Repairing the Damage of Fraud as a Business Model - Felix Salmon: Why no financial prosecutions?

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More than two years after the economy melted down, there's still been no financial malefactors sent to jail. Reuters blogger Felix Salmon explores some explanations.

Read his article here: http://blogs.reuters.com/felix-salmon/2010/12/09/looking-for-financial-crisis-criminal-prosecutions/

Meanwhile, Janet Tavakoli has come out with a presentation listing just some of the people who might be liable for prosecution here:

Presentation to the
Federal Housing Finance Agency Supervision Summit
Washington, D.C.

Janet Tavakoli, President
Tavakoli Structured Finance, Inc.
December 8, 2010

IMF: I’M Fantasizing

“The dispersion of credit risk by banks to a
broader and more diverse set of investors,
rather than warehousing such risk on their
balance sheets, has helped to make the
banking and overall financial system more
IMF Global Financial Stability presentation, April 13, 2006

Widespread Interconnected Ponzi Scheme

Securitization professionals at several
financial institutions knowingly bundled fraud
riddled loans into RMBS. New investors
needed to pay-off old investors. To delay
being busted, they escalated and sped up the
fraud. This required more “complexity” and the
involvement of more cronies.
Many CDOs and virtually every CDO-Squared
were more fraud to cover-up fraud.

Stan O’Neal’s OpEd

“In any system predicated on risk-taking, there are
failures, sometimes spectacular failures. But for
every failure to be viewed as fraudulent or even
criminal bodes ill for our economic system.”
“Risky Business,” WSJ April 24, 2003.

Tavakoli on O’Neal

“It?s great to have an open mind, but don?t leave it so
open that your brains fall out.”
Dear Mr. Buffett, Wiley, January 2009

Merrill and Ownit on O’Neal’s Watch

“The market is paying me to do a no-income-verification
loan more than it is paying me to do the full documentation
– William D. Dallas, Ownit?s founder and CEO

Dec 2006: Merrill, JPMorgan, and Ownit

• Merrill was part owner of Ownit.
• ML global finance head sat on Ownit?s board.
• JPMorgan yanks $500 million credit line.
• Ownit goes bankrupt December 2006; ML finance head
faxes in resignation.
• Stan O?Neal and Jamie Dimon can read newspapers

Merrill Accelerates Cover-Up

• HSBC takes $6 billion subprime write-off for 4Q 2006.
• Merrill madly accelerates CDO activity in first half of
2007; before securitization halts completely.
• JPMorgan closes “Squared” May 2007.
Fraud audits are in order

Tavakoli on Merrill – January 2007

• Business managers have boots on the necks of risk
• Risk managers should get out now and short.
“Subprime Mortgages: The Predators? Fall,” Tavakoli, Risk Professional (formerly GARP Risk
Review) Issue 35, March/April 2007.

Merrill’s 2007 “Ownit” Deal

• Package of loans including Ownit?s piggyback loans.
• Around 70 percent of the borrowers had not provided full
documentation of either their income or assets.
• Most loans were 100% LTV
• Home prices weak and falling.
• Deal docs omitted Merrill was Ownit?s largest creditor.
“Color –Blind in a Sea of Red Flags,” Floyd Norris, New York Times, May 16, 2008.
• In early 2008, “triple-A” rated tranche downgraded to
• Moody?s forecast 60 percent of the original portfolio
value could eventually be lost.
• Bond Fund of America was an investor.
“Color –Blind in a Sea of Red Flags,” Floyd Norris, New York Times, May 16, 2008.

Merrill’s 2007 CDOs – TSF Analysis

• Classic situation for fraud: All 30 ABS CDOs, more than
$32 billion.
• By June 10, 2008, all 30 had one or more “AAA”
tranches downgraded to junk by one or more rating
• Topmost “AAA” junked by one or more rating agencies
for 27 of the 30.

Financial Meth Labs

• Investment banks - securities fraud
• Mortgage lenders – widespread fraud
• Rating agencies – junk science
• CDO “managers” – crash test dummies & accomplices
• Certain hedge funds – shorted CDOs they “managed”
• Bond insurers – money for nothing
• Regulators – poseurs and enablers

FUBAR Finance: CDO Hawala

You bury my losses; I?ll bury yours.

TBTF: Trust Bernanke To Fund

• Shadow Banking
• Financial Trading Machines
• Hedge Funds / PE – Borrowed Money
• Industry Jeopardized by Financial Affiliates
• Derivatives / CDS - Swamp hedge value

15 Million Underwater Homeowners

• Four million - more than 50% underwater;
$107,000 average negative equity. This
alone: $428 billion.
• 7.8 million - 25% or more underwater
• Most paying higher interest rates than
national average. Can?t refinance. Not
eligible for HAMP.
Source: Equifax, U.S. Gov?t. via Moody?s Analytics

Banks Held U.S. Hostage

• No money to fund revolving lines of credit.
• Payrolls and payment for deliveries.
Fed bailed out banks, failed to regulate them,
failed to investigate them, and then covered
up for them.

Cronies Excuse Fraud with a Lie

They thought housing prices would always go up.
No competent structured finance professional uses ever
rising prices as the foundation of an analysis.
Finance pros are highly educated and paid more than
95% of the country to do their jobs.

FCIC: Stunning Incompetence or Cover-up?

• Phil Angelides: Bear Stearns hedge funds? June 2007
• Prince and Rubin say implosion raised no concerns.
• Rubin claims problems first apparent in fall of 2007.
• Citi?s $200 million credit line to Bear Stearns hedge
funds to be refunded by Everquest IPO reported May
2007. IPO cancelled after bad press, in which I was
quoted saying investment inappropriate for retail.
• Hedge funds invested in Citi?s toxic March 2007
Octonion I CDO. EOD February 2008.
• FCIC staffers made aware of public information
source by me prior to hearings.

Rubin: Media Enablers – Denial About 2007

• Rubin heads BG panel on potential U.S. state default:
Ambac?s pending bankruptcy, protection of Citi?s toxic
CDOs, and Ambac?s lawsuit/settlement with Citi,
never come up.
• Robert Rubin told Buttonwood Gathering, end
October 2010, that no one could foresee problems in
• Editor for The Economist said panel showed Rubin?s
value. (Editor wasn?t trying to be funny.)

Read the rest of this intriguing story here: http://www.tavakolistructuredfinance.com/FHFA1282010.pdf

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