Just adding to my post below, there’s an excellent interview by Bill Moyers at PBS with William Black, an American academic expert in fraud, and one of the people who helped clean up the savings and loans mess in 1991.
Black points out that the FBI warned of an ‘epidemic of mortgage fraud’ as early as 2004, though the FBI didn’t do much about it, because 500 of its financial investigators had been re-tasked to the war on terrorism.
The FBI were aware that many banks were fraudulently increasing the size of their mortgage portfolios. These fraudulent ‘liar’s loans’ were then parcelled up by investment bankers, who never checked what they were selling, and given AAA ratings by rating agencies who also never saw the loan files on the mortgages that were securitised and then sold on to unfortunate investors.
When the rating agency Fitch finally looked at some of these files in 2007, it found ‘widespread fraud’, but by then it had already given many bonds a clean bill of health.
Black is refreshingly indignant at the free ride the banks are getting – he points out that UBS received $5bn in US tax-payers’ money, at the same time as it was being indicted for avoiding hundreds of millions in tax.
He suggests that the government is obliged to put insolvent banks into receivership under the Prompt Corrective Action law, which he helped to introduce in 1991.
The law was designed to make it mandatory to step in and put banks into receivership if they are insolvent, so as not to keep bailing them out while needlessly wasting tax-payers’ money.
As he puts it, by continually supporting insolvent banks, Paulson and Geithner aren’t (or weren’t) just being foolish – they’re actually breaking the law.
