Bad guys never rest. And the latest, greatest example of fraud on a massive scale involves the subprime mortgage, or ABCP (asset-backed commercial-paper) mess.
A combination of fraudsters, the Mafia and a lot of financial intermediaries on Wall Street have pulled off something bigger than Enron, the savings-and-loan mess and Lenny Rosenberg's 1983 apartment flip all combined.
At its root is a U.S. 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.
Here's what we have now: U.S. 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 George W. Bush, the U.S. President, has talked about back-stopping homeowners so they don't lose their residences. Besides that, those holding mortgages cannot foreclose entire neighbourhoods, mostly modest ones, without destroying values for years.
When the savings-and-loan debacle swept the United States in another real estate recession, 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 flood the real estate market with properties and cause real estate depression in certain regions.
On the other end are the "rich" victims. These are the investors who bought bundles of these mortgages on what's euphemistically referred to as an "opaque" market. They bought junk along with OK stuff, but it was all neatly passed along and packaged as more creditworthy than it really was.
In August, the world realized what happened and debt markets crashed at once, forcing central banks and big banks to band together and halt a panic. Here's some information about the fraud techniques: - Mortgage broker licences were handed out indiscriminately and many of these companies sprung up, hiring people, often uneducated immigrants or crooks, and splitting handsome fees with them. - Initial lenders granted mortgages higher than the properties' values to people who wouldn't qualify for a mortgage in Canada or Europe. - Bogus valuations were involved, as happened in the Rosenberg fraud in Toronto, where $325-million worth of apartment buildings were "valued" and mortgaged for $500-million by trust companies in on the scam. - Mortgages were "sold" at discounts to a series of packagers, mostly on Wall Street, who took small fees and passed along the loans in bundles with good loans all over the world. - The rich institutions and funds that ended up with this junk were somewhat greedy or naive or both. How safe could they have been, given the high interest rates they were yielding?
Finger-pointing is rampant south of the border. U.S. Senate banking chairman Chris Dodd of Connecticut said subprime lenders were "predatory" and the government was negligent. But at the end of the day, this is a very simple, but huge, fraud due to the lack of proper U.S. mortgage brokerage licensing.