put them there, on purpose, in order for them to collapse. A ProPublica story, Did Citi Get a Sweet Deal? Bank Claims SEC Settlement on One CDO Clears It on All Others, says CitiBank created toxic assets on purpose in order to make bets that they would fail,
In the run-up to the global financial collapse, Citigroup’s bankers worked feverishly to create complex securities. In just one year, 2007, Citi marketed more than $20 billion worth of deals backed by home mortgages to investors around the world, most of which failed spectacularly. Subsequent lawsuits and investigations turned up evidence that the bank knew that some of the products were low quality and, in some instances, had even bet they would fail.
Citibank made a lot of money from these bets because they knew where the toxic assets were, because they put them there, on purpose, in order to bet against them. CitiBank created these CDO toxic assets in a way that was designed to fail, and sold them to customers as solid investments, and then made bets that these assets were worthless. When the designed-to-fail assets failed, CitiBank made money, the customers were wiped out.
The Securities and Exchange Comission (SEC) offered to “settle” this case with CitiBank, accepting a cash fine in exchange for dropping any prosecution or even making CitiBank admit wrongdoing. But promsingly this was rejected by the judge. DailyKos: Judge Rakoff stands up to SEC and Citigroup,
Today, Judge Rakoff added to his legacy of independence by rejecting the SEC's efforts to settle with Citigroup for $285M over mortgage-backed securities fraud allegations.
Goldman Sachs also received a earlier settlement-without-prosecution for operating a similar scheme. Washington Post: Goldman Sachs to pay record settlement in fraud suit, change business practices,
… Under the law, Judge Rakoff was obligated to determine whether this settlement was "fair, reasonable, and in the public interest"; the SEC argued that no, the public interest didn't actually matter—and, if it did, the SEC itself could assess what the public needed. No no no, said the Judge.
Goldman Sachs agreed Thursday to pay $550 million to settle a fraud suit brought by the Securities and Exchange Commission that accused the storied Wall Street bank of selling a subprime-mortgage investment that was secretly designed to fail.
Word is these schemes were not uncommon. Ney getting that an investment is going to blow up if you’re the one who put the bomb in it and set the timer in the first place.
The crux of the case alleges that Paulson & Co., a hedge fund, was looking for a way to bet on a drop in the housing market and that it asked Goldman to help create a financial product that would allow such a wager. Paulson, led by hedge fund manager John Paulson, essentially bought insurance against the investment -- much like taking out an insurance policy on a person who secretly has a potentially deadly disease.
The investment ultimately lost virtually all its value, costing investors $1 billion.
4. An “Epidemic” Of Mortgage Fraud
For years regulators were warned about “an epidemic” of mortgage fraud, but looked the other way. For example, a CNN news story is from 2004, years before the financial collapse, FBI warns of mortgage fraud 'epidemic', warned,
Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis."
The Bush administration’s reaction was to pull FBI agents off of white collar crime like mortgage fraud, reducing the numer of agents looking at banking fraud from 1,000 during the S&L Crisis investigation down to around 100.
...The FBI has dispatched undercover teams across the country in an urgent investigation into dealings by suspect mortgage brokers, appraisers, short-term investors, and loan officers, Swecker, flanked by FBI executives and Justice Department prosecutors, revealed.
5. Ratings Agencies Gave AAA to CDOs
Subprime and just fraudulent mortgages were getting bundled up into complex bonds and sold by the big Wall Street banks to investors looking for higher yields than they could get from other investments. (They didn’t even bother to make sure they had proper documentation proving who had signed the loans, and who should receive the payments. More on this later.)
But investors wanted to buy bonds that were safe. So they turned to the ratings agencies. These are the companies responsible for determining the safety of investments. The ratings agencies had conflicts of interest, being paid in various ways by Wall Street to help mislead investors and tell them that the “toxic assets” bonds that Wall Street was selling had the highest safety rating of AAA. Then the investors lost, the economy was tanked and the taxpayers are now and into the future paying the bill.
William Black was a regulator during the S&L crisis. He explains at the Huffington Post, writing in, The Two Documents Everyone Should Read to Better Understand the Crisis,
The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:
In other words, superiors at the ratings agencies told their underlings to just make up fraudulent credit ratings.
Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.
The rating agencies never reviewed samples of loan files before giving AAA ratings to nonprime mortgage financial derivatives. …
…Worse, the S&P document demonstrates that the … banks … engaged in the same willful blindness. They did not review samples of loan files because doing so would have exposed the toxic nature of the assets they were buying and selling. The entire business was premised on a massive lie -- that fraudulent, toxic nonprime mortgage loans were virtually risk-free. The lie was so blatant that the banks even pooled loans that were known in the trade as "liar's loans" and obtained AAA ratings despite FBI warnings that mortgage fraud was "epidemic."
Today the people who were at the top of the ratings agencies and the Wall Street firms have millions and live in big houses. How many of the rest of us now or will have to live in cars and cardboard boxes because of what they did?
6. Banksters Who Made Out Like … Bandits
Many financial-company executives made millions (hundreds of millions, actually) while they were doing questionable things that ended up crashing their companies and the economy. But they got to keep the money. For example, when you hear that Wall Street firm “Lehman Brothers” went bankrupt, you might think, “serves them right.” But what actually happened was that a lot of regular people ended up losing their jobs while a few people at the top got really, really rich. CEO Richard Fuld, for example, ended up with almost half a billion. (Really, really rich.) Business Week: How Much Did Lehman CEO Dick Fuld Really Make?
"Mr. Fuld will do fine," Waxman said. "He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis."
So, no, “they” didn’t get what they deserved – and neither did top executives like Fuld.
7. Insiders Profiting From Being … Insiders
Stephen Friedman was a member of the Board of Goldman Sachs at the same time as he was Chairman of the Federal Reserve Bank of New York. He has to resign from the NY Federal Reserve, keeping his position with Goldman Sachs, after it was revealed that he had purchased $3 million worth of Goldman Sachs stock while the Federal Reserve was regulating the company after it became a bank holding company in September 2008. This was around the time that the NY Fed negotiated for Goldman Sachs to receive payments from AIG, that would be paid at 100 cents on the dollar, even though AIG was in default. According to an Oct. 27, 2009 Bloomberg report, New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers,
The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
Congress finally, finally voted to audit the Federal Reserve. It was a one-time, limited audit, but that is a lot more than We, the People were allowed to know about the Fed before the audit. What did we learn? Rolling Stone’s Matt Tiabbi, in The Real Housewives of Wall Street, tells us,
The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."
For just one example of what has been going on with the Fed, one company, named Waterfall TALF Opportunity, received nine loans totaling around $220 million. Among its chief investors: Christy Mack and Susan Karches. Tiabbi explains why you care, writing,
Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.
Insiders getting hundreds of millions of dollars from the Fed, in secret. That is just one example of the shenanigans discovered when the Fed was audited. Is there any investigation of this underway? Not that the public has been told, and not likely ever.
More recently there was another example of insiders potentially profiting from being on the inside track was in the news recently. President Bush’s Treasury Secretary Henry Paulson may have tipped off a group of hedge fund managers with specific information about what the government would be doing.
Again, no one is being prosecuted.
There are so, so many other outrages. And these are only the things that have hit the news. Are some or all of these not just outrages, but actual crimes? After the “S&L Crisis” there were 1,100 prosecutions and more than 800 bank officials went to jail. This time – even with the appearance of widespread criminality in the financial industry – not so much. In fact, not any.
Were crimes committed by people high up in the financial industry? It looks that way, but we really have no way of knowing if our government again and again offers “settlements” that block the comprehensive investigations that come with prosecutions.
Why won't our legal system prosecute anyone on Wall Street for anything? We see outrage after outrage, and they put poor people in jail for life for stealing a hot dog when they are hungry. Meanwhile Wall Street is funding an effort to blame government for the financial collapse, to block regulation and defund the regulatory agencies. This is an effort to subvert government and turn people against democracy so that plutocracy – government of by and for the 1% – can reign.
We should all be demanding that the legal system do its job to sort this out instead of actively blocking prosecutions by approving “settlements.” People lose faith in government when it looks like the 1% can get away with any outrage. And now we know that when We, the People gather to demand something be done about this we are met with pepper spray and batons.
Dave Johnson is a Fellow at Campaign for America's Future and a Senior Fellow at Renew California.