That there is still ample room for movement - towards wariness on the part of the former, and prudence on the part of the latter - is demonstrated in today's International Herald Tribune. [Link to the report added.] Yes, dear reader, the mainstream press is finally catching on to the imperial trend we spotted years ago - towards widespread, commonly accepted fraud. Today it is 'fraud for housing.'
"Loans that require little or no documentation of income soared $276 billion, or 46 percent, of all subprime mortgages last year, from $30 billion in 2001," says IHT. Now, these 'liars' loans' are defaulting at eight times the rate of regular, fully documented prime mortgages.
According to the paper, many of the buyers didn't even know they were lying about their income; the mortgage brokers lied on their behalf, inflating income figures in order to get the loans through the approval process.
"I saw account executives openly engage in conduct such as altering borrower's W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct," said a witness.
But the FBI is not on the case. The G-men aren't interested in 'fraud for housing.' They've got bigger fish to fry - people who lie to get multiple mortgages with no intention of paying them back, known as 'fraud for profit.'
And don't expect the local DA or politicians to go after the small fish either. There's nothing in it for them - no glory…no votes…no path to higher office.
Instead, they will move to 'protect' the hapless victims of mortgage fraud - in many cases, the very same people who lied to get loans. Every era produces its own special variety of fraud; and every great, shining fraud is followed by paler imitators. Typically, borrowers get themselves into trouble; and then the politicians thunder about 'debt relief' or a 'moratorium' on foreclosures.
The second note is embedded in the introduction to last Friday's issue. It highlights a practice that, although not legally criminal fraud, may have incurred a civil tort:
When it comes to supplying funds for dodgy corporate deals, hedge funds rush in where banks fear to tread. And here we turn to Rob Peebles to tell us how...and why, using an example from the Wall Street Journal, July 25, 2006:
"First, Burger King paid the private equity folks $22.4 million in 'professional fees,' apparently for shepherding the company from the public wilderness into the loving arms of private equity owners. Then, after three years of restructuring and other voodoo, and three months before releasing Burger King back to the public, Burger King paid the investors a $367 million dividend...
"Burger King borrowed the money for the dividend, the sort of thing that apparently is possible at the late stage of a credit bubble.
"Finally, as a parting gift of sorts, Burger King paid the investors $30 million to terminate their agreement, because after all, there is only such improvement an operating company can take.
"All in [all], according to the Wall Street Journal, the private equity investors squeezed $448 million in dividends and fees out of The King before the company went public again...
"New York Times columnist Floyd Norris recently put a number on the private equity dividend mania, and that number - the amount of money companies borrowed to pay dividends to their owners - was $26.9 billion - in the first quarter of this year. At that rate, RFP this year will easily surpass last year's $56 billion, a figure that towers over the less than $20 billion borrowed for dividends as recently as 2003.
"The beauty of RFP, as Mr. Norris points out, is that the private equity investors can make money even if the company itself goes under, or has to layoff scads of employees. But who would loan money to a company that borrows money at one end and pays it to its owners out the other?"
We elaborate. Who would be so stupid as to lend to borrowers who use the money merely to impair the lenders' collateral?
The latter practice comes close to a kind of corporate loosery, which used to scare off old-style equity analysts, called "paying dividends out of capital," or paying more in dividends than the corporation has earned. In order to avoid this practice, a corporation that borrows money to pay a dividend would have to have earnings, as justified by solidly conservative accounting practices, that are greater than the amount of the dividends that were paid out. To use a bland phrase found in Wikipedia's article on dividends, the dividend cover ratio would have to be greater than one.
[NOTE: Intentionally paying a dividend out of capital is okay if it's clearly identified as either a "capital dividend" or as a "special dividend," and is non-recurring.]
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