William Black on Lehman Bros. and the Fed

"Liar loans" were loans where income and/or asset verification was not required. They were called stated income/verified asset or stated income/stated asset loans (SIVA or SISA for short). During the application process, potential borrowers were allowed to "state" the amount of income they received or assets they held on the application. The only verification done of anything was employment, via phonecall. Some loans, if you had a good enough credit score, didn't even require a verification of employement (No Doc loans). When he says these loans were 90% fraudulent he is not overstating. These were then bundled, rated as AAA, and sold into your pension fund, retirement account, Fannie, Freddie, hedge fund, religious institution investment fund, sovereign wealth fund, exc. Now the majority of the securities lie on Fed balance sheets (about 1.4 trillion of them) with you on the hook.

From around 2001-2007 anyone with a 620 middle FICO, 2 months payments in the bank (verified asset only), and 2 tradelines active for 24 months was able to purchase a home with zero money out of pocket using one of these loans.

I found it funny he mentioned Aurora. I knew many of their reps as they were very active in the Seattle area markets. Many of you may have had your loan underwritten by them and never have known it. Lehman had their fingers in many other wholesalers as well. BNC Mortgage and Finance America being the largest of those I believe.

Black offers a scathing indictment into the activities of Lehman, the Fed, and the federal government. Worth the 8 minutes to watch.

Nice to see some frank language. Geithner needs to go.

I agree Andy.

I'll take that statement a step further and say he should have never been appointed in the first place.

wow

Change is just more of the same.

Gee, if that was played several times during the newscasts on all the major networks, Americans might . . . finally . . . UP THE REVOLUTION!

GDTMMM

Sg

Unfortunately Salmo I don't think we will ever see testimony like that on any of our national propaganda outlets.

Kind of makes you wonder doesn't it?

Yet another reason we need to audit the Fed,......and then end it.

We do have to at least be a bit intellectually honest here...if in the past the Fed had exercised that kind of direct control over Lehman or Aurora, there would have been a ton of teeth-gnashing as the "socialist" and "non-free market" gubmint interfered with the "free market"...some of those teeth being gnashed would have belonged to a few who have posted on this thread...

Fish on...

Todd

Todd sometimes your assumptions are as amusing as your confusion as to how a free market actually operates.

If the Fed exerted control over Lehman or Aurora for fraudulently writing mortgage loans and fraudulently misrepresenting their value and the nature of their structure they would, in fact, be doing the job the government is prescribed to do in a free market system. The problem is they wantonly neglected to do their job. Fraud laws have existed for centuries. Failing to uphold them is not a failure of capitalism, it is the success of corporatism.

If you listen to Alan Greenspan then yes, you believe that a free market is actually anarcho-capitalism where anything goes. Greenspan is hardly a free marketeer. He was a central planner by the very nature of his job at the Federal Reserve. As I've said before his musings on free markets have been disingenuous at best and sinister at their worst.

Even your most died-in-the-wool, Libertarian, laissez-faire capitalist thinkers such as Rothbard, Mises, and Hazlitt all agreed and advocated that it is the government's job in a free market system to police fraud and uphold the sanctity of contracts.

SW, you're preaching to the choir...I wouldn't have been one of the teeth-gnashers...

Fish on...

Todd

Fair enough, but I didn't think you would have been.

Maybe it was me who shouldn't have assumed. I figured you were supposing I would be one of those teeth gnashers.

Either way my explanation is there for all to see. I think there is a lot of confusion as to what is, and what is not, a free market.

I'm curious , if the regulators were forcing out CEOs, which is a big part of what Black is recommending here, would you support that SW?

I'm more for Jail Time on these guys, not just forcing them out. The RICO statutes are in place for prosecuting organized crime, I wonder if they can be of assistance here.

I have a decent grasp of how the "free" market operates...it's no coincidence that I always put "free" in quotes whenever I talk about it.

The "free market" is a wholly government invented, operated, and regulated entity...and its definition is just like many others in the world of politics...changes to suit the particular needs of the definer.

Activist Judge: Judge who doesn't rule in the way you want.

Strict Constructionist: Judge who rules in the way you want.

Regulation that restricts your actions: A socialist plot to undermine the "free market".

Regulation that restricts your competitors' actions: A reasonable application of government power to protect the "free market".

...etc.

Fish on...

Todd

P.S. SW, I wouldn't have put you on the teeth-gnasher list...the ones to whom it applies know very well who they are.

All I know is that in my little healthy bank we have regulators here at least one day a week, every week, between 2 and 10, ever since I got here 8 years ago. FDIC, WA Dept of Financial Institutions, our own auditing firm, and external auditors we hire to audit the auditors and everybody else.

Good times!

The "free" market has been propped up by easy credit for 20+ years now. It dates back to giving out credit cards even to those with no income.

If said regulators were forcing CEOs of institutions that were openly committing fraud, then yes I would. If those same CEOs were found guilty of committing the fraud, then yes they should be thrown in jail.

speaking of pirates
i have to wonder why the navy ships that were attacked by these 11 pirates didn't just send them to davey jones's locker and be done with it
nooooo, they capture them then $hip them all the way over here, put them on trial, then lock them up for the rest of their live$?
meanwhile emergency taxes because we're broke raise my beer 5 cents a can? WTF?
i think the gubermint needs to get it's priorities straight

I would love to see the Monty Python pirates take down GS.

http://www.pbs.org/moyers/journal/04232010/watch.html

more william black regarding goldman sachs
it takes a minute or two before he comes on but well worth watching

Thanks for the link fuzz.

I think his assessment of the "liars loans" and their degree of fraudent activity is a little off base though. Where he states that the loans, when examined, are near 90% fraudulent I believe he is correct. Where he is incorrect is in his assertion that the fraud was committed by the loan originator or loan broker.

There were many cases where loan originators encouraged the fraud. There should be no doubt about that. Although, in the end, it was the consumer who signed the application and swore all the statements and representations therein were truthful and correct. That would include the amount of income and assets "stated" on the application.

Moreover, the other frauds Black is referring to are the representations on the quality of the loan packages held and sold by the likes of Lehman Bros, Bear Sterns, Goldman Sachs, exc. To the end of transparency, that is why the ratings agencies exist. They have just as much blame in this story as anyone. In the case of Goldman Sachs, they are being accused of misrepresenting the quality of loan packages they created while at the same time actively betting against them using the opaque market of OTC derivatives or credit default swaps. While what they did may have technically been legal at the time (up for debate, I lean towards illegal) firms should be allowed to hedge positions by betting against investments. Those bets however, should be transparent on an open exchange so the buyer is aware of the positions of the seller.

The big fraud, when looked at through a broad lense, is the fraud that was perpetrated by the Fed by providing all the booze for the punch bowl. You won't see too many people go after that monster. That's why an audit is desparately needed.

Clever loan officers pushing fraudulent docs huh? I knew many, many loan officers, most of them weren't that clever.

And you know this from your extensive experience in retail and secondary mortgage markets?

Please KK. Go back to something you know about,.......fantasizing about TeaBagging.

It's not my intent to defend anyone KK, simply stating what I know from first hand experience is all,......and I haven't proclaimed to be an expert on anything.

Was there retail side fraudulent activity? You bet there was. Personally turned in a broker shop that was openly forging W2 forms to show higher income than what was actually made, if the borrower had a job at all. Did that fraudulent activity constitute 80% of the mortgage market? Not an effing chance. Did the FBI cherry pick the loans it used for it's report? Perhap someone should ask them or you should provide some info on this 2004 report.

The crux of the issue though is what the FBI considers to be fraud and how they come to the conclusion that the lender/broker is responsible for said fraud. If the fraud is the "liar loan" itself than the gov't and state DFI's nationwide must bear the responsibility for allowing the product to exist. Mortgage lenders don't just invent new products without them being approved by a state department of financial institutions,.....but you already knew that. If the fraud is the fact that the income on the application was misrepresented than the borrower is who committed the fraud. If these are considered the frauds, which I think they are, then there is no doubt in my mind as to Black's 90% figure for the lair's loans. If that is different, as you say it is, then show me where Black distinguishes who the frauds were committed by.

We should be clear to draw a distinction between lenders, wholesalers, and brokers as well when fraud is concerned. I spent the majority of my career working for wholesalers. We operated on large credit lines provided by lenders or brokerage houses like Lehman, Goldman, exc. with preapproved mortgage products to sell to mortgage brokers. We underwrote, funded, and packaged the loans and sent them back to the lender in exchange for a fee based on yield speads and volume. That in turn bought us a new credit line for the next month to fund new loans. I can tell you that the underwriting process was taken very seriously where fraud is concerned. One fraudulent loan package was not worth the regulatory trouble, let alone our warehouse credit agreements. Mortgage brokers operated under the same premise. One bad loan, or loan officer, was not worth losing a wholesaler that provided the mortgage product for them to sell.

If the fraud being considered or talked about on the lender side is that of representations on the quality of liar loan packages to investors, well, I can believe the 90% figure in that case too. Something that really should have been picked up by the SEC and the ratings agencies. Somewhere there was a total disconnect as to what was being packaged and sold,..........and what the buyers thought they were getting. I wouldn't even know the types of documents that could potentially be fraudulent in those scenarios, I'm not even going to try. What I do know is that the gov't would have had to look the other way for it to even occur.

Bottom line is that for you to pontificate from on high that it's clever loan officers committing 80% of the fraud in the industry and suggesting someone you don't know from Adam may have been party to such fraud, truly shows your ignorance to the issue at hand. Like I said before, stick to the things you know; TeaBagging, goats, mowing lawns, not catching fish, and whatever else it is you do with your time.