Investment firms pretend that they did not know until a year ago that mortgage backed securities were not safe and secure. Yet, many experts were sounding warnings that many of the mortgages, which made up these investments, were ‘toxic waste.’ Thus, Wall Street firms cannot use the “stupidity” defense” to insulate themselves from investor fraud claims that they deceived investors into mortgage-backed securities.
This week it was revealed that even the FBI, which is not the primary watchdog of Wall Street, knew as early as 2002 of wholesale problems with mortgages-the majority of which were packaged into mortgage-backed securities and sold to investors. In an article published on SeattlePI.com, two retired FBI officials say that the bureau knew for years that fraud involving mortgage-fraud scams, insider scams, and corrupt appraisers was a growing problem in the mortgage industry but failed to take action to stop it.
One reason no action was taken, the retired officials say, is that after September 11, 2001, most of the FBI’s manpower was focused on fighting terrorism. Some 2,400 agents were reportedly reassigned to counterterrorism after the terrorist attacks in New York.
The retired officials claim that the FBI never got the necessary tips from the banking regulatory agencies. They also say that the Bush Administration was fully briefed about the mortgage fraud crisis and its potential financial implications but that government officials decided not to give back to the FBI the agents they needed to deal with the fraud problems. According to one of the retired officials, certified public accountants with the bureau were either assigned to HealthSouth, Enron, or terrorist financing.
Another problem that reportedly prevented the seriousness of the situation from being fully understood, or those responsible from being prosecuted, is that mortgage lenders and banks were generating so much money that the fraud that was occurring did not appear to be costly enough to warrant more attention. One of the retired officials says the Securities and Exchange Commission showed no interest in working with the FBI on the fraud problem until after the economy fell apart.
FBI Assistant Director Ken Kaiser, however, disputes the implication that the FBI could have done more to prevent the mortgage-backed securities crisis. He says the FBI’s criminal division has made 1,000 arrests and “targeted 180 criminal enterprises since 2004.” Kaiser says the agency pursued buyers and lenders involved in multiple fraud or cases involving drugs or organized crime.