Charging that the ongoing foreclosure fraud epidemic is the work of precisely the same unrepentant bank officers whose fraudulent mortgage schemes crashed the financial system in the first place, two leading critics of the financial industry are calling on the FDIC to put some of the nation's biggest banks into receivership -- starting with the Bank of America -- and make them clean house.
William K. Black, a former regulator and white-collar crime expert who cracked down on massive fraud during the savings and loan scandal of the 1980s, and his fellow economics professor at the University of Missouri-Kansas City, L. Randall Wray, write in the Huffington Post that it's time to "foreclose on the foreclosure fraudsters". They write:
The lenders, officers, and professional that directed, participated in, and profited from the fraudulent loans and securities should be prevented from causing further damage to the victims of their frauds, through fraudulent foreclosures.
They argue that, far from being a coincidence, massive foreclosure fraud "is the necessary outcome of the epidemic of mortgage fraud that began early this decade." The reason for that:
The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents... Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents.... Foreclosure fraud is the only thing standing between the banks and Armageddon."
So the only solution, then, is new management. "We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud," Black and Wray write.
They suggest starting with Bank of America, which they call "a 'vector' spreading the mortgage fraud epidemic throughout much of the Western world."
Looming large among Bank of America's sins is its purchase of mortgage giant Countrywide Financial long after it became clear that the company had engaged in massive fraud.
Even the extremely slow-to-anger New York Fed, which bought billions of securitized mortgages that Bank of America improperly represented as fully documented and conforming to underwriting standards, is now demanding that it buy some of them back.
But far from expressing remorse, Bank of America is going on the offensive, announcing it will end its three-week-old freeze on foreclosures in 23 states on Monday, much earlier than expected.
Bank of America officials are claiming they didn't find evidence of unwarranted foreclosures and are vowing to "defend the interests of Bank of America shareholders," and hire more lawyers, the New York Times reported. "It's loan by loan, and we have the resources to deploy in that kind of review," said the bank's chief executive.
Black and Wray write that Bank of America "is sufficiently large and powerful that its receivership will send the credible signal that America is restoring the rule of law and that even the most elite frauds will be held accountable. "
They note that about a thousand receivers were appointed during the S&L and banking crises of the 1980s and early 1990s under Presidents Reagan and Bush. "Contrary to the scare mongering about 'nationalizing' banks, receivers are used to returning failed banks to private ownership," they write.
The new managers would "direct the business operations, find the true facts about the bank's operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted," they write. "The receiver is also a well-proven device for splitting up banks that are too large and incoherent by selling units of the business to different bidders who most value the operations."
On Wednesday, administration spokesmen declined to endorse any dramatic federal action. They declared that they had found no "systemic" threat to the financial system from the foreclosure problems, spoke of "mistakes" and "errors" rather than pervasive fraud and said the banks and servicers now need to "fix" their "processes."
They "cannot even bring themselves to use the 'f' word -- fraud," Black and Wray write. "They substitute euphemisms designed to trivialize elite criminality."
The central problem appears to be that Obama Administration continues to see the mortgage and foreclosure crises primarily through the eyes of the banks -- not through the eyes of the regular people who became their victims, or even the taxpayers who bailed out the very fat-cat bankers who are now back to their tricks.
Black and Wray write:
This nation's most elite bankers originated and packaged fraudulent nonprime loans that destroyed wealth -- and working class families' savings -- at a prodigious rate never seen before in the history of white-collar crime. They created the worst bubble in financial history, echo epidemics of fraud among elite professionals, loan brokers, and loan servicers, and would (if left to their own devices) have caused the Second Great Depression.
The two professors call for "[n]othing short of removing all senior officers who directed, committed, or acquiesced in fraud."
For more on William K. Black, read my Oct. 20 story on his blistering critique of the press coverage of the financial crisis: Nine Stories The Press Is Underreporting -- Fraud, Fraud And More Fraud.
Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.