Diagnostics of white‐collar crime prevention

Abstract

Nguyen and Pontell’s (2010, this issue) article makes a strong case that white-collar crime played an important role in the origins of the global financial crisis; specifically, in waves of mortgage origination fraud. Particularly telling is the 2006 Federal Financial Crimes Enforcement Network (FinCEN) report of a 1,411% increase in mortgage-related suspicious activity reports between 1997 and 2005, 66% of which involved material misrepresentation or false documents. Then another 44% increase was reported between 2005 and 2006. The BasePoint Analytics (2007) analysis of 3 million loans, which indicated that 70% of early payment defaults had fraudulent misrepresentations on their original loan applications, was another early warning signal that the mortgage issue was a crime problem. These data also demonstrated that it was a consequential problem, as the loans with fraudulent misrepresentations were five times as likely to go into default. The Federal Bureau of Investigation began issuing public warnings in 2004, claiming that it was seeing a spike in mortgage fraud cases in the mid-2000s (Black, 2009). Even earlier than that, a more abstract early warning drew on the lessons of the history of the savings and loans debacle from Nguyen and Pontell and fellow scholars such as Bill Black (Black, 2005; Black, Calavita and Pontell, 1995; Calavita, Tillman, and Pontell, 1997; Tillman and Pontell, 1995). Of course, other layers of causation were found in the structures of the derivatives market, the bonus culture on Wall Street, the captured ratings agencies that failed to do their job, the structural imbalances of American indebtedness to China to pay for Chinese exports to the United States, and the defective quantitative risk models applied by the financial industry (Braithwaite, 2009; Johnson, 2009; Krugman, 2008; O’Brien, 2009; Partnoy, 2003). Yet Nguyen and Pontell’s (2010) emphasis on the proximate causes in mortgage fraud is well placed for two reasons. First, many other layers of causation are extremely hard to fix and