A FULL CIRCLE OF FRAUD Unlearned Lessons from Fraud in the Financial Crisis

1
A FULL CIRCLE OF FRAUDUnlearned Lessons from
Fraud in the Financial Crisis

• Peter Goldmann, MSc., CFE
• White-Collar Crime 101 LLC
• 21st Annual ECI Conference
• Potomac, MD
• October 19, 2010

2

• The defining element of fraud that distinguishes
  it from other forms of larceny is deceit.
• -- William K. Black, former SL senior regulator
  and thought leader on mortgage fraud

3
In the beginning

• Residential home prices riseand riseand rise
  from 1997 on, at double-digit rates until...

Source Federal Housing Finance Administration
4
In the beginning

• Lenders lend and lend and lend confident that
  they were protected indefinitely against any risk
  of loss from borrower default

5
In the beginning

• And, making piles of money, living in blissful
  denial about the immutable law that what goes up

6
And then things got ugly

• Mortgage brokers and appraisers, armed with
  ARMs, Alt-As and No-Doc loans, get into the
  act seeing green in the form of every would-be
  homeowner, no matter how bad their credit

7
Was it illegal?

• With banks lowering lending standards to bring in
  more and more mortgages, brokers and appraisers
  jump on the opportunity to fabricate borrower
  creditworthiness

8
Was it illegal?

• No one is around to monitor the activity of the
  brokers and enforce generally lax regulations for
  selling risky mortgages to willing
  borrowersNumber of mortgage brokers goes from
  14,000 in 1991 to 53,000 in 2006.
• Result Predatory subprime lending
  explodes

9
Did the banks know?

• So banks lend and lend and lend with no controls
  -- to even more unqualified borrowers

10
The bad-mortgage gravy train

• Bank executives start pressuring their
  underwriters to approve mortgage apps that
  contained patently false borrower
  informationControls against risky lending
  discarded and quickly become financial road kill

11
Wall St. Stokes the Fire

• Bank execs are motivated by Wall Streets bloated
  appetite for loans to pool together and package
  into securities that they sold off to
  institutional investorssometimes under dubious
  terms and no controls

12
Fraud Deceit 1

• So lenders care little about truthfulness in
  mortgage apps because the approved loans would be
  quickly sold to Wall Street.

Source Federal Housing Finance Administration
13
Fraud Deceit 2

• And the Wall St. firms care little about the
  quality of the loans underlying the exotic
  securities they are peddling to pension funds and
  other institutional investors because the risk
  was being pushed off of their books.

14
Dishonest Investors Pile On

• Fraud Conspiracy. Investors pay unscrupulous
  appraisers to overvalue a home and then use the
  false info to apply for a mortgage using a straw
  buyer. They obtain the mortgage, default and
  disappear.
• Property Flipping.
• Short Sales
• Equity Skimming

15
September 2008

• Lehman crashes
• Wamu Crashes
• Countrywide crashes
• Merrill Lynch crashes
• AIG crashes
• AND.
• Too Big To Fail Spawns TARP

16
Just when you thought

• Banks testify before FCIC.
• Jamie Dimon tells the heartwarming daughter
  story about financial crises

17
Lip Service from Bankers

• Banks pledge to do a better job of risk
  management
• Reforms effectiveness in preventing another
  banking crisis is questioned by skeptics
• Pundits predict another bubble if reform isnt
  tougher on bank capital requirements and risk
  management.

18
2009-2010 Where are the Controls NOW????

• Banks are now victims of loan origination fraud
  in the tens of millions.
• FBI has never been busier chasing mortgage
  fraudsters
• Banks screw up the post-crisis cleanup by
  fraudulently foreclosing on tens of thousands of
  the same people the sold crappy mortgages to.
  Several are forced to suspend ALL foreclosures

19
Conclusion 1

• Questions for lawmakers regulators, financial
  services executives now
• If big banks are TBTF but they cant manage risk
  or prevent their own people from committing
  fraud, how do we restore prudent business
  practices AND integrity?
• Will MORE regulation help solve the problem?
• Do the TBTF banks need to be broken up?
• Whatever happened to the Volcker Plan?

20
Conclusion 2

• The BIG questions now
• Where were bank/lender controls in the years
  before 2008?
• Where were investment bank controls in the years
  before 2008?
• Where were bank/lender controls AFTER 2008when
  the foreclosures began?
• Will the financial services industry EVER learn
  the basic lessons of anti-fraud/risk controls?

21
Your Questions
22
Thank You!

• Peter Goldmann
• 1-800-440-2261
• pgoldmann_at_fraudaware.com