Fraud By The Big Banks – More Than Anything Done By The Little Guy – Caused The Financial Crisis

The U.S. Treasury’s Office of Thrift Supervision noted last year (page 7):

The FBI estimates that 80 percent of all mortgage fraud involves collaboration
or collusion by industry insiders.

This confirms what one of the country’s top fraud experts has said for years: that it was fraud by the big banks – more than anything done by the little guy – which caused the financial crisis:

William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – explained last month before to the Financial Crisis Inquiry Commission why banks gave home loans to people who they knew couldn’t repay. The whole piece is a must-read, but here are excerpts from the introduction:

The data demonstrate conclusively that most liar’s loans were fraudulent, which means that there were millions of fraudulent mortgage loans because liar’s loans became common (Credit Suisse estimates that they represented 49% of new originations by 2006). The data also demonstrate that even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of such fraudulent liar’s loans. No honest, rational lender would make large numbers of liar’s loans. The epidemic of mortgage fraud was so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble (and the depth of the ultimate Great Recession.


In the cases where there have been even minimal investigations (New Century, Aurora/Lehman, Citi, WaMu, Countrywide, and IndyMac) senior lender officials were aware that liar’s loans were typically fraudulent. The lenders could not make an honest business out of selling overwhelmingly fraudulent mortgages.

Liar’s loans were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” (Akerlof & Romer 1993). A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by following a four-part recipe:

A. Extreme Growth
B. Making bad loans at a premium yield
C. Extreme leverage
D. Grossly inadequate loss reserves

Note that this same recipe maximizes fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy. This explains Akerlof & Romer’s title – Looting: The Economic Underworld of Bankruptcy for Profit. The failure of the firm is not a failure of the fraud scheme. (Modern bailouts may even recapitalize the looted bank and leave the looters in charge of it.)

The first two “ingredients” are related. Home lending is a mature, reasonably competitive industry. A lender cannot grow extremely rapidly by making good loans. If he tried, he’d have to cut his yield and his competitors would respond. His income would decline. But he can guarantee the ability to grow extremely rapidly by being indifferent to loan quality and charging weaker credit risks, or more naïve borrowers, a premium yield.

In order to become indifferent to loan quality the officers controlling the lender must eviscerate its underwriting.


There is no honest reason for a secured lender to seek or permit inflated appraisal values. This is a sure marker of accounting control fraud – a marker that juries easily understand.

In other words, banks made loans to borrowers who they knew couldn’t really repay because the heads of the banks could make huge bonuses based on high volumes and fraudulent appraisals, and they didn’t care if their own companies later failed.

In short, they looted their companies and the economy as a whole.

Professor Black brings us current to where we are today:

History demonstrates that if the control frauds get away with their frauds they will strike again.

By allowing the banks to use their political power to gimmick the accounting rules to permit them to hide their massive losses on liar’s loans we have made it far harder to take effective administrative, civil, and criminal sanctions against the elite frauds that caused the Great Recession. Hiding the losses also adopts the dishonest Japanese approach that cripples economic recovery and public integrity.

Prosecuting the elites control frauds can be done successfully. Create a new “Top 100” priority list and appoint regulators that will make supporting the Justice Department a top agency priority. That’s how we obtained over 1000 priority felony convictions of elite S&L criminals. No controlling officer of a large, non-prime specialty lender has been convicted of running a control fraud. Only one has even been indicted.

The FBI has written that any discussion of the crisis that ignores the role of mortgage fraud is “irresponsible.”

But instead of prosecuting fraud, the government just continues to cover it up.

Category: Bailouts, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “FBI Estimates 80% of Mortgage Fraud Involved Industry Insiders”

  1. digistar says:

    Excellent piece.

    Makes you wish William K. Black was in charge of cleaning up this mess.

    Major league crimes of the elite ignored, but just try stealing a loaf of bread.

    Public integrity – rest in peace.

  2. BigBlueCrab says:

    Biz as usual…Send the guy who robs a 7-11 to 20 years, but crush the economy, throw millions out of work?..
    High fives and crack the champagne….we killed em’ today!

  3. Insider says:

    Hi Barry, without trying to be too political, do you have any thoughts on why the president downplays all this?

    From the recent 60 minutes transcript:;contentBody

    “PRESIDENT OBAMA: Well, I think you’re absolutely right in your interpretation. And, you know, I can’t, as President of the United States, comment on the decisions about particular prosecutions. That’s the job of the Justice Department. And we keep those things separate, so that there’s no political influence on decisions made by professional prosecutors. I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.”

  4. xynz says:

    Barry, you just don’t get it.

    The solution is completely unfettered free markets. History clearly demonstrates that markets are perfectly capable of REGULATING THEMSELVES.

    For example, we should completely deregulate the political process and open it up to market forces. When people are allowed to vote with their dollars (as well as with their ballots), then the pure efficiency of the rational market would give us a purely efficient and rational government.

    Unfortunately, the rationalizing effect of private money on the political process has been muted by intrusive government regulations. Thankfully, recent judicial decisions have defined corporations as people with Constitutional Rights. The Supreme Court has also quashed some of the regulations which have made it more difficult for the free market to give us a more efficient government.

    Once the markets have complete control over society, then we won’t have to wait every two/four years for elections to change our national policies. For example, just as market forces are perfectly capable of protecting the environment, they are also perfectly capable of protecting our national security. Just imagine how safe and secure a truly free America would be, with the Enrons, Countrywides and Madoffs protecting our borders, seas and skies.

  5. rktbrkr says:

    and the occupy protesters get roughed up while they are arrested for protesting this injustice

  6. sjankis630 says:

    Thank you for the link. I hate to say it but I may just stop reading about this whole thing. It sickens me honestly.
    You are preaching so much to the choir you might as well have your back to the congregation.
    I work for a large company (govt contractor)where the majority of my coworkers are convinced that the liberal left’s policies are responsible for this entire mess (CRA- I must sit and listen to them tell me how those powerful bankers were forced to give those poor people loans which is ruining this country!)
    I also love it when someone who has never made more than $40k in a single year gets bent out of shape about the “death tax.” Barry these are not dumb people either. They are productive members of society who raise good families.
    I have given up trying to have them agree with reason.
    I gave that up when I went to a Christmas lunch with a friend who was working for a mortgage company back in 2006 who explained to me how his company was selling every loan (no matter how crazy) after an average of 8 days and who gives a hoot what happens then.
    How does that Serenity prayer go?
    God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.
    Well my wisdom tells me that I cannot change these things so I may as well accept them.

  7. honeybadger says:

    sjankis630: the version I heard goes like this

    God grant me the serenity to accept the things I cannot change; courage to change the things I can; and a red Ferrarri

    Well, I have changed a few small things in this world, and taken on fights that should have killed me, but I am still waiting on the car.

  8. Moe says:

    These days, whatever the issue – both sides are DEAD CERTAIN in their position. There is a self-assured smugness and I have no idea why.

    Read about the “Radium Girls” – I send it out a lot these days with the following message: “We were stupid enough to do this at one time…who’s to know the levels of stupid we are reaching today?”.

  9. UncleMilty says:

    I’m all for prosecuting those who committed fraud. But not all bankers knowingly committed fraud. We should be careful about painting them all with the same brush.

    However, every liar loan had a liar who knowingly signed for the loan. Should we also prosecute them?

  10. rd says:

    We should be thankful that these financial frauds are not being investigated or prosecuted so that there is time for the courts to address these critical cases:

  11. dsawy says:

    Okey-dokie. Let’s accept this figure as a given. I’m perfectly willing to accept it, even if it turns out to actually be somewhere between 60 and 90%.

    When is the FBI going to start issuing indictments for this fraud? I’m not expecting to see hundreds of well-heeled grifters from Wall Street do a perp walk, but certainly there must be very strong cases that could be made against anywhere from three to 20 of these clowns…?

  12. GeorgeBurnsWasRight says:

    Dsawy- my understanding is that prosecutors have mostly concluded that they can’t get an American jury that can understand complex financial cases well enough to convict anyone.

  13. rtol says:

    Absolutely right in outline, but missing context. No one wakes up one morning and decides to do 100% LTV liar loans. In the mid to late 90′s limited documentation loans existed, but were a reasonably rational product (25% cash equity, stellar credit, only available to people (such as the self-employed) who could reasonably be expected to have difficulty documenting their income, charged at a reasonable premium to fully documented borrowers. Over time, different lenders began edging away from this kind of underwriting and developed a kind of race to the bottom in underwriting standards until by 2004 or so no income documentation had become the de facto standard approach used for most purchase and may refinance transactions.

    By 2005-2006 you literally saw a generation of Realtors who knew of no other way to qualify a borrower, and would not accept the imposition of rational underwriting guidelines as long as a lender existed that would approve the loan with minimal documentation.

  14. alnval says:

    Keep the heat on Barry. No one else comes even close to your access to the media, personal credibility, knowledge and experience. I’m hoping that those few state attorneys general who are pursuing this have the stamina to finish the race. Thanks again.

  15. Moe,

    re: “Radium Girls”

    “We” knew then, as “We” know now..

    as per, it’s, merely, a matter of degree–how many(?) know..

    ’twas that, one of, at least, that laid out Marie Curie..

    compare and contrast to..

  16. merily says:

    Nice article, thanks; however the link to William Black’s presentation goes to a blank page at a university in Texas.

  17. philipat says:

    Bill Black should be Ron Paul’s Attorney General?

  18. Diogenes II says:

    I’m not surprised by this number, but it’s great to now have an FBI statistic to cite in conversations with naysayers. And I agree with your earlier article that housing is on the Japan trajectory.

    A request: please post more gift ideas. You have become my go to source.


    BR: I have a few more in the queue . . . Its a welcome break from the relentless ugliness I usually write about!

  19. Frwip says:


    The correct link for Black’s presentation at the FCIC is :

  20. [...] thinks that most of the fraud came from insiders….surprised? I thought [...]

  21. [...] further extend the life of the bubble (and the depth of the ultimate Great Recession.To read more, click here: Last modified: December 15, 2011 All rights reserved. This copyrighted material may not be [...]

  22. Budda Nature says:

    This was copied from a post at the website I cannot take credit for it. Nor do I know if accurately describes the process. But whom ever wrote seemed to know the proper terms and also seemed to have good grasp of how it is done.

    The Mortgage Origination and Securitization Process

    Here with is a very brief tutorial (on how you have been taken to the cleaners):

    You buy the house and you sign a “Note.” The Note says you borrowed the money from the “Lender.” But you didn’t. The “Lender” named on the “Note” is not the lender, that is a straw-man, a fee-origination broker that has no skin in the game and is just there to collect a fat fee for fronting. The real lender is unknown. So, first point, the “Note” does not even describe the transaction, and hence is not representative of the Obligation (sure, you owe money, just not to the “Lender” on that Note). The money came from a wholesaler, effectively a financial valet-park service. In turn, the funds sourced from a Wall Street bank, that in turn was not the original source; that is from the “Investors” [think: pension fund in Stavanger, Norway]. Why the subterfuge? Because then Wall Street controls the information, and information equals profit. The “investor” never knows the borrower, and the borrower never meets the investor. All they meet are the straw-men in the middle. The investors are told that they will receive (pick a number) a 3% return on their investment in CDS certificates; the investors receive a Bond, the Borrower issues a Note. Of importance is that the investors never get the Note to hold; all they get is a Certificate, a share of a pool (or Trust Indenture). For each million put up, the investors are promised an interest coupon of $30K. To generate that 30K, the hustlers (the Street) sells off $500,000 in 6% mortgage Notes (to anybody with a warm pulse). Now: what about the OTHER $500k in investor capital? Remember, only 500K was used to finance those Notes at 6%. Well, that disappears into the Bonus Pools of the Street. And there is Reason No.1 why the Street went crazy to collateralize home loans. All those mounds of cash were getting skimmed off up-front, with nobody the wiser. The margins get much better with sub-prime, or Alt-A, loans. In a sub-prime, the rate goes up, as high as a starter of 9%. At this rate, the fees to the “Lender” [the outfit on the paper] is 7-x larger than for a prime note. And the Street skims off 65% of the principal as the vig. To make it salable to the investor, it needs a AAA or AA Rating, so they get that from Fitch, Moodys, S&P. To convince the Raters, the Street buys a “credit-default swap,” an insurance policy, the premium paid for by the homeowner, from somebody like AIG. Then, to be really pernicious, the Street short-sells outside the package as they know the sub-prime is going to default soon enough. When the Indenture defaults, after 91 days the CDS pays off the principal and interest. At this point, the Notes in the pool are all paid. Except the homeowner (and the local foreclosure courts) don’t know about the payments; the payments are not credited by the Servicers to the Notes. The borrowers and the local courts think there is still an Obligation out there, although in actuality the Obligation was retired by the CDS. The CDS is without subrogation, so the insurer does not get the Note as residual. When the dust settles, what is left over is a Note, fully paid, but nobody stamps it “Paid,” still sitting with the Bankers, the “Trustee” of the “Trust.” That is just too tempting. So the “Note” goes off for foreclosure, (Yes, you need some dummied-up paperwork, so that gets contracted out to “Lender Processing Services” for robo-signing), the house is grabbed, is sold for whatever it can fetch, and that cash is “free money” to go straight into the Bonus Pool. So now you know how the Street can hand out hundreds of billions in bonuses while the country is in collapse. All you posters here have no clue. What is going on is theft on a colossal scale, because the Street controls the information. The Street keeps the two sides to the transaction apart, so only the Street knows the details of where the money (and the Notes) went. Never mind that the notes are non-negotiable instruments and that they do not describe the Obligation and that the mortgage is not connected to the Note in any event (having been spun off) and that they are transferred by indorsement “in blank” and by “allonge” not affixed to the Instrument; nobody has a clue. Including you guys. Which is why the Street steals, gets rich, and you are buried in a sea of confusion. Wise up, guys; the “borrower” was never expected to actually pay off the Note in full; that part was not even interesting. Why do you think they were handing out mortgage loans to hopelessly insolvent people? Who cared? The big bucks were in the up-front vig, and then the credit-default insurance payoffs. Who cares about some pedantic 30-year string of piddling remittances? Not the Street. There is no money velocity in a 30-year stream; the cash is all up front in the skim. You are being robbed by people who might as well be signed up with the Gambino family.

  23. Sechel says:

    A great response to the Fed study that blamed the bubble on borrowers/speculators.
    see below

    Virtually everyone who buys a house is hoping for prices to rise, and most use leverage (debt)—in this case, a mortgage—to allow them to buy more housing than they can afford to pay for in cash. While the majority of borrowers have a consumption motive—as “owner-occupants,” they intend to live in the house—some borrowers own housing purely as an investment. As mortgage lenders have long known, investors are more likely than owner-occupants to walk away from an underwater property. So when a borrower acknowledges on the mortgage application that she won’t live in the house, the lender will typically require a higher down-payment and charge a higher interest rate to reflect the additional default risk. Within the category of real estate investors, some buy properties with the intention of renting them out, while others intend to simply “flip this house,” selling quickly and reaping a capital gain.

    Because investors don’t plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates. The expansion of the nonprime mortgage market during the 2000s provided the perfect opportunity for optimistic investors to get low-down-payment credit, albeit at high interest rates. As shown in the charts below, investors were far more likely than owner-occupants to use nonprime credit to make their purchases, especially at the peak. Again, the colors show the number of properties the borrower owns, but this time we leave in the single-property borrowers for comparison.
    Lessons to Learn?
    We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought. The availability of low- and no-down-payment mortgages in the nonprime sector enabled investors to make these bets. This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family. In the end, even the value of the 20 percent down-payments made by responsible, prime borrowers was wiped out—leaving the housing market, and the economy, in the vulnerable state we find them in today.