the intentional production of a crimogenic environment

neweconomicperspectives | Restoring the pre-1993 underwriting rules would impose no cost on honest lenders and would greatly reduce fraud and make it much easier to prove fraud when it occurred. The rule we adopted in 1984 restricting S&L growth rates doomed the accounting control frauds that we were not able to close because we had no funds. The rule targeted an accounting control fraud’s Achilles’ heel – the need to grow rapidly or collapse. The lack of a rule requiring Fannie, Freddie, the investment banks, and mortgage bankers to file criminal referrals was a major barrier to prosecuting.

The regulatory “black holes” exploited by fraudulent mortgage bankers created a superb criminogenic environment. The GAAP and international accounting rules of credit default swaps (CDS) and international accounting rules for allowances for loan and lease losses (ALLL) are open invitations for accounting control fraud.

The broader point is that without superb criminal referrals by the financial regulators and the “detailing” of dozens of bank examiners to the FBI it is impossible for the FBI to investigate effectively an epidemic of elite accounting control fraud. By 2006, there were over two million fraudulent liar’s loans being made annually. Long does not understand that the financial regulators are the “cops on the beat.” The NYC police department does not deal with elite financial crimes. The FBI white-collar crime staff is so tiny (fewer than two agents per U.S. industry) that it cannot walk a beat. The FBI only come and investigates in response to effective criminal referrals. Banks will virtually never make a criminal referral against their CEOs. One cannot combat such a fraud epidemic by having the FBI investigate the criminal referrals that the FDIC-insured banks make against individual borrowers.

The anti-regulators controlling the banking agencies under Clinton and Bush killed the criminal referral process. Obama has failed to reestablish it. Long does not understand the meaning of her own example about Geithner’s response to learning of the Libor frauds. Geithner and the Federal Reserve Bank of New York (FRBNY) did not use the word “fraud” in their communications with the Bank of England or their sister regulators. The FRBNY did not make a criminal referral or even alert the FBI and the Justice Department to the Libor frauds. Obama’s recently created “working group” on secondary mortgage market fraud does not even include representatives from the banking regulators. Chris Swecker, the senior FBI official who made the famous twin warnings in 2004 (there was an “epidemic” of mortgage fraud that would cause a financial “crisis” if it were not contained) informed the FCIC that no banking regulator ever contacted him in response to his warnings. Long’s anti-regulatory dogma would recreate the criminogenic environment and spark new fraud epidemics and lead to the three “de’s” (deregulation, desupervision, and de facto decriminalization). One cannot credibly call for jailing the crooks while pushing anti-regulatory creeds that produce fraud epidemics and make it certain that the elite crooks will not even be investigated, much less jailed.