Financial Fraud Cases in the 2008 Crisis

Financial Fraud Cartoon

Financial Fraud Cases in the 2008 crisis

Fraud was endemic in the lead-up to 2008 financial crisis. Financial Fraud Cases were rampant. Lehman brothers was a full-scale fraud. They rotated debts to London to get them off-books in time for annual shareholder reports. Then they moved them back home afterwards.

The financial quarterlies were intentionally falsified with full CEO knowledge and repeated warnings to him. It’s not isolated, according to Academy Award Documentarian Charles Ferguson – a muckraker on the finance industry. Rico offences, bribery, perjury, accounting and equities fraud, insider trading, prostitution, drugs and drug laundering are primary components of the system.

25% of Wall Street executives believe that fraud is necessary in the financial arena. That means that at least 1 in 4 financial service players (and probably the ones doing the biggest volume) are committing fraud. Since sharks don’t always like to show their teeth, the number is probably far higher.

It helps explain what might be the largest-scale financial fraud ever. It is the largest nominal market in the world, by an order of magnitude. The interest rate swap market is based on the LIBOR. Under this scandal, the Chairman and the CEO of banking conglomerate Barclays both resigned on July 3-4, 2012. Executive Jerry del Missier was prominently implicated in the operation – he was let go with a bonus of £8.75 million.

The company was exposed for manipulating the LIBOR – the London Inter-Bank Offered Rate. The average rate of inter-bank lending sets the mortgage rate. By manipulating it upward artificially, Barclays was able to overcharge interest on millions of home mortgages. By manipulating downward, municipalities were scalped.

This is complicated, but they were locked into interest rate swap deals by the banks – if interest rates went up, then they could swap out of their payments to not pay more. But interest rates went down, artificially manipulated by the central banks.

The cities swap arrangements lost their value, but they had to keep paying on them. The banks payments declined to nothing. So banks are collecting 5% average on muni bonds while paying out .1% average on the swaps. They conned the naive muni managers.

The defense? Everybody’s doing it, or at least or at least the top execs at big banks are. This turned out to be true – what one does, most do. And plenty of evidence is there. Multiple governments are conducting inquiries on all the major banks.

Emails were traced back to the Bank of England which sanctioned the behavior. London is known for being even softer on white collar crime than the US. Policies are changing because the public is so angry.

The banks are charged with collusion by many governments. However, they are turning evidence against each other and ceasing communications on legal advice. The sharks are trying to kill each other for regional immunity.  Litigants are now in the thousands and include small banks, state and local governments. The problem for the banks is very, very big. European politicians are running successful campaigns as bank enemies.

The Economist, known for its bank-friendly policy, reported that the rigging went back to the late 1980’s. It’s global, too, of course. Cities all over are choking. The swaps were supposed to be risk hedges, explained as a safety net, but they toxified muni assets everywhere.

How many financial fraud cases were there? No one knows.

The Philadelphia school system coughed up $331 million, for example, just to get out of the odious contracts. The problem is massive – 50% of all California local governance bodies are struggling.

These financially unsophisticated local officials were being exploited by the big banks

Nobel prize economist Joseph Stiglitz

The cities cannot exit from the deals without huge penalties. The financing is made deliberately inscrutable to punish the naïve. Is this capitalism? Hundreds of municipalities, counties, provinces, and states have been pushed into bankruptcy by these instruments. They are huge, too. The CDS problem was about $50 trillion. IR swaps are $350 trillion – 7 times the size.

It illustrates who the true power is. Several trillion dollars were mobilized in weeks to prop up the big banks in 2008. It got media airplay 24/7. The propaganda was off-the-charts – the too big to fails would bring down the economy if they crashed. Obama pledged to eliminate the too-big-to-fail danger. Now, the banks are bigger than ever, with larger and more interconnected derivative positions. The problem is far worse than when he took office.Now whole cities are going bust and the media is silent. No bailout is forthcoming, even though it was the banks themselves who engineered both sets of problems by the same means. They hung themselves and the government cut the rope with a taxpayer funded knife. They hung the local citizens and the government collaborated, then ignored it.

Shadow Banking System as systemic financial fraud

The Libor is the most important interest rate index in the world. Such things may sound boring, but they move massive financial markets. A tiny change in the index can cause billions in profits or losses and make a lot of money.

The Fed funds rate rides on the LIBOR, so manipulating it allows the Fed to maintain its ultra-low interest rates. It also keeps the Interest Rate Swap machinery from breaking down.

It carries a deeper twist, as well. Since 2008, the LIBOR has steadily declined. This, Paul Craig Roberts argues, is deliberate. As rates decline, older assets holding higher rates increase in value. By manipulating the rates downward, the banks can overvalue assets respectively to appear more solvent.

All asset-based derivatives, the core of bank balance sheets, would be revalued higher. The Fed and the BOE both knew and supported the fixing as part of the game to keep the too big to fails from going under.

In 2007, Paul McCulley and Bill Gross, managers at the enormous bond trader Pimco, warned that there might be some concerns over “the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures.” They coined the ominous term shadow banking system.

We are witnessing the breakdown of our modern-day banking system.

It’s entrenched and it’s powerful – Romney and Obama received $300 million from the financial lobby. The shadow banking system bought both candidates.

Shadow banking arose largely from the repeal of the Glass-Steagall act. At a trim 37 pages, Glass-Steagall was a masterpiece of simplicity by today’s 1000 page legislative standards. Enacted in 1933, it established the FDIC and more importantly, separated commercial and investment banking.

This created a number of beneficial effects, which were not realized until its repeal and the dark consequences thereof. The 1999 Gramm-Leach-Bliley Act, repealing Glass-Steagall’s critical sections, allows for commercial banks to speculate and have that insured.

In other words, if banks screw up, they can pay for it from the public till of the FDIC. That’s because of a second ill consequence – banks can use depositors’ money to gamble in equities markets – or any markets. That ‘any markets’ phrase has led to the creation of the vast shadow banking complex and the enormous derivatives problems.

Shadow banking is the near-infinite fungibility of electronic credit-money equivalents within the infinitely interconnected modern financial system.


It’s the ability to collateralize any asset into an obligation for any financial derivative with any major party and to string these pieces of debt into a vastly larger tangle.

The critical factor of derivatives is the underlying basis for them. A derivative is a value ‘derived’ from an underlying asset. According to the IMF, $600 billion in assets backs up $600 trillion in derivatives. This is leverage of 1000 to 1 – an unavoidable catastrophe. If the value drops by 0.1%, the global derivatives portfolio is broke. If it drops by 1%, the total is $6 trillion in the red. That’s why derivatives are the financial black hole of the planet.

The utility function of banks lost out to the new investment function. Banks grew enormously in asset allocation, size and risk. The repeal of the act allowed for banks to become extremely interconnected and ‘too-big-to-fail.’ They were allowed to become systemically critical to the global system, while at the same time taking on fantastic risk.

Moral hazard became acute and is worse by the day. There is no provision for loss on these bets, only gain. Individual trading desks reap small percentage fees on numerous, huge transactions – derivative bets. They have a vested interest in making these bets to increase their paycheck. This ties the banks up in a spiderweb of interlocking agreements for trillions of dollars.

The CEO’s encourage the behavior, or at least allow it, because they know the government will backstop them – they are systemically important. Risk is encouraged, even celebrated, because the taxpayer foots the bill while the banks get the profits. Mussolini called fascism a partnership between corporations and government. The reader can decide if the definition fits here.

The SBS consists of hedge funds, special investment vehicles, investment banks, pension funds and other non-bank financial institutions. It’s called shadow because it is unregulated, since it does not perform deposit banking. The system holds about $60 trillion in assets. Because they can leverage so high and cannot use FDIC, these are risky in contractions or downturns. They pose systemic risks because of the many credit based interconnections to the conventional banking system.

In finance, a ‘weak sister’ is an element that undermines the entire system. The major banks and even governments have all become weak sisters – they suck in capital at an astounding rate, far higher than the productive economy can produce real capital. The twin vortexes of the sucking are the shadow banking system and the Treasury complex.

Bank System Fraud 

Aside from the loss of faith in banks, the point for this book is the loss of trust in the system as a whole. For many, the system is rigged – a casino where the average player cannot win. Casinos are fine, but Main Street should not be forced to gamble.

The global economy should be a place for honest business and trade, not a giant craps table where your home can be taken. Analyst George Washington (pseudonym) compiled a list of big bank fraud that has come out since 2008, but been ongoing for decades. 

  • Mortgage and foreclosure fraud.
  • Multiple collateralizing and sales of mortgages to buyers.
  • Robbing veterans through foreclosure law abuses.
  • Using mafia rigging tactics in municipal affairs.
  • Fraudulent accounting.
  • Manipulating and coercing ratings agencies for false ratings.
  • Selling short, then crashing bad investments to their own clients.
  • Frontrunning markets.
  • Scalping managed pension funds for many years.
  • Helping Enron and others to manipulate energy markets.
  • Drug money laundering.,

The banks are not what they were meant to be. Bank of America has below 10% of assets from traditional banking. Other banks are similar. They are engines of speculation. Big bank lending has declined by 3.4% since the bailouts. Small banks have taken up the slack.

Most of their profits come directly from the bailouts – 77% for JPMorgan. Economist Michael Hudson calls it warfare on society by the banks. By transferring their bad debts to the public hole and getting bailouts, they have transferred the mass of society’s wealth to the top shareholders. Goldman Sachs made $2.3 billion in profits in 2008 and received $10 billion in bailout money.

It paid $4.2 billion in bonuses – giving away almost double its profits by using taxpayer bailout money. Most banks have similar situations and some analysts call it a financial takeover.

In April, 2009 the Financial Accounting Standards Board fed honesty to the sharks. They suspended normal accounting rules – but only for the too big to fail banks. They were allowed to set their assets at whatever value they chose.

If the market price was too low to maintain solvency, the banks could (and did) claim the assets were worth the original price. The methods are used to disguise massive quarterly losses as the toxic paper rots. The favored accounting gimmick – a ‘trading’ portfolio is marked to market. An ‘investment’ portfolio (supposedly held until maturity) is not marked to market. This hides the balance sheets true position.

Credit markets are frozen. Britain’s banks have a £40 billion undeclared hole on their balances. Royal Bank of Scotland with £18 billion is the dirty stepson, as usual. None of the banks will lend into the economy because of the problem.

It’s the same everywhere – banks have no capital and show enormous losses on their books. They cannot lend – their reserve requirements are hopeless. If they came out with authentic accounting, almost all the largest banks in the world would be insolvent. 

John Cruz was a VP and relationship manager for HSBC. He became a whistleblower in 2012, presenting a thousand pages of documents proving illicit activity by HSBC. Visiting many clients as part of his job to sell them additional banking services, he discovered they were not what they seemed.

One ‘shipping company’ deposited millions of dollars through paypal. They had no evidence of any shipping activity at their place of business. He had hundreds of examples. Many businesses were just a house with a desk and phone – no evidence of business activity.

The transactions were hidden – the money came from an unknown source and left for an unknown source. One bank manager learned from Cruz that 75% of the branch’s investigated accounts were fraudulent.

The businesses used identity theft to get social security numbers. These were used to set up shell businesses for several hundred billion dollars in money laundering. A single social security number was used for 5000 accounts with $800 million transferred through them. The actual holder of the social security number had no idea.

The whole system is designed to be a culture of fraud to make it look like it’s a legalized system. But it’s not. HSBC is a criminal organization.

John Cruz, HSBC internal investigator – fired for whistleblowing

Cruz was fired for “poor job performance” when he refused to halt the investigation. The bank has been under criminal investigation by a Senate committee for several years now regarding the activity. They made a public apology in front of the Senate on July 17, 2012 and admitted to laundering $881 million six months later. No one was prosecuted, no activities were stopped. They are still doing it.

Other mega-banks are involved, of course. The Council of Europe made a presentation on July 4, 2012, naming JPMorgan as the conduit for money laundering through the Vatican. £20 million was frozen by Rome authorities during the investigation.

The bank then questioned the Vatican on the source of the funds, but, apparently received no reply and stopped asking. The transfers were egregious violations of anti-money laundering regulations.

The mortgage fraud deserves special details for its stunning breadth. Mortgages gradually increased from 20% to 60% of US GDP. Excepting derivatives, they are the biggest game in town. The increase was due to deliberate bubbling of the sector.

Loans were given with no income, assets or down payments. Appraisals were palm-greased to raise value, or no appraisals happened. Interest rates were manipulated by LIBOR machinations. A fistful of AAA paper was bundled with millions of F- mortgages into toxic securities.

They were sold with ratings rigged by payoffs to ratings agencies. The MERS database was put together to facilitate the con game, focusing on the bonds linked to the flow of funds. The database was found to be fraudulent in court and thrown out. MERS property titles are legally invalid.

Then the robo-signing scandal erupted. Banks were fraudulently foreclosing on millions of homes without any due process. People without mortgages – full ownership of their homes – were evicted by sheriffs. A number of soldiers serving overseas, with legally suspended payments, had their families evicted under false pretenses.

The settlement for trillions in mortgage fraud was a paltry $20 billion with a banker’s reward of strict limits on future lawsuits. The TARP program was billed to keep the credit and economy flowing. The money went to preferred stock and record-setting executive bonuses to the executors and planners of the crisis. None of it went to lending. 

William Black was a prominent prosecutor in the DOJ during the S&L crisis in the 90’s. His team made over 10,000 referrals for prosecution resulting in 1000 convictions. This time, he says, the scale is vastly larger, but there are zero referrals for criminal investigation.

Stats show that about one-third of loans in 2006 were liar loans, hence fraudulent. The Mortgage Bankers Association report shows definite knowledge of the activity by bank executives. Execs fully empowered the activity, helping to put the lie in the loans.

The game was ‘bankruptcy for profit.’ Banks elevated appraisals to get bigger loans and bigger commissions. They grew the book as rapidly as possible, but did not underwrite the loans – they sold them. They made terrible loans at premium yields and held a tiny amount of capital for loan loss reserves.

This system booked huge short-term paper profits with obscene return percentages over capital base. Executive pay went astronomical. But the profits were not real – they were accounting gimmicked because the loans would never be paid off.

The executives walked away filthy rich and the banks imploded. Then the taxpayer took the hit. The criminals won big-time. The FBI investigated this starting in 2004 and issued repeated warnings about the dangers. The best way to be ignored is to be right with bad news and to implicate the powerful.

This happened with Eileen Foster. As head of internal investigations at Countrywide, she blew a big whistle. Worse than being ignored, she was hounded out of her job and thoroughly discredited.

The labor department exonerated her, finally, with their conclusion: Countrywide had “multiple incidents of egregious fraud spread throughout the entire region, including loan document forgery and alteration, manipulation of borrower’s assets and income, manipulation of the company’s automated underwriting system, the destruction of valid client documents, and evidence that blank templates of bank statements from several different financial institutions were emailed back and forth among loan officers in various branches for use in forging proof of borrower income and assets.”

With all the banks doing it, they created an enormous bubble. When the bubble collapsed, the entire economy sank into recession.

[It was the] Greatest financial crime in history

William Black, DOJ investigator

The FBI was hamstrung. First, the regulators didn’t refer anyone for prosecution. Worse, the investigative force for white-collar crime shrunk from over 1000 agents to 120 under Bush. Since it required 100 agents for Enron alone, the task was hopeless.

They are pathetically understaffed to investigate a fraud of this magnitude. Why are resources not diverted to this important issue? Is there a willful blockage of any and all criminal investigation into the crisis? If so, what does that say about the future of the financial system?

Since Inspector General Mukasey refused the FBI request to create a national task force on mortgage fraud, no large-scale investigation has ever occurred. The FHA has 15,000 records with paper trail of massive serial fraud against the largest financial institutions in the country and not one criminal indictment or systematic investigation against a major bank has occurred.

If an insurance company backstopped serial gamblers when they ran out of money, the gamblers would vastly increase the risk of their bets, looking for higher returns. This is exactly what the government has done for the financial industry. Looking for bigger returns, banks are drawn to higher risk. Thus, the methods to prevent a crisis actually make worse crises inevitable and more frequent.


Financial Fraud was pervasive and causal for the 2008 crisis. It dialed back some post-crisis as the banks cleaned up their act, but is back again with a vengeance.

Some would claim the underlying cause is Fractional Reserve Banking which makes it possible. That may be. What do you think?