RBS’s chief credit officer in the United States at the time said that “fraud was so rampant” and that the loans had been “disguised to look okay” the emails revealed.
The transcripts were released as part of the Statement of Facts from the DoJ following its $4.9bn (£3.86bn) settlement with RBS, resolving claims that the bank misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008.
Changed due diligence results
The DoJ noted that RBS and its executives created and sold RMBSs backed by these loans while concealing the risky nature from investors.
Bankers also did not disclose their knowledge of material deficiencies in mortgage lenders’ lending practices.
“To the extent they performed diligence, they also changed due diligence results to make loans appear less risky than they were,” the DoJ added.
The process was part of a high-pressure environment “to bring in as many loans as possible” the emails revealed, with RBS earning hundreds of millions of dollars in underwriting fees.
Between 2005 and 2008, RBS underwrote and issued RMBS that have so far lost more than $49bn (£38.5bn), with more than $5.6bn (£4.41bn) in losses still forecast to occur. It also necessitated the £45bn bailout by the UK government.
Facilitated by brokers
The emails also revealed the broken state of the mortgage industry at that time.
A senior vice president in RBS’s Asset-Backed Finance Department wrote to one colleague that the mortgage lenders “raking in the money” had an “incentive . . . to bring in as many loans as possible,” while “the [mortgage lenders’ employees] that . . . have the incentive to hold the line don’t give a sh** because they’re not getting paid.”
In October 2007, RBS’s chief credit officer admitted the situation was akin to organised crime and blamed brokers for facilitating it.
“You can’t get to these default levels without having every possible, you know, style of scumbag . . . it’s like quasi organized crime. . . . [F]acilitated by brokers . . . and just a lot of bad people who just said, ‘Hey, there is a major flaw in this loan origination model. And we can fill it up like nobody’s business. . . .’”
Underwriters don’t use common sense
The DoJ added that nobody seemed to care about the risks.
“RBS never disclosed that these material risks existed and increased the likelihood that loans in its RMBS would default,” it said.
RBS executives acknowledged to internal bank committees that subprime originators were stretching loan underwriting guidelines to keep production up, which eventually led to high defaults and delinquencies resulting in losses being suffered by RMBS investors.
The bank’s chief credit officer said: “[T]he underwriters [at originators generally] don’t use common sense,” and originators “knew that it was total f***ing garbage . . . [but] they basically said, ‘Hey, we need more volume. We just don’t care.’”
As part of the settlement, the DoJ noted that these were allegations only, which RBS disputes and does not admit, and there has been no trial or adjudication or judicial finding of any issue of fact or law.
RBS has been contacted for comment.