Where is the Money? Let’s Get it Back!
February 5, 2008 at 10:02 am
About the Author
Catherine
Austin Fitts is president of Solari, Inc. Ms.
Fitts served as Assistant Secretary of Housing during the first Bush
Administration, lead financial advisor to the U.S. Department of Housing and
Urban Development during the Clinton Administration and is a former managing
director and member of the board of Dillon, Read & Co. Inc. Biographical information.
Summary
Media revelations are unfolding daily regarding losses in the U.S. mortgage
market. These losses are not a new phenomenon. Rather, they represent the
latest phase in an ongoing tradition of institutionalized
fraud in the U.S. mortgage system and the federal credit system that directly
and indirectly guarantees it. An understanding of this history can
mobilize public support for reforms that address root causes by reversing the
profitability enjoyed by those responsible.
Where is the Money? Let’s Get it Back!
by Catherine Austin Fitts
Large banks now claim recent losses in the US mortgage
market totaling over $100 billion. While amounting to only a small percentage
of banking profits over the last decade, this is still a lot of money. It may
pale by comparison, 
however, to the losses the banks’ customers, the
communities drained by predatory lending and investment practices and the
citizens who stand behind the federal credit may incur.
Municipalities from Australia to Montana are reporting
losses on U.S. mortgage and structured investments sold to them by the banks. (1) (2) Just as small towns in the
Norwegian Arctic Circle reported losses of $167 million on investments packaged
by Citicorp, Citicorp’s departing
CEO exited his job with a $100 million compensation package.
The City of Baltimore is suing Wells
Fargo. The City of Cleveland is
suing them as well, as part of the city’s suit against 21 Wall Street banks, a
veritable who’s who of U.S. mortgage lending and securities, including JP
Morgan Chase, Citicorp and Goldman Sachs, arguably the most prestigious member
banks of the New York
Federal Reserve Bank, the depository for the U.S. government.
According to the Baltimore
lawsuit, nearly 450,000 properties were in some stage of foreclosure during
the third quarter of 2007. The Baltimore lawsuit cites a recent study of
Chicago communities in which it was estimated that each foreclosure is
responsible for an average decline of approximately 1% in value of each
single-family home within a quarter of a mile.
While the financial community holds its breath waiting
for pension fund annual reports to disclose what may be the most significant
losses, the stock market continues to drop, evaporating the wealth of millions
of investors in America and around the world.
The state pension fund lawsuits over stock portfolio losses have
begun. The Ohio Public Employees
Retirement System is suing Freddie Mac, and Norfolk County Retirement and the New
York City and State Pension Funds are suing Countrywide. Ultimately,
pension stock portfolio losses will be insignificant compared to the fixed
income portfolio losses expected to wipe out billions in retirement savings.
The last time the U.S. media exposed mortgage fraud of
this magnitude was in 1989. In April of that year, I was appointed Assistant
Secretary of Housing/FHA Commissioner at the U.S. Department of Housing and
Urban Development (HUD) only to find that the FHA single family mortgage
insurance fund, required by law to be financially sustainable, was losing $11
MM a day and that the combined FHA mortgage insurance funds had lost $2 billion
in the Texas region alone over the prior year. The mortgage fraud at HUD, one
of the largest issuers of mortgage securities in the world, was so bad that
Secretary of Treasury Nicholas Brady privately tried to dissuade me from
joining the agency, saying “You can’t go to HUD — HUD
is a sewer.”
The HUD losses were a drop in the bucket compared to the
losses on the savings and loan institutions, ultimately costing U.S. taxpayers
an estimated $500 billion by the time the clean-up was through in the mid 90’s.
This estimate did not include the subtle and more expensive inflation borne by
ordinary citizens, resulting from allowing the large financial institutions to
use the federal credit to borrow inexpensively in the short-term markets and
reinvest in long-term U.S. Treasury and agency securities, helping some of them
dig out of the losses and resulting in windfall profits to the industry across
the board.
Policymakers encouraged those of us leading the last
clean-up to fashion reforms such that mortgage fraud on this systemic scale
“could never happen again.” And so significant financial reforms were
legislated and instituted.
First and foremost, were laws requiring federal agencies
and credit programs to produce audited financial statements. As a significant
amount of the US mortgage market enjoys direct or indirect support of federal
credit programs, such an audit requirement should ensure that any problems in
the housing finance system are illuminated early on. Part of this reform,
so-called “paygo,” (The equivalent of “loan loss reserves” required of private
lenders) would make it prohibitively expensive for Congress to extend federal
credit to support a new bubble.
Second, were administrative steps to ensure transparency
of federal mortgage credit and spending by county and zip code. The most
effective internal control is knowledgeable citizens, watching the use of
government resources on their home turf. With easy access to data about
government resources expended locally, communities could assess the performance
of their tax-supported housing and mortgage resources contiguous to the areas
in which they live, work and vote for political representation. Without access
to such “place based” financial information, it is difficult to hold our
legislative representatives accountable.
What happened? Beginning in 1995, numerous government
agencies and the US Treasury began annual announcements declining to publish
audited financial statements. In the process of explaining itself, HUD
announced “undocumentable adjustments” to balance its books in 1998 and
1999 of $17 billion and $59 billion, declining to give a total for the
undocumentable adjustments in 2000. In the process, the Office of Management
and Budget solved the loan loss reserve problem by cooking the assumptions used
to estimate costs, thus permitting issuance of greater amounts of mortgage
credit with lax terms and conditions. Things got so bad that the chief of staff
to the chair of the Senate Appropriations Subcommittee in 2000 confessed to me “HUD is being run as a
criminal enterprise.” The myths that there was a budget surplus during the
Clinton Administration or that the housing bubble began after the Clintons left
office represent the partisan fantasies of Americans desperately searching for
ways to avoid facing the real risks before us.
Even more money was missing at the Department of Defense
(DOD). On September 10, 2001, Secretary of Defense Donald Rumsfeld conceded,
“According to some estimates, we cannot track $2.3 trillion in transactions.”
By 2003, more than $4
trillion of “undocumentable adjustments” had been reported at HUD, DOD and
NASA alone. Since then the federal government fails to account for additional
billions each year as the U.S. commitment in Iraq leads to unprecedented
spending with third party contractors, many under “no bid” contracts and
without meaningful contracting supervision. Finally, after years of
manipulation in the precious metals markets, serious concerns are growing about
the status of the US gold stores. Has our gold gone missing as
well?
In the 2007 Financial
Report, the U.S. Comptroller General stated “Certain material weaknesses in
financial reporting and other limitations on the scope of our work resulted in
conditions that, for the 11th consecutive year, prevented us from expressing an
opinion on the financial statements…”
Meantime, efforts to bring
local transparency to government mortgage programs and credit have been stopped, destroyed or
reduced to ineffective window dressing. (See articles: Where is the
Collateral? and So,
Where is the Collateral?.) The average American has little
understanding of the government resources and credit programs around them.
So our earlier reforms failed to prevent billions in
subsequent mortgage fraud losses and the disappearance of
trillions from US government accounts. Why? What have we learned from this failure,
which would suggest lasting reforms?
If your public company were operating outside its bylaws
and U.S.
Securities and Exchange Commission regulations requiring audited financial
statements, at some point your bank would refuse to effect your banking
transactions and stop selling your securities to their customers. This means if
$4 trillion is
missing from the U.S. government, the federal depository and its member
banks are complicit, if not responsible.
We don’t need new laws for each new crisis. We need
enforcement of existing laws. What we also don’t need are bank depositories and
government payment and accounting contractors who will proceed with trillions
of banking transactions and government securities sales while basic provisions
of the U.S. constitution and laws governing federal financial management are
blatantly ignored.
In 1989, we failed to identify what money, credit and
assets had been stolen and to get them back. 
Billions of dollars in profits remained in the pockets of
the conspirators and their co-conspirators - the investors, strategic partners
and offshore backers to whom they funneled it. Rather than hold people and
institutions accountable and achieve restitution, we plowed additional back
door profits into the financial institutions and allowed them to continue in
their role as member banks and shareholders of the New York Federal Reserve
Bank, depository to the US
Treasury.
These institutions continued to provide a wide number of
important services to federal, state and local government and pension funds,
ensuring their access to extraordinary amounts of revenues, assets and critical
inside market information. We continued to accord them, their investors
and the politicians they funded the prestige and power traditionally reserved
for a society’s most trusted stewards and fiduciaries. By so doing, we
legitimized and institutionalized mortgage and financial fraudsters on a global
scale. (1)
(2) (3)
Trillions of dollars are missing. Where did it go? Who
has it? Let’s act on what we learned the last time around – “Crime that pays is
crime that stays.” This time, let’s ask and answer the right question: “Where
is the money and how do we get it back?”