Who Were “The Bad Guys” in The Mortgage Bubble and Bust? (Who Wasn’t?)

Bubble by Don McCrady

I have had several conversations with colleagues, friends, and neighbors who have shaken their heads in disgust for several years now.  Almost all of us have been suffering from the significant economic downturn with roots in a mortgage lending “bubble” that popped and not a single bank executive has been criminally charged for the banks’ roles in reckless lending practices and so-called predatory lending.

Some even have a particular banker they are hoping to hold criminally responsible for his role in the mortgage lending catastrophe.   It remains to be seen whether there are cases being put together right now and charges to be made in weeks or months to come.

But when one has a market bubble burst, is it fair to focus all of the condemnation or even the vast majority of the condemnation on “the banks” or “Wall Street”?  Maybe the pathology of greed and deceit that caused our problems was even more widespread and systemic.  Maybe banks were sometimes the victims rather than the wrong-doers?

This is a controversial view but there can be no question that many lenders were scammed.  One can always blame the banks, the victims of fraud in many cases, for their own gullibility, lax fraud detection, or poor risk management.  And this is easier to get away with when the victims are banks rather than vulnerable unsophisticated borrowers.

Nevertheless, here is a recent complaint by the FDIC as receiver for AmTrust Bank against a title company and it seems that the bank may not be “the bad guy.”  The allegations are that fake transactions were cobbled together so that a builder/developer could dump properties that were not selling.  A fake buyer would pay an inflated price for a property that he never intended to buy or live in with the bank’s borrowed money.  The “borrower” would immediately default (since he never had any intention of borrowing the money or buying the property and probably just got a few thousand dollars for playing the part at the closing).  Some of that inflated price allegedly went to vague business entities with no clear interest in the property or the transaction.  These vague entities, the FDIC alleges, were the puppeteers who conjured up the fake buyers and finagled the bogus transactions.  The bank was the victim.

So AmTrust Bank, founded in Cleveland, Ohio in 1889, was shut down by the FDIC in 2010.  It is hard to feel sympathy for a financial institution and it is clear that AmTrust bears some responsibility for the bank’s explosive, perhaps even reckless, growth during the mortgage boom.  At the same time, to focus blame on these institutions without acknowledging more widespread wrong-doing of so many — builders, developers, reckless borrowers, ratings agencies, speculators, scam artists, poor government oversight or twisted government incentives, etc., etc., etc. — is too simplistic.

This is not a matter of “too big to fail” but, maybe, “way too many bad guys to get all worked up about any one in particular.”