William K. Black
I have done a series of articles about the efforts of honest appraisers (which began in 2000) and loan brokers to alert the lenders, the markets, and the government to the twin fraud epidemics (appraisals and “liar’s” loans) committed by lenders’ controlling officers that drove the financial crisis.
Why did the Fed Refuse to Heed the Appraisers, Prosecutors, and Industry’s Fraud Warnings?
Honest appraisers could have profited greatly by becoming dishonest appraisers who would be given the lucrative assignments by fraudulent lenders’ controlling officers and their agents. Instead, honest appraisers suffered serious losses of income because they refused to succumb to the extortion efforts of the fraudulent lenders and their agents. A national survey of appraisers in early 2004 found that 75% of them reported that they were the subject of attempted coercion designed to inflate the appraisal during the past 12 months. A follow-up study in 2007 found that percentage rose to 90% and that 67% of appraisers reported losing a client and 45% did not get paid their fee because they refused to inflate the appraisal during the past 12 months. Many honest appraisers were driven out of the profession by the blacklists the fraudulent lenders’ controlling officers and their loan brokers used to deny business to honest appraisers.
There was a much smaller effort by honest loan brokers led by Steven Krystofiak. Krystofiak personally explained to senior Federal Reserve leaders the endemically fraudulent nature of “liar’s” loans, provided data on the incidence of fraud, explained the interaction of appraisal fraud and fraud through liar’s loans, and warned that mortgage fraud was largely driven by the officers controlling lenders and loan brokers.
Appraisers and loan brokers are the lowest status professionals in the lending process. The obvious question (to me) was what the highest status professionals – the attorneys, accountants, and members of corporate boards – did in response to the endemic control fraud that their peers permitted and aided and abetted. Did they emulate the courage and integrity of the honest appraisers and Krystofiak who risked their careers to try to prevent the crisis?
I have spoken to several groups of professionals who audit and many board members. I always ask: “who were the heroes?” Which members of their profession stood up and put their careers on the line to prevent the crisis? They have not been able to come up with a hero from their professions.
What about corporate lawyers? I get the same answer about heroes when I speak to legal groups made up of professionals who represent corporations. On August 9, 2013 I had an opportunity to test the accuracy of this answer when I participated in a meeting of nearly 20 law professors who teach white-collar crime classes. Some of these professors teach at schools that regularly send their graduates to Wall Street. The hot business in white-collar crime is corporate investigations. I asked my counterparts if they could name a hero among corporate counsel – any counsel who stopped a control fraud at a major firm or who was fired trying to stop the fraud. No one could think of a corporate counsel (in house or outside counsel) who had done so. As lawyers and teachers of lawyers we must be both horrified and energized (to change how we teach) by that answer. (I hope that there are corporate lawyers who were heroes we have not heard of yet.)
Wall Street corporate lawyers are among the highest paid of all Americans. They rank exceptionally high in social status. Honest appraisers and loan brokers risked their careers and their ability to send their children to college to try to prevent the crisis. Senior corporate lawyers at the mortgage lenders and purchasers of the fraudulent loans controlled by the fraudulent officers who drove the crisis risked neither their careers nor their ability to pay for medical school for their kids and million dollar vacation homes. Wall Street corporate lawyers who demonstrated as much integrity as the honest appraisers would have paid a price for their honesty, but after they paid the price they and their families would have remained wealthy.
Wall Street corporate lawyers have fiduciary duties to the corporation. I told my fellow teachers of white-collar crime that one of the tragedies I observed as a financial regulator was hundreds of corporate lawyers proud of providing “zealous advocacy” on behalf of their corporate clients. The problem was that they were zealously breaching their fiduciary duties by aiding the CEOs looting their clients through accounting control fraud. We, the regulators, were the ones trying to save their clients.
The corporate lawyers were typically unaware of accounting control fraud schemes. The corporate lawyers often seemed ignorant of the entire concept of control fraud. It may surprise readers, but the norm is that law students taking classes in white-collar crime do not study white-collar crime – only the law of white-collar crime. While any student taking law and economics must read economists’ work, virtually no student taking white-collar crime outside my class must read white-collar criminologists’ work. As a white-collar criminologist I find this odd, but I think my counterparts find me odd because I find it odd.
I know that the public won’t find it strange that elite Wall Street lawyers could not muster a single hero while the appraisers produced tens of thousands. The public does not expect much from Wall Street lawyers. That low expectation is what causes me the greatest distress. The honest appraisers have set a high bar of integrity that Wall Street lawyers may never attain, but in educating law students we should aim high and seek to emulate the over 11,000 appraisers who brought such credit to their profession.