Hudson On the Systemic Corruption of the Mortgage Business

The Center for Public Integrity Michael Hudson has another excellent installment of his investigation into the culture of fraud at mortgage lenders during the bubble.

Everybody else seems to have moved on from the on-the-ground crime scene, to the extent that they bothered to look at it in the first place, except for Hudson, who’s still trying to show us what happened for iWatch News.

At four years old and counting, this is ancient history for newspaper reporters unfortunately living under the “tyranny of recency” (h/t Megan Garber).

But there’s still lots of muck to be raked and it still matters, as we see from how easily the Big Lie that the private sector didn’t cause the crisis has taken hold on the right.

Hudson’s series has shown how companies crushed whistleblowers who tried to stop rampant fraud in their organizations. As Binyamin Appelbaum said this morning in linking Hudson’s story:

Further evidence that the government forced financial companies to make bad mortgage loans

Indeed, presumably managers weren’t doing this so they could meet Community Reinvestment Act requirements. They were doing it because they got paid to do it. Investors wanted crappy loans to get yield, banks wanted the fees from bundling and selling them to investors (and to themselves, in the cluster stage of the crisis), and the mortgage markets followed the money.

What Hudson is trying to do here is show the systemic corruption of the mortgage industry, and the numbers he puts up high help quite a bit there.

Watch News has identified 63 former employees at 20 financial institutions who say they were fired or demoted for reporting fraud or refusing to commit fraud.

Lest you think these people are falling all over themselves running to the media, think again. Some of the sixty-three talked to Hudson, but he found many of them scouring court filings and Department of Labor proceedings.

Like Washington Mutual fraud inspector Theresa Hagman, who was fired by WaMu in 2004 after finding what she thought was fraud in lending to homebuilders. A judge later awarded her a million bucks for wrongful terminating a whistleblower. She told him:

…that there were “senior-level people in this organization who are still there today who did not tell the truth. Their integrity and their honor … without question failed.”

Hudson nicely juxtaposes with ex-WaMu CEO Kerry Killinger’s testimony to Congress:

In congressional testimony, former Washington Mutual chief executive Kerry Killinger blamed borrowers for misleading WaMu about their incomes and other details in their loan applications.

“I’m certainly very disappointed to think about my customers lying to me, because that’s fraud and it shouldn’t happen,” Killinger said. “But I think an objective look at things is that there must have been situations where people did not tell the truth on their applications.”

Hudson notes that a WaMu internal investigation found an 83 percent fraud rate at one of the bank’s big centers, and it did nothing about it.

The prospect of whistleblowers getting fired, demoted, or ostracized is the big reason why it’s so hard to ferret out wrongdoing in companies. But there are other ones, of course.

At the same time, employers are often successful at preventing whistleblowers from getting the word out to the wider world. When companies and employees negotiate severance contracts and legal settlements, confidentiality clauses often permanently silence whistleblowers. Companies also frequently force ex-employees with whistleblower claims into private arbitration, ensuring that many details of their cases will remain secret.

This makes it that much harder for the press to report these stories. Hudson is showing here, though, that that’s no excuse.

UPDATE: In comments, Thimbles points out this stat from Hudson’s piece:

“When Congress passed Sarbanes-Oxley in 2002, it raised hopes that more workers would be emboldened to come forward with information that would help prevent future corporate scandals. One legal scholar hailed the act — which gave federal labor officials the power to order companies to swiftly reinstate whistleblowers with back pay — as “the most important whistleblower protection law in the world.”

Things haven’t worked out as whistleblower advocates had hoped. Critics claim the Labor Department hasn’t done enough to protect financial whistleblowers.

In roughly the first nine years of the law — from 2002 through May 20 of this year — the agency issued merit findings in 21 whistleblower complaints and dismissed 1,211 others.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,