A FULL CIRCLE OF FRAUD Unlearned Lessons from

A FULL CIRCLE OF FRAUD Unlearned Lessons from Fraud in the Financial Crisis Peter Goldmann, MSc. , CFE White-Collar Crime 101 LLC 21 st Annual ECI Conference Potomac, MD October 19, 2010 21 st Annual ECI Conference

“The defining element of fraud that distinguishes it from other forms of larceny is deceit. -- William K. Black, former S&L senior regulator and thought leader on mortgage fraud 21 st Annual ECI Conference

In the beginning… ü Residential home prices rise…and rise from 1997 on, at double-digit rates until. . . Source: Federal Housing Finance Administration 21 st Annual ECI Conference

In the beginning… ü Lenders lend… and lend… confident that they were protected indefinitely against any risk of loss from borrower default… 21 st Annual ECI Conference

In the beginning… ü And, making piles of money, living in blissful denial about the immutable law that what goes up… 21 st Annual ECI Conference

And then things got ugly… ü Mortgage brokers and appraisers, armed with ARM’s, Alt-A’s and No-Doc loans, get into the act… seeing green in the form of every wouldbe homeowner, no matter how bad their credit… 21 st Annual ECI Conference

Was it illegal? ü With banks lowering lending standards to bring in more and more mortgages, brokers and appraisers jump on the opportunity to fabricate borrower creditworthiness… 21 st Annual ECI Conference

Was it illegal? ü No one is around to monitor the activity of the brokers and enforce generally lax regulations for selling risky mortgages to willing borrowers…Number of mortgage brokers goes from 14, 000 in 1991 to 53, 000 in 2006. Result: Predatory subprime lending explodes 21 st Annual ECI Conference

Did the banks know? ü So banks lend and lend –with no controls -- to even more unqualified borrowers… 21 st Annual ECI Conference

The bad-mortgage gravy train ü Bank executives start pressuring their underwriters to approve mortgage apps that contained patently false borrower information…Controls against risky lending discarded and quickly become financial road kill… 21 st Annual ECI Conference

Wall St. Stokes the Fire… ü Bank execs are motivated by Wall Street’s bloated appetite for loans to pool together and package into securities that they sold off to institutional investors— sometimes under dubious terms and no controls… 21 st Annual ECI Conference

Fraud = Deceit 1 ü So lenders care little about truthfulness in mortgage apps because the approved loans would be quickly sold to Wall Street. Source: Federal Housing Finance Administration 21 st Annual ECI Conference

Fraud = Deceit 2 ü And the Wall St. firms care little about the quality of the loans underlying the exotic securities they are peddling to pension funds and other institutional investors because the risk was being pushed off of their books. 21 st Annual ECI Conference

Dishonest “Investors” Pile On… ü Fraud Conspiracy. “Investors” pay unscrupulous appraisers to overvalue a home and then use the false info to apply for a mortgage using a straw buyer. They obtain the mortgage, default and disappear. ü Property Flipping. ü Short Sales ü Equity Skimming 21 st Annual ECI Conference

September 2008 ü Lehman crashes ü Wamu Crashes ü Countrywide crashes ü Merrill Lynch crashes ü AIG crashes AND…. ü Too Big To Fail Spawns TARP 21 st Annual ECI Conference

Just when you thought… ü Banks testify before FCIC. ü Jamie Dimon tells the heartwarming “daughter story” about financial crises 21 st Annual ECI Conference

Lip Service from Bankers ü Banks pledge to do a better job of “risk management”… ü Reform’s effectiveness in preventing another banking crisis is questioned by skeptics ü Pundits predict another bubble if reform isn’t tougher on bank capital requirements and risk management. 21 st Annual ECI Conference

2009 -2010: Where are the Controls NOW? ? ü Banks are now victims of loan origination fraud in the tens of millions. ü FBI has never been busier chasing mortgage fraudsters ü Banks screw up the post-crisis cleanup by fraudulently foreclosing on tens of thousands of the same people the sold crappy mortgages to. Several are forced to suspend ALL foreclosures 21 st Annual ECI Conference

Conclusion 1 Questions for lawmakers regulators, financial services executives now: 1)If big banks are TBTF but they can’t manage risk or prevent their own people from committing fraud, how do we restore prudent business practices AND integrity? 2)Will MORE regulation help solve the problem? 3)Do the TBTF banks need to be broken up? 4)Whatever happened to the Volcker Plan? 21 st Annual ECI Conference

Conclusion 2 The BIG questions now: Where were bank/lender controls in the years before 2008? Where were investment bank controls in the years before 2008? Where were bank/lender controls AFTER 2008— when the foreclosures began? Will the financial services industry EVER learn the basic lessons of anti-fraud/risk controls? 21 st Annual ECI Conference

Your Questions 21 st Annual ECI Conference

Thank You! Peter Goldmann 1 -800 -440 -2261 pgoldmann@fraudaware. com 21 st Annual ECI Conference