After Years of Red Flags, a Conviction
By FLOYD NORRIS
Fannie Mae stopped doing business with the firm, called the Taylor Bean & Whitaker Mortgage Corporation.
For Taylor Bean, it was a crisis. Its checks bounced.
But Mr. Farkas scrambled, and Taylor Bean survived to commit more frauds.
This week, Mr. Farkas, 58, was convicted of 14 counts of fraud and conspiracy in what had become a $2.9 billion scandal.
Testifying in his own defense in federal court in Alexandria, Va., Mr. Farkas explained that in 2002 Taylor Bean had sold eight real loans to a lender who resold them to Ginnie Mae, the government agency that buys loans guaranteed by the Federal Housing Administration. When the loans were found to be ineligible for F.H.A. guarantees, Ginnie Mae demanded its money back.
Taylor Bean did not have the cash. So it created fictitious loans and used them as collateral to get the money from a bank. The loans were not supposed to be sold, he said, but a subordinate mistakenly put them in a group of loans to be sold to Fannie Mae.
“I had no intention of paying payments on those loans,” he testified. “It wasn’t my obligation. It was simply a way to keep track of it, and it was, it was an idea I had that probably wasn’t a great idea, but it was an idea that I had how to do it.”
It was also an idea that indicated something very strange was happening at Taylor Bean. It should have been the end for the company.
But it was not. Fannie Mae would no longer do business with Taylor Bean, but there was still Ginnie Mae as well as the other government-sponsored enterprise, Freddie Mac.
“Ginnie Mae did not do anything,” Mr. Farkas testified. “Freddie Mac came down and sent the head of, head of the division that dealt with us and all these other people, and they decided that they would let us, let us live.”
The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.
Fannie escaped unscathed. Freddie and Ginnie did not. Two major European banks, Deutsche Bank and BNP Paribas, thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real. Colonial had lent hundreds of millions on the security of mortgage loans that were either nonexistent or had already been sold to someone else.
Mr. Farkas was the seventh person convicted in the case. The witnesses against Mr. Farkas included the other six — four executives from Taylor Bean and two from Colonial Bank, all of whom pleaded guilty. Mr. Farkas was sent to jail and is awaiting a sentence that is almost certain to leave him imprisoned for life.
The Justice Department, which has been criticized for the paucity of criminal charges stemming from the financial crisis, celebrated the verdict. “His shockingly brazen scheme poured fuel on the fire of the financial crisis,” an assistant attorney general, Lanny A. Breuer, said. The United States attorney in Alexandria, Neil H. MacBride, said Mr. Farkas had orchestrated “one of the longest and largest bank fraud schemes” ever seen.
Mr. Farkas did not prove to be a very good witness on his behalf. He insisted no crime had been committed, but his understanding of the law seemed to be a little unusual.
Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.
“Yeah, I believe it does,” he replied.
“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”
The second-most important player in the fraud, after Mr. Farkas, was Catherine Kissick, the head of Colonial Bank’s Mortgage Warehouse Lending Division. Her division was in Ocala, Fla., which was also Taylor Bean’s headquarters, and she appears to have been hired by Colonial to enable it to get Taylor Bean’s business, which she had handled for her former employer, SunTrust.
It was Ms. Kissick who came up with a plan in 2002 to hide overdrafts when Taylor Bean began to get into trouble, and then came up with ever more elaborate ways to fool her Colonial colleagues. Ms. Kissick, who is awaiting sentencing, testified that Mr. Farkas repeatedly promised he would find the money to make it right. By the time she realized that could never happen, she was in too deep.
Ms. Kissick had a lot of authority at Colonial.
“One day she was at the McDonald’s drive-in, and I asked her for a hundred — which meant a hundred million — more, and she was in the middle of ordering a Happy Meal,” Mr. Farkas testified.
“She said, ‘A hundred?’ I said, ‘Yeah.’ She said, ‘O.K., fine. Hold on.’
“She called Colonial, and we had a hundred million before she paid for her Happy Meal,” Mr. Farkas said.
Taylor Bean was audited by Deloitte & Touche, which failed, year after year, to spot the fraud. But Deloitte grew suspicious in early 2009, and never completed the 2008 audit. At Deloitte’s request, the board hired an outside counsel to investigate. The company collapsed before that investigation was completed.
For connoisseurs of financial scandals, this one has a link to the old savings-and-loan crisis. Taylor Bean was once owned by a savings bank in Peoria, Ill., and that bank’s failure left the company in the hands of the Resolution Trust Company, which the government created to manage the refuse of that crisis. Resolution Trust sold it to a Michigan bank as part of a bundle of assets.
“I’m not sure they realized really that they even owned it,” Mr. Farkas said of the Michigan bank. When the bank did figure it out, it decided to close the operation. Instead, Mr. Farkas bought it for $75,000, but was allowed to take two-thirds of the money from the bank’s own assets.
That financing arrangement was an eerie forerunner of his plan to recapitalize Colonial Bank by investing $300 million. That would qualify the bank for $553 million in federal bailout money through the Troubled Asset Relief Program. Mr. Farkas testified that he planned to pay for half of the investment by selling securities owned by Taylor Bean. It would no longer need the securities, he explained, because they were bought to hedge risks inherent in other assets, and he planned to sell those assets to Colonial, which would pay for them with the TARP money.
To pull off the deal, Mr. Farkas needed to find $150 million from other investors. He told Colonial and the Treasury Department that he had done so, but that turned out to be a lie. He attributed the misinformation to an innocent mistake, but the jury did not believe him.
The mortgage party probably would have gone on even if Mr. Farkas had been put out of business in 2002. But perhaps the sins that could have been discovered then — fraudulent loans hidden in masses of data that no one had bothered to carefully review — would have persuaded someone, whether regulators, rating agencies or investors, to be more careful.
But Taylor Bean survived and grew to make 14,500 loans a month and service $80 billion in mortgages.
Eventually Desiree Brown, a former receptionist, rose to corporate treasurer and collected more than $1.5 million in bonuses, including $66,500 just before the company failed. She admitted to faking documents that enabled Taylor Bean to fraudulently obtain more than $400 million from Colonial Bank, and is awaiting sentencing.
Mr. Farkas took at least $20 million out of his company, in addition to millions in salary. He amassed a large collection of classic cars and bought a private jet by taking out mortgages on nonexistent condominiums.
And in 2008 he boasted, according to a co-conspirator’s testimony, that he “could rob a bank with a pencil.”
This article has been revised to reflect the following correction:
Correction: April 23, 2011
Correction: April 23, 2011
The High & Low Finance column on Friday, about the fraud conviction of Lee B. Farkas, a mortgage lender, misspelled part of the name of his firm. It is Taylor Bean & Whitaker, not Whittaker.