Some Perspective on PNC, Fraud, and the Bailout

Last week, I broke a story of corruption and fraud involving PNC Bank. In this story, there was a group of business persons lead by a very powerful individual named Rusty Rose. Rose is a Dallas area business that counts ownership of the Texas Rangers among his list of accomplishments. In fact, Rose once brought in the current President into the ownership group of the Rangers. At the end of 2000, this group created a company, Davenport Tools, that they intended to use to buy up other companies, including one they were also involved with, Crudgington Tools. Even though this company was months old and had no financial assets to speak of, this group applied for and received a $25 million loan from PNC bank. According to an internal memo, the loan was approved despite the waiver of normally vital financial documents like tax returns, balance sheets, and income statements. At the time the deal was done, no one at PNC, except the loan officer on the deal, knew these documents were waived. The loan invariably went into default and then PNC even voluntarily suspended payments. Then, this defaulted loan was bundled into a package of $1.5 billion in loans that were all supposed to be in good standing. To make the corruption even worse, one of the other principles, Rick San Soucie, was involved in a divorce at the time of this deal and failed to disclose this loan in the divorce to his ex wife. Furthermore, when the attorney representing the group, Richard Waggoner, found out that the divorce hadn't been disclosed to him, he did absolutely nothing about it... Late last month, the federal government gave PNC about $7 billion to acquire National City.

I was thinking about this story recently as I tried to process the unmitigated disaster that is the $700 billion bailout. Certainly, not every transaction involved at the heart of creating this crisis was laced with the sort of fraud that I described in the first paragraph. Make no mistake though, the crisis was created by a systemic corruption and fraud. Most of the fraud was "relatively" mild at least compared to what I broke involving PNC bank. Still, mortgage transactions were routinely done in which income was misrepresented. Borrowers routinely misrepresented where they intended to live. Bank accounts were routinely stuffed temporarily with an artificial infusion of cash in order to make them worthy of qualification. It was also routine for appraisals to be done in a fraudulent manner. In fact, it became routine for good buyers to act as fronts, known as straw buyers, in order to purchase a property that others intended to actually occupy and pay for. More recently, new fraudulent schemes like buy and bail have begun to infect the industry. On the horizon, the practice of loan modifications will likely be the next round of systemic fraud.

I understand that it is an unfortunate and all too real fact of life that most industries have their share of fraud. The difference here is that the fraud that infected mortgages and financial services lead directly to the crisis we are in now. To truly appreciate just how corrosive this fraud is, you have to get close to it the way I did in covering the fraud surrounding the loan PNC approved for Rose's company, Davenport. Money to folks like PNC, Rick San Soucie and Rusty Rose is the financial equivalent of crack to a crack addict. Giving folks like these even more money only feeds their insatiable desire to commit even more corruption. While the PNC fraud is one story, make no mistake that nearly each and every player was and continues to be crooked. Whether the name is Countrywide, AIG, Fannie Mae, Bank of America, etc. they were party to fraud that eventually lead to this crisis.

Now, they are all vying for a piece of a pie worth $700 billion. Already, we see that there is absolutely no oversight. The deal has changed. Instead of buying troubled assets, the Feds will just give these companies money. The Feds aren't also going to do any substantial oversight in seeing how these funds are spent. Already, we are seeing signs that this bailout will also be corrupted. The Hartford, perfectly viable, has applied for some of this money. In other words, we are about to give the same crooks that got us into this mess a blank check of another $700 billion to do as they please. Is it really hard to do the math on such a proposition? More than that, are we all really going to pretend that the effects on our economy will be anything but devastating and probably permanent if not generational?

Recently, Alan Blinder made this ridiculous point.

You need to boost spending in the economy," Blinder said. "It almost doesn't matter what kind of spending, but we'd like it to not to be wasteful spending, something that's valuable in its own right."

Does anyone really believe that making sure the bailout isn't corrupted is merely optional? Does anyone really believe that if the bailout is totally wasted, as it clearly will be, that this will still have a positive effect on our economy, just not as positive as if it wasn't wasted? Whatever stimulus a corrupt and wasteful scheme brings are temporary and ultimately counter productive? Are we all going to bury our heads in the sands and sit by while our country is destroyed by the cancer of corruption that folks like PNC, AIG, and Rusty Rose are allowed to perpetrate again? If this $700 billion continues to be doled out as it has, with no oversight, then folks like PNC and Countrywide will get together again with folks like Rusty Rose and Rick San Soucie and they will commit more of the same kind of malfeasance that got us here. They will just change the combinations of players and augment the dynamics of the scams in order to reflect a new reality. Furthermore, unlike the good economy the committed their fraud in prior, this time the corrupt the economy in a time of economic distress.

It isn't that hard to do the math on what an entirely corrupt $700 billion bailout will bring if it is allowed to manifest. Right now, our economy is weak. It needs a boost. If it isn't given a boost soon, the recession will soon enough grow into a depression. If the bailout is simply wasted, that won't boost anyone's bottom line but the folks receiving it. Furthermore, if they are given $700 billion with no oversight, then eventually the government will have to create a plethora of new regulations to try and anticipate the corruption that will follow. Does anyone really believe the government is equipped to do this?

That's not the only effect on our economy. What happens when the country borrows with reckless abandon. This creates the exact same effect as the Treasury simply printing money. In fact, this is the 21st century version of printing money. At some point, the effect will be inflationary. With the sum at $700 billion, that isn't merely inflationary, but hyper inflationary. That's only if the government can actually borrow the money. Right now, the Treasury has no problem borrowing because the world views it as good borrower. That status is only because it can readily find lenders anytime. What happens if the world ever decided not to lend to the U.S.? We would then begin defaulting on our obligations and have to file for bankruptcy. The only reason that inflation hasn't yet reared its ugly head is because our economy is so weak that it overwhelms any inflationary pressure. So, what happens when the corrupted stimulus known as the bailout gives the economy some short term stimulus? Then, the inflationary pressure of adding about $1 trillion to our debt will be unleashed. Of course, whatever stimulus this bailout creates will be temporary because it is corrupted. The inflation on the other hand... As such, we will then face this nightmare...

In other words, the $700 billion boondoggle being handed to the likes of PNC and AIG is heading this country straight into the uncharted territory of a simultaneous depression and hyper inflation. The effects are unclear because we've never actually seen such a nightmare scenario as this. To avoid this, we must demand that the bailout be tabled immediately. There must be a grass roots revolt against this bailout as soon as possible. The more money spent frivilously the closer we will get to the point of no return on our economic viability. The situation we are facing is NOT the equivalent of pouring gasoline on a flame. Rather, it is the equivalent of setting off a sophisticated dirty nuclear bomb in a city already dealing with an AIDS epidemic.