A two-part investigative series called "Silencing the Whistleblowers" reports that when fraud investigators working within big banks tried to warn their superiors of shady practices, they were not only ignored, but frequently harassed, demoted or even fired. We speak to the article’s author, journalist Michael Hudson, and one of the whistleblowers profiled in the article, Ed Parker, the former head of mortgage fraud investigation at Ameriquest. [includes rush transcript]
Calls for the reform of the financial industry have been sounded far and wide since the Wall Street meltdown in 2008. But how will financial reform prevent another economic bubble if the banks themselves subvert their own internal warning systems?
A two-part investigative series called "Silencing the Whistleblowers" reports that when fraud investigators working with big banks tried to warn their superiors of shady practices, they were not only ignored, but frequently harassed, demoted or even fired.
AMY GOODMAN: The article looks at the cases of ten former fraud investigators at seven of the nation’s biggest banks and lenders. The article is online at TheBigMoney.com. It was written by Michael Hudson, a journalist and author of the forthcoming book The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America —- and Spawned a Global Crisis. He joins us here today.
We’re also joined by one of the ten whistleblowers profiled in the article. Ed Parker was the former head of mortgage fraud investigation at Ameriquest. He’s joining us from Los Angeles.
And we welcome you both to Democracy Now! Michael Hudson, lay out your investigation.
MICHAEL HUDSON: Right. You know, these folks were in-house mortgage fraud investigators. So, you know, their job definition was essentially to be whistleblowers, to find fraud and document it and expose it. Again and again, these folks, you know, say that when they did, they were either ignored or marginalized or, in some cases, demoted, fired, harassed, you know, accused of embarking on witch hunts.
One fraud investigator said that she was investigating a Ponzi scheme involving sort of a fake real-estate development in the mountains of North Carolina, and she said that she wanted to be part of the meeting with the FBI, between her bank BB&T and FBI investigators, and she says that one of the bank’s lawyers told her, "We don’t want you in the meeting, because if they ask you a question, you’ll answer it."
JUAN GONZALEZ: And in that particular case, I think her name was Amy Stroupe? She -—
MICHAEL HUDSON: Amy Stroupe, right.
JUAN GONZALEZ: Stroupe. She actually discovered that the lender in the — or the development company was actually paying the loans, the monthly payments, of the people that they were supposedly arranging loans for?
MICHAEL HUDSON: The lot buyers, yeah. It was a pretty clear tip-off that there was a Ponzi scheme. And eventually, five people associated with the development company did plead guilty in federal court and get prison terms. According to Amy Stroupe’s lawsuit, she felt, though, that the bank was really in a damage-control mode. They were concerned that not only would they be on the hook for the $20 million that the bank had lent into the project, but also for some $100 million other — $100 million more in loans that other banks had made. So, according to — you know, she alleged that she was punished for pushing too hard on the case. And Department of Labor administrative law judge upheld that and ruled against the bank and ruled the bank had violated the whistleblower provisions of Sarbanes-Oxley.
JUAN GONZALEZ: And how often does that occur?
MICHAEL HUDSON: Not very often. Her case is unusual. I mean, one of the problems is, is that whistleblowers don’t — still don’t have a lot of protections. There was a study done in the first three — Sarbanes-Oxley was passed, you know, in the wake of Enron and some of the other corporate scandals in 2002. There was an academic study that found that roughly whistleblowers won their cases about five percent of the time inside the Department of Labor bureaucracy. So, not a very good record for them.
AMY GOODMAN: Ed Parker, you’re a former fraud investigator at Ameriquest. Tell us what happened.
ED PARKER: Well, I was hired by Ameriquest in January of 2003 to come in and develop the fraud investigation unit. Prior to my arrival at Ameriqest, fraud investigations, or allegations of fraud, was channeled through the internal control department, which had multiple responsibilities. So they thought, by bringing me in, that they could kind of drill down and focus on systemic fraud within the organization.
Immediately after arriving at Ameriquest, my first investigation uncovered systemic fraud in one of our branches in the Michigan area, where the branch personnel was working in cahoots, collaborating, with outsider appraisals to boost value to do loans. That ended up causing a major investigation where we went into the branch with outside counsel and the head of our HR department, and we interviewed nine of the sixteen employees there. And during the course of that interview, we discovered that it was a branch practice to back into the — it was a branch practice to back into the loan a value which was to determine — which was the determining factor that decided whether the loan was doable or not.
We also discovered that at that time Ameriquest was doing what we call verbal appraisals, which is kind of unusual for me, coming from a paper, where the account executive could fax to the appraiser the desired estimated value that they needed in order to do the loan. Now, what’s interesting about that is that 95 percent of the values that were faxed to the appraiser came back exactly as the amount that was indicated by the loan exec, which is kind of — which was odd, because on the loan application, the borrower is asked, "What do you think your property is worth?" And so, when we did our investigation and looked at the data, we saw that there was a high number of loans where verbal appraisals were submitted by the loan executives, and they all came back exactly. And that’s untypical. That’s not normal.
So, that was one of the fact — things that I discovered early on. And that kind of ended with us closing the branch and having to bring back in-house a lot of loans that we had already sold on secondary — through the secondary marketing to investors. So the company sustained a substantial hit, because we had to go back and repurchase those loans because of our indemnification agreements and broker agreements that we had with the investors.
JUAN GONZALEZ: Most people have never heard of Ameriquest, but it became one of the first big casualties — didn’t it? — of the whole subprime crisis. Could you talk about how extensive — how big the company was and how much that particular situation that you uncovered there was replicated throughout the company?
ED PARKER: It goes back to the way — the business model, in terms of how they process loans and their whole business model. We didn’t have central underwriting, so therefore underwriting was basically up to the branch manager and the loan coordinator to package the loan and send it to our central location in Orange County, where the people there basically just were checking boxes to make sure all the documents there. So there wasn’t anyone — there wasn’t any what we call prudent underwriting, someone who did debt servicing, which is making sure that the debts were — the debt ratio — the borrower qualified according to the debt ratio. There was no one to look to make sure that the notes and all the other legal documents were in order. That permeated the entire company.
The company was — went from — when I started in 2006, the company was doing millions, several million dollars a month. That escalated by the time, 2005, we were in the billions, in terms of our volume. As a matter of fact, Ameriquest was — we were right around number one between Countrywide. We were battling back and forth between who, you know, being number one in the subprime industry.
But it was widespread. I mean, there were other inducements we uncovered in our investigations, that Ameriquest — the people that were hired to work in our branches came from high-commission areas. They were not your typical, quote-unquote, "traditional" loan executives, who are people who understood the loan, who understood what debt servicing was, who understood how to qualify a borrower, how to sit down and counsel a borrower, whether or not this is a loan that we can do or whether they should go and come back and pay down some of their bills. These were people who were used to high-pressure sales, and it was a numbers game. So you do what you needed to do in order to make the loan work. What we’re interested in is in quantity, not quality. And that became an issue for me, because my department’s job was to report on the quality of the loans, which basically was to talk about fraud as we uncover it. So, it was across the spectrum, from just the loan — from the way in which we process loans in a branch to the way in which it was processed at the loan centers.
AMY GOODMAN: Michael Hudson, we only have a minute to go. Can you talk about what most surprised you in this investigation that you did?
MICHAEL HUDSON: You know, what most surprised me really was just the unwillingness of — according to the accounts of the fraud investigators, of top bank officials to really see that not only, you know, was this fraud that was so rife hurting borrowers, but it was also, you know, endangering the long-term health of the financial institutions themselves and, you know, more broadly, of the financial system. You know, so much was of it was focused on short-term profits and short-term growth, and people were incentivized within the companies to sell as many loans as possible and to double their volume every year and just push, push, push, sell, sell, and don’t worry about the future, because they were able to sell these loans off to Wall Street and essentially wash their hands of them and not worry about whether or not the borrowers could actually afford the loans or whether or not the borrowers would end up in foreclosure.
AMY GOODMAN: And when whistleblowers fought back?
MICHAEL HUDSON: You know, according to their accounts and, of course, according to the ruling in the BB&T case, the administrative law judge, you know, they were punished for it. And it wasn’t just whistleblow — you know, it wasn’t just fraud investigators, but anyone who acted as a gatekeeper in the system — mortgage underwriters, real estate appraisals, risk managers. You know, I’ve talked to lots of folks, I’ve read lots of lawsuits, and it’s almost universal — folks talk about being forced to commit fraud or, at the very least, turn a blind eye to fraud.
AMY GOODMAN: Well, we’re going to leave it there. We thank you very much. We’ll certainly link to your two-part investigation, "Silencing the Whistleblowers." Michael Hudson, journalist and author, and Ed Parker, thanks for joining us from LA, former fraud investigator at Ameriquest.