Bill Black: Time to End Ethnic Profiling in Prosecuting Mortgage Fraud

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

I am returning to my series of articles about the pathologies that have caused the Department of Justice (DOJ) to suffer a strategic failure in prosecuting the banksters that led the three fraud epidemics that caused the financial crisis and the Great Recession.  I have been inspired by Tom Frank’s column in Salon covering our successful defense of a mortgage fraud case in Sacramento.  This column addresses the single most offensive thing I learned in the course of that case.  Under U.S. Attorney Ben Wagner’s leadership the Eastern District of California has begun targeting immigrants of Russian descent for mortgage fraud prosecutions.

The links are all broken because the Sacramento Bee does not preserve its links, but the spoor of those links shows that the paper has repeatedly written that Wagner’s mortgage fraud prosecutions now target dozens of Russian-Americans.  This should be immediately suspicious, for mortgage fraud was, according to Wagner’s theories, committed by over three million Americans in 2006 alone.  The incidence of fraud in “liar’s” loans, in the study relied upon by the federal government, including key members of DOJ’s task forces against mortgage fraud, was 90 percent.  By 2006, roughly 40 percent of all home mortgage loans originated – well over two million – were liar’s loans.  That means that there were over two million fraudulent mortgage loans, and over three million borrowers signing the notes on those loans.  Far from being an “ethnic” crime, mortgage fraud was ubiquitous in the United States and the United Kingdom (where 45% of all the loans made in 2006 were liar’s loans).

I was preparing to excoriate Wagner for his selective prosecutions of a disfavored minority when, to my horror, I found that the FBI is also promoting mortgage fraud as an ethnic crime.

The FBI’s 2008 report to the nation on mortgage fraud prominently features this claim.

Mortgage Fraud Perpetrators

Mortgage fraud perpetrators are industry insiders, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives. Perpetrators are also known to recruit ethnic community members as victims and co-conspirators. FBI reporting indicates numerous ethnic groups are involved in mortgage fraud either as perpetrators or victims. This type of mortgage fraud is known as affinity fraud. Ethnic groups involved in mortgage loan origination fraud include North Korean, Russian, Bulgarian, Romanian, Lithuanian, Mexican, Polish, Middle Eastern, Chinese, and those from the former Republic of Yugoslavian States. Street gangs such as the Conservative Vice Lords, Black P. Stone Nation, New Breeds, Four Corner Hustlers, Bloods, and Outlaw Motorcycle Gang are also involved in various forms of mortgage loan origination fraud as a means to launder money from illicit drug proceeds. Additionally, African, Asian, Balkan, and Eurasian organized crime groups have also been linked to various mortgage fraud schemes.

The FBI’s 2009 report has the identical language.

A Thought Exercise

What if the FBI’s list of suspect ethnic groups contained the word “Jew?”  We all know that the list would last less than a day before it was removed amidst a blizzard of criticisms and unctuous apologies blaming obscure staffers.  If the above list contained the descriptors “white” and “male” the inanity of the list would have been clear.  It would have been clear that everyone involved in the home lending industry – an overwhelmingly “white” and “male” group of actors – was a potential suspect for mortgage fraud.  The list would have been promptly taken down among a chorus of jeers for the FBI.  Indeed, the list as it was actually written is a superb guide to what ethnic groups the FBI’s leadership thinks it can safely label “the [suspect] other” in America today.

If the FBI were compiling an accurate list of ethnic and demographic groups leading the epidemics of accounting fraud the list would consist of two descriptors ”Jews” and “high status white male banking executives.”  For obvious reasons, the FBI will never use either descriptor to create a “suspect ethnicity list.”  In the rare studies that have been done of the ethnicity and demographics of the most destructive white-collar criminals in the U.S., being Jewish, an adult, male, with high social status, a college degree, business executives, and owning a home are the variables that best predict those crimes.  The classic white-collar criminology study of perpetrators, “White Collar Crime and Criminals,” was published in 1988 by Stanton Wheeler, David Weisburd, Elin Waring, and Nancy Bodett.  Their study found that Jews were far more likely to have been convicted of white-collar crime than any other religious group, but were underrepresented among blue collar criminals.  (Protestants were substantially underrepresented among criminals of both the streets and suites.)

Jews, although roughly eight percent of the population of our districts, make up only three percent of our common crime sample, but fifteen percent of our white collar sample?” It would be a fair summary of our data to say that, demographically speaking, white collar offenders are predominantly middle-aged white males with an over-representation of Jews.

Home ownership was also a major explanatory variable for white-collar crime perpetrators.

[F]orty-six percent of our white collar offenders own their own homes, in contrast to only six percent of the common crime defendants.

Unlike the FBI’s reckless claims that mortgage fraud was a “[disfavored] ethnic group” crime, the authors of the 1988 study (funded largely by DOJ) did real empirical work that led to actual correlations in which demographic factors varied considerably in their association (or lack thereof) with white-collar crime perpetrators.

“It seems well established, then, that whatever else may be true of the distinction between white collar and common crime offenses and offenders, they definitely do draw from distinctively different sectors of the population.”

The authors’ sample came from judicial districts in which Jews were far more common (roughly eight percent of the districts’ total population) than in the U.S. as a whole (roughly two percent).  Relative to the two percent figure, the over-representation of Jewish white collar criminals found in their same study (fifteen percent) was extreme.  The authors stressed in their later book on this subject– quite correctly – that none of this suggested that Jews were more likely to commit white-collar crimes than non-Jews for any reasons unique to their religion.  Jews were more likely to hold more senior positions in their organizations in the seven metropolitan areas studied and therefore had more opportunity to commit larger white-collar crimes.

Criminologists do not like to discuss these matters because it is certain that some yahoo will grab a quotation about the Jews, ignore the paragraph about opportunity (immediately above), and trumpet the quotation as proof of perfidy of Jews.  In the case of the current crisis, where the triple epidemics of mortgage fraud were led by the officers controlling investment, mortgage, and commercial banks, the degree to which Jews are overrepresented leading such frauds is likely to be exceptionally large given those differences in opportunity.  But no one has done that work and unlike the era when Wheeler and his co-authors conducted their studies, DOJ is now infamous for refusing to prosecute those who occupy the C-suites even of the far from elite mortgage banks that caused billions of dollars of losses by systematically originating fraudulent loans and then selling those loans to the secondary market through false “reps and warranties.”  Wheeler’s study design would produce nonsense results if it were applied to DOJ’s current practices of prosecuting solely the least culpable individuals engaged in alleged mortgage fraud.  Wagner’s selective indictments would “prove” that Russian-Americans are far more likely to be mortgage fraud perpetrators.

In any event, the FBI has no basis for it “ethnic” speculation – mortgage fraud was led overwhelmingly by folks not on the FBI’s “suspect ethnicity” list.  The FBI’s suspect ethnicity list for mortgage fraud is far worse than the CDC’s infamous labelling of being “Haitian” as a “risk factor” for AIDS.  In that era there was at least a positive (albeit spurious) correlation between AIDS and being a resident of Haiti and there was uncertainty about how AIDS was transmitted.  The true correlation between the ethnic and demographic characteristics on the FBI’s suspect ethnic groups list and the leaders of the mortgage fraud epidemics is negative – and was always obviously negative.  Members of the ethnic groups on the FBI’s suspect ethnicity list were virtually never important leaders of the three mortgage fraud epidemics.  The FBI’s advice that investigations of the leaders of the three mortgage fraud epidemics should begin by concentrating on mortgage fraud by “Russians” or by gangs such as the “New Breeds’ is beyond silly.

The FBI’s suspect ethnicity list is the indefensible product of bigotry and anti-empirical practices.  Attorney General Eric Holder purports to be a huge opponent of this kind of faux “profiling” of a disfavored minority.  The clock is ticking.  How long will it take Holder (or the FBI’s director) to end the travesty of the FBI’s suspect ethnic group list?  And how long will it take for Wagner to stop his selective prosecution of disfavored minorities?

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  1. just bill

    Not only does crime pay, but it is just about the only thing that does pay. Perhaps ethnic minorities see this more quickly than others?

    1. ambrit

      Too simplistic my friend.
      First take a look at barriers to advancement in our society. Then look at the skill sets and habits that predict success in both business and crime. If done right, most crime is a business. If one is a person on the wrong side of the ethnic divide and has the skills needed to run a business, well, go where the opportunity is. QED

    2. diptherio

      Someone didn’t grok the article. Black’s whole point is that ethnic minorities are not more likely to commit fraud. White-collar crime is a mostly white, male pursuit, because white males have the most access to financial institutions and therefore the most opportunity to abuse them.

      1. ifthethunderdontgetya™³²®©

        And rich white males own both the judiciary and our politicians.

        Did the elite financial criminals on Wall Street face prosecution after they broke our economy with their relentless greed?

        No. They were showered with money, instead.

        Heckuva deterrent!

      2. cnchal

        Black’s whole point is that ethnic minorities are not more likely to commit fraud.

        Black’s whole point is this.

        If the FBI were compiling an accurate list of ethnic and demographic groups leading the epidemics of accounting fraud the list would consist of two descriptors ”Jews” and “high status white male banking executives.” For obvious reasons, the FBI will never use either descriptor to create a “suspect ethnicity list.”

        The FBI uses misdirection to provide cover for ”Jews” and “high status white male banking executives.” so the crime wave can continue. It’s called following orders from above.

        Let’s remember that no less than the President of the United States has said that no crimes were committed in the run up to and aftermath of the financial crisis. A farcical lie.

        The contrast with what happened in Ferguson couldn’t be greater. There, a black man cannot cross the street without getting a jaywalking ticket from a white cop. The “high status white male banking executives” were showered with money for their criminal acts. That’s justice today.

        1. Sam Kanu

          “…The contrast with what happened in Ferguson couldn’t be greater. There, a black man cannot cross the street without getting a jaywalking ticket from a white cop. The “high status white male banking executives” were showered with money for their criminal acts. That’s justice today….”

          Spot on – that is our society in a nutshell. In fact we even have scarce police resources (eg. NYPD Wall st unit) dedicated specifically to stopping public protest against the while collar criminals that the justice system is pretending not to see!

  2. diptherio

    When in doubt, blame the Russians. That’s a trick that’s worked like magic since ’45.

    We all knew those Russians couldn’t be trusted, anyway. It’s no surprise that they would take advantage of our poor, trusting bankers to attempt a take down of our whole economy.

    1. Ulysses

      Not just the FBI, but the entire U.S. “Justice” system has been frantically trying to deflect and divert attention away from the huge crimes committed by wealthy banksters, through acting as if the financial collapse was the result of too many poor folks trying to buy homes they really couldn’t afford. The traditionally xenophobic, WASP dominated FBI naturally wants the crisis to be blamed on “others.”

      I think this comment, from a few years back, puts this particularly offensive trend– highlighted by Mr. Black in this excellent article– into context:

      “By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.

      It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.”

  3. Jim Haygood

    In the larger picture, financial businesses such as banks and insurance companies don’t just pursue civil remedies, but also avail themselves in parallel of criminal prosecutions as a deterrent. All around the NYC area, a current highway billboard campaign proclaims, INSURANCE FRAUD = PRISON.

    This is asymmetric justice. When insurance companies, as a business practice, routinely deny claims (as has been discussed in many NC posts) so that their customers are forced to appeal or even sue for payment of legitimate claims, no one at the insurance company ever goes to jail for that.

    If enough health care claims are fraudulently denied, could we RICO Aetna? Worth a go …

  4. Ronald Pires

    You should be aware …

    When I tried (twice) to access the source article at New Economic Perspectives using the link above, it tried to open some unidentified app on me, identifying the app as coming from that page. I refused, and the page opened as a blank sheet. When I went to the New Economic Perspectives home page and tried to open the article, no app; it worked just fine. Obviously then, the app was not coming from that page, as the two links are identical, with only the source page being different.

  5. Larry

    I am disheartened to read about the ethnic minorities profiled by the FBI, but it at least it did also mention them as victims in a scheme. Perpetrated by the small cogs in the mortgage origination game (brokers, real estate agents, etc.). Real investigations should go after these individuals, and get them to role on their superiors. The fact that Anthony Mozillo walks free is a crying shame. And the FBI could really dig into this, given that known criminal enterprises were laundering money through property. And yet, nothing really happened.

    Cheers to Bill Black for being a beacon of light in this otherwise deceitful beat.

  6. John Mc

    I appreciate this article by Professor Black for several reasons.

    First, this type of remaking or shape shifting of culture by Wagner/FBI (i.e. ethnic fraud profiling) is a common strategy used when capital feels threatened (see Edward Bernays, 1928 Propaganda). The timing of Russian-American prosecutions is also a bit fuzzy, and a nice distraction for Wagner to prove his bona fides to the Neoliberal state.

    Second, this article (and so many like these by Dr. Black) really show how important it is for “power” in this country to direct its time, attention, and resources in creating knowingly false realities — This speaks to Yves earlier article about finance and social justice (being able to make salient and understandable connections to fraud in an increasingly complex environment). More of these types of analyses are needed on a variety of subjects. I am thankful for the changes by Yves/Lambert and staff to accommodate this.

    Third, while I am not a big proponent of lists, branded spaces or simplistic-catchy titles meant to get an audience to open a link without much substance to follow. I do wonder if one of the better ideas that came from the S&L crisis (namely, a top ten list of offenders) wouldn’t be a good idea here at NC to shame, ridicule, and call attention to those people who aid and abet fraud prosecutions —- one vote for Ben Wagner here.

    1. Blackdoesnt want to prosecute the red Mafia

      The DOJ is targeting the Israeli-Russian mafia (the ‘Red Mafia’ ) and Black wants them to back off because some people of Jewish ethnic background might be ensnared. But these criminals are not religious, anymore than the Italian mafia was Catholic. Moreover they are involved in murder for hire, human trafficking , drug dealing, extortion for which fraud is merely an add on. Shame on Black for pulling the antisemitism card to defend these criminals.

      They should be prosecuted and deported.

      How Russia’s mafia is taking over Israel’s underworld

  7. nony mouse

    two citizens break the same law. one gets the slammer, and the other gets the slap on the wrist. what are the major differences between them? race and class.

    this article’s argument is lacking, a bit. I can understand someone’s outrage at the government going after ‘small time’ fraudsters on the basis of racial profiling. but I don’t see that as being the same thing as targeting someone because of their race, and then trying to find out what they did wrong after the fact so that one has justification for nabbing them (“driving while black”). I see it as going after the lower-hanging fruit, because it would be obviously politically impossible to go after the rich, powerful, white perpetrators who did this on a mass scale.

    this is the difference between busting the local drug dealer, and going after the individuals who actually import and allow the drugs into the country, and allow the distribution networks to operate. I can see that it would be extremely possible to use ethnic minority groups to perpetrate a kind of systemic mortgage from by some connected individuals operating within the system. I don’t see this recognition as being the exact same thing as declaring that “Russians tend to be mortgage fraudsters.”

    what I see outlined is the governmental structure going after actual crimes taking place in ethnic communities, because those communities are being utilized by criminals who might be members. perhaps through the social networks existing in those communities, perhaps because these individuals are easier to prey on BECAUSE of their economic and political disenfranchisement. I see the gov’t taking the low hanging fruit, and ignoring the powerful players, as it always does. I also see Mr. Black’s point, that to the idiot American public, the two issues could become easily conflated so that the meme expands as “it was the Russians and Eastern Europeans who came here.” but what I don’t see is Mr. Black saying this: if frauds were committed in these communities, against them or by some select few of their members, then they should not be ignored just as those greater fraudsters from outside of these communities should not be ignored.

    instead, the argument reads like the government is targeting people because of their ethnicity (or using it to demonize them), without real evidence of actual crime-doing. unless I’m misunderstanding something, is that what is really occurring? or is the FBI merely recognizing that there are crime networks operating within these communities that definitely were engaged in mortgage fraud? it’s almost as though Mr. Black is saying that we need to be outraged that the gov’t is prosecuting crime, simply because of the ethnicity of those they are choosing to prosecute.

    it IS an injustice if the white guy gets off. that doesn’t mean that the other guy didn’t do it. yes, the public will take this extreme selectivity in prosecution and misconstrue it. i just don’t see this article helping to fight that process as much as it believes it does. or I have a serious reading comprehension problem!

  8. Lee

    I understand the larger point, but want to ask a question about the example presented about profiling for white collar crimes. Black states that the profile for accounting fraud would be “high status white male banking executives” and “Jews.” But Jews make up just 15% of the people convicted of white collar crime; presumably the vast majority of the remaining 85% in the US would be Christian. Wouldn’t the profile be incorrect to focus on Jews and not on Christians? The representation of Jews relative to their background population is interesting but it doesn’t mean that an accurate profile should include them.

    Indeed, parsing the quotation from the 1988 study, it states that white collar offenders “are predominantly middle-aged white males with an over-representation of Jews.” It doesn’t say white collar offenders are predominantly Jews — just that they are overrepresented relative to population. The quotation, I am imagining, could also say “predominantly Christian” and be accurate, no? Or is there another angle I am not understanding?

    1. Ulysses

      No you understood the meaning perfectly well. The vast majority of white collar criminals in the U.S. are indeed nominally Christian. I must say, as a medievalist, I get a bit nervous when people note that some criminal banksters are Jewish. For many centuries in Europe, Jews were encouraged by Christian authorities to serve as money-lenders, while at the same time actively discouraged from filling other economic roles. This contributed to the development of many hurtful anti-Semitic stereotypes that persist today.

  9. Teejay

    I’m not sure I’m accurately understanding what Bill Black said here. “The incidence of fraud in “liar’s” loans[…] including key members of DOJ’s task forces against mortgage fraud, was 90 percent.” Black is saying, using the DOJ’s convoluted understanding of fraud, key members of the task force have also committed fraud. Do I have that right?

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