by John Lawrence from the San Diego Free Press
Wall Street Fraud on a Massive Basis
In an article in Rolling Stone, Matt Taibbi lays out the case involving massive fraud on the part of JP Morgan Chase, one of Wall Street's biggest and unfinest banks, considered too big to fail and, evidently, too big to prosecute for the massive criminality it is guilty of. It has been well documented what they and other Wall Street banks did that caused the financial crisis of 2008.
First, their counterparts lured everyone with a beating heart into their offices and gave them a mortgage regardless of their credit score, regardless of whether or not they were working, regardless of whether they could even afford to make a mortgage payment. Countrywide is the prime example of the predatory recruitment of low income people in order to turn them into homeowners despite their inability to pay.
As soon as they had signed on the dotted line and Countrywide had collected their commissions, they offloaded the mortgages to JP Morgan Chase and others so that they could be collectivized with other mortgages, securitized and given triple A ratings by credit rating agencies like Standard and Poor's and Moody's, then sliced and diced into tranches and sold off as Collateralized Debt Obligations (CDOs) to pension funds, retirement funds, insurance companies and other unsuspecting dupes.
People who would have qualified for prime mortgages were pushed into subprime mortgages with all the attendant risks involved because larger commissions were given as incentives to mortgage brokers. Then JP Morgan insured themselves against losses by purchasing Credit Default Swaps (CDSs) from AIG whose purpose was ostensibly to insure the Big Banks against losses that they knew were coming because they knew the CDOs were complete crap. What brought down the whole financial mess was the fact that AIG did not have the money to pay off on the insurance policies when the whole structure started to come tumbling down. They owed JP Morgan Chase and particularly Goldman Sachs huge amounts of money that AIG didn't have.
So it was necessary for the taxpayer to step in and pay AIG money which it should have had backing up their worthless insurance policies so they could pay off Goldman and Chase monies that they were owed on the CDSs. Taxpayer money went to AIG and from there to Chase and Goldman. Meanwhile, Chase and Goldman were foreclosing on houses that Countrywide should never have written mortgages for at a rate to beat the band, actually a rate to beat 100 bands. The foreclosures were illegitimate because of the phony electronic records that had replaced the normal records that had been kept by counties because Wall Street did not want to pay the county recording fees. As a result there were enormous paperwork screwups with the result that in many cases no one could prove who was the legal owner of the properties. So Wall Street hired robo-signers - low level workers who didn't know shit from shinola - to sign documents testifying that the foreclosures were legitimate.
Regulators Asleep at the Switch
Regulators were clueless about the whole mess in part because they were in collusion with the banks and their lobbyists who held out the promise of much better paying jobs than they currently had with the Securities and Exchange Commission. Credit rating agencies rated pure crap as triple A because the banks were paying them for their services and they didn't want to lose business by rating the securities honestly.
Mortgages were foreclosed on after banks had supposedly worked out deals with homeowners to modify them so that payments could continue. In some cases people were foreclosed on that were current on their payments.
Unsuspecting investors were royally screwed by Wall Street. For instance, hedge fund manager John Paulson phoned up Goldman Sachs with an idea. He wanted to handpick the CDOs that would be placed in a new fund called ABACUS. Paulson selected the shittiest subprime mortgages he could find to put in the fund and paid Goldman a substantial fee (about $15 million) for their help in this atrocity. Then Goldman sold off the fund to unsuspecting investors. Meanwhile, Paulson shorted the fund which was designed by him to fail in the first place. When it did, Paulson pocketed $1 billion.
So the American public was screwed four ways to Sunday. 1) Most subprime mortgages, which violated prudent underwriting standards, never should have been written. 2) AIG should have been required by their worthless regulators to have sufficient collateral to pay off on its insurance policies with the big Wall Street banks. 3) Pension funds, retirement funds and other institutional investors were screwed because they were sold worthless junk passed off as triple A rated securities. 4) Taxpayers were screwed by having to bail out Wall Street to the tune of trillions of dollars while being foreclosed on right and left.
The Whistleblower That the Government Wouldn't Let Blow Her Whistle
Whistleblower Alayne Fleischman was an insider at Chase when it was taking part in criminal activities involving knowingly selling crappy funds to an unsuspecting public. Fleischman was akin to a diligence manager, someone who was supposed to verify that the mortgages placed in a fund were sufficient to justify the fund's rating. However, she found that her bosses and managers were condoning putting the crappiest mortgages in triple A rated funds, and they didn't want any back talk from her. Case in point: Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Fleischmann smelled a rat almost immediately. The dates on the mortgages were suspiciously old. Normally, mortgages are sold off and securitized at warp speed. These had sat around for awhile or been returmed by other banks who knew they were rotten.
These GreenPoint loans were the bottom of the barrel. Somethng, indeed, was rotten in Denmark or perhaps even closer to home on Wall Street. They reeked. They were not rated as subprime, but were instead sold off as Alt-A to investors who were duped. It was like putting a fresh coat of paint on a junk car and selling it off as top quality merchandise. "Everything that I thought was bad at the time," Fleischmann says, "turned out to be a million times worse."
When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes. For instance, there was a manicurist who stated her income as $117,000. There was no way on God's green earth that she possibly could have earned that much, but such liar loans were passed off so Chase could make hefty commissions. Fleischman was instructed to put nothing in writing; she could not even e-mail her superiors!
As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as "stated income unreasonable for profession," meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.
Fleischman approached her superiors about these obviously fraudulent securities. She told one that the bank could not sell the high-risk loans as low-risk securities without committing fraud. "You can't securitize these loans without special disclosure about what's wrong with them," Fleischmann told him, "and if you make that disclosure, no one will buy them."
But Chase went ahead and sold them anyway without disclosing how putrid they were. In early 2007, Fleischman sent a long letter to another managing director which warned of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase's diligence process. She assumed this letter would be enough to force the bank to stop selling the bad loans. But she understimated the depths of fraud that Chase would stoop to. A few months later Fleischman was laid off.
A few months before the GreenPoint deal, Chase CEO Jamie Dimon informed the media that he knew about some of the toxic loans circulating in the industry. But this didn't stop him from greenlighting the sale of the GreenPoint securities anyway. Then later when testifying before the Financial Crisis Inquiry Commission, he told investigators that he had been duped like everybody else. These guys were supposed to be the smartest wizards of the universe, but all of a sudden they were dumber then hell.
Chase Doubles Down on Fraud