The Best Way to Rob a Bank
March 9, 2021·12 comments·In Brief
A major investment bank collapsed this week, but the real story isn't its failure. It's that major institutions knowingly bought obviously bad loans, top regulators looked away, and politicians profited from the scheme while ordinary investors lost money in supposedly safe funds. The fraud wasn't hidden. It was protected by institutional incentives that made looking the other way more profitable than stopping it.
- The same investment bank sold obviously fraudulent loans to one major fund in 2019, that fund collapsed, and investors lost billions. Within months, another mega-bank began buying even more of the same loans from the same originator.
- The investors in the second bank's funds didn't know that some of their co-investors were actually funding themselves through the same bank. They thought they were in an arm's length financial arrangement. They weren't.
- When a company couldn't repay a $435 million loan, the lender exchanged it for equity in a bankrupt company and reported zero loss. The accounting was clean. The math was fiction.
- Major regulators eventually shut the operation down, but only after an insurance company got spooked and dropped out. The same regulators that were shocked by a similar collapse two years earlier. The same patterns. Different actors.
- Now regulators are asking if the damage is contained. But the real question is whether anything has changed since the last time this happened, or whether the same mechanisms that protected this fraud are still in place.
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