Where's your god now?
The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a weapon to defraud, that is called "control fraud." Control frauds cause greater financial losses than all other forms of property crime ... combined. Control fraud epidemics can arise when financial deregulation, de-supervision, and perverse compensation systems create a criminal-like environment.
So what happened? Did the FBI act upon these findings? Did the Bush Administration act...even minimally? No. Instead, widespread accounting fraud enveloped this country. How So? Don't ask; don't tell. book profits, "earn" bonuses, and closet your losses. Show the good stuff, reward the top, and hide the losses.
Don't Ask, Don't Tell:
AAA means there is practically no credit risk. Mortgage loan files are so large that they are photographed and stored on computer tapes. If anybody cared to look at these loans they would have seen how toxic these loans were going to be. S&P, the largest of the rating agencies, had an employee who asked to review the nature of these loans to rate the loan. This is the reply to the request by a senior manager:
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.
Fraud is the principal credit risk of nonprime mortgage lending. During the time these so-called AAA loans were dispersed, profit margins soared with these lenders. As long as no one gets 'called out' about the frauds being perpetrated, everyone makes money.
Then investment and commercial banks bought these nonprime loans, packaged them, and re-sold them to other banks, all without even looking at these toxic loans. They got their profit, so who cared about oversight.
And now, the banks which hold these subprime loans do not even have the loan files. That means that neither they nor the Treasury know their asset quality. Now the nations largest banks are insolvent. These big banks and the U.S. Treasury don't even know how insolvent they are because they don't even have the loan files!
Another rating agency, Fitch, ended up reviewing a very small sample of these nonprime loans after the secondary market in nonprime loan paper collapsed and nonprime lending ceased. This is what the conclusions are:
Fitch's analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.
[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools.
What is the point? The point is that these reporting agencies committed fraud by giving false ratings to the securities, which were then sold and resold until everyone had a fuse leading to the timebomb of inevitible defaults. When it went off it set the world on fire. Read more!
Compiled By J Ho at 20:39