Regulators Slam Mortgage Market Fraud

February 21, 2008

Just when I lost all hope with the integrity of the U.S. financial regulatory system, those darn regulators pull me back from the brink and fully restore my confidence.

Here I have been sitting the past couple of years worrying about the growing impact of questionable subprime paper that had all too easily filtered its way into the stream of securitization. Not being a babe in the woods and fiercely independent in nature, I refused to shift the blame. The greed of bankers and their Wall Street cronies fueled the fires of excess. It wasn't that no one saw the danger signs. No, it was that no one cared. Come on, let's all be honest with that one. It was a great party while it lasted. Lots of champagne. Free canapes for all.

All of which leads us to the proper role of regulation -- to protect an industry against its own follies and vices. In the good old U.S. of A., we got lots of regulations and regulators. We got self regulators. We got state regulators. We got federal regulators.

Alas, we got bupkus. At best, our regulators were spectators to the present economic disaster. At worst, they were accomplices and conspirators. They saw no red flags. They cheered on the industries involved. They got to the dance a day late and a dollar short. Of course, now, we can't get these Johnny-Come-Latelies off our damn televisions. My, how tough they all are after the fact.

Still...even a hard-boiled guy like me believes in redemption.

In reading through the February 2008 disciplinary cases from the Financial Industry Regulatory Authority (FINRA), I was thrilled to see that the regulator isn't sitting down on the job. No, FINRA is on top of the mortgage crisis and its devastating impact on the FINRA member firms. FINRA knows how much investors' stock portfolios have declined because of the improper practices in the mortgage market and the pipeline of securitization. FINRA knows how severly strained the finances are of its members because of questionable mortgage financing. FINRA knows the damage caused to our mutual funds, money market funds, 401(k)'s, and all the other vehicles into which our life savings and retirement funds have been placed. Relax, FINRA is not going to tolerate fraud connected to mortgages. It's digging in its heels and rooting out the bad guys and gals.

In a February 2008 settlement, FINRA absolutely slammed a major firm for overstating financials in connection with a mortgage appolication. Further, FINRA allocated substantial manpower to uncovering misstatements in that member firm's documentation. That firm overstated its financial position in an apparent effort to obtain more mortgages, and even overstated its stature in the industry to gain a step up on its competitiors. In an impressive signal that such corruption will not be tolerated, FINRA expelled the firm from its members.

Oh...gee...wait a minute...I may have misread this case...let me put my glasses on and re-check the facts.

Oops. My bad. Sorry. I got a few facts wrong.

In a February 2008 settlement with Candice Elicia Hall (Docket #2007008809001), FINRA found that Hall intentionally submitted a Request for Verification for Employment that overstated her salary and reflected an incorrect length of service of employment and incorrect position title;and she transmitted the document to a mortgage company in connection with an application for a home mortgage loan. FINRA sanctioned her with a bar.

Okay, so I sort of got the facts right. It's just that instead of going after the really big bad guys, FINRA went after this individual woman. And, yeah, you're right, FINRA wasn't actually focused on the massive subprime fraud and its catastrophic impact on the world's economy. No, this was more of a precision bombing type of regulatory effort. I guess FINRA's strategy is to go after the folks seeking the mortgages and then gradually work through the banks and eventually into the member firms who sold us all the nearly worthless crap.

I don't know about you, but I'm going to start sleeping much better now knowing that the Candice Halls of Wall Street aren't going to be permitted to rip off the public. Thankfully, with such dedicated regulators manning the parapets, we will never have another meltdown in our markets again. No more "next time." Of course not. Never. Ever. Yeah, right . . .