America tearing in two and systemic bank fraud


by David Malone

US housing is pushing America towards a double dip.  If it happens, it will tear America’s social fabric in two.  There will be the elite of Wall Street profiting from the vast and obscene support the government has lavished upon it, and those the government has turned its back upon, who are without jobs, a house or the hope that their children will get a decent education.

In the last quarter of 2010, while Wall Street said enough of crocodile tears and mock humility and returned to crowing and oiling itself with bonuses, housing for ordinary people in 11 of America’s today’s biggest cities declined to new lows, nearly 4% down in just three months.  The rate of foreclosures is up and so is the number of them flooding the market.

Because of the on-going collapse in US housing and the tower of debt still protected on top of it, ordinary people’s lives are in free fall.  State and local pension funds are simply not paying out what they promised.  Schools, police, fire departments, everything that we used to call society are all being cut because states and municipalities are crippled with their own debts.

Official unemployment is stuck at 10% while the real US misery level is between 16% and 14% of citizens of the country, where banker bonuses are measured in billions, 43 million Americans feed their families with food stamps.

How could this still be happening after all the trillions pumped in to the banks supposedly to fix those write downs and bad debts?

Well, a hint of the real cause came from a law suit filed by the insurance company Allstate.  In fact it follows on from an earlier law suit the company filed.  The first was filed against Bank of America and Countrywide while the second expands the net to include JPMorgan and Washington Mutual.  Essentially both suits claim that all these banks lied about everything.

They make for fairly horrific reading.  What makes the Allstate suits important is not so much what they allege, horrific and blood boiling though it is, but how they do it.  One of the problems with taking the banks to court has been the sheer number of securities, CDOs and mortgages that would have to be investigated in order to prove systemic and intentional fraud as opposed to ‘a few mistakes’.  Allstate has used statistical sampling methods to solve this.  They have developed proprietary methods of sampling the whole vast cesspit of debts to give a statistically accurate picture of the whole.  Their total sample size was 26,000 in 17 different debt offerings.  From these they chose 800 defaulted loans and compared them to 800 randomly chosen loans.  Were the defaulted loans systematically different from other loans?

Such sampling is legally and mathematically well accepted but this is the first time it has been used to get at what they banks were really up to and how endemic is was.  Until now we have had damning specific investigations such as Pro Publica’s magnificent work which I wrote about.  But now thanks to Allstate we have a true picture of not just specific instances but the proof that these examples are typical.

And what do they show?  They show the banks – all four of them – the biggest in America –  lied about almost every aspect of loans that went in to the CDOs they were selling.  For example a prospective CDO buyer like Allstate might want to know if the CDO contained any loans where the person had borrowed more than the value of the house known as 100% LTV (Loan to Value).  Such high LTV’s are good indicators of possible defaults.

JPMorgan said it included no 100% LTV loans.  In fact there between 17 and 23% of the loans included were 100% LTV’s.  Washington Mutual said it also included no 100% LTV’s whereas it actually included between 10 and 25%.

For 80% LTV mortgages it was worse.  JPMorgan routinely included between 10% and 60% more of these very risky mortgages than they had claimed.  For WaMu they included between 46 and 66% more of them.

The picture for Bank of America and Countrywide is similar.  Allstate’s suit claims that such huge and endemic ‘errors’ can only be the result of intentional fraud.

What I would like to see is the same statistical sampling method used on RBS’s CDOs and those of the other banks we have bailed out and whose bad debts we have bought and insured.  Banks like Halifax, Northern Rock, UniCredit, Santander, HVB, Hypo Real Estate,  Commerzbank just to name a few.



David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: