Shocking Fraud from Financial Scum

[FiveGoodMen]

http://scienceblogs.com/goodmath/2010/04/shocking_fraud_from_financial.php?utm_source=networkbanner&utm_medium=link

"It turns out that investment firms were deliberately putting together packages of loans that they knew weren't going to get repaid, in order to provide some of their customers with something that they could bet against."

[kentuck]

1. Is it criminal?

Or just unethical??

[RUMMYisFROSTED]

3. :)

[FiveGoodMen]

4. The linked article is pretty clear that most of it is legal although it shouldn't be.

Either way, it alleges intent on the part of the financial corps to produce the appearance of money where there actually was none.

[kentuck]

6. First thing they did was to get fake AAA ratings on the stocks....

before they sold them? Was that illegal or just deceptive? :-)

[Warpy]

9. That's why Moody's is central to this scandal

and the focus on Goldman is almost a diversion at this point.

When they start getting the muckety mucks at Moody's answering the big questions, let me know.

Goldman couldn't have done what they did without collusion by Moody's.

[kentuck]

13. Excellent point!

Right on! Start with Moody's and move up the chain. That would be the right way to handle this.

[Dappleganger]

2. Fits right in with Lewis' "The Big Short"

which I'm reading now.

[Liberal_in_LA]

5. horribly corrupt thing to do... money at any cost

[sandnsea]

7. 2006 - As Homeowners Face Strains, Market Bets on Loan Defaults

This is not a secret. They didn't keep it a secret when they did it. And what's worse, they're still writing these interest only loans and giving people no other option and passing on all the consequences to the homeowner.


http://www.realestatejournal.com/buysell/mortgages/20061031-whitehouse.html

"At about the same time, in early 2005, Wall Street bankers were developing a new kind of derivative contract that would allow investors such as Mr. Whalen to make bets based on their misgivings. Called a credit-default swap, it had previously been applied mainly to corporate and sovereign bonds. Like an insurance contract, it pays off if a subprime-backed bond suffers a certain amount of losses to defaults. The holder, known as a protection buyer, makes regular payments to a bank or other counterparty for the insurance, and also has the right to resell the contract. If defaults prove higher than expected and the bond starts to look riskier, the value of the contract rises, and the holder can resell it at a profit.

In January 2005, for example, Mr. Whalen bought an insurance contract on the Long Beach Mortgage Loan Trust 2004-2, the bond into which Mr. Spirou's loan had been packaged. He agreed to pay the counterparty, Citigroup Inc., $20,300 a year for a contract that would pay up to $1 million if more than 3.35% of the loans originally in the bond went bad. So far, the wager hasn't made money: He says he could sell the insurance for close to what he paid.

Mr. Whalen sees the new derivatives mainly as a hedge against the riskiest part of the subprime market. He looks to bet against bonds with high concentrations of loans to people who have low credit scores, who did "no-doc" loans, or whose homes aren't worth much more than they owe on their mortgages."

[county worker]

10. and giving people no other option ? What does that mean?

Did these people not have the ability to say no I won't sign for such a loan? I think we make a big mistake to not see that the buyers had a role to play too.

[sandnsea]

11. It's a scam

I refuse to blame the victims for what Wall Street concocted. What's worse, they have people like you in the boiler rooms who are convincing the homeowner that it's in their best interest to sign these piece of shit loans.

[county worker]

12. People like me? I would never have signed for a loan and I would never force someone else to.

You really have your thoughts mixed up. It was not a scam. There were still truth in lending laws. People knew that they could not afford the loan yet signed for it anyway.

They had a role in victimizing themselves.

This is from the article you posted the link to:

At the age of 23, with only a few years of credit history, he might have had a hard time getting a traditional home loan. But he found an eager lender in Option One, which lent him $266,000 toward the $300,000 purchase price. The loan required an initial monthly payment of $2,200, which after two years would start floating with short-term interest rates. Option One says it has guidelines in place to make sure its borrowers are able to pay.

He found a lender!

[kentuck]

14. Of course he found a lender.

Who was it, Washington Mutual? They were selling them to other banks. It didn't matter who they were selling to. They did not plan on keeping it anyway. Unfortunately, they ended with more of these type loans than reliable ones. So they went under...

[sandnsea]

18. A 23 year old knows he's not getting an honest loan?????

I can't speak any further or I'd get banned. A 23 year old does not know Countrywide is a piece of shit scam operation. And they were.

[county worker]

20. I don't want to argue the point anymore but only to say this.

Whether it is the media hitting us night and day with what as consumers we should be doing with our money or peer pressure or what, we have become a people so dumb we believe everything we here on cable and give our responsibility for our lives over to the credit companies I guess. That is what you are telling me.

I know that past generations would not have fallen for that line of crap. They took responsibility for their decisions.

[sandnsea]

25. No. Past generations relied on LAWS

Then they voted in Reagan and let him destroy them all.

23 year old kids rely on the realtor and the appraisor and the lender. They ALL sucked people into this for shit loans.

Past generations didn't behave this way. They do now. Blame the crook, not the victim.

[county worker]

8. There was great pressure on underwriters to write these loans that they knew would fail.

The lender was paid for them and passed the risk on to the next level who packaged them as securities and sold them to fund managers.

Everyone up the chain made money except the holder at the time of loan default which was many times pension funds and other institutional investors.

It gets to me many times that this would not have been successful if people did not sign on the bottom line for a loan they knew they could not afford to repay.

We all know what we can and cannot afford. I hear it everyday here at DU. Yet people accepted loans without showing the income to pay for it. What were they thinking? And please don't tell me they were forced to sign for the loan. People making the median income signed for a $500,000 or better Mc Mansion. There is a reason these were called sub-prime. It was because the chance was good the buyer would default.

[ljm2002]

15. People don't buy homes that often...

...so they are susceptible to being conned. It has already been established that there were many loans made to blacks, hispanics, and others, that were subprime with subprime rate schedules, even though those people would have qualified for non-sub-prime loans. This is a documented fact and it was very prevalent in some areas. So already there are a good number of people who could have afforded their homes had their lenders been honest with them and got them a less-risky loan.

That is but one example. There are many others. Of course, there were some people who bought more than they could afford who should (and in many cases, did) know they were overreaching. But from what I can tell, these were by no means the majority of the loans that went bad. They did their part, to be sure, but they were not the primary cause of the meltdown. The primary cause was structural and was put in place by the greedheads just so they could close deals and profit on them by selling them immediately, therefore alleviating any risk to their own holdings.

The catchword for the financial meltdown is: F R A U D

[alstephenson]

17. Yes, you're absolutely right.

The mortgage brokers were actually getting incentives for putting people into subprime loans, even if they could qualify for a conventional loan. Disgusting.

[Warpy]

16. As the scam developed, creative financing came into the mix

meaning those humble people would have to pay only the interest on the loan for three to five years, high balloon payments kicking in after that. The interest only payments were often barely affordable and the sales pitch went that the house would appreciate so much over the next few years that they'd be able to sell overnight and walk away with enough cash to put a down payment on something more sensible. It's why we also had the hilarious pictures of the fancy McMansions furnished with cheap resin lawn furniture.

That stuff only happened when the writing was on the wall about the bubble market and they were trying to stall the inevitable crash. They used desperate and gullible people to do it.

The buyers were panicked about being kept out of the market forever. The sellers knew better. The big players knew best of all, and bet against the bad mortgages they were selling as risk free securities.

[county worker]

22. Think about this.

Say a family brings home $5,000 a month. They have car payments of $400, rent or house payment of $1000. The rest of the bills and utilities and doctors and schools etc leave them with $500 at the end of the month. So they see a mortgage broker. He tells them they can buy a new house for nothing down. No proof of income and make payments just a bit more than they are paying rent.

Now I would say to myself if I were that person, I only have $500 left over and if I do this I will have even less. My prospect for a good raise isn't much.

Then they learn that this is a teaser rate and the monthly payment will adjust higher in a few years.

I say to myself, I won't be able to pay that, I'll lose the house.

Now what people are saying here is that I am the only one who thinks like that!

[Warpy]

23. You're forgetting the rest of the sales pitch

and that was after a couple of years of paying a little more than rent, you could turn around and sell that place for tens of thousands of dollars in pure profit.

A lot of people fell for it because that is exactly what the bubble market had been doing for several years. They also fell for it because they knew there would be no way to afford even the interest only loans within a year or two.

Tell the rest of the story and you begin to see the reason otherwise sensible people took on these shady mortgages they knew they'd never be able to pay off.

Remember, also, that the balloon mortgages were the only type available before the Depression and the foundation of Fannie Mae. People just renegotiated the loans every few years, the bank collected pure interest on houses they had no hope of selling for cash, and nobody ever ended up owning much of anything free and clear. Still, it was better than renting in that one wasn't subject to the whim of a capricious landlord. Anyone who could, did.

People who were scammed by the mortgage companies that knew they were writing bad paper to sell to places like Golden Sacks who knew they were unloading bad paper worldwide on the basis of crooked ratings from Moody's are victims, as are all the institutional buyers around the globe who got stuck with that scam paper.

Focus on the perps for a change: Goldman Sachs, Moody's, and a host of smaller but just as rotten hedge funds and investment houses around the world.

[county worker]

24. "Focus on the perps for a change" I focused on the perps every time I saw a commercial on TV.

I told myself that if it sounds too good to be true it probably isn't true.

I'm thinking that I grew up in a different age than most here.

It takes two to tango.

[jeanpalmer]

26. The sales pitch

There are a lot of crazy stories from that era, but the one I remember is the scam in Vegas where they would get people to line up for the right to buy a new house in the development, and the first person in would get it for $500,000. For the second person, they'd raise the price to $510,000, and the third $520,000. Etc. The word got around that prices were going up by $10,000 an hour, and it created a mad rush of people who wanted to buy. People were selling houses the next day for $50,000 more than they paid the day before. That was the peak.

My son and I were driving through an upscale neignborhood and saw an open house. We checked it out to see what the price was. The salesman said it was $1.7 million. We told him the dump wasn't worth that much. He said don't worry, you can sell it next year for $2.7 million. And he was probably right. That was in 2004 just as the panic buying was beginning. That was the sales pitch everywhere.

[Warpy]

28. Right, and people who weren't in areas where it didn't happen

just don't realize how crazy it all was. People were in a blind panic, thinking they'd be shut out of the market if they didn't jump at an overpriced shack financed by incredibly iffy paper.

I bought in 1996, arguably the last reasonably sane year in real estate, and the pressure to take on an ARM and "buy more house" was intense. I had to pick up my papers and head for the door to get them to start talking about a fixed 30 year mortgage on a heap of adobe I could afford.

Most of the foreclosures here are in the "better" areas, developments of large trophy houses on practically no land that appealed to out of state speculators hoping to make a fast buck. Since they were being slapped up so fast 2003-2006, the profits never materialized and a lot of out of state speculators lost big. The houses were never lived in and remain empty even now, blighting the areas where locals finally got their dream houses. A third of new construction was being sold to out of state speculators in 2005, a quarter of all new construction to people from California, alone. It was insane.

I hope the people who are condemning those who got caught up in the frenzy never get stuck in a bubble market. Although they need to learn a little humility, the price is enormous.

[sandnsea]

19. They could afford to pay for it

They were not all getting McMansions. That's a big fat lie Wall Street put it out there to turn people like you against your neighbor instead of putting the blame on the derivatives and hedge funds where it belongs.

[county worker]

21. That is a crook of shit.

If you have ever bought a house you know what is involved. If you bought a car you know what is involved. I don't let Wall Street or anyone else do my thinking for me. Maybe you do though. I am so amazed that we all give the people who signed up for these loans a complete pass for doing a stupid thing!

On edit: I can now understand how people were so gullible by observing the replies to the OP.

[dkf]

27. Would any of the proposals make this illegal?

I don't believe I've seen anything that would.