International Journal on Criminology Volume 1, Number 1, Fall 2013 | Page 30

Subprime or Subcrime?
known as “shadow banking”. Therefore, in the absence of any real regulation, bad
(dishonest) professionals gradually replaced the good (honest) ones and bad practices
superseded good ones, like a new Gresham’s law on a major scale.
Secondly, we now have an innovative and globalized fraud, modern in a manner of
speaking, consisting of dispersing these questionable loans by removing them from the
balance sheets of financial institutions. This time, the victims were not average
Americans but international investors. The fraudulent real-estate bubble was followed by
an equally large financial bubble. Subprime/predatory loans were transformed into
financial securities: securitized. Mortgage lenders understood that securitizing high-risk
loans left them as sure-fire winners. They ceded legal and financial responsibility for
these loans with a high likelihood of default (due to their fraudulent nature), and also
immediately cashed in the liquid assets. The securitization process thus encouraged them
to pursue loan policies, which were not qualitative (prudential) but rather quantitative
(always more), even as far as fraud. Risk taking was at a maximum, as the income earned
by these professionals was index-linked to the volume of loans. The technique of
securitization had been praised by dogmatic liberals and monetarists (such as Alan
Greenspan) as a factor in spreading risk. Instead, it was an instrument infecting the entire
financial chain. Questionable loans were regrouped—and in fact hidden—in debt
packages (automobile loans, student loans, etc.), with the bad apples (subprime/predatory
loans) contaminating the rest of the basket. With these “innovative new financial
products” (CDOs etc.), the sorcerer’s apprentices of Wall Street believed that they could
suddenly turn lead (bad debts) into gold (sustainable profits). These alchemists of
innovative finance imagined that they were defying the laws of financial gravity and
common sense, blinded by euphoria and profits, making themselves believe that “this
time it’s different”.10
These new financial products, toxic in nature due to being crippled by subprime
loans, contaminated the entire American and subsequently global financial system,
producing a chaotic butterfly effect: small fraudulent causes, large macroeconomic
consequences. At this stage, deceit was being skillfully spearheaded by those responsible
for ensuring de facto regulation of the financial markets: The three main rating agencies,
one of which is French (Fitch),11 and the major investment banks (Goldman Sachs,
Lehman Brothers, etc.).
The record of the rating agencies is a painful one.12 The 9/10 ratings given to
securitized products would prove to be erroneous. Such incompetence is stunning. These
massive errors can surely be explained by the fact that the loan files they received were
booby-trapped with fudged figures by mortgage lenders, mortgage brokers, and
sometimes even households themselves. However, ratings with this level of fantasy can
also be traced back to the two “conflicts of interest” governing these agencies’ economic
model. First of all, the agencies are paid by the issuers of securities (issuer-pay principle),
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
10. Carmen M. Reinhart and Kenneth S. Rogoff. Cette fois, c’est différent: Huit siècles de folie
financière. Pearson, 2010. The phrase “this time it’s different” (cette fois, c’est different) is simply
a manifestation of the blindness we have already touched upon.
11. The French press has always been very reticent regarding this rating agency’s role in the crisis,
most likely because it belongs to the FIMLAC group which is owned by French capitalism baron
Marc Ladreit de Lacharrière.
12. Rating agencies are structurally short-sighted. They failed to anticipate the financial crises of
Latin America in the 1980s, the collapse of the American savings and loan associations and the
giant Enron, the Greek sovereign debt sinkhole, etc. In fact, they tend to give yesterday’s forecast
or announce catastrophes which are then triggered by their pronouncements (self-fulfilling
prophecies).
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