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Judge Rules Against Bank - Precedent Could Cost Bank of America Billions

Monday, 11 February 2013 14:13 By Paul Jay, The Real News Network | Video

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And welcome to this week's edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City.

Bill'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, and author of the book The Best Way to Rob a Bank Is to Own One.

Thanks for joining us again, Bill.

BILL BLACK, ASSOCIATE PROFESSOR OF ECONOMICS & LAW, UMKC: Thank you.

JAY: So what do you got for us this week?

BLACK: I've got an obscure case that's really important in two different ways. So this is the Flagstar case. And it was sued by what's called a monoline insurer.

So Flagstar was a big mortgage lender, and it lent among the riskiest kinds of mortgages and was a major user of liar's loans. These are the pervasively fraudulent loans that I've talked about many times. And Assured—when we say a monoline insurer, that just means that it's a specialized insurance company that specialized in guaranteeing the quality of these kinds of loans, once they were packaged, to back this kind of bond.

So in itself this case isn't all that important, but it turns out that this is the same methodology being used in an enormously bigger case against the Bank of America. And Assured just got a huge win against Flagstar, where Judge Rakoff has ruled that the lender basically lied repeatedly—in one year, 75 percent of the time—to the people that were insuring the quality of their loans. So that's a big deal, because under that same methodology, Bank of America could face actually tens of billions of dollars of liability from other parties. And, of course, that could be a massive effect on Bank of America.

But I also want to—.

JAY: Just one sec. Where's that case at, like, in terms of level of court and appeals?

BLACK: That is a district court decision that has just come down within the last, you know, 36 hours or so. So this is hot off the presses. And, of course, your implicit question is an important one: there obviously will be an appeal, and there may well be a settlement. But this is a well-respected Judge, and if other judges followed and approved the same kind of methodology and some of the rulings on the law, then Bank of America is in a world of hurt.

JAY: [inaud.] just make sure I understand it, the insurance companies are saying, you banks lied to us about how good these assets were, and we insured you, and now, I guess, we want our money back.

BLACK: That's right. We other people came and demanded their money back from us, because we guaranteed these bonds and said they were good bonds. And so now we're turning around and suing you, because you're the one who lied to us and induced us to provide that kind of insurance.

And as I said, the methodology that the judge approved found that in 2005, 75 percent of the time, the lender misrepresented to the insurance company what was going on. And in 2006 they did so 65 percent of the time. In other words, this is in a massive business built on fraud.

And the insurance players are, you know, a relatively moderate to modest group. The other folks who would have been defrauded in this fashion of course include Fannie and Freddie and all the investment banks and random cities in Norway and such. So all of those entities' potential to win their cases just went up rather considerably if other judges approach the law the way Judge Rakoff did. Now, that's the first thing.

Here's the second thing that is, however, getting absolutely no press and is completely insane. So remember there are only lawyers for the lender and lawyers for the insurance company arguing to the judge. And so a bizarre version of reality emerged from all of this in which 75 percent of the time the lender lies deliberately to the insurer, lies to the people who buy the bonds. All of these people are, you know, supposedly among the most sophisticated financial players in the world. But as soon as they get to fraud in the origination, in the making of the loan, with no discussion, everybody involved assumes that it must have been the borrowers that did all the lying, not the lenders.

And of course this is completely insane, completely contrary to the accounting control fraud recipe, in which the lender deliberately makes—grows enormously by making incredible numbers of crappy loans at a premium yield with extreme leverage and next to no reserves against losses. And guess what? That's exactly what the lender did in these cases.

But because there is no one representing the borrower, and because there is no one bringing criminology theory and findings and research findings in front of the judge, they just all assume that all of this fraud had to arrive from the borrowers, even in a case where they're saying that the lender repeatedly lied to everybody else involved.

JAY: And by borrower they mean some ordinary person who's told, here's some money at subprime, you can go get a house, and we don't even need to see any of your credit history.

BLACK: Right. And, indeed, if you don't give the right answer as a borrower, they often just made it up, and in extreme cases forged the borrower's name. So that's what the evidence overwhelmingly shows.

But none of that evidence was presented in the court. And, of course, then you get a press report from Forbes. And what does Forbes take away? Whoa, those rotten Fred and Mary, those borrowers, those fraudulent borrowers ripping off people.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: Thank you for joining us on The Real News Network.

End

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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Judge Rules Against Bank - Precedent Could Cost Bank of America Billions

Monday, 11 February 2013 14:13 By Paul Jay, The Real News Network | Video

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And welcome to this week's edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City.

Bill'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, and author of the book The Best Way to Rob a Bank Is to Own One.

Thanks for joining us again, Bill.

BILL BLACK, ASSOCIATE PROFESSOR OF ECONOMICS & LAW, UMKC: Thank you.

JAY: So what do you got for us this week?

BLACK: I've got an obscure case that's really important in two different ways. So this is the Flagstar case. And it was sued by what's called a monoline insurer.

So Flagstar was a big mortgage lender, and it lent among the riskiest kinds of mortgages and was a major user of liar's loans. These are the pervasively fraudulent loans that I've talked about many times. And Assured—when we say a monoline insurer, that just means that it's a specialized insurance company that specialized in guaranteeing the quality of these kinds of loans, once they were packaged, to back this kind of bond.

So in itself this case isn't all that important, but it turns out that this is the same methodology being used in an enormously bigger case against the Bank of America. And Assured just got a huge win against Flagstar, where Judge Rakoff has ruled that the lender basically lied repeatedly—in one year, 75 percent of the time—to the people that were insuring the quality of their loans. So that's a big deal, because under that same methodology, Bank of America could face actually tens of billions of dollars of liability from other parties. And, of course, that could be a massive effect on Bank of America.

But I also want to—.

JAY: Just one sec. Where's that case at, like, in terms of level of court and appeals?

BLACK: That is a district court decision that has just come down within the last, you know, 36 hours or so. So this is hot off the presses. And, of course, your implicit question is an important one: there obviously will be an appeal, and there may well be a settlement. But this is a well-respected Judge, and if other judges followed and approved the same kind of methodology and some of the rulings on the law, then Bank of America is in a world of hurt.

JAY: [inaud.] just make sure I understand it, the insurance companies are saying, you banks lied to us about how good these assets were, and we insured you, and now, I guess, we want our money back.

BLACK: That's right. We other people came and demanded their money back from us, because we guaranteed these bonds and said they were good bonds. And so now we're turning around and suing you, because you're the one who lied to us and induced us to provide that kind of insurance.

And as I said, the methodology that the judge approved found that in 2005, 75 percent of the time, the lender misrepresented to the insurance company what was going on. And in 2006 they did so 65 percent of the time. In other words, this is in a massive business built on fraud.

And the insurance players are, you know, a relatively moderate to modest group. The other folks who would have been defrauded in this fashion of course include Fannie and Freddie and all the investment banks and random cities in Norway and such. So all of those entities' potential to win their cases just went up rather considerably if other judges approach the law the way Judge Rakoff did. Now, that's the first thing.

Here's the second thing that is, however, getting absolutely no press and is completely insane. So remember there are only lawyers for the lender and lawyers for the insurance company arguing to the judge. And so a bizarre version of reality emerged from all of this in which 75 percent of the time the lender lies deliberately to the insurer, lies to the people who buy the bonds. All of these people are, you know, supposedly among the most sophisticated financial players in the world. But as soon as they get to fraud in the origination, in the making of the loan, with no discussion, everybody involved assumes that it must have been the borrowers that did all the lying, not the lenders.

And of course this is completely insane, completely contrary to the accounting control fraud recipe, in which the lender deliberately makes—grows enormously by making incredible numbers of crappy loans at a premium yield with extreme leverage and next to no reserves against losses. And guess what? That's exactly what the lender did in these cases.

But because there is no one representing the borrower, and because there is no one bringing criminology theory and findings and research findings in front of the judge, they just all assume that all of this fraud had to arrive from the borrowers, even in a case where they're saying that the lender repeatedly lied to everybody else involved.

JAY: And by borrower they mean some ordinary person who's told, here's some money at subprime, you can go get a house, and we don't even need to see any of your credit history.

BLACK: Right. And, indeed, if you don't give the right answer as a borrower, they often just made it up, and in extreme cases forged the borrower's name. So that's what the evidence overwhelmingly shows.

But none of that evidence was presented in the court. And, of course, then you get a press report from Forbes. And what does Forbes take away? Whoa, those rotten Fred and Mary, those borrowers, those fraudulent borrowers ripping off people.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: Thank you for joining us on The Real News Network.

End

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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