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General Electric and the Great Mortgage Cover-up

November 1, 2013 159 comments

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The Center for Public Integrity reveals one of the hidden causes of the financial crisis – how corporate codes of silence and whistleblower abuse helped lenders flood the nation with toxic mortgages. “The Great Mortgage Cover-Up” has been selected to appear in Columbia University Press’s Best Business Writing 2012 and has been honored with a “Best-in-Business” Award from the Society of American Business Editors and Writers and an Excellence in Financial Journalism Award from the New York State Society of CPAs.

Fraud and folly: The untold story of General Electric’s subprime debacle

Ex-employees say GE ignored warnings from whistleblowers

By Michael Hudsonemail, Center for Public Integrity
January 6, 2012

For General Electric Co., hawking subprime mortgages was a long way from making light bulbs and jet engines.

That didn’t stop the industrial giant from jumping into the subprime business in 2004, lending blue-chip respectability to the market for risky home loans by paying roughly half a billion dollars to buy California-based WMC Mortgage Corp.

What GE got in the bargain, former WMC employees say, was a place where erstwhile shoe salesmen, ex-strippers and even a former porn actress could sign on as sales reps and make big money pushing home loans. WMC’s top salespeople earned a million dollars a year or more and lived fast, swigging $1,000 bottles of Cristal and wheeling around in $100,000 Ferraris and Bentleys.

In pursuit of these riches and perks, several ex-employees claim, many WMC sales staffers embraced fraud as a tool for pushing through loans that borrowers couldn’t afford.

Dave Riedel, a former compliance manager at WMC, says sales reps intent on putting up big numbers used falsified paperwork, bogus income documentation and other tricks to get loans approved and sold off to Wall Street investors.

One WMC official, Riedel claims, went so far as to declare: “Fraud pays.”

How well did GE address WMC’s fraud problems?

GE says it did plenty to deal with the issue. Some ex-employees counter that GE officials didn’t do enough to rein in illicit practices, despite warnings from Riedel and other whistleblowers inside the lender. GE dispatched emissaries to look into the problem, the ex-employees say, but their efforts were too little, too late.

“They sent in people we thought were going to bring us back in the right direction,” Victor Argueta, a former risk analyst at WMC, says. “But it just never happened.”

By 2007, WMC was bleeding bad loans and red ink. General Electric shut the lender and reported related losses totaling more than $1 billion.

‘Everyone knew’

How could General Electric — a corporate icon voted America’s most admired company in 2006 and 2007 — have stumbled so badly?

The story of GE’s subprime misadventure has earned little attention from news media or public officials amid headlines about bank failures and mega-bailouts at other big companies. But now, with the aftershocks still being felt by GE and by WMC’s borrowers, lawsuits and former employees have begun to shed light on what happened and why.

It’s a tale of a 134-year-old industrial concern that’s transformed itself into a financial services juggernaut. It’s also a story about breakdowns in corporate compliance systems amid the chase to cash in on the latest innovations in high and low finance.

In interviews with iWatch News, eight former WMC employees claim WMC’s management ignored them when they reported loans supported by falsified documents, inflated incomes or other legerdemain. Two of them say they were transferred and demoted because they pressed too hard to expose corrupt practices.

Riedel, who worked as quality-control manager for the lender’s largest production division, claims that after he informed a GE official about fraud inside the lender, WMC’s management demoted him — reorganizing him out of his job, taking away his office and his staff and forcing him to sit at a desk for months without a job title.

“I didn’t have any files,” Riedel told iWatch News during a series of interviews. “I basically stared out a window.”

Two other former WMC employees confirm Riedel’s account of his transfer. “Everyone knew,” Argueta, the former risk analyst, says. “We all knew why he’d been moved to our section, from a nice comfy office out to the cubicles.”

General Electric didn’t answer questions from iWatch News about the accounts provided by Riedel and other ex-employees. It also declined to provide detailed answers to a series of questions about how much it knew about alleged fraud at the Burbank, Calif.-based lender and what steps it took to deal with it.

In a written statement, GE says that “following its acquisition by GE, WMC strengthened and expanded its compliance programs and standards. WMC held people to those standards. In those instances where WMC learned of violations of these standards, management took disciplinary action, including terminations of employment.”

‘All kinds of crazy loans’

WMC made a name for itself long before GE came courting.

Founded in 1955, it had been known for much of its life as Weyerhaeuser Mortgage, a subsidiary of the pulp and paper giant Weyerhaeuser Co.

By the late 1990s it had a new owner — billionaire financier Leon Black’s Apollo Management LP — and it had moved into the subprime game, spurring production by rolling out a “Race to the Top” program that gave top sales performers the use of Porsche Boxsters.

The push to book mortgage deals produced a rash of bad loans around the country. WMC claimed it had been victimized by on-the-ground fraudsters who’d used bogus appraisals and other deceits to get mortgages approved.

In Minnesota’s Twin Cities, however, so many WMC loans ended up in or near foreclosure that a local newspaper, the Star Tribune, suggested WMC had “self-inflicted some of its wounds by pushing too hard and fast” to sell loans. An assistant state attorney general told the paper that the company simply didn’t do “some of that due diligence” needed to ensure loan deals made sense.

“I have never seen a company that has been this aggressive,” one mortgage broker told the Star Tribune. “They were doing all kinds of crazy loans. They were doing anything they could do to push these deals through.”

Questions about WMC’s lending tactics were also raised by an academic study that looked at a pool of 5,610 loans the company had made around the country in 1998. By December 1999 almost 25 percent of the loans were facing foreclosure or were seriously delinquent — more than five times the rate for loans originated by other major subprime lenders, the study found.

GE, meet WMC

Despite these problems, WMC’s aggressive sales culture helped it survive and grow.

One of the forces behind its resurgence was Amy Brandt, who had gone from practicing law to peddling mortgages for WMC, quickly rising to become WMC’s No. 1 salesperson and then executive vice president of production. When she joined the executive team in 2000, she later told a business magazine, the company was on the verge of bankruptcy, and she helped lead what was, in her words, an “unbelievable turnaround story.”

By the end of 2003, Brandt was WMC’s president and chief operating officer, and the lender was producing $8 billion a year in subprime home loans and boasting profits of $140 million a year. It had also attracted the interest of General Electric, which was looking to grow in what, since 2001, had been a slow-moving economy.

“We’re going to have to turn up the engines to drive growth,” GE’s chairman, Jeffrey Immelt, told a TV interviewer in late 2003, explaining his company’s overall growth strategy. “The economy is not going to give you much, so what do you do?”

One of the things General Electric did was to seek profits in a home loan market that was rapidly heating up.

The big deal was announced in April 2004.

General Electric has never publicly disclosed the purchase price, but Apollo later revealed in securities filings that GE paid nearly $500 million for WMC, providing a nice profit for Black’s firm, which had paid less than $200 million for the lender seven years before.

GE asked Amy Brandt to stay on. She added CEO to her title. Internal documents obtained by iWatch News indicate GE promised the 31-year-old executive as much as $20 million in compensation over three years — including a $10 million upfront bonus at the closing of the deal.

General Electric declined to answer questions from iWatch News about the acquisition. It won’t say how much scrutiny it gave the lender before it closed the deal, or whether it was aware of WMC’s earlier fraud problems.

GE officials made it clear at the time that their regard for Brandt played a role in the company’s decision to buy WMC. “A big part of us doing the acquisition was Amy, no question about it,” a top GE executive told American Banker.

Immelt and other GE honchos thought so much of what Brandt had done with WMC, Businessweek later noted, they invited her to talk before the parent company’s top 600 executives at its annual leadership summit in Boca Raton, Fla.

As she left the stage, Immelt gave her a high five.

Tricks of the trade

Dave Riedel started at WMC soon after General Electric took over.

Riedel had experience in the banking industry as a real-estate appraiser, loan underwriter and, most recently, mortgage fraud investigations manager at Washington Mutual Bank. At WaMu, he claims, higher ups had told him to keep quiet when he’d tried to warn them about fraud-tainted loans streaming into the company’s mortgage pipeline.

With General Electric in charge, Riedel thought things would be different at WMC. He thought he’d get a chance to do his job and, he says, “catch the bad guys.”

He supervised a quality-control team of a dozen or more people who watched over WMC’s lending in a broad area of Southern California where salespeople were pushing subprime loans as well as “Alt-A” mortgages, another type of risky home loan.

The team, Riedel says, found many examples of fraud committed by in-house staffers or the independent mortgage brokers who helped bring in customers to the lender. These included faking proofs of loan applicants’ employment and faking verifications that would-be home buyers had been faithfully paying rent for years rather than, say, living with their parents.

Some employees also fabricated borrowers’ incomes by creating bogus W-2 tax forms, he says. Some, he says, did it old-school, cutting and pasting numbers from one photocopy to another. Others, he says, had software on their computers that allowed them to create W-2s from scratch.

‘Branded as a whistleblower’

In 2005, Riedel’s team became concerned about a sales manager who oversaw the funding of hundreds of loans a month. An audit of these loans, Riedel says, found that many of the deals showed evidence of fraud or other defects such as missing documents.

This wasn’t enough to get the sales manager fired. At most, Riedel says, the guy got a stern lecture.

“He became a little more shy. He wasn’t so flamboyant,” Riedel says. “But nothing changed.”

Later, during a sit down with a visiting GE compliance official, Riedel recalls, he described the audit and the response.

Over the next few days, Riedel claims, his career was thrown into tumult.

He says a WMC official countered by telling the GE representative that Riedel didn’t know what he was talking about and that the company had already been planning to demote him.

Riedel was stripped of his title, he says, and idled for months with no assignments and no staff.

A former WMC executive, who spoke on the condition of anonymity, says the fact that GE knew about Riedel’s concerns about fraud may have prevented WMC officials from firing him, but it didn’t stop them from putting him into corporate limbo.

“He was kind of branded as a whistleblower and not a team player,” the former executive says. “They didn’t exactly fire him. They just marginalized him and he didn’t really have anything to do.”

‘Business as usual’

While Dave Riedel was fighting battles inside WMC’s California headquarters, Gail Roman was losing battles on the other side of the country.

Roman worked as a loan auditor at WMC’s regional offices in Orangeburg, N.Y. She and other colleagues in quality control, she says, dug up persuasive evidence of inflated borrower incomes and other deceptions on loan applications.

It did little good. Management ignored their reports and approved the loans anyway, she says.

“They didn’t want to hear what you found,” Roman told iWatch News. “Even if you had enough documentation to show that there was fraud or questionable activity.”

If GE made any progress against fraud at WMC, Roman says, she didn’t notice it. Fraud was as bad at WMC in 2006 as it was when she started at the lender in 2004, she says.

“I didn’t really see much of a change,” Roman says.

Victor Argueta, the former risk analyst, says he didn’t see much change either.

Meetings would be held. Executives from GE would agree fraud was a problem and something needed to be done. “But the next month it was business as usual,” Argueta says.

Argueta was barely a year out of college, with an undergraduate economics degree from the University of Southern California, when he started at the lender in 2004. What he encountered, he recalls, wasn’t what he had expected to find at a branch of a top-flight Fortune 500 corporation.

Twenty-something salespeople with little education or mortgage experience ran the show, he says. They pulled in $250,000 to $350,000 a year while sales managers made $1 million or $2 million, thanks to generous production bonuses and the network of independent mortgage brokers that fed the lender business.

“We had ex-strippers working there,” Argueta says. “The whole point was to have someone attractive to talk to the brokers. One of the salespeople did porn before she worked there. When someone told me that, I couldn’t believe it. Then I saw the video and I realized it was true.”

Argueta says one top sales staffer escaped punishment even though it was common knowledge he was using his computer to create fake documents to bolster applicants’ chances of getting approved.

“Bank statements, W-2s, you name it, pretty much anything that goes into a file,” Argueta says. “Anything to make the loan look better than what was the real story.”

In one instance, Argueta says, he sniffed out salespeople who were putting down fake jobs on borrowers’ loan applications — even listing their own cell phone numbers so they could pose as the borrowers’ supervisors and “confirm” that the borrowers were working at the made-up employers.

Management gave him a pat on the back for pointing out the problem, he says, but did nothing about the salespeople he accused of using devious methods to make borrowers appear gainfully employed.

juicy mugshot

Nightmare loans

Roman and Argueta weren’t alone in their concerns, according to other ex-employees who spoke on the condition they remain anonymous, because they still work in banking and fear being blackballed within the industry.