Tag Archives: mortgage fraud

Part 1. Misconceptions About the 2008 Financial Crisis

The subject of the The 2008 banks bailouts (TARP), which understandably angered both Republicans and Democrats, a pertinent case study in pragmatism, in which other otherwise inviolable free market was temporary suspended for the ‘greater good’ of the economy, but ultimately, in spite of great criticism, the bailouts proved to be a success, or at the very least a Pyrrhic victory. Sometimes, as in the example of TARP, the most effective policy is the one that no one likes, sort of like bad tasting medicine that you want to spit out, and this compromise between short-term sacrifice and pain and long-term success underscores the trio of rationalism, utilitarianism, and pragmatism – in contrast to traditional left/right policy that seeks immediate gratification even if such policies prove useless and wasteful in the long-run. Part two will discuss TARP and its aftermath in further detail.

Although its been seven years since the ratification of TARP, many misconceptions about the program, as well as the 2008 financial crisis, remain, which I discuss in detail in an earlier article, Defending Finance: Why Bankers and Economists Are Not to Blame for the Crisis.

Economists are generally better at fixing crisis than predicting or preventing them. The fact 99% of economists failed to predict the crisis doesn’t render the profession useless or economic policy ineffective. If an oncologist cannot actually prevent someone from getting cancer, or predict when someone will get cancer, does that mean oncology is a useless profession? Doctors can create risk profiles, but this alone cannot predict who will get sick and when.

Homeowners share some of the responsibility in terms of reckless borrowing and not reading the fine print. Did anyone really think it was a good idea buying a 6,000 square-foot mc-mansion on a $40,000/year income? It’s simple common sense, and people who are lacking in it should and do pay the price.

Institutions and wealthy individuals who bought mortgage backed securities, often in search of extra yield, like homeowners, bear personal responsibility for their own bad decisions, poor risk management, and poor market timing. Just because Goldman or whoever sold these products doesn’t mean they were guilty. Is an ETF provider guilty because their ETF falls in value? No, the ETF is created to meet a market demand for the underlying asset, and the ETF creator, as per the prospectus, has no culpability whether the product succeeds or fails.

As I explain in the article linked above, contrary to popular belief, people did go to jail for mortgage fraud. From the WSJ:

In the three years since the crisis peaked in October 2008, the Justice Department has filed financial-fraud cases against 14,843 defendants, according to the letter to Mr. Grassley. Over that time, it said, more than 1,100 people have been sentenced to prison for mortgage fraud.

The letter names 17 CEOs and other senior corporate officers convicted of significant financial crimes. Most of the 17 committed frauds that weren’t directly related to the financial crisis. They include Allen Stanford, convicted in March of running a Ponzi scheme; Raj Rajaratnam, jailed last year for insider trading; and Zevi Wolmark, who pleaded guilty this year to bid-rigging in the municipal-finance market. Courtney Dupree, convicted last year of a $21 million bank fraud, makes the Justice Department’s list.

The left keeps ignoring these details, parroting the same line that no one went to jail for mortgage fraud.

But then why were so few, if any, executives punished? One reason is that it’s very difficult to actually build a high-profile criminal case. Unlike TV and movie crime dramas that are settled in under an hour, government cases take years to build, and even longer in court, exhausting hundreds of millions of dollars and tens of thousands of man-hours. In light of this, defendants will often agree to pay a fine and admit no wrongdoing, even when gilt seems obvious.

As explained by NyBooks, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, one reason for the lack of high-profile convictions is because prosecutors are targeting firms rather than individuals; second, since 911, for the FBI fraud has taken a backseat to counter-terrorism; third, that the SEC is going after Ponzi schemes, which are much easier to prove criminal intent than, say, investigating the sale of complicated mortgage-backed securities; and, finally, individuals and firms that bought mortgage backed securities are considered ‘savvy’ investors, as opposed to naive ‘mom and pop’ investors.

Another possibility is that no fraud was actually committed, but rather the system collapsed due to ‘good intentions’ in increasing home ownership, which later went horribly wrong. The crisis also involved mistakes in risk management by firms, and mistakes are not illegal. The sudden failure of the housing market, as well as many financial institutions, was a multi-sigma event that firms were not only unprepared for, but could not have possibly foreseen. Few foresaw that securities which were marked ‘AAA’ would become worthless in less than a year.

The same liberals who want the banks to fail and Wall St. to burn fail to realize that it was their polices that contributed to the mess in the first place. The Clinton administration, as well as various other liberal pressure groups, were complicit in inflating the housing market by forcing lenders to create risky loans to meet quotas. From Wikipedia, Government policies and the subprime mortgage crisis:

The Department of Housing and Urban Development (HUD) loosened mortgage restrictions in the mid-1990s so first-time buyers could qualify for loans that they could never get before.[131] In 1995, the GSE began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[132]

The Housing and Community Development Act of 1992 established an affordable housing loan purchase mandate for Fannie Mae and Freddie Mac, and that mandate was to be regulated by HUD. Initially, the 1992 legislation required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. However, HUD was given the power to set future requirements. In 1995 HUD mandated that 40 percent of Fannie and Freddie’s loan purchases would have to support affordable housing. In 1996, HUD directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

“The National Homeownership Strategy: Partners in the American Dream”, was compiled in 1995 by Henry Cisneros, President Clinton’s HUD Secretary. This 100-page document represented the viewpoints of HUD, Fannie Mae, Freddie Mac, leaders of the housing industry, various banks, numerous activist organizations such as ACORN and La Raza, and representatives from several state and local governments.”

Thus, in the year 2000, HUD Secretary Andrew Cuomo increased to 50 percent the percentage of low-income mortgages that the government-sponsored entities known as Fannie Mae and Freddie Mac were required to purchase, helping to create the conditions that resulted in over half of all mortgages being subprime at the time the housing market began to collapse in 2007.

Since the government, particularly under the Clinton administration, played such an important role in the crisis, criminal proceedings would be tantamount to the government being its own plaintiff and defendant. Do you think Eric Holder would go after one of his own? Fat chance.

The left wants fordable housing and high-paying job for everyone – provided that companies and individuals are not allowed to make too much money. And it’s always Republicans’ fault when things go wrong.