Saturday, October 16, 2010

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.


  1. This is simply unbelievable. The lengths banks will go to screw the consumer.

  2. This fraudulent foreclosure crisis is appalling in so many levels. The bankers who were bailed out by the government put profit for themselves before anything else, just like what they have done during the housing boom. The few law firms that hire attorneys during this recession time are firms that specialize in foreclosures. Lawyers who feel lucky to be able to find a job in those law firms may also be blinded by self interest to disregard the blatant fraudulent acts that happened under their watch.

  3. No one variable can cite the financial crises. All the countries of the world are dependent on each other for some reason. Therefore if one is under pressure regarding money, others too are affected. The volume of investments have increased which is why money is stucked at one place. Banks do not hold enough liquidity to circulate around the economy.
    Banks and financial crisis

  4. Doreen R FIU-

    It is disturbing to see the complicity by the courts, lawyers and banks to keep the bank's heads above water at the expense of the homeowner. A lot has been said about the homeowners that now face foreclosure, "they should have known", "they were in it for a quick buck" "they were speculators" but it was the banks that created the culture and environment of adjustable rate, neg am, sub prime, No Doc loans that has brought us to this point. Now the banks are scrambling to enforce fraudulent or merely invalid contracts to take back property from homeowners. In the wake, neighborhoods across the country are deteriorating as vacancy skyrockets and the bank and homeowner abandon the properties. Unfortunately, the bail out may be the tip of the iceberg.

  5. What is unbelievable about this post is how the American people seem shocked that banks would result to fraudulent foreclosures to make a quick dollar. These are the same banks that approved just about anyone with a pulse that sought to buy a home in the first place. I think the bank bailout in the first place was irresponsible on the government's behalf as our society works in a circle of life. These banks, like Goldman Sachs, which got to big to fast will die off and new regional banks will re-emerge, hopefully with a new perspective on proper lending techniques.

  6. Our nation's most trusted institutions, those who led us to becoming one of the nations economic superpowers now have blood on their hands from fraud committed against their very own customers. People defaulting on their mortgage is obviously against public interest and illegal, but the way the nations once enshrined institutions are "slaughtering" the homeowners with forged notes and indecent trade practices is shameful. The lust and glamor of Wall Street has now turned to opinions of greed at which even the law cannot stop. There must be a massive investigation undertaken that will demand people to take responsibilities for the actions of the banks. People must be compensated for having their homes illegally taken away. The toxicity of this problem undoubtedly seeps from the top of the chain of command, and executives should no doubt be held responsible.