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article imageOp-Ed: Senate Report details elaborate Wall Street Mortgage Fraud

By Bill Lindner     Apr 15, 2011 in Politics
A report released by the U.S. Senate paints a scathing picture of mortgage fraud on Wall Street enabled by the malfeasance and blatant disregard for oversight by Federal agencies that regulated them.
A 650-page report (PDF), titled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” released by the U.S. Senate Permanent Subcommittee on Investigations chaired by Sen. Carl Levin (D-Mich) cites 5,800 internal documents and the private communications of bank executives, credit rating agencies, investors and regulators and details Wall Street's fraudulent business practices and conflicts of interest that fueled the mortgage meltdown, undermined public trust in the U.S. markets in the months leading to the financial crisis, and reveals reckless activities that were ignored by the banks and their federal regulators.
As Washington has tried to ignore the massive Wall Street fraud -- for which no one on Wall Street or their enablers has been put behind bars -- responsible for the latest economic crisis in the hopes that it would go away, Senator Carl Levin, and Senator Tom Coburn (R-Okla) blasted Wall Street after 2-year bipartisan investigation on the main culprits responsible for the crisis. As noted by Common Dreams, the report (PDF) comes at a time when much of the feeling from Washington lawmakers is that Wall Street is being over-regulated by the new Dodd-Frank rules.
The Senate Committee's report names several institutions that played a central role in the mortgage crisis, including Washington Mutual, the Office of Thrift Supervision, credit ratings agencies Standard & Poor's and Moody's Investors Service, Goldman Sachs and Deutsche Bank.
Four key areas of causes of the financial crisis were cited by the Senate panel:
• Risky mortgage lending as exemplified by Washington Mutual, which became the biggest U.S. bank ever to fail in September 2008.
• The failure of regulators to clamp down on lending abuses and risky conduct at banks in the years leading up to the housing bust and financial crisis.
• The AAA ratings given by big credit rating agencies to high-risk subprime mortgages that later went bad and helped cause the housing bust.
• The role of investment banks like Goldman Sachs and the finance deals they put together, which flooded the markets with risky securities
Pulling Back the Curtain on Shoddy, Risky, Deceptive Practices
In an interview, Senator Levin reportedly said "The report pulls back the curtain on shoddy, risky, deceptive practices" -- often referred to as 'shitty deals' by Senator Levin -- "on the part of a lot of major financial institutions. The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.”
Included in the bipartisan Senate report (PDF) were 19 recommendations for changes to regulatory and industry practices such as creating strong conflict-of-interest policies at the country's banks and requiring banks to hold higher reserves against risky mortgages. It also suggests that federal regulators examine its findings for violations of laws and recommends that criminal charges be brought. In fact Sen. Levin believes that Goldman executives weren't being truthful about its activity, and said he would refer their testimony to the Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) for criminal investigations. “In my judgment, Goldman clearly misled their clients and they misled the Congress,” Sen. Levin said.
The report reveals more information on the way Goldman Sachs touted investments to clients on one hand and bet against them on the other. Similar accusations against Goldman by the SEC led to a $550 million dollar settlement -- of which $250 million was returned to investors, $300 million went to the U.S. Treasury, and zero went to the defrauded homeowners -- last year, but Levin and his committee don't think that punishment fit the crime. From the report (PDF):
When Goldman Sachs realized the mortgage market was in decline, it took actions to profit from that decline at the expense of its clients. New documents detail how, in 2007, Goldman’s Structured Products Group twice amassed and profited from large net short positions in mortgage related securities. At the same time the firm was betting against the mortgage market as a whole, Goldman assembled and aggressively marketed to its client’s poor quality CDOs that it actively bet against by taking large short positions in those transactions.
New documents and information detail how Goldman recommended four CDOs, Hudson, Anderson, Timberwolf, and Abacus, to its clients without fully disclosing key information about those products, Goldman’s own market views, or its adverse economic interests. For example, in Hudson, Goldman told investors that its interests were “aligned” with theirs when, in fact, Goldman held 100% of the short side of the CDO and had adverse interests to the investors, and described Hudson’s assets were “sourced from the Street,” when in fact, Goldman had selected and priced the assets without any third party involvement.
New documents also reveal that, at one point in May 2007, Goldman Sachs unsuccessfully tried to execute a “short squeeze” in the mortgage market so that Goldman could scoop up short positions at artificially depressed prices and profit as the mortgage market declined.
Financial Industry Chose Profits over Propriety
The Senate report adds volumes of new evidence to previously disclosed information showing that much of the financial industry chose profits over propriety during the mortgage lending spree and more evidence on regulatory failures that helped deepen the financial crisis. Senator Levin and his committee found 3,400 places in Goldman documents where its officials used the phrase "net short," a reference to negative bets. Goldman profited greatly at the expense of their clients by using abusive practices.
A new aspect of Goldman's mortgage malfeasance during 2007 was uncovered by the Senate's investigation. That year, as Goldman tried building its bet against housing, it drove down the cost of shorting the mortgage market by squeezing those who had made negative bets, including Deutsche Bank. Goldman tried to put on the squeeze so that it could add to its negative bets more cheaply and protect itself against the housing collapse. Due to being so large, Goldman had the power to drive prices in whatever direction it wanted. Goldman reportedly abandoned its plans in June 2007 when two Bear Stearns hedge funds collapsed due to bad mortgage bets.
The Senate report (PDF) reveals that Deutsche Bank, which has not been accused of wrongdoing by Government investigators, by shedding light on a trader named Greg Lippmann, who has since left the bank and joined a hedge fund. As early as 2005, Lippmann was negative about housing and pitched his idea of shorting the market to professional investors on Wall Street. Lippmann referred to risky mortgage securities as "pigs" and responded that he "would take it and try to dupe someone" according to the report. Lippmann's fraudulent activities helped reduce Deutche's overall losses.
In 2006 and 2007, banks reportedly created about a trillion dollars worth of Collaterized Debt Obligation (CDO) deals -- fraudulently complex practices that helped destroy the economy in 2008. Emails provided to the Senate committee revealed that Lippmann called the bank's operation "CDO machines" and characterized such securities as a "Ponzi scheme." When interviewed by the committee, Lippmann quickly changed course, saying that his descriptions were used to defend his negative view of the market.
Goldman denies any wrongdoing. A Goldman spokesman said in a recent statement: “While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee. We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes that will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments.” As Wall Street's nefariously fraudulent history has repeatedly proved, nothing will change. Think Wall Street execs and its enablers will face jail time? Don't bet on it.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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