Watchdog Blog

Dan Froomkin: Fraud, From Top To Bottom – But Especially Top

Posted at 9:21 pm, May 19th, 2010
Dan Froomkin Mug

In an interview with NiemanWatchdog.org’s John Hanrahan last October, University of Texas economist James Galbraith argued that the press has paid too little attention to investigating the “criminal and felonious behavior” involved in the economic crash.

Galbraith said the crisis “was the product of wide-scale criminal fraud,” just as was the case in the savings and loan scandal of the late 1980s, which produced thousands of criminal charges against S&L officials and loan officers.

One of the hero regulators of the S&L scandal, William F. Black, shared his outlook with me last month, explaining how at the heart of the crisis was what he calls “control fraud” — fraud committed by design, by the people at the top. And as Galbraith recently explained to me, Wall Street banks basically became massive fencing operations for the fraudulent loans.

Galbraith is in some ways following in the footsteps of his father, John Kenneth Galbraith, one of America’s leading economists and a liberal who didn’t just challenge the “conventional wisdom” — he actually coined the phrase.

In recent testimony before a Senate Judiciary subcommittee, Galbraith raised questions that are as appropriate for journalists as they are for congressional investigators:

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public.

For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?



One Response to “Fraud, From Top To Bottom – But Especially Top”

  1. Darlene says:

    I wonder if there will be criminal charges for those big executives who profited so lavishly from this deception. Don’t hold your breath. Greed and money are more powerful than ever.

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