FED's 2008 Mistake Caused Financial Crisis
 No, Blame Government Inaction Says Economist William Black

Return to Quick Economics Notes Updated 8/4/18  
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Prelude:

1980s and 90s Savings and Loans Crisis was caused by the birth of liar loans.  A non-public nickname used by bankers, they are one of two key types of nonprime loan in which income is not verified. Liar loan information is put together by brokers and agents.

In about 1988s federal bank regulators realized LL made no sense unless their purpose was a fraudulent attempt to inflate bank income. By 1994 most LL had disappeared. But, Long Beach Savings (Amerquest) was still in the business. They had given up their savings bank charter and FDIC insurance to become an essentially unregulated mortgage broker. This avoided federal jurisdiction and sanctions. They quickly became the biggest vector of shadow banking system fraud. Essentially Lehman and the other top five Investment banks all would join what is now known as the Shadow Banking Sector where there is little regulation.

Also in 1994, Alan Greenspan refused to use the FED's exclusive authority provided the Home Ownership and Equity Protection Act to stop this type of fraud. Years later Ben Bernanke delayed the law's application to Liar Loans until said loans had mostly disappeared  until resurrected  in _____?.

 

Lehman Ignited the 2008 Credit Crisis

Liars Loans are those where a lender does not checks the income data on the mortgage application. Lehman brothers was a leading buyers and resellers of about $100 billion of fraudulent liar low credit subprime loans. Loans reps and warranties were marketed as being safe.

In early 2006, the Mortgage Bankers Association reported to all large mortgage lenders that about 90% of liar loans had exaggerated income figures and were therefore fraudulent. State investigations would reveal it was lenders and their agents who put the lies in liar loans. By then, about half the subprime poor credit/no credit mortgage loans were also liar loans.

Leman was not bailed out because the government feared there was a vast potential taxpayer liabilities associated with fraudulent procedures associated with low credit and liar subprime loans.


 

 

 

Not Prosecuting Unintended Consequences

The Depression era Pecora Hearing discredit bankers by revealing that ..."Legal chicanery and pitch darkness were the banker's stoutest allies." The hearings provided political space needed for Glass-Steagall bank regulations.

Years later the Savings and Loan Crisis generated over 1000 successful criminal prosecutions. This allowed for media coverage without fear of suit and fostered  politically understanding by the public of the pattern and extent of criminal banker behavior.

Well Fargo ignored the Lehman lesson and their own studies of fraud and massively expanded their newly named Courage's Lending subprime loan program. 

Black feels that with control of both houses,  Democrats could have prosecuted Well Fargo.

But Obama's Attorney General Eric Holder did not prosecute and this may have cost to the Democrat may have been the 2012 midterm elections and it may have contributed to the election of President Trump.

Blackman also feels that fraudulent banker activity will not ever be prosecuted. Why, Bush Two, Obama and now Trump have not prosecuted.

Source 20 minute Real News video