Stocks enter the final hour about even on little significant economic data. The latest Mortgage Activity Index from the MBA surged 13.6% to 550.5, purchase apps jumped 10.1% while refi’s gained 15.8% as the 30-year contract rate fell to 5%. So much for the fears about mortgage interest rates spiking, though I’m still wondering who’s buying the paper that mortgages are syndicated into or are the various mortgage related companies simply keeping them on the books, time will tell it always does. The Architecture Billings Index increased 1.3 points to 46.1 in March, while this index has increased fairly steadily since very early in 2009 it remains underwater.
The parade of questionable actions taken by corporate executives, government officials including financial regulators and many others leading up to this crises and ongoing to this day continues to surprise me. William Black, Associate Professor of Economics and Law, at the University of Missouri and Senior Regulator during the S&L Crises, a man exceedingly well qualified to comment on financial crises and there related frauds. Recently released a 27 page statement following his testimony before the House Financial Services Committee, which contained the following gems regarding Lehman Brothers collapse and the Fed’s handling of the situation.
He noted that Delaware corporations have eliminated the fiduciary duty of “care.” And “It is insane to withdraw accountability for negligence. Doing so encourages negligence.” No surprise there. Dropped this bombshell, “Lehman’s nominal corporate governance structure was a sham. Lehman was deliberately out of control with regard to “risk” in its dominant operation – making “liar’s loans.” Lehman did not “manage” the risk of making liar’s loans. It engaged in massive, fraudulent transactions that were “sure things”. Followed buy, Lehman’s principal source of (fictional) income and real losses was making (and selling) what the trade accurately called “liar’s loans” through its subsidiary, Aurora. (The bland euphemism for liar’s loans was “Alt-A.”) Liar’s loans are “criminogenic” (they create epidemics of mortgage fraud) because they create strong incentives to provide false information on loan applications.
In English, that means that the average dollar lent on a liar’s loan creates a loss ranging from 50 – 85 cents, In the near-term, making massive amounts of liar’s loans creates a mathematical guarantee of producing record (albeit fictional) accounting income. (As long as the bubble inflates, the liar’s loans can be refinanced – creating additional fictional income and delaying (but increasing) the eventual loss.
The industry saying for this during the S&L debacle was: “a rolling loan gathers no loss.” As an aside accounting rules allowed the financial institution to book the loans income stream at the fully amortized rate despite 85% of payments on these loans being done at the lowest negative amortization rate, can you say phantom income. Lehman’s underlying problem that doomed it was that it was insolvent because it made so many bad loans and investments. It hid its insolvency through the traditional means – it refused to recognize its losses honestly.
Lehman personnel that pointed out the fraudulent liar’s loans were attacked, even fired, by Lehman’s management. Honest managers, of course, would be delighted if employees identified frauds. The same has been shown to be true of bank field examiners, the identified problems but were ignored by their superiors allowing the bubble to continue.
Making liar’s loans is not risky – it is suicidal. That is why every significant lender specializing in liar’s loans failed. Remember Countrywide finance and my dumb and dumber comments relevant to B of A’s 7 billion Dollar purchase in 2008.
The following is the most damming statement of all by Mr. Black as he essentially accuses the NYFRB under Timothy Geithner, now our Treasury Secretary, of fraud and gross dereliction of duty. The FRBNY, led by President Geithner, had a clear statutory mission — promote the safety and soundness of the banking system and compliance with the law – yet stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a “three card Monte routine”. The Fed official doesn’t even make a pretense that the Fed believes it is supposed to protect the public. The FRBNY remained willing to lend to a fraudulent systemically dangerous institution (SDI). This is an egregious violation of the public trust, and the regulatory perpetrators must be held accountable. The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity. It constructed three, progressively weaker, stress tests – Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Surprise, it passed.
Hi and welcome to The Profit Motive, I’m your host Caleb Lawrence. Once upon a time in America the media acted as the watchdog of the corporations and the state. In the modern era it’s all about ratings and profits, opinion has been substituted for news and frequently is presented as fact. 
