Financial “Control Fraud” – Bill Black – Part I

by Ken Kappel on February 14, 2011

“…markets are taking it upon themselves to begin to close down the control frauds — with homeowners fighting the foreclosures and investors demanding that the banks take back the toxic waste….. At the end of that process, the banks will have to be resolved [nationalized]. No matter how much the politicians dislike it, they will end up with the banks in their hands — either now or later. Taking them now is the right thing to do.”
William Black and Randall Wray. See, Foreclose on the Foreclosure Fraudsters, Part 2

“Bill Black, the former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for contributions and other perks. So enraged was one of those bankers, Charles Keating — after whom the senate’s so-called “Keating Five” were named — he sent a memo that read, in part, “get Black — kill him dead.” Metaphorically, of course. Of course.

“Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname ‘banksters’ Bill Moyers.  See, Bill Moyers Interview with Bill Black.

*     *     *

As this blog site begins we are dedicating our first post to the tireless, peerless and continuing work of William K. Black, Esq., chief regulator for the federal government during  the Savings and Loan debacle. During his tenure 1,000 bankers were indicted and many spent time incarcerated.

Mr. Black wrote a seminal paper “When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse,” whereby he brought forth the concept of Control Fraud. From our point of view he was pointing not only to the housing bubble and subsequent collapse, but also for the systemic economic disequilibrium which continues to destroy our economic environment, both domestically and globally. Beyond de-regulation in the financial markets, begun in the late nineties, these banksters put pressure on domestic industrial and manufacturing corporations to send our productive industries, which created National Wealth, off-shore. This has lead to current high unemployment, destruction of the Middle Class, chaos and instability.

Bill Black said:
”Individual “control frauds” cause greater losses than all other forms of property crime combined. They are financial super-predators. Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away at trust. Endemic control fraud causes institutions and trust to become friable – to crumble – and produce economic stagnation.”

Ken here. The germ for our monstrous and likely unpayable national and global debt that challenges all of us is based in fraud. There are approximately 72 millions homes in America.  Of those, 52 million have mortgages. Fully 23% of all mortgage bearing homes are underwater (owing more on their mortgage than the current value of their loans/debt) and some 30% of those are more than 30% underwater. Most astonishing in painting the picture is that an additional 22% of the 52 million mortgaged homes are nearly underwater.

Some have postulated that rather than bottoming out, indicators and statistics show home value will drop another 20 to 40% nationally, and when it does touch bottom, perhaps by the middle to end of 2012, will stay flatlined for another four or five years.  See Japan.
The primary reason for such a bleak prognosis is growing unemployment, which is why (bought and paid for) politicians on both sides of aisle cry out for jobs, jobs and more jobs. Yet we do not see any significant or serious plans put forward to actually create good jobs in America, which can rebuild our middle class (required for a “consumer society”) and lift housing prices.

Just as Jack Kennedy united the nation and brought confidence by building our space program, we posit a national high speed bullet train system, spawning tens of thousand of county and city light rail systems. The bullet train system could be exported and linked North to Canada and South to the Americas. Such a program would provide jobs in every state, and enable us to wind down our reliance on foreign oil. Additionally, we would bring the Americas together in a competitive market unit to rival Asian and Europe blocs. We’ll not develop that further here.

As we look further at Mr. Black’s contentions of Control Fraud understand that we present these argument in an attempt to cast light on Predatory Lending and Securities fraud issues that directly effect homeowner. That is what we’re about.

Mr Black said:
”White-collar criminology emphasizes incentive structures. A criminogenic environment is one that has strong positive incentives to engage in crime. While economists stress incentive structures, economics ignores criminogenic environments. The weakness comes from three sources. Economic theory about fraud is underdeveloped, core neo-classical theories imply that major frauds are trivial, economists are not taught about fraud and fraud mechanisms, and neo-classical economists minimize the incidence and importance of fraud for reasons of self-interest, class and ideology.”

Ken here. In other words, the current environment – that of a national Ponzi Scheme, a financial casino – has been encouraged, aided and abetted; first by long-term planning by Investment Bankers working in cooperation with, Alan Greenspan and now Ben Bernanke, who were and are the supposed “regulators;” with the witting help of two former Goldman Sachs’ leaders, Bob Rubin and Henry Paulson as Secretaries of the Treasury. We submit that current Treasury Secretary Tim “boy” Geithner, who served disastrously as the President of the New York Fed, is but a willing pawn of Goldman Sachs.  (That is just our opinion. Yet we believe that if he is unceremoniously sacrificed in 2011, it will serve to confirm our theory.)

Mr. Black wrote further:
”Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions, if adopted wholly, produce strongly criminogenic environments that cause waves of control fraud. Neo-classical policies simultaneously make control fraud easier and more lucrative, dramatically reduce the risk of detection and prosecution by maximizing “systems capacity” problems, and encourage crime by making it easier for fraudsters to “neutralize” the social and psychological constraints against deceit and fraud.

”Thus the paradox: neo-classical economic triumphs produce tragedy. Perverse policies led to four recent crises:
i.  the deregulation and desupervsion of the savings & loan (S&L) industry produced the 1980s crisis,
ii.  “shock therapy” caused the collapse of the Russian economy,
iii.  the “
Washington consensus” produced a wave of control fraud in Latin America, and
iv.  the desupervision of the U.S. economy in the 1980s and 1990s led to an epic wave of control fraud that contributed materially to the $9 trillion loss in U.S. stock market capitalization.’’

”With globalization, these crises can transmit to other nations through “contagion” or by causing key international investors to fail.

Ken here.  That is exactly what has occurred.  Key domestic and “international investors” have failed, rather been severely impacted by the loss of their investments in Mortgage Backed Securities (MBS) as millions of American families have defaulted on their housing debt and been ILLEGALLY foreclosed upon.  ILLEGALLY foreclosed on.

The major players have recently been filing law suits in New York State courts, where a majority of the Securities Entities (spawn of the Investment Banks) are domiciled. And, in some case filing in Federal Courts.

To prove up out point, witting economic analyst Karl Denninger presented the following language from a recent law suit: Life Insurance Companies v Countrywide – filed Jan 24 2011

”The Offering Documents for each offering of the Certificates represented in substance that the issuing trust for that offering had obtained good title to the mortgage loans comprising the pool for the offering. In reality, however, Countrywide routinely failed to comply with the requirements of applicable state laws and the PSAs for valid transfers of the notes and security instruments to the issuing trusts.”

Karl then wrote.
”Looks to me like as the Statute of Limitations approaches and the firms in question that have gotten screwed have faced the choice of “shut up or sue” they’ve decided that the correct response is ‘Ok, I’ll sue.’

”I doubt they’ll be interested in settling for a tiny amount of money either, given the default and economic harm numbers put forward in the complaint. Nor do I think this will be a singular complaint – drop in your name and play “template” with this one folks.” See Karl’s full article here.

Great News
This is great news that consumer advocates and homeowners have been waiting for. As the pension funds, insurance companies, etc., step forward – backed by effective major law firms to pushback fraudulent loans to their originators – legal precedents are being established that can be used by borrowers and their advocates to enable home owners the relief they’ve earnestly and in good faith been seeking through game-the-system “plans” such as HAMP.  We think that is exactly what Karl meant:  “drop in your name and play “template” with this one folks.”

In other words your lawyer, representing you in pushback litigation with loan originators and servicers can and will use the very legal language (lawyers call it boilerplate) in order to settle your case with the outcome you are seeking. In the event that you must move on that might be a “protected” short sale (with no future cash owed deficiency judgment or tax issues); or a major loan reorganization – if you’re underwater.

We’ll revisit this theme and present breaking news here as this story unravels and borrowers finally discover relief through an virtual alliance with large stakeholders in the MBS process who were also victimized by Predatory Lending and Securities fraud violations.

More and more local judges who were previously sympathetic to the banksters, have become outraged as they’ve discovered that “standard,” but, illegal foreclosure process has been in fact what some of them have called: “fraud on this court.”

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