"At the Root of the Crisis We Find the Largest Financial Swindle in World History", Where "Counterfeit" Mortgages Were "Laundered" by the Banks

George Washington's picture

Washington’s Blog


A "false front" building from the Old West. Towns built false fronts to make the town look more substantial and prosperous than it really was.

tidal wave of evidence showing that the giant banks have engaged in
fraudulent foreclosure practices is so large that the attorneys general
of up to 40 states are launching investigations.

People's homes are being taken when they didn't even hold a mortgage, and the big banks have been using "robo signers" to forge mortgage related documents. Indeed, even president Obama has been hit by robo signers (see this and this).

Its so blatant that foreclosure mills have published price lists for forging documents, including such gems as:

"Create Missing Intervening Assignment" $35

"Cure Defective Assignment" $12.95

"Recreate Entire Collateral File" $95

response, the big banks are saying that these are simply "procedural
defects" which don't affect their ability to foreclose. See this, this and this.

But let's take a step back. Only with some context will the actions of the banks with regards to these "defects" make any sense.

As I pointed out last year:

Simon Johnson confirmed what William K. Black has said about fraud by the financial sector, booms and busts.

As I previously wrote:

Black explained that fraud by a financial company usually involves the company:

1) Growing like crazy

Making loans to people who are uncreditworthy, because they’ll agree
to pay you more, and that’s how you grow rapidly. You can grow really
fast if you loan to people who can’t you pay you back


3) Using extreme leverage.

This combination guarantees stratospheric initial profits during the expansion phase of the bubble.

But it guarantees a catastrophic subsequent failure when the bubble loses steam.

collectively - if a lot of companies are playing this game - it
produces extraordinary losses (more than all other forms of property
crime combined), and a crash.

In other words, the companies
intentionally make loans to people who will not be able to repay them,
because - during an expanding bubble phase - they'll make huge sums of
money. The top executives of these companies will make massive salaries
and bonuses during the bubble (enough to live like kings even even if
the companies go belly up after the bubble phase).

Johnson confirmed that a high housing default rate was part of the banks' models.
The financial giants knew they would make huge sums during the boom,
and then transfer their losses to the American people during the bust.

As William Black noted last October:

  • Everyone
    involved knew that the CDOs which packaged subprime loans were not AAA
    credit-worthy (which means that they are completely risk-free). He
    also said that the exotic instruments (CDOs, CDS, etc.) which spun the
    mortgages into more and more abstract investments were intentionally created to defraud investors
  • In
    November 2007, one rating agency - Fitch's - dared to take a look at
    some loan files. Fitch concluded that there was the appearance of fraud
    in nearly every file reviewed

As I wrote in April:

University of Texas economics professor James K. Galbraith previously said that fraud caused the financial crisis:

You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.

Senator Kaufman said last month:

Fraud and potential criminal conduct were at the heart of the financial crisis.

Congresswoman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this).


According to economist Max Wolff:

securitization process worked by "packag(ing), sell(ing),
repack(aging) and resell(ing) mortages making what was a small housing
bubble, a gigantic (one) and making what became an American financial
problem very much a global" one by selling mortgage bundles worldwide
"without full disclosure of the lack of underlying assets or risks."

accepted them on good faith, failed in their due diligence, and rating
agencies were negligent, even criminal, in overvaluing and endorsing
junk assets that they knew were high-risk or toxic. "The whole process
was corrupt at its core."


Indeed, Galbraith just gave a must-watch half hour speech where he points out:

  • "At the root of the crisis we find the largest financial swindle in world history."
  • The fraud originated in the mortgage market of the United States.
  • The
    houses were over-appraised, and the banks only hired appraisers who
    were willing to do that. Galbraith rhetorically asks: "For what
    conceivable reason would a lender accept an inflated appraisal for a
    house against which it was going to make a loan?"
  • The
    language used in the mortgage industry is very telling: "liar's loans",
    "ninja loans" (where the borrowers had no assets and no income),
    "neutron loans" (where it would destroy the people but leave the
    buildings), and "toxic waste"
  • The mortgages in the millions were counterfeits,
    not mortgages. They were "laundered" ... the dirty paper was converted
    into clean paper. Securitization was used to convert the worthless
    paper from triple D minus junk to triple A. The commercial banks were
    the "fences", they took the laundered paper and sold it on to the
    legitimate market. The "marks" were the pension funds, or any
    investing entity which trusted triple A rating or investment banks.
  • The police left the beat.
  • If
    the counterfeit is big enough, the whole system collapses, because you
    can't tell what's real from what's counterfeit and so confidence
  • The failure to face the problem of fraud
    constitutes a huge barrier in the path of economic recovery. The
    banking system can't be restored until it is taken apart, cleaned up and
    rebuilt in a transparent and honest manner.
  • We
    should make the Department of Justice uncomfortable to ignore these
    frauds. Because if we don't have fair and honest and functioning
    financial system, we won't get out of this crisis.

Indeed, there was fraud at every step
of the mortgage process. The big banks intentionally signed up
borrowers with insufficient income and assets, threw out the
documentation because it would prove fraud, racked up loan fees and
received short-term payments before all of the new borrowers ran out of
money, and then laundered the bad loans into securitized instruments to
sell to the suckers.

The banks created an intermediary called
"MERS" to hold all of the documentation, in at attempt to shield the
banks legally. But courts have held that this scheme doesn't fly, and
that MERS doesn't have title to foreclose on houses. See this and this (and as Tyler Durden points out, MERS might have infected the commercial real estate market as well.)

there's the whole foreclosure scandal, where banks have forged and
backdated documentation to try to prove they are entitled to foreclose.
This is the part that is in the news right now. But because fraud was
committed every step of the way - from mortgage origination and loan
applications, to securitiztation, to MERS to foreclosures - it shows a
fraudulent scheme, and not just sloppy paperwork.

As Yves Smith writes:

banks' statement that is a minor paperwork problem] is an effort to
divert attention from the real issue, the mess the securitization
industry has made of the housing market at pretty much every step of
the process, from ginning up bad “spready” loans on purpose to feed
demand for CDOs, to deciding to ignore the carefully-devised procedures
to make sure the securitization trust complied with all the
requirements needed for it to have ownership of the mortgages ....

Karl Denninger writes:

Everyone talking about this in the mainstream media - with a handful of exceptions ... is trying to play this down as a mere technicality.


It's not.


It's a coverup that is now coming unraveled.

In another essay, Denninger points out:

The issue is not "robo-signed" documents. The issue is that the robo-signed documents are
an attempt to cover up for previous failures in the securitization
process which have left investors worldwide holding an empty bag, and
homeowners with seriously-damaged chains of title.

As Ellen Brown writes:

most reports, it would appear that the voluntary suspension of
foreclosures is underway to review simple, careless procedural errors.
Errors which the conscientious banks are hastening to correct. Even
Gretchen Morgenson in the New York Times characterizes the problem as "flawed paperwork."


But those errors go far deeper than mere sloppiness. They are concealing a massive fraud.


They cannot be corrected with legitimate paperwork, and that was the reason the servicers had to hire "foreclosure mills" to fabricate the documents.


errors involve perjury and forgery -- fabricating documents that never
existed and swearing to the accuracy of facts not known.




problems cannot be swept under the rug as mere technicalities. They go
to the heart of the securitization process itself. The snowball has
just started to roll.




How do you recreate the original
note if you don't have it? And all for a flat fee, regardless of the
particular facts or the supposed difficulty of digging them up.


of the mortgages in question were "securitized" - turned into Mortgage
Backed Securities (MBS) and sold off to investors. MBS are typically
pooled through a type of "special purpose vehicle" called a Real Estate
Mortgage Investment Conduit or "REMIC", which has strict requirements
defined under the U.S. Internal Revenue Code (the Tax Reform Act of




That was not done; and there is no
legitimate way to create those conveyances now, because the time limit
allowed under the Tax Code has passed.


The question is, why
weren't they done properly in the first place? Was it just haste and
sloppiness as alleged? Or was there some reason that these mortgages
could NOT be assigned when the MBS were formed?


argues that it would not have been difficult to do it right from the
beginning. His theory is that documents were "lost" to avoid an audit,
which would have revealed to investors that they had been sold a bill
of goods -- a package of toxic subprime loans very prone to default.

The government, of course, did nothing to prevent mortgage fraud. See this, this, this, this, and this.

Indeed, the government is closing ranks with the banks. And instead of fixing the underlying problem, the government is still trying to prop up the whole rotten, falling down mess:

(Its not working very well.)

So what can we do, if anything?

Karl Denninger has a great suggestion. And we must break up the giant banks.

But these solutions will only be followed if the government decides to start following the rule of law again.

As the Wall Street Journal notes,
some congress members and states attorney general have set their sites
a little lower, focusing on short-term help for homeowners:

think the mortgage-servicing firms need to understand that they face
real exposure now, and they would be well advised to take this very
seriously, to clean this up by doing loan workouts to keep people in
their homes, which up till now they've just paid lip-service to," said
Ohio Attorney General Richard Cordray.

in Congress have called for a moratorium on all foreclosures until the
documentation issue is resolved, though senior Administration
officials Monday again declined to endorse that idea.




attorneys' general immediate aim is to determine the scale of the
document problems and correct them. But several of them have said that
the investigation could force the lenders and servicers to agree to mass
loan modifications or principal forgiveness schemes. Other
possibilities include financial penalties or changes in mortgage
servicing practices.




Former New Jersey attorney
general Peter Harvey, now a trial lawyer in New York, said that a
settlement with state attorneys general would likely "to give the banks
some cover" to make changes that might otherwise result in lawsuits by
investors in mortgage-backed securities.




attorney general Thomas Miller, who is leading the effort, said his
office might take cues from an investigation brought by Massachusetts
attorney general Martha Coakley. She successfully pressured Bank of
America Corp. in March to reduce mortgage-loan balances by as much as
30% for thousands of borrowers, using the threat of a lawsuit to get a
settlement, though documentation problems were not at issue then.


The primary weapon the states could wield would be
their respective laws against unfair and deceptive acts and practices,
said Prentiss Cox, a professor of law at the University of Minnesota and
former Assistant Attorney General in Minnesota.


Those laws are
easier to apply, however, when a lender misleads a borrower than in
pursuing problems with foreclosures related to documentation, he said.
Individual attorneys general could also bring actions under states'
various foreclosure laws.


Illinois Attorney General Lisa Madigan
said she was preparing to introduce legislation meant to tighten
foreclosure laws and prevent document errors in the future. She also is
pushing federal representatives to resurrect a bill that would allow
bankruptcy judges to "cram down," or cut, a troubled homeowner's
mortgage debt.


"The immediate goal is to stop fraudulent
foreclosure and to require that the lenders and servicers are following
the law. But that's the bare minimum. That's what they have to do to
follow the law," she said.


Nearly a dozen attorneys general
nationwide, including Ms. Coakley and Mr. Miller, have called on
lenders and servicers to suspend foreclosures until document
irregularities are studied and corrected.


Top lawyers from
multiple states have gone after mortgage lenders before. In 2008, Bank
of America Corp. settled charges brought by 15 attorneys related to
accusations of predatory lending in its Countrywide Financial Corp.
unit, granting loan modifications worth $8.4 billion to thousands of


Mr. Cordray, of Ohio, last week became the first
attorney general to sue a mortgage servicer, when he filed suit against
GMAC Mortgage LLC. The suit also named as a defendant GMAC employee
Jeffrey Stephan, an alleged "robo-signer," who said that he signed off
on thousands of court documents related to foreclosures without reading
them first.


GMAC announced that it was suspending foreclosures
in the 23 U.S. states where judges are required to sign off on them
after news of Mr. Stephan's activities surfaced. J.P. Morgan Chase
& Co.'s Chase Home Mortgage unit suspended judicial foreclosures
soon after, and Bank of America followed suit. On Friday, Bank of
America widened its foreclosure freeze to all 50 states.


attorney generals would like to look beyond the narrow issues raised by
the robo-signing. The issue "I'm most engaged in right now is the big
servicers who are initiating foreclosures while the borrower is in the
modification process," said Arizona Attorney General Terry Goddard.

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George Washington's picture


Mr. Banzai, you just keep getting better ...

williambanzai7's picture

Tnx...You know my blog is like a vault full of this stuff. And I have all this other stuff waiting to be deployed at the right opportunity. Its fun!

tamboo's picture

"if we don't have fair and honest and functioning financial system, we won't get out of this crisis."

we have a winner!!!

blindfaith's picture

"The issue is not"robo-signed" documents. The issue is that the robo-signed documents are an attempt to cover up for previous failures in the securitization process which have left investors worldwide holding an empty bag, and homeowners with seriously-damaged chains of title."

By far, this is a key element in the mess.  To clear up a defect in the chain of tiles is no easy feat.  A legal nightmare and will cost thousands for each mortgage.  Anyone who has a mortgage less than 10 years old, likely has a "cloud of title" to contend with (when and if they sell their property).

No respectable real estate agent can NOW recommend a property with a mortgage as a safe property to buy. 

"Constructive notice" is yet another area that can rear it's ugly head up to 7 years after you think all is OK.

Lies, upon lies, upon lies and no truth is in sight.  You can not pass a state exam to be a real estate "agent" or mortgage broker, or banker, and not know what the law is...and what is ethical  (And much is rooted in the bible, believe it or not, and goes to show you how many "Christians" don't practice what they preach).

There is no innocence anywhere in all this, just lies and greed.

Page 3, August 2005 issue of Consumer Reports...the shit is about to hit the fan...so how did they know if the bankers didn't.


Waterfallsparkles's picture


You hit the nail right on the head.

I remember reading where Countrywide was giving Mortgages to People with Credit scores of 540.  I could not believe it.  I would not rent one of my Apartments to someone with a credit score of 540.  I have seen credit reports with a 540 score and the people usually have at least 2 Judgments and 8 accounts that are 90 days delinquent.

I agree with you that the Banks intentionally made loans to these people knowing from their Credit history they would not pay back the loans.  It is my opinion that these Loans with 540 Credit Score were the ones that were duplicated.

Hypothetically, if you took a $100,000. Sub Prime loan and duplicated it 9 times you would make $900,000.  You could take that $900,000. and buy Credit Default Swaps betting on the Montage to fail.  When it does you would receive $1,000,000.  A total of $1,900,000. on a $100,000. loan.  In addition to the above you would Short the Company (like AIG, ABK, MBI, PMI, etc.) that insured the Credit Default Obligation.  Many of the Insurance Company's were trading for $100. per share and were pushed down to in many cases to less than a $1.  Probably another cool Million Dollar profit.

I also beleive that this is why the Mortgages were broken up into so many Tranches.  The Banks beleived that no one would every put them back together again so they would never be detected.  Kind of like Humpty Dumpty.

When I think about it what comes to mind is that many of these Credit Default Obligation and Credit Default Swaps were originated was when Hank Paulson was CEO of Goldman Sachs.  Now what I am saying is conjecture and not in any way fact.  Just my imagination of what happened.  After, all of these CDO's and CDS's were originated Paulson was Nominated to the Treasury.  That is when everything appeared to fall apart.  It is my opinion that the reason that FRE, FNM were Nationalized was to put all of these Mortgage Duplications into FRE, FNM where the Taxpayer would have to pick up the losses on the Duplications.  FRE, FNM bought all of the alleged Fraudulent Mortgages from the Banks to get them off their Books.  It was in my opinion also that AIG was Nationalized to pay out the winnings of the Banks CDS's.  The other reason for the Nationalization was with the companies (FRE, FNM, AIG) was so no one could force an audit of the Companies once they were 80% owned by the FED.

The Bailout Money that was to be used to buy these Toxic Mortgages was given to the Banks in a lump sum instead of Buying the Assets because with the Nationalization of FRE, FNM the FED could buy those Mortgages from the Banks thru FRE, FNM.  They would then become the Taxpayers Liability.

Doesn't anyone find it interesting that Hank Paulson wrote into the Bail Out Bill a Get out of Jail Free Card for himself?

Ripped Chunk's picture

It's a huge ball of collusion. Subprime deals especially pay-option ARM's generated massive commissions at the originator level and massive profits for the funding banks at the securitization level.

Wachovia required it's in house originators and commissioned brokers to put 45% of business into pay option ARM's. This is a product that works for 10% of the borrowers or less. It is an investor loan not a primary residence type loan. And it only works in a rapidly appreciating (bubble) environment.



Matto's picture

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Matto's picture

Your comment has been flagged as incendentry

I am more equal than others's picture

If you are the cook at a house of prostitution are you culpable? 

Parsing morality is dangerous because it will allow those who were enablers to avoid the consequences.

Careless Whisper's picture

arthur andersen went down for shredding documents... and these banksters have yet to be charged with a single crime.

"a financial coup d'etat? i could agree with that." (marcy kaptur)

VWbug's picture

let me go on record as saying you will be as wrong about this as you were on the GOM disaster GW.

Alarmist bullshit that makes no sense whatsoever.

This is a procedural problem that gets fixed by hiring some clerks, BFD.

Just so I can say 'i told you so' , again!

Imminent Crucible's picture

What a nincompoop.

MERS is not a real company.  It's a shell projected by the participating mortgage and securitization banks:


Read it all.  By page 55 the lights will be coming on.  By page 72, you will be blushing with shame at your ignorance.

VWbug's picture

i speed read like 2 articles on this and even with that I can tell this is not going to do anything more than make some lawyers a few $$ and keep house prices from falling even further.

I am the laziest trader alive and I still have a better track record than you guys who analyze all this shit to death.

Better to have good judgement and be lazy than to work your ass off reading bullshit I say.

I was right about GWs alarmist nonsense postings on the GOM disaster, and I'll be right about this too.

And I ain't even trying. Imagine if I actually read up on any of this shit.

Panafrican Funktron Robot's picture

Are you actually trading on this prediction, or are you just dick waving?

alien-IQ's picture

What I find most disturbing and disheartening about this is Americas lack of outrage towards it. It is the reaction and behavior of a defeated society.

Imminent Crucible's picture

99% of Americans don't know about it yet. The MSM are all house organs of the banksters.  Bloomberg is refusing to cover it, the WSJ dismissed it as "procedural errors", etc.

When they do find out about it, most Americans will misunderstand it, at least at first.

Events will gradually force awareness and understanding.  The body under the floorboards is beginning to stink.

Give it a little more time.

Bob's picture


Kudos and thanks. 

reinhardt's picture
eventually, the foreclosure nonsense.. will probably be used as the primary tool of debasement.. and will catch up to the speculative market.. which should have tanked on the foreclosure suspending news


when the market does tank.. the commonly heard excuse will be.. "well everyone knew - it was the robo-signing" (and that platitude should be ignorant enough to end the conversation)


then the call for "robo-signing reform"


how do you punish a robot?


Jake Green's picture

Are you the real reinhardt?

I was on the google finance board when the infamous call, "the negative news of Sept. 15" was made way back when.

dcb's picture

good job, but as usual where is the mainstream media in raising outrage. Nowhere!!!

Cognitive Dissonance's picture

On the contrary, the mainstream media aka the fawning corporate press, are doing exactly what they are paid to do. That is distracting the masses with shinny objects and mind numbing pablum, biased "reporting" aka repeating of WH, Pentagon and corporate talking points and press releases and the all important and scared "Keeping of the Public Myths" the most important of which is that the USA posses a vibrant, motivated and extremely inquisitive "free" press.

Long live the all important primary public myth keepers, the mainstream media.


Bob's picture

Sharing your frustration, dcb, but I do see an evolving wider awareness in what I would call the MSM blogosphere.  Even CNBC is giving credit to ZH and linking to posts here. 

Keep the faith and maintain the effort to get the word out. 

Goldenballs's picture

Even now 2 years later they still fail to acknowledge the system is irrepairably broken,the staff leaving the Whitehouse in recent times attests to how bad the situation probably really is.The ramifications of 2 years ago still haunt the economic system,whilst the politicians openly proclaim business as usual the sheeple realise its only a matter of time before judgement day arriveth.As the dust refuses to settle "confidence" evaporates further everyday.

Precious's picture

Note the latest politicians who were heading the banking charge to hoodwink the public.


How bought and sold are these political frauds?  This time they were cut off at the pass.  Next time maybe not.

MakesMeChunder's picture

Thanks for the link.  When I tried to acces it, here is what came up:


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AUD's picture

Hey, if the ratings agencys can give government bonds a.k.a. worthless junk, a AAA rating why not a MBS or any other worthless paper.

It's all the same worthless shit. To measure something you need a standard to measure it against, government bonds are hardly that. And that is the root of the crisis.

zwscott33's picture

The fiat currency makes it all possible

Matto's picture

Great summary of the issues GW