And this is interesting:

In another instance, according to a former manager cited as a “confidential witness” in shareholders’ litigation against the company, employees appeared to be involved in a “loan flipping” scheme, persuading borrowers to refinance again and again, giving them little new money, but piling on more fees and ratcheting up their debt. The witness recalled that when the scheme was pointed out to Lumsden, Countrywide’s subprime loan chief, the response from Lumsden was “short and sweet”: “Fund the loans.”

The fact that Countrywide was not only the largest subprime lender but the nation’s largest mortgage lender makes a story like this significant, even if one already suspected the place wasn’t clean. If it’s shown that fraud in the lending system was systemic—not just a branch here or there—then your view of the financial crisis has to change.

But that won’t keep the flacks at BofA from their jobs:

When fraud happens, Bank of America spokesman Rick Simon says, “the lender is almost always a victim, even if the fraud is perpetrated by individual employees. Fraud is costly, so lenders necessarily invest heavily in both preventing and investigating it.”

That’s like saying shoplifters are almost always victims when security guards catch them and they have to spend a night in the slammer. This is where you should revisit Bill Black’s concept of control fraud. That’s where a company’s executives loot the company by using fraud to pump up short-term and midterm profits to increase their pay. Saying that the lender is a victim, when the people who run it commit fraud, is essentially saying that the corporate entity can’t be blamed for anything. Corporations don’t defraud people; people defraud people—or something like that. It’s nonsense.

But even when the people defraud people they didn’t face any consequences other than termination (although even that wasn’t necessarily the case for top producers). Countrywide found prima facie evidence of fraud in its Boston offices and shut six of them down. Hudson also reports that Countrywide had to shut a Chicago branch and a Southern California one for rampant fraud. What I want to know: Did Countrywide turn anyone into the authorities for these frauds? If not, isn’t that a big no-no?

This is great work by Hudson, and reminiscent of what he reported went down at Ameriquest in his book The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America—and Spawned a Global Crisis, which you should buy.

You have to marvel at how a reporter can put this stuff together but the SEC/Department of Justice/FTC/FHA etc. can’t.

Further Reading:

Audit Interview: Michael Hudson. “We’re in a battle now to define what happened.”

Tale of Two Citis. It took an obscure magazine to reveal how Sandy Weill built his empire on subprime lending. Why?


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 rc2538@columbia.edu.