British actor Clive Owen pulls off bank heist in "Inside Man"
Bad guys never rest. And the latest, greatest example of fraud on a massive scale involves the sub-prime mortgage, or ABCP (asset-backed commercial paper) mess.
A combination of fraudsters, the Mafia and a lot of incompetent financial intermediaries on Wall Street have pulled off something bigger than Enron, the savings and loan mess or Lenny Rosenberg’s 1983 apartment flip all combined.
At its root is an American investment banking and mortgage brokerage system that’s broken, had little government oversight and was rife with crooks. Last, but not least, most will get away with this because the globalization of capital markets allowed them to export the crime to Canada, Britain, Europe and elsewhere. The Bank of Canada should have acted immediately to stop the spread of pain, but did not.
Biggest victims are the American homeowners with mortgages they should never have obtained, who cannot make the payments because interest rates have gone up and who cannot sell because house values have gone down.
Some foreclosures are happening but it’s a Presidential election year and even President George Bush has talked about back-stopping homeowners so they don’t lose their residences.
For instance, when the savings and loan frauds swept the U.S., the properties underlying non-performing or sub-standard loans on properties were seized by Washington and sold off slowly over years. To do otherwise, would have flooded the market with properties and have caused a real estate depression.
These include the investors who bought bundles of good and bad mortgages on what’s euphemistically referred to as an “opaque” market. They were packaged as being more creditworthy than they were.
In August, the world got it and the debt markets crashed at once, forcing central banks and big banks to band together and halt a panic.
For instance, here's what has been going on:
Mortgage broker licenses were handed out indiscriminately and many of these companies sprung up, hiring people, often uneducated immigrants or crooks with criminal records. Fly-by-nights splits handsome fees with them and they found friends, relatives or anyone to sign mortgages at fluctuating interest rates.
Front-line lenders granted mortgages higher than the properties’ values to people who wouldn’t qualify to get a mortgage in Canada or Europe.
Bogus valuations were often involved, as happened in the Lenny Rosenberg fraud in Toronto in 1982 when $325 million worth of apartment buildings were fraudulently “valued” and mortgaged for $500 million by trust companies in on the scam.
Mortgages were “sold” at discounts to a series of packagers, on Wall Street mostly, who took fees and passed them along through many hands.
The banks, brokers and pension funds that ended up with this junk were greedy or naïve or both. After all, how safe could they have been if they paid a premium interest rate?
Finger-pointing is rampant south of the border. U.S. Senate banking chairman Chris Dodd of Connecticut said sub-prime lenders were “predatory” and the government was negligent. Others say homeowners were victims of the mortgage brokers, fake appraisers and Wall Street which backed this stuff.
But at the end of the day, this is a very simple, but huge, fraud due to the lack of proper mortgage brokerage licensing in the U.S. and the complicity of intermediaries who helped these gangs export the problem elsewhere.
The bad guys have headed for the hills and dumped their bad loans around the world.