Ruminations on Robo-signing and Our Corrupt Financial Elite

Every American should be outraged by the subversion of middle class property rights now underway in courthouses across America where massive fraudulent foreclosures appear to be occurring. The video above provides an overview of the problem. As Paul Krugman puts it: "the mortgage mess is making nonsense of claims that we have effective contract enforcement -- in fact, the question is whether our economy is governed by any kind of rule of law."

So far, Wells Fargo, JP Morgan Chase, Ally (GMAC), Citi, PNC, Bank of America and Goldman Sachs among others have each been caught up in the robo-signing fraud. Apparently our major banks decided to kick-out homeowners through the cheapest and fastest means they could get away with regardless of illegality. Basically, according to one attorney who has deposed 150 "robo-signers," this was "an industry wide scheme designed to defraud homeowners."

This started to unravel when Attorney Thomas Cox discovered that GMAC hired a "limited signing agent" to execute 10,000 affidavits a month in support of foreclosures--a veritable dispossession machine. Obviously, such a pace makes it impossible to testify based upon personal knowledge and to assure that the bank actually has the right to foreclose. Now attorneys have admissions from agents of major banks that they had no personal knowledge of the facts they swore to, they did not understand the affidavits they signed, and they had not searched for basic documents like notes and mortgages that would prove the right to foreclosure. A paralegal at one foreclosure mill testified that signatures were forged, documents backdated, and social security numbers swapped to support faster foreclosure actions.

Maryland now appears poised to conduct a massive audit of foreclosure actions in its courts. The SEC is investigating publicly held firms involved in this entire sordid affair, and the DOJ, FDIC and OCC are also conducting their own inquiries. These actions have been announced since I posted my first blog on this topic which was triggered by the coast-to-coast investigation of our 50 state attorney generals. Class action attorneys will no doubt file massive claims. This fraud in foreclosures amounts to a massive assault on the judicial process and the rule of law in America and should lead to convictions, judicial sanctions and the imposition of massive legal liabilities.

According to one bank analyst the litigation losses to the banks from this pattern of fraud could mount to $80 billion. Another analysis suggests a $6-10 billion loss from the delay in foreclosure recoveries. For now, at least, it appears that the value of MBS has not suffered much. So, standing alone, these losses ought not to lead to another Lehman meltdown. But, the mortgage bond meltdown (which I will cover in more detail soon) may lead to even larger losses. In a fundamentally weak economy, the combined problems in the mortgage market could easily trigger another financial crisis, complete with federal bailouts of our banks, again.

I became a lawyer in 1986, shortly after graduating from Saint Louis University School of Law. Since then I worked for large corporate firms, small firms, the SEC, the FDIC and as a teacher at two different law schools in Chicago and Topeka, Kansas. Nothing in my experience prepared me to understand the robo-signing scandal now gripping the banking sector. In my opinion the systematic submission of fraudulent documentation to support residential foreclosures was impossible. Lawyers cannot participate in fraud and owe a duty of candor to courts. CEOs and directors would never approve such a brazen method of generating revenues now while exposing their firms to massive legal liabilities down the road. Under Model Rule 1.13 any in-house attorney as well as outside counsel would be duty bound to alert corporate authorities to the fraud and would even confront the possibility of reporting wrongdoing within publicly held banks to the SEC. Fraud ought not to pay, and the system really does punish fraudfeasors (other than securities fraudfeasors which benefit from special legal protection).

Nevertheless, I was clearly wrong. We are seeing the most massive legal fraud in US history, right before our very eyes, right now. This all makes a mockery of the rule of law in America, which already was suffering from excessive elite subversion, as I argue in my forthcoming book Reimaging Capitalism.

We should have expected this. When we bailed out the banks we permitted the reckless bankers to remain in control, even though they had proven themselves inept, at best, and corrupt at worst. According to Professor Emma Jordan Coleman, 92% of the senior bank managers who caused the crisis remain in control of their firms. They sunk global capitalism in the name of short term profits. Now they are so anxious to generate revenue from foreclosures they seem to be utterly unconcerned about committing fraud on the courts, fraud on homeowners, and fraud on buyers of tainted properties. It is now past time to oust the managers of these "zombie" banks that do not lend and instead "suck the lifeblood out of our economy." That is why I argued here, here, here, and here that any bailout should require dismissal of the senior managers who recklessly crashed the economy.

Otherwise, the managers will simply be emboldened by their ability to foil legal accountability to pursue even worse misconduct--like judicial fraud.