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The Criminal Roots of the Financial Crisis

One of the many unanswered questions about the current financial crisis is why there haven’t been more criminal investigations into what happened, including the highly suspect actions of the rating agencies, the banks, and mortgage brokers. At Salon, economist Simon Johnson and author and former investment banker John Talbott share a three-part email exchange about the roots of the crisis, and Talbott hits hard on this exact point.

Economists and media pundits — themselves mostly gentlemanly elites anxious to please corporate America — are slow to make the accusation that what happened here was truly criminal, and so miss the real story. The American people understand that when a group of bankers shuffle some paper unproductively and get away with hundreds of billions of dollars in bonuses, yet cause a loss of $40 trillion in global wealth and cause approximately 100 million people to become unemployed worldwide, there is only one word to describe it: criminal. [...]

Why isn’t the FBI breaking down the doors of the commercial and investment banks and grabbing computers so as to preserve incendiary e-mails that will most definitely implicate executives? Why are managements that caused this still in their jobs and still receiving bonuses? Are the bonuses paid to the folks at AIG that caused its collapse nothing more than hush money? How can the rating agencies still be in business? Why don’t we make one arrest and lean on the bankster to see if he will fold like the cheap suit that he is and name other conspirators? The FBI spends more time investigating $2,000 drug buys than they have to date investigating the biggest heist in the history of the world: $40 trillion, that’s trillion with a T, that’s 40 million bags each containing $1 million.

Talbott’s arguments bring to mind a recent investigative series by the Sarasota Herald-Tribune, which used public records to document who was behind the flipping and mortgage fraud that have decimated the area, with $450 million in defaulted loans.

Nearly 40 percent of the people involved in questionable flips in Sarasota and Manatee counties were industry insiders — real estate agents, developers, lawyers and mortgage brokers. Of the 37 groups discovered by the newspaper, 21 were organized by real estate agents or mortgage brokers.

Some of the people who organized or participated in flips were considered leaders of their profession. One was recognized as one of the top 50 Re/Max real estate agents in the world. Another won multiple awards from the Mortgage Bankers Association of Florida. Some flippers identified by the Herald-Tribune were seen as key clients by local banks and were allowed to pick their own appraisers or had loan approvals expedited to quickly close deals.

In the email thread, Johnson agrees that more criminal investigations are called for, but points out that investigations can be lengthy and more charges actually may be on the way. He adds that an equally worrisome problem were the actions during the crisis that were perfectly legal — such as campaign contributions to politicians who did the bidding of the financial industry.

That’s true, but the criminal piece of this shouldn’t get left behind. I’ve heard the argument before that numerous criminal investigations are ongoing and it’s just a matter of time before we begin to see more prosecutions — but I’ll believe that when I finally see it. In the meantime, the Sarasota stories point out that the real estate industry has a responsibility to do a much better job of policing itself. Award-winning agents who engaged in flipping schemes based on fraud should be hounded out of the profession. And if the industry won’t do it on its own, then someone else needs to do it for them, either by aggressive criminal investigations and prosecutions or some kind of public censure.

As it stands now, everyone up and down the line is getting away with it when it comes to predatory mortgage lending, from the brokers at the bottom to the investors at the top. As Talbott points out, it’s not hard for the American public to figure out that something criminal went wrong in a $40 trillion meltdown. Now it’s the justice system’s turn to do the same.

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