The Hunt for Sharks

Real Estate Crisis

The Federal Bureau of Investigation (FBI) is draining the Subprime swamp. The scale of criminal activity is so large that 181 investigators from the FBI are involved and backups are needed from other law enforcement agencies.

The financial crisis arose from wild, unregulated markets. For now, at least, the scams have been shut down, but because it is too late, only some of the swindlers have been taken into custody. Over the summer, FBI agents took 400 suspects into custody, just from “Operation Malicious Mortgage” alone, and confiscated their assets (and their luxury automobiles).

Furthermore, the police are looking at more than 30 banks for insider trading and forgery. “The financial crisis is rooted in a mixture of weak regulation and criminal activity,” says Michael Mines, 51, Deputy Director of the FBI’s Criminal Investigative Division.

All Risk with the Banks

To begin, the American real estate boom has been going on for the last ten years. The interest rates were so low that more people than ever before were able to afford homes, and the home prices climbed to unheard of levels. The banks loaned money hand over fist.

What appeared to be Utopian to the German home-builder was the long standing business model in the United States, where one could buy real estate with no money down. The banks never required salary information or tax returns.

The poor “Ninjas,” short for “no income, no job,” moved into the suburbs as homeowners. “One did not have to put any money down on the table as a home buyer,” says Mines. “The entire risk was with the banks.”

Despite this, the banks did not smell disaster. If the borrower did not pay off his home loan, the bank would go ahead and sell the property itself, for a profit, of course.

Con men had an easy game in this overheated market. One popular scam was something like the following: Bob the Swindler bought a house valued at $200,000 and then sold it to his friend Fred for $400,000. A corrupt assessor certified to the bank that the house was worth $400,000, and then the bank loaned Fred the buyer over $400,000, which Fred transferred to Bob. As Bob made off with the $400,000, his cash-strapped friend Fred told the bank that he was bankrupt. The bank was then suddenly sitting on a $200,000 property, while Bob was long gone with his $400,000. Then Bob secretly split the profit with his “poor” friend Fred and the corrupt assessor.

“The banks have blindly trusted the assessor working for the seller or the real estate agent,” Mines says. Criminals have earned a fortune with tricks like this, without any acts of violence or any great risks. Even street gangs are said to have gotten rich with these tricks along with their usual drug businesses.

Home Speculation

These rackets were certainly not the only instigators of the banking crisis. Countless Americans bought properties not only for themselves to live in, but also as objects of speculation because they were counting on higher prices in the future.

In the United States, this is called “flipping.” Someone buys a house, and when they want to rake in a profit, they flip it on to the next person. It brought in more money than stocks.

“In America, it’s always said to buy as many houses as you can,” says Mines. “But in the middle of the real estate boom from 1998 to 2006, everyone really wanted to jump on the bandwagon. There were even some TV shows about it.”

Those willing to buy were locked in with an initial interest rate of one percent, but then when the interest rates increased again a few years later, many families were facing ruin. Many of them had to sell their homes. Then the housing market prices dropped, and with them the security of the banks. The banks are only now noticing that many properties had been overvalued.

The housing market bubble burst but, under normal circumstances, this would have only affected the real estate financiers. In the roaring years of the gold rush, however, the financiers sold their home loans as packets to the large banks, which in turn bundled them up with others and offered them to investment banks for speculation.

It is in these large banks and investments banks where the highest-placed criminals are sitting. While this mortgage fraud was spreading, corporate fraud was becoming rampant in the executive floors of the large banks and investment banks, involving crimes like “cooking the books” and insider trading.

“Many middle- and upper-level executives saw the coming catastrophe, and they knew that the dominoes were falling,” says Mines. They were only fooling their stockholders and the outside world by saying that everything was O.K. while they were selling off their bank stocks because they knew the crash was imminent. This is what happened with Ralph Cioffi and Matthew Tannin, two Bear-Stearns managers who were arrested over the summer.

The Search for the Culprits

The culprits are easy to convict. “They leave behind a paper trail,” says Mines. Many employees are willing to come clean and say that they massaged the numbers and cooked the books on orders from the boss. The permissive state’s evidence provision in U.S. law induces bank employees to tell all to gather evidence.

Not all bank managers who covered up the crisis wanted to enrich themselves, and many only wanted to conceal their failure or the scale of the catastrophe as long as possible. “Usually though, those responsible are simultaneously selling their own stocks. They outwardly speak highly of their own bank, but they secretly tried to withdraw as much money as possible.” If the bankers had confessed earlier, many investors probably would not have lost as much money.

As early as four years ago, FBI Deputy Director Chris Swecker warned Congress that “because credit fraud is so widely disseminated and we are not doing anything to stop it, it will, in the end, endanger the financial institutions and be reflected in the stock market.” At that time, many in Congress liked to think that the police should only really be worrying about terrorists.

To this day, it is not clear just how the U.S. Congress and government would like to control the real estate and banking businesses in the future. The banks may now be allowed to be more careful if they extend credit ever again. Other than that, however, Mines believes that it could make sense “to subject the real estate assessors to government supervision.”

Nowadays, the FBI man thinks the con men are looking forward to quite new businesses. The U.S. government is now going to spread across the country the $700 billion dollars from its financial rescue package. That money is supporting not only the large banks but also small real estate financiers and families in need.

Mines says that this reminds him of the time after Hurricane Katrina, when the government sent large sums of money into the New Orleans disaster area. In that crisis, however, everything was fast and uncontrolled, and suddenly all kinds of new construction companies popped up which accepted down payments from the authorities to clean up and rebuild. It certainly did not take long for the reputed company owners to disappear with thousands of dollars.

The FBI learned from Katrina and passed on what it has learned from the current financial crisis to state and local authorities, things like more control, more suspicion, and more critical questions. Mines says, “this time, dubious businesses will once again spring up. When $700 billion comes to a city in your area, then the con men are also not far away.”