Home > Finance and money > When is a fraud not a fraud?

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.”

William K Black on the Bill Moyers Journal

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.

Categories: Finance and money
  1. Neil
    December 7, 2010 at 8:38 pm

    I like this definition of fraud:-

    “If I tell you lies and you give me money, that’s fraud”

  2. December 8, 2010 at 8:50 am


    I think a jury would agree with this. I’m not a lawyer, but I suspect that the defence may resort to one of the following:

    – Insisting that they didn’t actually lie, such as “we were acting on information in good faith from another party” (read ratings agency, technical analyst, financial model of asset valuation etc.), or

    – Arguing that the “mis-representation” was not material in influencing your initial investment actions anyway

    If the practise and process of law gets co-opted / contorted, then defences like this could become a “get out of jail free” card. See:


  3. Infnordz
    January 9, 2011 at 7:00 pm


    1. Seller due diligence should be expected to involve deeper investigation than mere authority ratings, especially when such authorities have potential conflict of interest (e.g. rating agencies), this should be enough to allow legitimate accusation of at best negligence and otherwise fraud, thus require remedy.

    2. Any seller “mis-representation” impacting valuation or costs during a sale, is at best negligence, otherwise fraud, unless later explicitly detailed and contractually remedied before the sale is completed.

  4. May 4, 2012 at 9:18 am

    More from William K Black on the absence of investigations and explanations based on fraud:


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