Lee Bentley Farkas was born in Albuquerque, New Mexico. He dropped out of college to run the family insurance firm after his father died. After it floundered, he drifted for a period, before setting up a construction company in Ocala, Florida, which failed in 1989. In 1991 he bought a small mortgage company called Taylor, Bean & Whitaker (TBW) for $75,000, funded by a loan from the mother of a friend. Over the next 18 years he would transform TBW into one of the largest mortgage brokers in the US. By 2008, it was dealing with $35bn a year in mortgages.
What was the scam?
TBW originated the mortgages, then quickly resold them to various investors, relying on Colonial Bank, one of the largest banks in the region, to provide short-term funding. Consistent losses meant that TBW’s overdraft with Colonial grew and grew. Farkas persuaded Catherine Kissick, an executive with Colonial, to hide the overdraft from her superiors. Meanwhile, he started including fictitious mortgages in the bundles that he resold to investors. With debts continuing to mount, Farkas borrowed even more money from large financial institutions through a subsidiary, using mortgages that were either fraudulent or pledged for multiple loans as collateral.
What happened next?
By early 2009 Colonial Bank was on the verge of going under. Realising this would expose the true extent of his overdraft and by implication his fraud, Farkas joined a consortium of investors that offered to recapitalise the lender in exchange for support from the government’s crisis-era Trouble Asset Relief Program (TARP). Auditors hired by the scheme quickly discovered evidence of fraud and alerted the FBI. Later that year TBW declared bankruptcy. Farkas and Kissick were convicted of fraud and received hefty prison sentences.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
Total losses from the fraud are estimated at around $3bn and Farkas’s use of mortgages as collateral for multiple loans caused legal chaos for many unfortunate homeowners. The collapse of Colonial, which lost around $500m with TBW, was the sixth largest bank failure in US history; the Federal Deposit Insurance Corporation lost $2.8bn in the subsequent rescue. Much of this could have been avoided had the lenders followed the example of Fannie Mae, which cut ties with TBW back in 2002 over claims that some of the mortgages it had been sold were fraudulent.
-
Spot the Dog: £67bn in underperforming funds revealedAround 137 funds consistently underperformed their benchmark, BestInvest's Spot the Dog report finds. Which funds are in the dog house?
-
What does a BP and Shell merger mean for the UK oil industry?BP’s struggles have made it vulnerable to a takeover. Could it merge with Shell to create a British behemoth?
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
Bank of England raises interest rates to 5.25%The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation slides to 8.7% - what does it mean for your money?News Inflation has dropped below 10% for the first time in months, but with food prices at a 45-year high, is this good news and what does it mean for your money?
-
Why the UK equity market is shrinkingAnalysis The crisis has been building for 25 years, says Max King, and it will take decades to reverse the trend.
