Janet Tavakoli: "Fraud As a Business Model"

09-07-2011 • huffingtonpost.com

On Friday, September 2, 2011, The U.S. Federal Housing Finance Agency (FHFA), the regulator for taxpayer-subsidized mortgage lending guarantors Fannie Mae and Freddie Mac, filed lawsuits against 17 of the world's largest banks over suspect mortgage loans which helped exacerbate the U.S. housing crisis. Both Fannie Mae and Freddie Mac were placed in conservatorship in September 2008 after they nearly collapsed. The FHFA claims banks misrepresented the value of the mortgage loans and mortgage securities they underwrote, arranged, and sold. So far the banks being sued include Bank of America Corp along with its Countrywide Financial Corporation and Merrill Lynch & Company divisions, Goldman Sachs Group Inc., JP Morgan & Chase & Co, Citigroup Inc., Deutsche Bank AG, Barclays PLC, Nomura Holdings Inc., Morgan Stanley, Ally Financial Inc., Credit Suisse Group Inc., First Horizon National Corp, General Electric Co, the HSBC North America Holdings unit of HSBC Holdings, The Royal Bank of Scotland Group PLC and Société Générale SA. The FHFA is just getting started. Critics of Fannie Mae, Freddie Mac, and their previous regulator, OFHEO, say that they were sophisticated investors, and they should have known better. William K. Black is a former bank regulator who played a role in hundreds of successful prosecutions after the Savings and Loan Crisis. He told the Wall Street Journal: "It's a great myth that you can't defraud sophisticated financial parties." Particularly when loans are fraudulent and material information was not disclosed. The Financial Crisis Inquiry Commission published evidence from the testimony of officials of Clayton Holdings(among others), a due diligence firm, that underwriters and rating agencies ignored evidence of suspect loans and did not disclose this information to investors.