Refuses to Pay Fitts $2.5 Mil for Work Done on Successful
HUD Loan Sales
by Joe Taglieri, FTW staff
[Copyright 2002, From The
Wilderness Publications, www.copvcia.com. All Rights Reserved.
May be copied, redistributed for non-profit purposes only.
May not be posted on any Internet web site without express
written permission. Contact firstname.lastname@example.org.]
June 20, 2002, 15:00 PDT (FTW) -- It's
been almost six years, and Catherine Austin Fitts still
hasn't been paid. The government owes her $2.5 million plus
interest for work done by Hamilton Securities, her former
investment bank and financial software developer. The "cleaning
lady of $100 billion financial frauds," as she humorously
describes herself, is in the seventh year of audits and
litigation, all resulting from what she deems a frivolous
lawsuit filed by a government-sponsored "bounty hunter."
The end game of Fitts' fierce federal adversaries: slow
down her ability to impact the market with her transparent,
taxpayer-friendly, local control-based economic model --
"The Department of Justice and the
HUD Inspector General's (IG) office have used investigations
to drive out honest HUD officials and their most effective
financial advisor," said Fitts. "As DOJ and the
HUD IG intentionally destroy internal financial controls,
billions of taxpayer's monies are reported missing, and
losses on defaulted mortgage inventories grow."
On March 18 United States District Court
Judge Louis F. Oberdorfer issued a scheduling order effectively
ending mediation between the Department of Justice (DOJ),
Ervin and Associates, and Hamilton Securities without settlement,
thus initiating the discovery phase with a consolidated
trial set for September 2003.
the Money Works" in Your Place
by Catherine Austin Fitts
[Copyright 2002, From The Wilderness
Publications, www.copvcia.com. All Rights Reserved.
May be copied, redistributed for non-profit purposes
only. May not be posted on any Internet web site without
express written permission. Contact email@example.com.]
June 20, 2002, 15:00 PDT (FTW) -- I
am sitting looking at a framed check on my desk. The
check was written by the Hamilton Securities Group
on our J.P. Morgan account. It was dated Sept. 3,
1997, payable to the Africatown Neighborhood Equity
and Trust Corporation for $125,000. This was to be
the first solari -- a neighborhood investment databank
and investment advisor. Shortly thereafter, Hamilton's
government contracts were cancelled, our offices were
seized and our computer systems and databases destroyed.
It was time to rethink the risk management
issues involved in helping 72,000 U.S. neighborhoods
understand "how the money works" in their
neighborhood. While it was unthinkable to many Americans
in 1998 that the Department of Justice was so corrupt,
it is not so unthinkable today. That means the market
opportunity is emerging to start having the conversation
about how we can start a solari.
What is a solari?
A solari is my idea for a locally controlled,
private investment databank and investment advisor
for a neighborhood. A solari collects and circulates
information on how resources work in its place so
that a group of people can "vote" in the
marketplace or "vote" at the polls in a
powerful way. [See http://www.solari.com/solari].
Once folks in a place understand "how the money
works," they can start to get it to work for
Should you start a solari? The key to
starting anything is for it to be totally energizing
for you. It is impossible to determine a sound business
plan for a solari until you have a sense of the various
opportunities that exist in your neighborhood:
Do you have housing being built for
more per unit than what can be produced locally?
Are you paying more for a government
contractor through your federal, state or local budget
for a job that a small business or neighbor could
do for less?
Are your water, energy and other essential
services in danger of Enron-type privatization where
you and your taxes foot the bill, but they get all
the equity value transferred to them at below market
Is data about you and your neighbors
being collected by government agencies, then finding
it's way into the wrong hands?
The list of potential opportunities
is endless. Step one is to collect up a group of your
neighbors who you know and trust. An investment club,
book club, Rotary, Kiwanis, local women's club or
other similar group may be a place to find like-minded
folks. Divide up the data collection tasks for the
different kinds of operations: taxes, utilities, education,
health care, and so forth. Start with the ones that
generate the most short-term interest. Look for the
opportunities for change that will provide you with
short-term improvement in services or time. You are
paying the money. Where can you get more performance?
If you learn how the money works
in your place, step two or three may be to start a
solari. It will be one of the tools that we will use
to generate jobs and equity for ourselves, our family
and our neighbors.
And so despite a six-year investigation
by the DOJ and the Department of Housing and Urban Development
(HUD) that found no merit to the charges of bid rigging
and insider trading alleged by Ervin in his suit, Fitts'
legal ordeal continues. In a qui tam case, which is what
Ervin filed in summer of 1996, the governing statute provides
for a 60-day investigation period.
A qui tam suit is one filed by a private
party on behalf of a federal government agency against an
outside third party. In Fitts' case, her firm was the lead
financial advisor for HUD, and Ervin made the claim that
Hamilton's HUD loan sales program was rigged in favor of
large Wall Street bidders. No evidence of this has surfaced
before or since Ervin's suit was filed.
LOAN SALES AND THE 'BOUNTY HUNTER'
Ostensibly, John Ervin's firm is a HUD
Ginnie Mae contractor, performing servicing tasks for the
department's mortgage portfolios. It was these very same
single family and multi-family portfolios that Fitts, first
as Federal Housing Administration (FHA) cCommissioner in
the first Bush Administration, then as the head of Hamilton
Securities, was intent on reducing -- and so reduced --
costs to the government, to borrowers, and to nearby homeowners
whose property values are harmed by HUD foreclosures, boarded
up homes, and troubled properties.
Traditionally, HUD would manage these defaulted
mortgages so as to recover about 35 cents on the dollar,
said Fitts. So she devised a loan sale program that was
basically the opposite of HUD's old pork barrel style. And
political brass couldn't deny the "fiduciary soundness,"
as Fitts described it, of her $10 billion of successful
loan sales. Fitts and Hamilton were lauded for more than
doubling recoveries, making upwards of 70- to 90 cents on
the dollar return from loan sales -- a $2.2 billion profit
affirmed by a General Accounting Office audit.
Picture Hamilton Securities leading auctions
of all kinds of government-owned, defaulted mortgage portfolios
to a host of large and small investors -- from Wall Street
and state housing finance agencies to local mortgage bankers
and property owners. Fitts even utilized the budding Internet
at the time (1994) to maximize the loan sales' productivity
and level playing field.
"Hamilton used software tools, the
Internet and AT&T Bell Labs' optimization methodology
to dramatically improve transparency and competition. All
the steps on the loan sales were documented with hyper linked
"design books" that were accessible on the Web,
as were detailed databases on the mortgages for sale and
upcoming schedules of loan sales. This shifted the balance
of power between Wall Street and HUD insiders on one hand
and the FHA Funds and homeowners on the other. From Goldman
Sachs to Harvard Endowment, the big guys had to pay a lot
more to play," said Fitts.
Fitts' loan sales success was a red flag
to those who profited both financially and politically from
the department's large defaulted portfolios and fiscally
unsound, pork barrel style. HUD insiders would be increasingly
impacted if high standards of transparency and competition
were maintained -- stock prices and executive bonuses would
be lower, and tax liabilities would be higher.
Enter John Ervin, or as Fitts describes
him, the DOJ's "bounty hunter." Fitts learned
Ervin received a HUD contract generating $30,000 per month
when the legal action against her began.
Prior to the loan sales program, Ervin
was the lead servicer on defaulted multifamily mortgage
portfolios at HUD. As the loan sales reduced the defaulted
HUD mortgages, Ervin's servicing work diminished. Unsuccessful
in his attempts to interest Wall Street loan sales bidders
in his services and unsuccessful is his bidding efforts
on the loan sales, Ervin started filing lawsuits and contractor
bid protests claiming wrongdoing. He filed over 30 contract
bid protests, a lawsuit against HUD and HUD officials, and
a qui tam lawsuit under seal in the name of the government
charging Fitts and her firm with insider trading connected
to the loan sales program.
The Hawkes and hud: 'criminal enterprise'
Ervin's legal team included Dan Hawke,
the son of Jerry Hawke, who was the undersecretary of domestic
finance at the Department of the Treasury. Jerry Hawke,
also a former general counsel of the Federal Reserve, was
the Treasury official responsible to oversee the integrity
of the federal credit programs (HUD is the largest), as
well as the integrity of government accounting and financial
systems and reporting. Jerry Hawke is now the comptroller
of the currency, the lead U.S. banking regulator. When efforts
to frame Fitts and Hamilton failed, Dan Hawke left private
practice to join the Securities & Exchange Commission's
Reduced portfolios owned by the government
also reduced the opportunities for DOJ and the HUD IG office,
working with Ervin as a servicer, to profit from enforcement
actions related to HUD's defaulted mortgage portfolio. As
the War on Drugs expanded throughout the 1990s, DOJ and
the HUD IG's Operation Safe Home focused on generating revenues
from civil money penalties, recapture of contractor payments,
debt collections and asset seizures. Fitts and Hamilton's
efforts were good for the taxpayers and homeowners but bad
for the enforcement business.
An audit of the loan sales program performed
by HUD IG auditors in 1996 found the allegations against
Fitts and Hamilton to be unfounded. But the HUD IG hushed
it up, and the lead auditor was ultimately forced to leave
government service. Similar findings by FBI investigators
in 1999 were also ignored. One effort to falsify evidence
by the HUD IG general counsel failed when Fitts produced
an affidavit documenting them.
Upper echelons apparently marked Fitts
and Hamilton for destruction.
In fact, Fitts' loan sales generated $2.2
billion in profit as a result of selling blocks of HUD's
defaulted mortgage portfolio on the open market. Whoever
wanted to bid, the opportunity was there, says Fitts. But
this success threatened top players in Washington and on
"In the summer of 2000, I went to
visit with a senior member of the staff of the chairman
of the HUD appropriations subcommittee. The staff member
asked me what I thought was going on at HUD. I deferred.
They said, 'HUD is being run as a criminal enterprise.'
Until that moment, I had resisted facing this, as HUD is
run by the Department of Treasury, the Department of Justice
and a group of private companies and banks. It was hard
to face the fact that this many parties would conspire to
run HUD as a criminal enterprise. Subsequently, the appropriations
committees voted a $1.7 billion increase in HUD appropriations."