" ... Anyway, let me fast forward. In 1995, when HUD produced the first audited financial statements, they were published, and a fellow came to see me, and he said, “Look, there’s been a terrible mistake. You don’t understand, my family’s been in business for many generations, and we’ve been tracking all the FHA mortgage insurance outstanding in the market since the FHA went into existence in 1934, and there’s a terrible mistake – the amount of outstanding FHA mortgage insurance in the markets is significantly more that is shown in these financial statements …
Now when the fellow came to see me, Jim I thought he was crazy because what he was saying was that the U.S. Treasury and the FHA were engaged in significant securities fraud. In other words, what he was saying was that there was a significant amount of FHA & Ginnie Mae (or FHA related) securities outstanding than was shown in the financial statements.
Now, that’s what I’ve come to believe is true. In 1995, I thought the guy was nuts. What has been evidenced over the last 7 years, is that there is a pattern that suggests there is very significant financial fraud in the mortgage markets. And let me tell you a little bit about why I believe that to be true.
After I left the Bush administration, the Secretary of Treasury asked me to go back in as a Governor of the Federal Reserve. But I discovered the Internet when I was in HUD, and decided that I wanted to create my own securities firm that specialized in financial software. And I was convinced there was a tremendous opportunity to finance neighborhoods and places, and securitize small businesses and small real estate income and finance in the equity markets. In other words, in a world of privatization, there’s no reason why you can’t finance a lot of municipal functions with equity. …
So we wanted to do that, but a lot of it depended on creating the software tools to let you really see how the money works by place. And part of what I discovered when I was Assistant Secretary is, because there’s no transparency in how the money works by place for government money, there’s tremendous opportunities. There’s neighborhoods where, for example, HUD is spending $250,000 per unit to rehab public housing, but you can buy a rehab single family in the same 3 or 4 block area for $50,000. So, to the extent that you can reengineer government money within a place, there’s tremendous arbitrage opportunities if you combine that with financing places with equity. So we got very interested in doing that.
One of the things that happened was HUD later hired the [i.e. Catherine’s software] company back on competitive contract, to help with $12 billion of defaulted mortgage auctions. HUD was the last of the RTC and the private financial institutions auctioned all their mortgages. But HUD was kind of the Johnny-come-lately, and so hadn’t done that, and we helped them do that between 1994 and ’95 & ’96. They auctioned successfully about $10 billion of mortgages. What happened in that process was we were able to get the recovery rates, which had traditionally been about 35 cents on the dollar, beyond the industry standards which was about 75 cents on the dollar, we got it up to about 70-90 cents on the dollar.
And then in 1996, [we] were targeted by … the only way I can describe it, have you ever heard of the movie “Enemy of the State”?
JP: Oh sure.
CA: OK. Well I have someone who introduces me at conferences and says “This woman played Will Smith in real life.” Do you remember the role that Will Smith played?
JP: Oh absolutely.
CA: OK. Well what happened was we were targeted in a process where we went through a period of having 18 audits and investigations, and 12 pieces of litigation, and through that whole sort of enforcement process, the honest people were pushed out of HUD. And they pushed my company, and a series of other honest contractors and government officials out. And what happened in the year following that is HUD failed to produce audited financial statements, and reported undocumentable adjustments of $59 billion, that was in fiscal 1999. And throughout government in fiscal 1999 thru 2000/2001, there were reports of not only failure to produced audited financial statements, but about $3.4 trillion of undocumentable adjustments. Very, very significant. That works out to about $11,000 per American resident. ... "
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