The warning, in retrospect, could not have been any clearer. It led to this unambiguous headline on CNN.com on September 17, 2004: “FBI warns of mortgage fraud ‘epidemic‘.”
Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.
Little did we know that the “unscrupulous professionals” would prove to be such people as IndyMac president Richard H. Wohl and Countrywide CEO Angelo Mozilo, but, as University of Missouri associate professor William K. Black points out in this interview, top government and industry officials had ample time and ample information to prevent today’s financial crisis, but chose to do nothing.
Uncovering the factors that led to that fateful choice is the reason why Black, who was a senior regulator during the savings and loan crisis in the 1980s, supports the creation of a Pecora Commission, modeled after the 1930s investigative panel headed by Ferdinand Pecora that exposed the corrupt practices that helped fuel the Great Depression.
Black said that such a commission should look at the compensation incentives that encouraged mortgage fraud as well as the “complete regulatory failure” that took place during the Bush administration. (That includes the failure of the Bush administration and the then Republican-led Congress to beef up law enforcement resources at the FBI so that it could more aggressively go after the mortgage fraud it knew was there.) The commission’s work would clarify that the mortgage crisis was driven by systemic problems within the financial industry and the rating agencies that were supposed to be honest evaluators of the debt being sold by these institutions. It was not, as conservatives would have us believe, primarily driven by individual home buyers trying to game the system or regulators pressuring banks to market unsound loans to people of color.
Congress is moving toward creating a panel along the lines of the Pecora Commission. A mortgage fraud bill that was passed by the Senate on Monday includes a provision that would create a bipartisan 10-member panel with subpoena power. It would be structured in a manner similar to the 9-11 commission and made up of people who are not politicians or government officials. As Black points out, there is much work for that commission to do.