We know the administration didn't really pursue criminal charges against any of these banksters. So it's good to have an experienced regulator like Bill Black explain the whole mess to us:
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore. And welcome to this latest edition of The Black Financial and Fraud Report.
Now joining us is Bill Black. He's an associate professor of economics and law at the University of Missouri-Kansas City. He's a white-collar criminologist, a former financial regulator, author of The Best Way to Rob a Bank Is to Own One, and he's regular contributor to The Real News.
Thank you so much for joining us, Bill.
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
NOOR: So, Bill, what do you have for us this week?
BLACK: So, this'll be the first installment in what can we learn from the statement of facts that constitutes JPMorgan's admissions. This in that settlement that the Department of Justice is billing as the $13 billion settlement. As I've explained in the past, it's not that big, but it's still quite large in dollar terms. And we owe a debt of gratitude to Judge Rakoff, who's been giving the Securities and Exchange Commission a hard time about settling cases and getting absolutely no useful admissions from the people that perpetrated the frauds.
And so the Justice Department was embarrassed into getting this statement of fact, which was obviously closely negotiated with JPMorgan to try to not establish its criminal liability, but still is a remarkable document in terms of what it tells us about the fraud second epidemics, not just at JPMorgan, but also the criminality at Washington Mutual and at Bear Stearns. And it tells us about the whole secondary market frauds. And it tells us a great deal about why the Justice Department is batting .000 against the elite frauds.
So, to back up, the Department of Justice is only investigating the secondary markets sales. But there, the Justice Department has finally gotten to the point of essentially saying that there was a epidemic of fraud in sales to the secondary market. And what they've done in particular is endorse and piggyback and take advantage of the work of the Federal Housing Finance Administration, which is the conservator for Fannie and Freddie, and in that capacity has sued 18 of the largest financial institutions in the world and said that each of them engaged in fraud.
So, you know, stop right there. The United States government, now with the endorsement of the Justice Department, has said that after investigation it found that essentially every large bank involved in the secondary market sales to Fannie and Freddie committed fraud. And frauds and intentional crime. Right? So that's an extraordinary thing.
There were three of these epidemics of mortgage fraud that drove this crisis. Individually, each of the three fraud epidemics would have been the most destructive financial fraud in world history, but all three of them occurred at the same time and they're related. So the first two are in the mortgage origination phase, and that is what I've described in the past: the epidemic of appraisal fraud, led by lenders, and the epidemic of liars loans, also led by lenders and their agents. And that generated literally millions of fraudulent mortgages originated each year, most of which they sold to the secondary market. And since there's no fraud [incompr.] they had to, of course, engage in fraud in the representations and warranties--what we call reps and warranties for short--in the sale of these fraudulent mortgages through a further fraudulent representation to the secondary market.
So the first thing that we have is that there are admissions not just as to JPMorgan in this statement of facts, but also as to Bear Stearns and Washington Mutual. And collectively, of course, we're talking about three of the largest and most elite financial institutions in the world. And the Justice Department says each of these engaged in fraud, which ought to be sort of the headline news, right, that three of the largest financial entities in the world engaged in pervasive fraud.
Now, this is particularly remarkable in the case of Bear Stearns and in the case of Washington Mutual, both of them acquired by JPMorgan (Washington Mutual is called WAMU by most people for short), because they're infamous from past investigations. So the famous phrase used by the industry--remember, the industry used the phrase liars loans. That was not something that prosecutors came up with to try to bias juries. Well, the phrase in the industry was "Bear don't care", meaning that Bear Stearns could care less about the quality of the loans that it was buying in the secondary market, that it was most happily deceived and such. And Washington Mutual's infamous for the investigations that found that it was one of those places that did have a literal blacklist of honest appraisers who refused to inflate appraisals, in which WAMU refused to send future business to honest appraisers because it wanted to engage in this massive fraud scheme of inflating appraisals.
Okay. So we've got not just really big, really elite, but incredibly infamous places, and we're getting confirmation from the Justice Department and from JPMorgan, the acquirers of these entities, that says, yes, these two entities ran this fraud scheme in the secondary market sales. But, of course, there's also the same allegations against JPMorgan and JPMorgan conceding to these facts as well, which, of course, leads to the obvious question: why haven't these senior officers controlling JPMorgan, Washington Mutual, and Bear Stearns been prosecuted for the crimes? And if for some reason they don't think they can prosecute the individuals, why don't you prosecute the corporation instead of letting it get off scot-free, apparently, with no criminal case? So that's the big take away at this point.
But as I say, there's a second story, and that is that the Justice Department still doesn't understand this industry, the fraud schemes at all, and it is still living in this mythical world in which this is supposedly the first virgin crisis. And that's why you still don't see President Obama or Attorney General Eric Holder actually just making a flat-out statement that says, you know, we were wrong; this crisis really was driven by fraud, and it was driven by fraud in our most elite institutions, and it's a national scandal that they've gotten away with it without any prosecutions and that not a single one of the leading officers who led the frauds and became wealthy through the frauds, not only has a single one not been prosecuted, but we have not taken back a significant chunk of the money and left them, you know, with none of the fraud proceeds. We've done that in zero cases as to elite bankers. So in next installment we'll look at what the statement of facts tells you about how the Department of Justice unfortunately remains largely clueless.
NOOR: Thank you so much for joining us, Bill.
BLACK: Thank you. And happy Thanksgiving, everybody.
NOOR: Thank you for joining us on The Real News Network.