When is a fraud not a fraud?
According to Wikipedia: fraud is an intentional deception made for personal gain or to damage another individual. Fraud is a crime, and also a civil law violation.
This recent submission to the Independent Commission on Banking makes some quite bold claims about the potential for fraud to occur, such that some recent feedback I received asked me to explain why I thought that Securitisation of loans was fraudulent.
I don’t necessarily argue that it is in itself fraudulent, merely that the likelihood for fraud is substantially increased. The argument goes like this:
If securitisation of loans creates a false impression of credit quality, such that the handling parties (e.g. the originator of the loan) mislead investors in the level of associated risk (which clearly seems to have happened with subprime mortgages), then there is ample suspicion for fraud. The pre-conditions are ripe, and the fingerprints of fraud are all over the subprime crisis.
Here’s William K Black, the former regulator who put more than 1,000 bankers in jail in the US Savings & Loan crisis (yes, that’s right, the biggest white collar crime that no-one’s ever heard of):
“Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.”
Unfortunately, it seems that we can be blind to fraudulent conduct, if the means are subtle and they are undertaken by parties whom we (and say, our Gvt) already have great trust & respect for.
Until we can see through the veneer, and judge companies and people purely by their actions and the consequences, we may be unwittingly blind to the banking sector fraud before our eyes.