Now here’s a lede The Audit can get behind:
If it wasn’t already blindingly obvious that pervasive fraud was at the heart of the financial crisis and the ensuing foreclosure catastrophe, you would think that the latest news — that banks have routinely been lying their heads off in the rush to kick homeowners off the properties they fraudulently induced them to buy in the first place — would pretty much clinch it.
That’s Dan Froomkin kicking off a must-read column over at Nieman Watchdog. Froomkin asked former S&L cop William K. Black to talk about what stories the press is underreporting or outright missing.
Black was a cop on the S&L crisis beat two decades ago, back when regulators helped send more than a thousand of bankers to prison. More than a thousand! So you might suspect he has a few choice thoughts on what the press misses, and he does: It’s missing “the crooked heart of the credit crisis,” you might say.
As we and others have said, the press has to connect the current foreclosure scandal to the fraud that was pervasive in the lending process while the bubble was inflating. They’re at base part of the same story.
The things I think are critical and badly underreported are:
1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.
2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice” to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit.)
Need an example? Look no further than the top dog of the mortgage mess: Angelo Mozilo of Countrywide, recently let off with a rap on the wrist by the SEC. This from Gretchen Morgenson’s story in The New York Times on Sunday (I should say, if anybody deserves an exemption from Black’s press criticisms, it would be Morgenson):
But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: “Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies.”
Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They “are going to experience a payment shock which is going to be difficult if not impossible for them to manage,” he said….
Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.
“In all my years in the business, I have never seen a more toxic product,” he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. “With real estate values coming down … the product will become increasingly worse.”
Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.