xthread | There Oughta Be A Law!

There Oughta Be A Law!

In another venue, someone argued 'the people who caused the mortgage meltdown be in jail?!'

I don't know if any of you, dear readers, happen to hold that view, but, if you do, would you be so kind as to tell me, in general terms, who you think ought to be in jail, and in specific terms, what you think they should be in jail for?

Let me note two important things at the outset: remember that lying to people is usually only against the law if you're doing so to cheat them out of money (which is why Bernie Madoff is in jail), and it's unconstitutional to make laws that make something retroactively illegal.

Got your moral outrage ready? Go!

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1. There is a world of difference between something that is illegal (e.g. mortgage fraud, as practiced by many lenders and brokers) and something that is prosecuted. It appears that while it certainly was illegal to write many of those mortgage contracts, none or very few of the folks involved have been prosecuted. This oversight, if we can call it that, is what many of us would like changed.

2. There was very clear fraud in the bundling of mortgages, some of which is being litigated now under civil laws. Again, fraud is illegal, but this does not mean that it is prosecuted. It should be.

3. If you want the specific statutes violated, you know you can always ask me. :)

4. The fraud in the foreclosure industry has been exposed quite thoroughly as well. Signing legal documents fraudulently is quite illegal. And yet, I don't see large prosecutions there either.

5. Also, while we're at it, I believe we should prosecute the Office of the Comptroller of the Currency, but that was is much harder (it requires proving willful disregard, which is quite tricky). If you need more on that, read Watters v. Wachovia Bank (Supreme Court, 2007).

How many humans do you think we're talking about? How large a fraction of the market? When I hear people say 'where are the perp walks,' I'm assuming they also mean, even if they're not saying, 'it's the fraud that got us in to this mess.'

That's an interesting question. There is very clear documentation that about 15% of the mortgages were fraudulently obtained (and the fraud was not by the borrower but by the broker or the bank), and that the bundling information was often falsified. But we'd need to prosecute to get more details (because discovery powers are a wonderful thing). Fraud was pretty prevalent (http://www.seattlepi.com/national/397690_fbiweb28.html).

Do I think it's a good idea to prosecute the little fish? Well, I'm fond of RICO; let's see if we can pressure the little fish to give up the bigger fish and see how far up the food chain we can trace the fraud. I expect it would reach quite high.

15%!??! Across all income levels and market categories?!

Did I say that? I was talking about the overall levels. Obviously not the same levels of fraud across all income levels and market categories. I know this will come as a shock but knowledgeable purchasers and investors were much less likely to be defrauded.

I think it was a huge level of fraud, and mostly deliberately ignored by regulators until the housing market blew up. http://www.crime-research.org/analytics/mortgage_fraud0405/

Am I missing something? Those articles are reporting loss levels of tens of millions of dollars and tens of thousands of cases of fraud.. which is a drop in the bucket in a Trillion dollar business.

To quote a relative:

"The only explanation is the FDIC management must have been smoking dope and inhaling," says Richard Newsom, a retired FDIC and California state banking examiner who reviewed court documents, FDIC reports, financial filings by UCBH (the bank's holding company), and other documents forwarded by SF Weekly. "They knew he[Tommy Wu] was a scumbag eight years ago. But they did nothing."

...
Last fall, Tommy Wu's bank collapsed, taking with it $1.3 billion in FDIC insurance funds, while devouring the $300 million UCB got from the Troubled Asset Relief Program (TARP), meant to fortify supposedly healthy banks.

from: http://www.sfweekly.com/2010-12-29/news/the-mad-quest-of-mr-wu/

My uncle's colorful phrasing aside, there are indeed indications of higher-level looking-the-other-way and profiteering, and being able to prosecute *that* would be lovely. (Uncle Dick is also the man who brought down the Lincoln S&L guy, for context.)

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There Oughta Be A Law!

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