Bill Black: The New York Times Publishes the Most Ironic Sentence of the Crisis

Yves here. I enjoyed this piece by Bill Black because 1. Anyone who tries to pretend the Administration is serious about prosecuting bank-related fraud needs to be named and shamed and 2. I like the device of using a single sentence as the basis for a post.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from New Economic Perspectives

The author of the most brilliantly comedic statement ever written about the crisis is Landon Thomas, Jr. He does not bury the lead. Everything worth reading is in the first sentence, and it should trigger belly laughs nationwide.

Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.

“The government,” as a statement of fact so indisputable that it requires neither citation nor reasoning, has been engaged in an “aggressive effort to hold banks accountable for their role in the housing crisis.” Yes, we have not seen such an aggressive effort since Captain Renault told Rick in the movie Casablanca that he was “shocked” to discover that there was gambling going on (just before being handed his gambling “winnings” which were really a bribe).

There are four clues in the sentence I quoted that indicate that the author knows he’s putting us on, but they are subtle. First, the case was a civil case. “The government’s” “aggressive effort to hold banks accountable” has produced – zero convictions of the elite Wall Street officers and banks whose frauds drove the crisis. Thomas, of course, knows this and his use of the word “aggressive” mocks the Department of Justice (DOJ) propaganda. The jurors found that BoA (through its officers) committed an orgy of fraud in order to enrich those officers. That is a criminal act. Prosecutors who are far from “aggressive” prosecute elite frauds criminally because they know it is essential to deter fraud and safeguard our financial system. The DOJ refused to prosecute the frauds led by senior BoA officers. The journalist’s riff is so funny because he portrays DOJ’s refusal to prosecute frauds led by elite BoA officers as “aggressive.” Show the NYT article to friends you have who are Brits and who claim that Americans are incapable of irony. The article’s lead sentence refutes that claim for all time.

The twin loan origination fraud epidemics (liar’s loans and appraisal fraud) and the epidemic of fraudulent sales of the fraudulently originated mortgages to the secondary market would each – separately – constitute the most destructive frauds in history. These three epidemics of accounting control fraud by loan originators hyper-inflated the real estate bubble and drove our financial crisis and the Great Recession. By way of contrast, the S&L debacle was less than 1/70 the magnitude of fraud and losses than the current crisis, yet we obtained over 1,000 felony convictions in cases DOJ designated as “major.” If DOJ is “aggressive” in this crisis what word would be necessary to describe our approach?

Second, notice that only one of Bank of America’s (BoA) former officers, Rebecca Mairone, is being held “accountable” for the frauds they committed that made them wealthy. DOJ gives the word “aggressive” new meaning! To add to the humor, JPMorgan has hired Mairone despite her disastrous leadership at Countrywide.

Third, for what exactly was DOJ “aggressively” holding BoA “accountable?” BoA “sold defective mortgages.” That phrase is one part euphemism and one part bizarrely incomplete. BoA first originated fraudulent mortgages and then sold fraudulent mortgages through fraudulent “reps and warranties” to the secondary market. It is passing strange that the lead sentence of an article that is archly portrayed as a triumphal report on “aggressive” “accountability” cannot bring itself to use the “f” word. But the incomplete nature of the sentence and the government’s “aggressive” non-prosecution of the elite banks and bank officers that led the frauds is revealed as soon as one asks why BoA and its officers were committing tens of thousands of frauds by making false reps and warranties about the loans they were selling to the secondary market.

The answer, of course, is that BoA had fraudulently originated tens of thousands of loans. Because there is no “fraud exorcist,” a fraudulent loan remains a fraudulent loan and infects every step in mortgage chain: loan origination, the sale to the secondary market, and the creation of mortgage products (MBS and CDOs). Any competent investigation therefore would look at the process on an integrated basis. The DOJ, however, has no task force, and no lawsuits or prosecutions, against the twin loan origination fraud epidemics. The task force DOJ created looks only at fraudulent sales of the fraudulently originated mortgages – and ignores the origination fraud. Because “only” about 85% of the fraudulently originated loans were sold through fraudulent reps and warranties to the secondary market, the twin loan origination fraud epidemics represent the most destructive frauds in world history. (One does not have to make fraudulent reps and warranties about loans that were not fraudulently originated.)

I’m not sure whether the DOJ consciously deciding not to investigate, bring civil suits, or prosecute the most destructive frauds in history represents “aggressive” or “accountable” to the DOJ. We do know, however, the fantasy that caused DOJ to give these control frauds a free pass.

Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.

“They” refers to the CEO. “Themselves” refers to the bank. “They” are not “defrauding themselves.” The lender’s CEO makes far more money, and obtains what George Akerlof and Paul Romer aptly termed a “sure thing” in their famous 1993 article – “Looting: The Economic Underworld of Bankruptcy for Profit.” By deliberately making enormous numbers of bad loans at a premium yield the bank’s CEO created three “sure things.” The bank was guaranteed to report record income in the near term, the senior officers were guaranteed to be made promptly wealthy by modern executive compensation, and the bank would eventually suffer severe losses. It is not simply Nobel Laureate economists like Akerlof who figured this out, published the results, and prosecuted the elite S&L frauds. Criminologists, S&L regulators, FBI agents, and prosecutors all understood the fraud “recipe” for a lender.

While DOJ and the FBI have forgotten the recipe, bankers have not. As Jamie Dimon explained in his March 30, 2012 letter to JPMorgan’s shareholders: “Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.”

More precisely, “poorly underwritten loans” represent fraudulently reported “income” (and resultant massive bonuses to the officers) “today” and losses whose “losses” are, fraudulently, not recognized for accounting purposes until “tomorrow.” No honest mortgage lender would extort appraisers to inflate appraisals or make endemically fraudulent liar’s loans. By 2006, over two million fraudulent liar’s loans were made annually – and DOJ is giving the officers who grew wealthy through fraudulent originating those loans a pass. Remember, it was the fraudulent origination of the loans that hyper-inflated the real estate bubble, drove the financial crisis, and caused the Great Recession. The fraudulent sale of the fraudulently originated mortgages primarily redistributed the losses. It is a dangerous mistake to assume that the secondary market is essential to create an accounting control fraud epidemic. Secondary market sales were not critical to the epidemic of fraud that drove the S&L debacle, the Enron-era frauds, or the frauds in Iceland and Ireland.

Fourth, notice the return to euphemism, incompleteness, and ambiguity in the final clause of the lead sentence: “the government” is “aggressively” holding the “banks” (not their senior officers who directed the frauds and were made wealthy by the frauds) “accountable” for what exactly? The NYT reporter, tongue firmly in his cheek, tells us that DOJ is holding the banks accountable for “their role in the housing crisis.” And what “role” might that be? And why is it a “role” “in” the crisis as if they were some minor actor with a walk-on role in the three most destructive epidemics of elite fraud in history? How about their role in “causing” the crisis?

Please ask yourself, and then if you have time research the question, why haven’t Attorney General Holder and Presidents Bush and Obama ever told us what the banks, and more importantly their controlling officers, caused the crisis, that they (the officers) did so to enrich themselves at the expense of the shareholders, the borrowers, and the Nation, and that their actions were fraudulent. Whenever Holder and Obama talk about the role of the banks (they ignore the role of the controlling officers) “in the crisis” they minimize any criminality. They can barely bring themselves to use the “f” word even as a possibility.

Lest you think that they are only making the weakest (it’s harder to be weaker than zero) prosecutorial response to the fraud epidemics and are being tough on the civil side recall that only a handful of elite bankers who led the frauds that drove the crisis have been sued by DOJ. None of them have had their bonuses “clawed back.” None of them, even in the handful of cases settled with elite defendants like Countrywide’s former CEO, has left the elite bankers who caused the crisis non-wealthy. We can hope that Mairone will be the first exception to this rule. In every one of the handful of civil or administrative cases brought by DOJ, the banking regulators, and the SEC against the elite “Wall Street” officers who grew wealthy by directing the frauds that caused the crisis that has been settled the results are clear – control fraud is a “sure thing” that makes the controlling officers wealthy even in the rare cases that the government brings a civil or administrative action. The game being played out in all the corporate settlements, like the JPMorgan deal, is that the controlling officers, even when they grew wealthy by looting the shareholders, use corporate funds to cut deals that protect them from being prosecuted or having to return their fraudulent proceeds. We all know who pays for this – the shareholders. Only a comic genius would have the mastery of irony necessary to call the ability of elite bankers to become wealthy through fraud with immunity “accountability.”

No one should believe that bringing successful civil or criminal actions against BoA or senior officers is easy. The AUSAs who won the case deserve our heartfelt congratulations.

The DOJ’s non-response to the fraud epidemics that caused the financial crisis, however, is scandalous. The secondary market for nonprime loans collapsed in mid-2007 – over six years ago. The bulk of the mortgage origination frauds and fraudulent secondary market sales occurred at least eight years ago. DOJ has allowed the normal statute of limitations to expire without prosecuting a single elite Wall Street officer who led the frauds that caused the crisis. It can only bring fraud cases now involving FDIC-insured institutions pursuant to the FIRREA provisions for longer statute of limitations we obtained from Congress in 1989. The BoA case involves loans made and sold after the collapse of the secondary market for nonprime loans. Even with the longer 10 year statute of limitations provided by FIRREA it becomes harder to prosecute older cases because witnesses die, memories fade, and documents disappear. I hope that DOJ will have some tactical successes, but it is has waited far too long and ensured that our criminal justice response to the frauds that drove the crisis will be such a humiliating strategic defeat that it will encourage future control fraud epidemics. The self-congratulations that DOJ press flacks regularly issue to attempt to con journalists and the public into believing that DOJ is aggressively holding elite bankers accountable for their frauds make “Baghdad Bob” seem credible by comparison.

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  1. s spade

    When you make a confidence man your President you can hardly expect him to prosecute other confidence men, particularly when he knows they will begin making him really rich in another two years.

  2. theshizz

    Here is the money quote from the Bloomberg story on the same court case: “Jurors sent a note yesterday asking Rakoff why other Countrywide officials weren’t sued with Mairone. The judge told jurors they weren’t to speculate on why others weren’t part of the case.”

    1. Martin Finnucane

      Zowie! Good catch.

      I know the judge was just following the law here, but I can’t help but see this as a kind of metaphor for the abjection of the post-2008 consumer-citizen. We’re all like those jurors, being told to shut up and helpless to respond.

  3. monday1929

    Benjamin Wagner, US Atty. in Sacramento needs to know that his purchased ignorance did not go unnoticed.
    And Mr. Black, the Bull market in irony is just getting started, as predicted in 2006. The next 5 years will make your head spin.

    Benjamin Wagner
    Phone: 916-554-2700

    U.S. Attorney’s Office
    501 1 Street
    Suite 10-100
    Sacramento CA 95814

  4. Paul Tioxon

    I can only hope that the US Attorney is flooded with congratulations, instead of denouncements for some sort weakness in the face of massive corporate fraud.

    “No one should believe that bringing successful civil or criminal actions against BoA or senior officers is easy. The AUSAs who won the case deserve our heartfelt congratulations.” So says Bill Black toward the end of the piece.

    As anyone who has bothered to read Bill Black’s book can see, the organized political opposition that was personally directed against him during the building of the case, the investigation, the prosecution fell just sort of assassination, but every threat was made against him and every political pressure point was used against him, personally, and what he did manage to accomplish was not easy. You can see him putting at least that much in his quote about heartfelt thanks for waging the fight and winning. But one person is not the full force of the DoJ and Government with the full throated support of the president. Bill Black was a part of the government at war with itself, and he was a target of abuse. Let’s not abuse the one guy who actually did something we have been screaming about for years. Try to recognize allies, maybe even try to interview him and give him public support. You know, the kind of public support convicted weapons dealers like Col Oliver North get on Fox News with their own show.

    1. James Levy

      Banger, if you are saying what I think you are saying, I agree with you. This article parses what was in fact a blank statement on the part of the author of the original quote. The mental apparatus and gymnastics that Black reads into this may be a figment of his imagination. I have no confidence whatsoever that the reporter was winking and nodding at us. This may be exactly how he sees it.

      1. Brooklin Bridge

        I suspect Mr. Black had his tongue firmly in cheek in his attributions of irony to the author of the pathetic NYT article. That is, he knows full well Mr. Thomas Junior’s article is written in earnest. Attributing irony to such a doofus is a commonly used rhetorical device and makes Mr. Thomas look all the more like the buffoon that he is.

      2. Knute Rife

        I wish there were such a thing as Satire Font; all Black’s comments here would be printed in it. He’s just pointing out what’s been a problem for decades: The great and glorious NYT’s legal reporting is routinely and profoundly wrong.

  5. JEHR

    I am so impressed with the persistence of Bill Black in uncovering all the schmaltzy articles that refer to the banks being aggressively pursued by the DoJ.

    We now know that the banks will never be properly criminally prosecuted for their accounting control fraud but it is nice to hear the names of those who support banks and to keep them in mind when we think about fraud.

  6. Susan the other

    Bill Black just told the NYT that they are shamelessly indiscriminate in their reporting. Intentionally vague, using inaccurate descriptions, no analysis, etc. This can also be said of the administration who is hand-in-glove with the NYT. It is also amusing (yesterday’s posts) that the new capital requirements for banks and banksters is considered to be a national security issue. Since all of the information coming from the banking industry is equally vague and indiscriminate! Starts to sound like a national security cover story – to let the banks do whatever they want. What kind of accounting would national security prefer to use on the fraudsters? Probably none. Because if regulation and accounting can’t be enforced they won’t be enforced. Which is very important because there is no statute of limitation on fraud until you discover it (I’m assuming this means you have proof) and the banks have revealed nothing so their great frauds remain undiscoverable still, and they say, Well what we did may have been immoral but you can’t prove it was illegal. Etc. Shut the big banks down. Enough is enough. As they stand they are just petri dishes for fraudsters. Take away their charters. Fold the Fed into Treasury and let us have the United States Bank. A fully accountable institution that will not hide behind a false claim of privacy.

    1. Knute Rife

      But you CAN’T do that. The FIRE sector is pivotal in creating the crises that create the fear that makes the security politico-industry “necessary.” As Chancellor Sutler says in “V for Vendetta,” “I want EVERYONE to remember WHY THEY NEED US!”

  7. Benedict@Large

    Bill may be a tad harsh in his indictment of Landon. In looking at that sentence (and the article), I’m pretty sure I can see the quite heavy hand of an editor shining through. Reporters generally don’t lard their stuff up like that unless an editor wants them to.

  8. shtove

    Is the payment to Renault in Casablanca really a bribe?

    That makes a much stronger statement than the usual hypocrisy interpretation, but if it’s a bribe he wouldn’t be closing the joint down.

    1. Robert Dudek

      Perhaps you are not familiar with the film. The winnings are a bribe, more accurarely a regular kickback for Renaud. He is essentially forced to shut down Rick on orders of the Nazi major just arrived in town.

  9. sierra7

    Kudos for Bill B.!!
    This country had its chance in 2008-09 (etc) to do a good reform job on the corrupt financial system we live under… wasn’t even approached!
    We are now and will pay a heavy price!

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