And the Award for Best Financial Crisis Book …

… goes to Chain of Title, by David Dayen (with apologies to Jennifer Taub, Alyssa Katz, Michael Lewis, and many others, including my co-author, Simon Johnson).

Chain of Title isn’t primarily about the grand narrative of the financial crisis: subprime lending, mortgage-backed securities, collateralized debt obligations, credit default swaps, synthetic CDOs, the collapse of the global financial system in 2008, and the frenzied bailout that followed. Instead, it’s about foreclosure fraud: how mortgage servicers, banks, and the law firms they hired systematically broke the law to force people out of their homes. At the same time, it’s about securitization fraud: the fact that an untold number of securitizations were not properly executed, meaning that they violated the terms of their underlying agreements, meaning that their investors should have been able to force rescission of the entire deal.

The substance of the argument has been well known for years, so I’ll try to pack it into one sentence: The banks creating mortgage-backed securities failed to properly transfer notes (the documents proving a borrower’s obligation) to the trusts that issued the MBS, so not only was the securitization itself faulty, but the trust did not have legal standing to foreclose on homeowners—so the banks paid third-party companies to forge the required paper trail, and lawyers knowingly submitted fraudulent evidence to courts, who usually accepted it.

This has been common knowledge on the Internet since 2009 or 2010. But Dayen does what good writers do: he tells the story of a few real human beings figuring out the workings of this vast fraudulent system on their own, fighting against it … and ultimately, for the most part, losing. The book makes you feel the anger, disbelief, hope, and disappointment of those days over again. Even though I knew how the story ended—in a whimper of liability-eliminating settlements and self-congratulatory back-patting by politicians—it was still painful to read.

As I said earlier, Chain of Title isn’t about the grand narrative of the collapse of the financial system. Because even if the banks had been pushing the paperwork properly, the crisis still would have happened: Washington Mutual still would have paid mortgage brokers to push Option ARMs onto homebuyers who could have qualified for prime loans, AIG still would have sold all those credit default swaps on senior tranches of CDOs, John Paulson and Fabrice Tourre still would have concocted ABACUS, and small towns in Norway still would have bought those MBSs and CDOs. The missing transfers weren’t a cause of the financial crisis.     

But Chain of Title is about something bigger and more important: the corruption of our legal system and the political system behind it. The banks and their enablers—their lawyers (including the big-city law firms they hired for the big cases and negotiations) and the document production companies that churned out fraudulent paper—didn’t just forget to sign some documents and mail them to the right place; they covered up those mistakes by going into courtrooms all across the country, submitting documents that in many cases were obviously fake, and lying about where those documents came from. If you are, say, a defendant in a drug possession case, I strongly advise you not to try this. But apparently if you are a bank, it works just fine.

The banks clearly knew what was going on. They were ordering replacement documents from companies like DocX that sold them off a price list (p. 218). In the rare cases that lawyers were called out for submitting obviously fraudulent evidence—for example, a notary stamp used to notarize a signature dated before that stamp even existed—they simply withdrew the evidence and replaced it with a newly forged copy.   

Why did they get away with it? Because, as many people have noted, we have two legal systems in this country: one for the wealthy and well connected, and one for the rest of us. You don’t get much better connected than the major banks. Arthur Levitt wasn’t much of an SEC chair, but he did say this back in 2000 (p. 59): “It won’t come out for ten years, and the banks know it. By then they’re already on to the next scam.” Or, as one bank executive said to a lawyer contesting false documents (p. 129), “You’re going to destroy the country. And if you don’t stop, we’ll just go to Congress and get the laws changed.”

Which is more or less what happened, at both the state and federal levels. In Florida, many judges simply refused to entertain defense lawyers’ claims, even though they went to the very core of the foreclosing banks’ case: whether or not they had standing to sue in the first place. Staff members in the attorney general’s office investigating foreclosure fraud were tossed out of their jobs.

In Washington, things were handled much more … professionally, you might say. Barack Obama talked about the importance of helping homeowners, while quietly protecting the banks’ backs. The White House told the IRS not to investigate wholesale violation of tax laws (because the trusts did not hold the mortgages they said they did) (p. 262); the Department of Justice hindered an investigation by a U.S. attorney’s office in Florida (p. 263); and the Department of Housing and Urban Development tried to get state attorneys general to fall in line behind a toothless settlement (p. 266). In the end, the banks paid a few tens of billions of dollars in penalties—most of it fake, as Yves Smith showed long ago—and promised to obey laws they were already supposed to obey, and which they then found new ways to break. 

So we have two legal systems: one for banks and law firms, and one for ordinary homeowners. And the reason we have two legal systems is because our political system is, well, rigged—how else would you put it? As Dayen’s story shows, there was widespread evidence of systematic lawbreaking by banks that, by rights, should have cost them hundreds of billions of dollars and should have sent hundreds of people to jail (for knowingly forging evidence or knowingly submitting forged evidence). Yet the political establishment, from Republican attorneys general to a Democratic administration in Washington, closed ranks behind the big banks—at best because they thought it was necessary to keep the economy going, at worst because they were bought and paid for by campaign contributions and promises of private sector jobs.

This is the defining issue of our day. The financial crisis itself was produced by reckless bankers, aided and abetted by credulous or self-interested politicians and regulators. But the bigger scandal is that, in the wake of that colossal example of economic devastation, the powers that be chose to protect the big banks at the expense of ordinary families. They did so because that was the path of least resistance. It was easier to bail out a handful of large banks—overlooking both securitization fraud and foreclosure fraud constituted a far bigger bailout than TARP—than to uphold the law, and it didn’t hurt that bank campaign contributions and lobbying expenses keep Washington afloat. That’s what happens when you have an electoral system dominated by large donors and big corporations and when you have a political class so jaded by the system that it treats rampant lawbreaking as an inconvenient problem to be swept under the rug as a favor to a constituent. That’s the world we live in. And that is the ultimate lesson we should all learn from the financial crisis.

18 thoughts on “And the Award for Best Financial Crisis Book …

  1. I haven’t read the book yet, but, while reading about it, I stumbled upon the story of Nye Lavalle, the unsung hero/prophet of the subprime saga. What a story.

  2. There is a law for youins(the gvt), and there is a law for weins,(the people) and they AINT the same law.

  3. I bought a copy which was signed by David at a conference last month. He lays out one of the many paths of our corporate coup d’etat as the many institutions that have become corrupted in the money grab and land grab from the people to the oligarchs.

    I went to (another monopoly that I hate) and found extremely positive reviews which were like a blog conversation. I wrote a review that used as the title a tweet from a financial expert that it was the best book that showed how the financial fraud played out for ordinary Americans, and another comment listed the books that the person had read about the crisis, almost a dozen books, and still he found “Chain of Title” informative.

    Glenn Greenwald, Jeremy Scahill have reminded me about the important of journalism and now that I follow David Dayen on twitter, I find out that he writes several good articles per week.

    As a lay person in this field, I appreciate trusted voices like James Kwak to verify what was my hunch in reading the book.

  4. So here we have it, all agreed that it was, especially in scale, a “Crime Against Humanity”. Obama promised (who?!!) that he would NOT use USA’s, now completely impotent, and worse, government institutions.

    Boy oh boy, our current list of reasons to “throw off such Government” is HUGE, but as far as the human “intent” goes, not different in character from what the King was doing against the colonies, or why:

  5. Mr. James wrote, “That’s the world we live in. And that is the ultimate lesson we should all learn from the financial crisis.”

    Yes, that it was and is a Crime Against Humanity.

    We need to hit the pause button here on nanosecond theft and prosecute the crime. You cannot have a “global economy” that depends on committing Crimes Against Humanity to order to operate with impunity!

    C’mon you guys – a decade of examining HOW they did it is enough EVIDENCE of the crime. Saying we have to “live” with it is ridiculous – we obviously cannot “live” with it!

    The “investment” part of the economy BROKE the “commerce” part – so who is really broke? Separate them out again…

  6. Honestly Annie, you’re carrying on about useless drivel would seem to be between you, yourself, and the eye. The lost battle of the understand ables. Jimmie cracked dean con lately?

  7. The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street September 7, 2010
    by Robert Scheer
    Looting behavior in the corporate social system is endemic & politically pandemic in captured government representatives. The 20/20 hindsight is outrageous and complacency at its worst. If too big to fail is a jail-less social club, too little to late is its academic and intellectual counterpart.
    compliments to Annie: she’s got it right.

  8. (From the editorial review)
    “…accounting fraud on a massive scale. In the new afterword, he also authoritatively links the S&L crash to the business failures of 2008 and beyond, showing how CEOs then and now are using the same tactics to defeat regulatory restraints and commit the same types of destructive fraud.”

    The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry
    Updated Edition 2014
    by William K. Black (Author)
    (Still the most accurate model of how the USA was and is swindled by politically facilitated finance: accounting and control fraud)

    “… a few real human beings figuring out the workings of this vast fraudulent system on their own, fighting against it … and ultimately, for the most part, losing.” ??? Is that really the world we live in?

    George A. Akerlof; Bill Black; Michael Hudson; Charles H. Ferguson;
    Matt Taibbi; Yves Smith; Robert Scheer; Tom Engelhardt; Noam Chomsky; Neil Barofsky; Naomi Klein; Nomi Prins; Elizabeth Warren;
    Zephyr Teachout …to name a few good people that have made a difference…and …occasionally…Baseline Scenario.

  9. The Audacity of Greed: Free Markets, Corporate Thieves, and the Looting of America Paperback – September 1, 2009
    by Jonathan Tasini (Author)
    (Jonathan Tasini is the executive director of Labor Research Association. From 1990 to 2003, he served as president of the National Writers Union. In 2006, he challenged Hillary Clinton for the Democratic Senate nomination in New York)
    ….from the summary review:
    “Over the past quarter century, we have lived through the greatest looting of wealth in human history. While billions of dollars streamed into the pockets of a few elites in the corporate and economic class, the vast majority of citizens have lived through a period of falling wages, disappearing pensions, and dwindling bank accounts—all of which lead to the personal debt crisis…”

    customer reviews (7 worth reading)

  10. Sometimes Vanilla wins the best choice award for full flavor:
    Check out:
    Kevin T. Leicht and Scott T. Fitzgerald”s
    Middle Class Meltdown in America: Causes, Consequences, and Remedies 2nd ed. Edition 2014
    (editorial review):
    “During the ‘boom’ years of the late twentieth century, middle class incomes stagnated, while middle class debt fueled a period of growth accompanied by rising levels of inequality. Even as the Great Recession makes the consequences of this unstable equation apparent, standard economic accounts tend to obscure more than they explain. But Leicht and Fitzgerald’s empirically grounded sociological perspective moves beyond the limits of neo-classical logic. Middle Class Meltdown in America is an engaging and critical analysis of the false promises made by 40 years of neo-liberal political and economic practice. Required reading for any student of our continuing economic crisis.”
    -Graham Cassano, Sociology, Oakland University, and Culture and Media Editor, Critical Sociology

  11. @hhill51: On a tangent to your reference is another gem:

    Financial Stability: Fraud, Confidence and the Wealth of Nations (Wiley Finance) Kindle Edition
    by Frederick L. Feldkamp (Author), R. Christopher Whalen (Author)

    (Editorial review excerpt):
    “From disputes described in Biblical times all the way to the most recent collapse, financial crises throughout history all have a single cause: the hidden leverage and bad debt caused by various types of fraud. That is the basic claim of Financial Stability and, drawing on analysis of 27 years of data, the authors present a remarkably compelling case.”

    @hhill51: …Many Thanks!

  12. Financial Stability: Fraud, Confidence and the Wealth of Nations (Wiley Finance) Sep 4, 2014 (hardcover 1st edition)
    by Frederick L. Feldkamp and R. Christopher Whalen

  13. Bailed Out Citigroup Is Going Full Throttle into Derivatives that Blew Up AIG
    By Pam Martens and Russ Martens: August 4, 2016
    “Sheila Bair was the head of the Federal Deposit Insurance Corporation (FDIC) during the 2008 crash. The FDIC is the Federal agency that insures the deposits of U.S. commercial banks and savings associations. Bair published an authoritative book on the crisis, Bull by the Horns. This is an excerpt of what Bair had to say about Citigroup’s management of risk and its Credit Default Swaps:
    “By November, the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks. Citi had not had a profitable quarter since the second quarter of 2007. Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking…It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits. If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

    The OCC and the New York Fed are doing the exact same thing today – cowering under the lobbying and political clout of Citigroup – which perversely just hired Mervyn King, the former head of the Bank of England, the U.K.’s central bank, now that former Treasury Secretary Robert Rubin has collected his $120 million from Citigroup and moved on.
    What exactly is a single name Credit Default Swap? In simple terms, it’s a derivative that allows a bet to be placed on whether a corporate issuer will default on its corporate bonds
    Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself Sep 10, 2013
    by Sheila Bair
    The Bullies of Wall Street: This Is How Greed Messed Up Our Economy Apr 12, 2016
    by Sheila Bair

  14. And these derivatives are held by the same guys that want to check and see if there is any gold left in Ft. Knox, one way rainbow street ism at it’s pot hole finest.

Comments are closed.