Fraud at Every Step of the Mortgage Securitization Chain

“It takes courage to tell the real story. This is actually a story of Wall Street’s massive, wide-spread, multi-year fraud, including accounting fraud”.

-Janet Tavakoli, Global expert in derivatives.

The fraud we have seen so far was at the loan application level. There was major fraud also when the banks began creating and selling their own residential mortgage backed securities (RMBSs) to the public — and every step along the way.

In early 2006, Citigroup, the largest bank in the world, wanted in on that money machine of the securitization of mortgages. It established a department of employees to find mortgages that met the company’s credit policies from other banks and financial institutions for inclusion in Citibank’s Residential Mortgage Backed Securities.

As is a standard practice in mortgage securitization, Citibank also hired an independent firm to review the mortgages for quality, called a collateral manager or due diligence vendor.

As an additional check on the banks’ internal quality review department, it promoted Richard Bowen to Senior Vice-President and gave him the task to oversee their work to ensure that the $90 billion in mortgages Citi was purchasing were in fact prime mortgages.

Bowen tells his story on his website with this introduction.

“The banking and Savings and Loan crisis of the 1980’s cost our country over $150 billion — and we criminally convicted 1,000 senior bankers. The financial crisis of 2008 is expected to ultimately cost our country over $24 trillion — with zero senior bankers prosecuted. And it is not because of lack of evidence. I can attest to personally and professionally, how greed, corruption and a total disregard for stakeholders led to the massive meltdown.”

Bowen soon discovered that over 60% of the mortgages purchased in his largest channel were defective or fraudulent, and yet these mortgages were being approved, securitized and sold to investors with Citigroup giving false certifications to the investors that the mortgages met its credit standards.

* Bowen continued sending emails to his superiors over18 months over which time the percentage of toxic mortgages continued to increase reaching 80%.

* At that point Citibank stripped him of his responsibilities, placed him on administrative leave and then told him not to come back to the bank.

In May 2009, Congress passed an act to establish the bipartisan Financial Crisis Inquiry Commission (FCIC) to investigate the causes of the 2008 financial crisis.

Bowen provided the FCIC staff twenty-eight pages of written testimony which include many of the damning details of Citigroup management’s cover-ups and investor fraud.

* However, the staff forced Bowen to remove most of the damning details from his written testimony.

* Bowen decided it was better to sign the shortened statement so at least something got to the commissioners.

* The commissioners never saw Bowens complete testimony.

* The Commission published Bowen’s shortened testimony as his official testimony.

How do the banks get this power over the DOJ and the FCIC staff? The New York Times published a full-page opinion piece, “ Was This Whistle-Blower Muzzled? “, noting some of the possible sources for Citibank’s influence over the FCIC. One being the many interactions the president of the law firm representing Citigroup had with the FCIC staff; and that a primary member of the staff was subsequently hired as a full partner at another major law firm representing Citigroup a few months after leaving the FCIC.

A New Business Model

Janet Tavakoli is one of the most respected experts in Derivatives. As a management insider:

* She headed bank departments that created derivatives that included a substantial quantity of Residential Mortgage Backed Securities.

* Has authored authoritative books on credit derivatives and structured finance.

She is a staunch Republican and remarkable because she could have been part of the banker bonus culture, but rejected it, proving she has a strong sense of ethics. As recited on her website, she gave early warnings about the amount of fraud in the residential mortgage back securities. Bloomberg news called her “ The Cassandra of Credit Derivatives”.

*All her warnings before 2008 about the fraud banking system were ignored.

* Her present-day warnings that the reforms of 2008 have left the banking system open to the same abuses as before 2008 have been ignored as well.

The title of her book on the banking crisis captures her opinion of banker ethics, The New Robber Barons.

Business Insider reports that In a presentation made to the Federal Housing Finance Agency Supervision Summit in 2010, Tavakoli explained that individuals at firms making mortgage backed securities knew the loans they were securitizing were fraudulent. In her experience, the fraud was so widespread that she entitled her presentation, “ Repairing the Damage of Fraud as A Business Model”.

More Evidence Came Out

Described as JP Morgan’s worst nightmare, by journalist Matt Taibbi, Alayne Fleishmann, who worked in its quality control unit, was frustrated by her boss’s insistence that her group continually approve a significant number of mortgages for inclusion in J P Morgan certified Residential Mortgage Back Securities that did not pass the smell test such as a manicurist who reported income of $200,000 a year.

She naïvely wrote a memo to her boss’s boss, expecting that he would not approve JP Morgan lending its name to representing toxic mortgages as prime. Being a lawyer, she knew how to set out the facts to establish the elements of criminal fraud for any government investigator. The memo became known internally as “ The Howler” from the Harry Potter stories and ignored. Of course, she was fired.

The senior executives at JP Morgan-and the other banks-we’re not worried about their reputational risk. They knew the matter was so complex that the voting public would not understand what happened and the banks had the power to control the media coverage and the DOJ.

We will see how the banks accomplished this amazing feat, next.

Acknowledgement: Image by Mohammed Hassan, Pixabey

Originally published at https://jandweir.substack.com.