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Fannie Mae silence on Taylor Bean led to US$3B fraud

Fannie Mae, the government-sponsored company that emits almost half of all mortgage-backed securities, determined over the next two years, more than 200 loans purchased from Taylor Bean were false, or non-performance lacked critical components such as mortgage insurance.

It could have been the end of Taylor Bean and its chairman and principal owner, Lee Farkas.He was sentenced Thursday in federal court in Alexandria, Virginia, 30 years in prison for masterminding what prosecutors call one of the "largest bank fraud in the history of this country."

Instead, it was just the beginning.

Fannie Mae officials never reported the fraud to the police or anyone outside the company. Internal memos, the court documents and public testimony show that he sought only to get rid of liabilities and cut ties with the sale of a mortgage firm "which have no value," as Smith, the former vice president of operations of Fannie Mae single family said in a deposition in 2008.

The trial of Farkas and his co-defendants resulted in the only major criminal conviction arising from the financial crisis - a crisis that followed the September 2008 collapse of Lehman Brothers Holdings Inc. and takeover of the U.S. government of Fannie Mae and Freddie Mac's rival month.

"Most Significant"

Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program, described the case of a Farkas Feb. 14 letter to President Barack Obama as "the largest criminal prosecution to date" that was born of the financial crisis.

"If there had been a referral to court, Farkas would have gone to prison in 2002," William Black, who served as deputy director of the Federal Savings and Loan Insurance Corp. in the S & L crisis of the 1980s, said in an interview.

Seven years passed before federal regulators closed Ocala, Florida-based Taylor Bean and prosecutors responsible for orchestrating the fraud Farkas U.S. $ 3 billion.He had fooled some of the largest financial institutions in the country, has sought federal funds and bank bailout has contributed to the failure of Montgomery, Alabama-based Colonial Bank and its parent company, Colonial BancGroup, once among the 25 of the nation's largest custodian banks.