Wall Street Fraud on a Massive Basis
By John Lawrence
In an article in Rolling Stone, Matt Taibbi lays out the case involving massive fraud on the part of JP Morgan Chase, one of Wall Street’s biggest and un-finest banks, considered too big to fail and, evidently, too big to prosecute for the massive criminality it is guilty of. It has been well documented what they and other Wall Street banks did that caused the financial crisis of 2008.
First, their counterparts lured everyone with a beating heart into their offices and gave them a mortgage regardless of their credit score, regardless of whether or not they were working, regardless of whether they could even afford to make a mortgage payment. Countrywide is the prime example of the predatory recruitment of low income people in order to turn them into homeowners despite their inability to pay.
As soon as they had signed on the dotted line and Countrywide had collected their commissions, they offloaded the mortgages to JP Morgan Chase and others so that they could be collectivized with other mortgages, securitized and given triple A ratings by credit rating agencies like Standard and Poor’s and Moody’s, then sliced and diced into tranches and sold off as Collateralized Debt Obligations (CDOs) to pension funds, retirement funds, insurance companies and other unsuspecting dupes.
People who would have qualified for prime mortgages were pushed into subprime mortgages with all the attendant risks involved because larger commissions were given as incentives to mortgage brokers. Then JP Morgan insured themselves against losses by purchasing Credit Default Swaps (CDSs) from AIG whose purpose was ostensibly to insure the Big Banks against losses that they knew were coming because they knew the CDOs were complete crap.
What brought down the whole financial mess was the fact that AIG did not have the money to pay off on the insurance policies when the whole structure started to come tumbling down. They owed JP Morgan Chase and particularly Goldman Sachs huge amounts of money that AIG didn’t have.
So it was necessary for the taxpayer to step in and pay AIG money which it should have had backing up their worthless insurance policies so they could pay off Goldman and Chase monies that they were owed on the CDSs. Taxpayer money went to AIG and from there to Chase and Goldman. Meanwhile, Chase and Goldman were foreclosing on houses that Countrywide should never have written mortgages for at a rate to beat the band, actually a rate to beat 100 bands.
The foreclosures were illegitimate because of the phony electronic records that had replaced the normal records that had been kept by counties because Wall Street did not want to pay the county recording fees. As a result there were enormous paperwork screwups with the result that in many cases no one could prove who was the legal owner of the properties. So Wall Street hired robo-signers – low level workers who didn’t know shit from shinola – to sign documents testifying that the foreclosures were legitimate.
Regulators Asleep at the Switch
Regulators were clueless about the whole mess in part because they were in collusion with the banks and their lobbyists who held out the promise of much better paying jobs than they currently had with the Securities and Exchange Commission. Credit rating agencies rated pure crap as triple A because the banks were paying them for their services and they didn’t want to lose business by rating the securities honestly.
Mortgages were foreclosed on after banks had supposedly worked out deals with homeowners to modify them so that payments could continue. In some cases people were foreclosed on that were current on their payments.
Unsuspecting investors were royally screwed by Wall Street. For instance, hedge fund manager John Paulson phoned up Goldman Sachs with an idea. He wanted to handpick the CDOs that would be placed in a new fund called ABACUS. Paulson selected the shittiest subprime mortgages he could find to put in the fund and paid Goldman a substantial fee (about $15 million) for their help in this atrocity. Then Goldman sold off the fund to unsuspecting investors. Meanwhile, Paulson shorted the fund which was designed by him to fail in the first place. When it did, Paulson pocketed $1 billion.
So the American public was screwed four ways to Sunday. 1) Most subprime mortgages, which violated prudent underwriting standards, never should have been written. 2) AIG should have been required by their worthless regulators to have sufficient collateral to pay off on its insurance policies with the big Wall Street banks. 3) Pension funds, retirement funds and other institutional investors were screwed because they were sold worthless junk passed off as triple A rated securities. 4) Taxpayers were screwed by having to bail out Wall Street to the tune of trillions of dollars while being foreclosed on right and left.
The Whistleblower That the Government Wouldn’t Let Blow Her Whistle
Whistleblower Alayne Fleischman was an insider at Chase when it was taking part in criminal activities involving knowingly selling crappy funds to an unsuspecting public. Fleischman was akin to a diligence manager, someone who was supposed to verify that the mortgages placed in a fund were sufficient to justify the fund’s rating.
However, she found that her bosses and managers were condoning putting the crappiest mortgages in triple A rated funds, and they didn’t want any back talk from her. Case in point: Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Fleischmann smelled a rat almost immediately. The dates on the mortgages were suspiciously old. Normally, mortgages are sold off and securitized at warp speed. These had sat around for awhile or been returmed by other banks who knew they were rotten.
These GreenPoint loans were the bottom of the barrel. Somethng, indeed, was rotten in Denmark or perhaps even closer to home on Wall Street. They reeked. They were not rated as subprime, but were instead sold off as Alt-A to investors who were duped.
It was like putting a fresh coat of paint on a junk car and selling it off as top quality merchandise. “Everything that I thought was bad at the time,” Fleischmann says, “turned out to be a million times worse.”
When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes. For instance, there was a manicurist who stated her income as $117,000. There was no way on God’s green earth that she possibly could have earned that much, but such liar loans were passed off so Chase could make hefty commissions. Fleischman was instructed to put nothing in writing; she could not even e-mail her superiors!
As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as “stated income unreasonable for profession,” meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.
Fleischman approached her superiors about these obviously fraudulent securities. She told one that the bank could not sell the high-risk loans as low-risk securities without committing fraud. “You can’t securitize these loans without special disclosure about what’s wrong with them,” Fleischmann told him, “and if you make that disclosure, no one will buy them.”
But Chase went ahead and sold them anyway without disclosing how putrid they were. In early 2007, Fleischman sent a long letter to another managing director which warned of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process. She assumed this letter would be enough to force the bank to stop selling the bad loans. But she understimated the depths of fraud that Chase would stoop to. A few months later Fleischman was laid off.
A few months before the GreenPoint deal, Chase CEO Jamie Dimon informed the media that he knew about some of the toxic loans circulating in the industry. But this didn’t stop him from greenlighting the sale of the GreenPoint securities anyway.
Then later when testifying before the Financial Crisis Inquiry Commission, he told investigators that he had been duped like everybody else. These guys were supposed to be the smartest wizards of the universe, but all of a sudden they were dumber then hell.
Chase Doubles Down on Fraud
But Chase continued to sell worthless securities:
A single lawsuit by a single angry litigant gives some insight. In 2011, Chase was sued over massive losses suffered by a group of credit unions. One of them had invested $135 million in one of the bank’s mortgage–backed securities. About 40 percent of the loans in that deal came from the GreenPoint pool.
The lawsuit alleged that in just the first year, the security suffered $51 million in losses, nearly 50 times what had been projected. It’s hard to say how much of that was due to the GreenPoint loans. But this was just one security, one year, and the losses were in the tens of millions. And Chase did deal after deal with the same methodology. So did most of the other banks. It’s theft on a scale that blows the mind.
In 2012, President Obama, giving in to pressure from the Occupy movement and other reformers, had formed the Residential Mortgage-Backed Securities Working Group. This seemed like a serious show of force against banks like Chase. The group included noted anti-corruption investigator and New York Attorney General Eric Schneiderman, which gave many observers reason to hope that finally something would be done about the crimes that led to the crash.
However, investigators at the highest level including Attorney General Eric Holder participated in a whitewash of Chase and gave them a little slap on the wrist without Chase having to admit anything regarding its criminal activities.
The following year, the SEC would fine Chase $297 million for misrepresentations in another deal. “The kid-gloves approach that the DOJ and the SEC take with Wall Street is as inexplicable as it is indefensible,” said Dennis Kelleher of the financial reform group Better Markets, which would later file suit challenging the Chase settlement. “They typically charge only one offense when there are dozens. It would be like charging a serial murderer with a single assault and giving them probation.
In 2013 AG Eric Holder was scheduled to hold a press conference at which he would announce civil fraud charges against Chase. Before he could do so, however, CEO Jamie Dimon got on the phone with him and convinced him to open talks for a negotiated settlement for the situation which Holder agreed to.
So a criminal calls the highest law enforcement official in the US and persuades him to agree to a negotiated settlement which subsequently amounted to a slap on the wrist with no admission of wrongdoing.
It goes without saying that the ordinary citizen who is the target of a government investigation cannot simply pick up the phone, call up the prosecutor in charge of his case and have a legal proceeding canceled. But Dimon did just that. “And he didn’t just call the prosecutor, he called the prosecutor’s boss,” Fleischmann says. According to The New York Times, after Dimon had already offered $3 billion to settle the case and was turned down, he went to Holder’s office and upped the offer, but apparently not by enough.
Fleischman was led to believe that she was the chief witness in the corruption case against Chase. But the fact was that she was being used by the government as motivation to get Jamie Dimon to up the amount he agreed to pay to settle the case. In fact Dimon upped the amount to $9 billion and Fleischman never got a chance to testify in court.
Jamie Dimon Comes Out Smelling Like a Rose
Newspapers announced erroneously that the “$13 billion” deal, which ended Chase’s civil liability, was the largest white collar settlement in history, but Chase could still be gone after for criminal liability. It turned out that the government crackdown on Chase was a carefully contrived fiction. $4 billion of the deal was in “consumer relief” which Chase was not even responsible for paying.
Chase was allowed to sign a short “statement of facts” which effectively whitewashed their entire involvement in fraud and criminality. The kicker was that some $7 billion dollars of the deal was allowed to be written off Chase’s taxes because the settlement monies were not called fines or penalties.
Duhhh. So the hapless American taxpayer effectively paid for Chase’s crimes. Shortly after the deal was done, Chase announced their innocence.
Meanwhile, Fleischman was waiting to be interviewed by the goverment’s criminal investigators. The meeting never happened. It seemed that a tacit part of the government’s deal was that the case for criminal fraud would not be pursued.
As Fleischmann was waiting for the Justice Department to call, Chase and its lawyers had been going to tremendous lengths to keep her muzzled. A number of major institutional investors had sued the bank in an effort to recover money lost in investing in Chase’s fraud-ridden home loans. In October 2013, one of those investors – the Fort Worth Employees’ Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines in The Wall Street Journal and other major media outlets.
Other investors sued to gain access to Fleischman and her inditement of Chase’s top executives. In each case Chase did an end run to keep what Fleischman had to say out of the spotlight. Nevertheless, she has the proof for all the elements of the crime as defined by federal law – the bank made material misrepresentations, it made material omissions, and it did so willfully and with specific intent, consciously ignoring warnings from inside the firm and out.
Eric Holder in a speech hemmed and hawed about how you couldn’t really blame any executive for the things that happened which blew up the economy. Responsibility was too diffuse, and besides is it worth really undermining the whole world’s banking system to punish a few wrongdoers? I guess not because the government hasn’t put one of them in jail.
During the Savings & Loan crisis they prosecuted over 600 individuals, but now fraud is completely acceptable as long as it is done at a high enough level. But don’t try stealing a few candy bars from 7-11; you’ll surely go to jail. Matt Taibbi makes this point abundantly clear in his latest book, The Divide and as reported by us here.
Fleischman is still waiting for the opportunity to get what she saw and experienced off her chest even though she has no financial incentive for doing so. “The assumption they make is that I won’t blow up my life to do it,” Fleischmann says. “But they’re wrong about that.”
For an interview wth Alayne and Matt by Democracy Now!, check this out.
Lobbyists are also going after states’ Attorney Generals and getting them to ignore the American people in favor of the banksters. This is from the New York Times, October 28, 2014:
Our leaders are self-congratulating after every new “settlement” the government reaches with the financial institutions – like they scored the biggest prize of their lives. The hypocrisy that they can claim to have executed justice over the banks, while not criminally prosecuting a single person who was responsible for the crimes that these multi-billion-dollar settlements are now addressing, is something we, as a nation, should not accept or forget.
The facts are clear: those who perpetrated enormous fraud are being let free with a small price tag to pay in compensation, while the victims of their crimes remain left out in the cold, many years later, without any rectification for their losses.
The National Mortgage Settlement was supposed to get $5 billion from the banks. In reality it only allocated $1.5 billion for compensation to homeowners who lost their homes to unlawful foreclosures between 2008-2011. The rest of the settlement money went to the states. Some states used this money to balance their budgets, and some, like Florida, used it to fund even more speedy foreclosures that gave homeowners no chance of due process in court.
Just a few days ago the media announced another fraud perpetrated by the big banks including JP Morgan Chase and Citibank and the obligatory slap on the wrist fines. This time it was rigging foreign exchange markets. Oh well, another day, another Wall Street fraud and no one jailed. Ho Hum.