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. Originally published at New Economic Perspectives
Every day brings multiple new scandals. At least they used to be scandals. Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil. The Wall Street Journal, our principal U.S. financial journal ran two such stories today.
The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline: “U.S. Banks to Help Authorities With Tax Evasion Probe.” Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.”
Oh, and the feckless DOJ (again) did not require any officer who committed the felony of aiding and abetting tax fraud to resign or to repay the bonuses he “earned” through his crimes. But not to worry, the banks – not the bankers – may have to pay fines as the cost of doing their felonious business. The feckless regulators did not even require Goldman Sachs and Morgan Stanley to disclose to shareholders their participation in the program.
Best of all, the “cooperation” the banks will offer will be of vastly reduced value because under Swiss law they will not report the names or any identifying information of the wealthy U.S. taxpayers that they helped commit felonies. But not to worry says DOJ:
“Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding,” said Dena Iverson, a Justice Department spokeswoman.
And did I mention that there was an U.S. amnesty program for wealthy U.S. tax cheats who used Swiss banks to commit their felonies?
Note that this aspect of Switzerland’s deliberate national policy of aiding tax evasion by the world’s wealthiest tax cheats fits into the article I wrote earlier this week about Dr. Hans Geiger’s rage that FATF is seeking to require banks to make criminal referrals against tax cheats. Geiger is a leader in a Swiss movement to block that requirement. He has also written that requirements that the banks file criminal referrals when they discover evidence indicating that they may have aided money laundering, the funding of terrorists, or international sanctions busting should be eliminated.
The Ethics-Free WSJ Story on the Regulator’s Latest Betrayal of Homeowners
The context of this WSJ story is the broader series of betrayals of homeowners by the regulators and prosecutors led initially by Treasury Secretary Timothy Geithner and his infamous “foam the runways” comment in which he admitted and urged that programs “sold” as benefitting distressed homeowners be used instead to aid the banks (more precisely, the bank CEOs) whose frauds caused the crisis. The WSJ article deals with one of the several settlements with the banks that “service” home mortgages and foreclose on them. Private attorneys first obtained the evidence that the servicers were engaged in massive foreclosure fraud involving knowingly filing hundreds of thousands of false affidavits under (non) penalty of perjury. As a senior former AUSA said publicly at the INET conference a few weeks ago about these cases – they were slam dunk prosecutions. But you know what happened; no senior banker or bank was prosecuted. No banker was sued civilly by the government. No banker had to pay back his bonus that he “earned” through fraud.
Naturally, the WSJ provides none of that context, but what the article does discuss remains a travesty. It is entitled “GAO: U.S. Foreclosure Review Could Have Generated Higher Payments: Review Could Have Delivered $1.5 Billion More to Consumers if Not Halted, Federal Watchdog Finds.”
I’ve added emphasis to the dishonest euphemisms the WSJ employs (and quotes) for the “f” word (fraud).
• The Government Accountability Office, in a report being released Tuesday, evaluated federal bank regulators’ decision last year to cancel a prolonged review of foreclosure-processing and loan-assistance mistakes.
• The GAO report shows that the settlement “was reached without adequate investigation into the harms committed by the servicers,” Rep. Maxine Waters (D., Calif.) said in a prepared statement.
• “Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts” [the WSJ quoting Water’s prepared statement].
• But finishing this process would have been a long and complicated affair. Doing so, the GAO said, would have taken up to two more years for consulting firms to scour thousands of foreclosure files for errors, at a cost to banks of about $4.6 billion.
• The foreclosure review was ordered three years ago by the Office of the Comptroller of the Currency and the Federal Reserve, which told banks to hire independent consultants to evaluate allegations the firms used shoddy practices when handling a huge volume of foreclosures during the housing bust.
Sadly, I tend to read the underlying documents and the truly bad news is that the GAO report uses the “f” word only once and is otherwise a mass of euphemisms. This sentence will give you an accurate flavor of the Report.
In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized [GAO 2014: 7, emphasis added].
In addition to the euphemisms and the fact that the sentence reads like it was written by the banks’ criminal defense counsel, it is a sentence crafted to mislead. By that time there were sworn statements by a series of servicer personnel admitting that their offices engaged in systematic foreclosure fraud through filing affidavits that were known to be false. They admitted to tens of thousands of criminal acts by their organizations.
The one time the GAO uses the word fraud is to report that the foreclosure payout program carefully protects itself from fraud by the victims – by providing that the checks expire after 90 days [GAO 2014: 34 n. 51]. In a very dark Irish humor kind of way I find this hysterically funny. By contrast, when the GAO discusses real frauds the passage again reads as if it were drafted by the bank’s criminal defense lawyers.
Failure to review documents filed in support of a judicial foreclosure may violate consumer protection and foreclosure laws, which vary by state and which establish certain procedures that mortgage servicers must follow when conducting foreclosures [GAO 2014: 7 n.13].
Everyone involved in the faux foreclosure review – the “consultants” hired who to do the review, the mortgage servicers, the (non) regulators, and the GAO performed abysmally. The “review” was an expensive farce. The regulators did not conduct the review. The servicers did not conduct the review. The consultants were chosen by the servicers, which the regulators should never have allowed. The consultants were allowed to have additional conflicts of interest such as having worked on the loan foreclosures they were reviewing. The “design” of the (non) study was an embarrassment. The (non) study collapsed almost immediately because it turned out that many of the servicers’ files were so pathetic that the study “design” could not be followed. Rather than stop and reconsider the implications of those file defects for the likelihood that the servicers engaged in fraud in order to foreclose the regulators decided to continue. The more severe the file defects the greater the incentive of servicers to engage in foreclosure fraud.
The consultants were soon hopelessly behind schedule and budget because of the severity of the loan file defects. Eventually, the (non) regulators gave up and brought the (non) study to an end, not with a bang but with a whimper.
Real regulators would have had great negotiating leverage. The servicers had agreed to conduct the study and failed. It would cost the servicers more to complete the review than simply boost the payout by several billion dollars. The two obvious answers were to continue the study and order interim payouts or to stop the study and in return for a significantly larger payout to homeowners.
Naturally, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve found a third, far worse choice. They left the cash on the table that could have gone to the homeowners.
The GAO was no stronger. They do agree that the OCC and the Fed left billions on the table but they also give them a pass, saying that the settlement is in the “range” that would emerge from the regulators assumed rate of bad foreclosures. The problem, as the facts disclosed in the GAO’s report make clear, but GAO’s analysis ignores, is that the regulators’ assumed rate of bad foreclosures had no reliable basis and was proven to be far too low an estimate by the fact that the loan files were so incomplete that the consultants could not complete the study. So, there is no reliable basis for GAO’s claim that there is any “range” of reasonableness for the payments to homeowners.
This passage from the GAO report conveys the GAO and the regulators’ unique approach to (non) quantification.
• Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership [GAO 2014: 55]
“Generally,” “instances,” and “some consultants found cases” – billions of dollars were spent to produce nothing but these useless, vague phrases. The “study” “results” were so worthless that the GAO reports that the consultants did not even bother to create reports on their work. Instead, and this is hilarious, the OCC and the Fed held “exit interviews” with the consultants. Only a PR “expert” planning to put lipstick on a wild boar would spend even more money on such a useless exercise. The GAO tells us that many of the regulators’ exam teams given the exit interview materials concluded that they were useless.
Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, has been trying to get the regulators to do the right thing and has urged the chairman of the committee to investigate the servicers’ and regulators’ actions. Waters has been, rightly, extremely critical of the servicers and the regulators. Here is the link to an interview of her that is well worth reading in its entirety.
Postscript: The WSJ Op Ed’s Ode to Insider Trading
Henry Manne is back. The WSJ published his op ed on same day these other two stories ran. Manne ran the effort for decades to indoctrinate judges and law professors in theoclassical economics. Manne’s metaphor is that insider trading is like prohibition.
Manne’s op ed asserts that insider trading cases target “low level functionaries.” Manne’s so-called “low level functionaries” consist of millionaires and multi-millionaires that include the head of a major hedge funds and a senior official at Goldman Sachs.
We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this ‘corruption’ surely goes far beyond what prosecutors have been able to demonstrate.
Manne’s point is that if business officials have an incentive to cheat they will.
There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world’s stock exchanges waiting for an “edge.”
To use Manne’s metaphor, Wall Street is manned by alcoholics who are so addicted to greed and so devoid of ethics that Manne says it is impossible to deter them from committing these felonies even if you put hundreds of them in prison.
The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions.
So, the financial industry is run by alcoholics who are so addicted to greed that they think they have the right to profit personally from confidential corporate information – and Manne’s answer is to roll out the keg and shout “drinks for everyone.” Manne provides another proof of one of our family rules: it is impossible to compete with unintentional self-parody.
Is anyone on Wall Street horrified by Manne’s “defense” (indictment) of them? Now would be a good time for you to take a public stand and lead a long-term public campaign to clean up the Street.
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Cleaning up the Street would be a Labor of Hercules; even the Atlantic Ocean didn’t manage it.
Seriously: Manne has a point; enforcement is Sisyphean (big on classical metaphors this evening; they seem to have predicted the Wall St. sewer.) Surely there’s a better way – like outlawing a lot of speculation, and preventing insiders or those with access to them from trading at all. Eliminating or drastically curtailing the stock market via worker ownership would help, too.
But then, during the Crash, I thought the banks should just be allowed to go down. Things would have been tough for a while,but much sooner straightened out, and without the huge overhang of TBTF, zombie institutions, the economy might have started recovering. Instead, we’re well into a Lost Decade, Japan-style – which I note that Japan has now plunged back into.
I guess this is what it’s like when con men run your country.
Still, the reminder that the “servicers” are essentially con artists is salutary.
The GAO and CBO know the hand that feeds them. With a Congress and White House openly supporting corrupt policies, the GAO and CBO provide analysis which favors elite policy making.
There are loads of ways to bring transparency to these processes and put an end to scalping and tax dodging. This is all typical of white collar scams we can trace back centuries, that are essentially restrictive practices. The prosecution needs to be taken out of hands of judges in a new form of electronic public scrutiny trial in which any legal wrangling is also made public and subject to turnover by the public. Investigators should be given carte blanch powers and it should be a serious offence to resist or lawyer up to prevent instant access to information.
A key issue in dealing with the professional class generally is in preventing them making law and another letting them use “conservative” judges in secret. A great deal could be done electronically to break these medieval privileges up. Most work done by professionals is parasitic and most secrecy is unnecessary. Why are we not using new technology to replace the professional class?
It is interesting that addiction to alcohol is mentioned. There was an article a little while ago by a ‘reformed’ hedgie which was basically saying that the world – or at least Wall Street – is now largely run by money addicts. Like all addicts they are concerned only with their next fix, which always has to be bigger than their last, think only of themselves and allow no moral or legal constraints on their behaviour that inhibit them feeding their addiction. Perhaps he had a point.
Yes William, this is a huge and, by its very nature, unknown and underreported factor. I used to do volunteer work in the field of addiction and made what was, to me at the time, an astounding but on reflection perhaps not all that surprising observation that the following two groups were massively over-represented in those seeking treatment for their addictive behaviours:
1) Those with easier access to drugs such as clinicians, pharmacists or laboratory workers (including researchers)
2) Those with high incomes or high net worth who could not only pay for street drugs but could also pay someone to get them for them (the matter of being able to put in an intermediary between the user and the dealer and thus not run the risk of being found to have purchased the drugs directly was often just as important as being able to afford the drugs in the first place). This second group also had far more examples of behavioural addiction such as compulsive gambling, compulsive spending
Eating disorders seemed to be the only “equal opportunity” addiction, affecting the poor, the unearned rich, the working rich and the middle class pretty much equally.
For the “high income” group and the “easy access” group, whether having an addictive personality predisposed you to pursuing a career which either allowed you to afford street drugs or put legal but additive substances in your reach — or, conversely — whether those sorts of work facilitated addiction is still an open question in the addiction treatment world. For me, I always leaned towards the “there are no accidents in life” explanation, which means that people who are predisposed to addition either consciously or unconsciously choose jobs which will enable them to act out their incipient addictive behaviours.
I’d also add that there’s another destructive behaviour pattern which is vastly under-researched and relevant to this. Most of the people in the treatment centre came because a primary addiction) (e.g. a chemical dependency such street narcotics, alcohol or prescription drugs or a behavioural addiction such as gambling) made their lives unmanageable.
But many people seeking treatment for their primary addiction also had secondary addiction(s)) which the treatment programme also attempted to address but wasn’t given the focus or attention of the primary addiction (usually because it wasn’t immediately life or liberty threatening).
Time and time again though, in treatment, those individuals admitted to episodes of kleptomania (compulsive stealing). Superficially, the thefts were ridiculous — a person earning £500k p.a. taking a cheap bottle of perfume or an owner of a £10M country estate purloining a few thousands’ worth of jewellery. (I use these examples intentionally because for those who did admit to stealing, there was a definite female to male bias; whether of course this was just that women were more able to own up to this aspect of their compulsivity or had better opportunities is not certain). But nevertheless, a compulsive desire to steal is prevalent in a lot of individuals with additions. This is, of course, quite logical.
I’ll make a distinction here between addicts who stole to fund an addiction because of economic need and those, who I am referring to here, who stole inexplicably not due to some identifiable necessity. It is the latter group I am discussing here.
It was always difficult for both the people in treatment and also for the professionals attempting to treat them to identify the reason for the diagnosis of kleptomania. Like I say, it wasn’t given, usually, as much attention as the other more “pressing” additions. I think that often, the patients didn’t know themselves. Where they did try to rationalise the behaviour, I recall it was usually with some sort of sense of trying to — in a tokenistic way — reclaim from the world what the addict thought the world was denying them.
Thank you for these interesting comments, Clive.
Right on, money and power junkies, who crave unlimited wealth, lordship and abject fealty. And this naturally correlates with unconstrained aggressive militarism, necessary to correct the common condition wherein our resources lie in lands occupied by others. Absolute power corrupts absolutely, and there is no better manifestation of this than our present imperial military kleptocracy.
Good comments here on Addiction as maybe one of the roots of our problems, not only in Finance but Society at large. Combine Addiction with recent reports of an abnormal number of sociopaths in our Elite and one may have the real source of most of our problems. A study of Addiction/Sociopathy among the 1% and their minions would seem to be in order.
The fatal flaw of Humanity may be that we are not able to prevent the worst amongst us from becoming our Leaders. I wonder how other species do in this regard. Meanwhile, through Science, we develop more and more technology for the 1% to destroy us and Earth.
I put this forward the other day–pick our new executive council (to replace our imperial Presidency) by lottery. The arguments against–that venial, inept, or unqualified people will be chosen–is negated by the facts on the ground. We’ve had a surfeit of venal and unqualified and inept people in the Oval Office. With 11 shots at it, we might actually get a majority of decent, caring, and open-minded leaders rather than self-selected or elite-sponsored egomaniacs. They get one six year term and then back to real life with a very modest pension for time served. They can all be given apartments in Georgetown and the White House can become a museum. Our magistrates will be citizens again, god help us, and I think we’d all be better for it.
Every day I find myself interacting with people — and we’re not talking about your traditional mobsters or the sorts of Eastern European criminal gangs which titillate the readers of the Daily Mail — who either tacitly or even overtly signal their willingness to assist our TBTF enterprise’s overlords in, as a minimum, violation of internal controls, through to unethical conduct and right up to out-and-out fraud and criminality.
To look at them and to talk to them and to get to know their lives, these are apparently respectable middle class (and they are middle class, upper middle class even, but they are paying an increasing price to retain that status) well educated and usually from not deprived backgrounds English traditionally conservative (with a small “c”) people are about as far away from anyone’s usual idea of the sorts that society should be shunning or punishing.
What they are doing is, comparatively, whoring for quarters. At best, their rewards average in the £50-100k range with maybe bonus of £10-20k on top of that. To me – and I cannot help but be influenced by my own class, background and formative social influences so I’ll put my cultural biases on the table here for all to see – that sort of money is quite simply insufficient motive to justify and overrule one’s own value system. I am forced to wonder though, if I’m wrong and that really is the going rate for an ethical and possibly criminal sell out of yourself ?
I have to conclude that our society is making – or has made – Desperate Housewives into reality TV. People live superficially pleasant and conventional lives but with an undercurrent of secrets and dishonesty. The bigger question I have is, is this something new ? Or is it old but we’re just starting to notice it more ?
Britain replaced Christian morality with middle class propriety about 175 years ago (it was a gradual process eventually effective those both above and below the middle class). I think the dream on the Left was to eventually replace middle class propriety with worker/social solidarity. When that dream failed to materialize, Britons were left with no overarching ethical standard. Thatcher’s call of “every man for himself” (not too ironically the traditional cry of a defeated army fleeing the field) seems to have become that overarching standard. British society, and too many British individuals, seem to have no moral compass. Without one of those metanarratives that poststructuralist like to abuse, everything and everyone is for sale–“the family silver”, as Macmillan put it. All very distressing and disheartening for a nation I love and have devoted my life to studying.
Yep… the amounts of times I’ve actually had people say to me, “But” – I’m a home owner” like it makes them a better sort of human, granted more rights.
I think American business-people look at most rules of business life the same way that they look at rules in a game like football.
For example, there is a rule in football against offensive holding. But nobody considers holding cheating, because holding comes with a penalty which is inflicted as part of the game. It is the offensive lineman’s job to open holes for runners and to protect the quarterback. It is the referee’s job to observe infractions of the rules and to inflict the stipulated penalties. So holding is an activity that is part of the game, but which carries a certain measure of risk, like throwing the ball deep into the middle of the field. The lineman rolls the dice and holds if the situation seems to demand it, and attempts not to get caught. On the other hand, violating some other rules, or violating the standard rules them in particularly unusual ways, would be considered cheating.
I’ve said it once (or thrice) and I’ll say it again: Your tax dollars at work.
One begins to wonder how apparent the death of the rule of law has to become before the little people catch on…meanwhile, everyone keeps paying for regulatory agencies whose main (sole?) purpose is to provide cover for criminal enterprises.
I would argue that the main role of regulatory agencies today is to maximize profit for those they regulate. Followed by the obligatory oops several years later, well after the profit has been captured.
But I thought they burned all those $20 bills I mailed them every year for my taxes!? ;-)
So glad that Mr Black still gets outraged. Speaking of ethically challenged, Bloomberg had a story this morning about the Korean Ferry and, with not an ounce of irony, mentioned the problem of the “revolving door between government and the safety regulators” as contributing to the problem.
‘Financial institutions, their directors, officers and employees should be prohibited by law from disclosing (“tipping-off”) the fact that a suspicious transaction report (STR) or related information is being filed ….’
Turning banks into government informers who secretly rat out their customers is odious.
Welcome to East Germany, comrades.
This is the morality of mobsters, nothing worse than a snitch!
I believe the term is “omerta.”
All banking is rooted in this fraud: “Your deposit is available on demand even though we lent almost all of it out.” In other words, banking is rooted in embezzlement.
But with government privileges, banks have moved to almost pure counterfeiting. But you have no problem with that so long as the counterfeit money (“credit”) has a high chance of being repaid – not to the victims of theft by dilution – but to the thieves, the banks.
Yes, “The best way to rob a bank is to own one” but also “The best way to rob the poor is to be a bank.”
Question? Why were bank robbers in the 1930s often popular? Because people then knew what you don’t know now, that banks themselves are robbers?
Banking [in all its disguises] is theft. This has been known for thousands of years.
Well, at least hundreds, but Progressives think they can manage anything – including theft and systematic oppression of the poor – satisfactorily.
I wonder what god they have the remotest hope of pleasing? Beats me. Or was Buddha a banker?
“We earn money the old fashion way”… “We steal It”!
So American Citizen/Consumer, dependent on us for your very existence…. what are you…. what can you…. do about it!!!!
NOTHING…. ABSOLUTELY NOTHING!
A Financial Mafia Owns your Government and in fact is your Government!
Observed Reality!
What is hanging out there right now is the fact that “No Standing” issue was taken off of the payment category, and Ginnie Mae caught in the middle right now, has been forced to stop BOA and the rest of these thieves from transferring the FHA & VA service loan that BOA and Wells Fargo etc have no proof what so ever that they own.
What were the 24% of errors for BOA? It the government insured loans that Ginnie Mae already had physical possession of the loan per Ginnie Mae MBS requirements. Wells Fargo has the same problem with the 1.3 million Washington Mutual Bank (WaMu) government insured loan housed out of the Milwaukee WI ex-mortgage servicing center of WaMu that Wells purchase on Jul 31, 2006.
Ginnie Mae saw a problem if WaMu collapsed (which it did collapse) and they still have all these blank endorsed Note were in the possession of WaMu means that that the bankruptcy court would have to determine the ownership of these assets. However now Wells Fargo is acting as the servicer, custodian of record and trustee, but neither Wells or Ginnie or Investor (Federal Reserve Bank) are recorded on the Note in the endorsement.
So the question is, how does Wells foreclose as the owner of the Notes & debts when in fact its impossible because WaMu has already relinquished the blank Notes to Ginnie Mae who is prevented from originating, buying or selling a home mortgage loan at all or a MBS.
Wells Fargo admitted to not being the owner of this loans and I am sure as the GAO report states, Wells was not turning over documentation claiming it was all over the place, so Promontory could not review the files.
Ginnie Mae problem is it is the best example of the crime because all the loans are in a uniform program where every single Note that in the Ginnie MBS re blank and detached from Countrywide and WaMu and can never be modified or foreclosed because the Notes been forever separated from the debt and titles. This is why Ginnie asked the servicers for the titles. WaMu cannot be on title because its not a bank that exist. WaMu not called the loan due because after Sept 25, 2008 it is dead!
Speaking of fraud, a few years ago when my sister got her divorce during the housing crisis… and *three* different entities were trying to foreclose on her *simultaneously*… little things like that tell you that at least two of them are lying. Big time.