Obama Hires Wall Street Welfare Father as Chief Adviser

Obama hires Wall Street welfare father as chief adviser

Sam Smith

For the second time in a row, Obama has hired as his chief advisor someone who directly benefited from the greed and stupidity that led the country's current financial crisis.

For the seven years William Daley was with JP Morgan Chase, including a tour as a member of its executive committee. During this time JP Morgan got over three times as much in TARP aid as was promised states to help millions of Americans facing foreclosure and 35 times the size of Obama's own foreclosure fund.

Daley's government experience has mainly been as Commerce Secretary under Clinton, a post designed to appease big business interests without interfering too much with the overall administration. He was also a major backer of the NAFTA agreement.

Worse, this is the second time in a row that Obama has named as chief of staff someone with deep involvement in the financial industry that brought the country down. The New York Times reported in 2008:

||||| In late 1998, while Washington was in the throes of the Monica Lewinsky scandal, Rahm Emanuel, a departing senior political aide to President Bill Clinton, ventured out to an elegant restaurant in Dupont Circle for something of a job interview. . .

John Simpson, who ran the Chicago office of the investment banking boutique, had flown to Washington to meet with Mr. Emanuel at the behest of Mr. Simpson’s boss, Bruce Wasserstein, a major Democratic donor and renowned Wall Street dealmaker who had gotten to know Mr. Emanuel. . .

Mr. Emanuel, who was chosen last month to become President-elect Barack Obama’s White House chief of staff, went on to make more than $18 million in just two-and-a-half years, turning many of his contacts in his substantial political Rolodex into paying clients and directing his negotiating prowess and trademark intensity to mergers and acquisitions. He also benefited from the opportune sale of Wasserstein Perella to a German bank, helping him to an unusually large payout. ||||

And the NY Post reported:

|||| Emanuel served on the Freddie Mac board of directors during the time that the government-backed lender lied about its earnings, a leading contributor to the current economic meltdown. The Federal Housing Enterprise Oversight Agency later singled out the Freddie Mac board as contributing to the fraud in 2000 and 2001 for "failing in its duty to follow up on matters brought to its attention." In other words, board members ignored the red flags waving in their faces. The SEC later fined Freddie $50 million for its deliberate fraud in 2000, 2001 and 2002. Meanwhile, Emanuel was paid more than $260,000 for his Freddie "service." Plus, after he resigned from the board to run for Congress in 2002, the troubled agency's PAC gave his campaign $25,000 - its largest single gift to a House candidate. ||||

Even during the presidential campaign, it as clear that on Wall Street matters - as on so many others - Obama was not who he pretended to be. Here were some of the Progressive Review's gleanings from before Obama was elected:

-- Cass Sunstein, a constitutional advisor to Obama, told Jeffrey Rosen of the NY Times: "I would be stunned to find an anti-business [Supreme Court] appointee from either [Clinton or Obama]. There's not a strong interest on the part of Obama or Clinton in demonizing business, and you wouldn't expect to see that in their Supreme Court nominees."

-- Obama wrote that conservatives and Bill Clinton were right to destroy social welfare

-- Supported making it harder to file class action suits in state courts

-- Voted for a business-friendly "tort reform" bill

-- Voted against a 30% interest rate cap on credit cards

-- Had the most number of foreign lobbyist contributors in the primaries

-- Is even more popular with Pentagon contractors than McCain

-- Was most popular of the candidates with K Street lobbyists In 2003, rightwing Democratic Leadership Council named Obama as one of its "100 to Watch." After he was criticized in the black media, Obama disassociated himself with the DLC. But his major economic advisor, Austan Goolsbee, is also chief economist of the conservative organization. Writes Doug Henwood, "Goolsbee has written gushingly about Milton Friedman and denounced the idea of a moratorium on mortgage foreclosures."

-- Doug Henwood, Left Business Observer: "Top hedge fund honcho Paul Tudor Jones threw a fundraiser for him at his Greenwich house last spring, 'The whole of Greenwich is backing Obama,' one source said of the posh headquarters of the hedge fund industry. They like him because they're socially liberal, up to a point, and probably eager for a little less war, and think he's the man to do their work. They're also confident he wouldn't undertake any renovations to the distribution of wealth."

In other words, Obama has once again successfully conned his constituency. Sorry, but it's not just the right that's deep into masochistic myth. Liberals have a destructive dream world, too -- it's called Obamaland.


The Money Paradox

by David Sirota

If there's one thing you can still count on from today's increasingly erratic politics, it is pure unadulterated paradox. In a Washington circus that features as many morons as oxymorons, we have self-described deficit hawks who promote tax cuts, alleged war opponents who back war escalations, and supposed anti-government conservatives who press to expand the national security state. Heck, we even have senators who famously brag of voting for things before voting against them.

That said, for sheer Ringling Brothers-grade flamboyance, none of those contradictions matches the one relating to money. With spectacular regularity, cash is now simultaneously billed as both all-powerful and completely powerless, depending on whom the particular definition serves.

Exhibit A is the December fight on Capitol Hill over spending and tax cuts. A standard back and forth over macroeconomics, the debate saw politicians of both parties assert that different ways of deploying taxpayer resources would guarantee different results from economic actors. Pass more tax cuts, said Republicans, and profit-seeking small-business owners will be motivated to hire more workers. Provide more unemployment benefits, said Democrats, and the jobless will be moved to spend more on consumer goods.

These messages, unflinchingly transcribed by a servile press corps, all echoed the basic assumption that money is the prime motivator of human action. The underlying theory is simple: Cash goes in, actions automatically come out. It makes basic mechanical sense ... until you listen to what else is being said at the same time.

A week after the tax cut bill passed, the Washington Post reported that Montana Sen. Max Baucus, a Democrat, had held a big fundraiser on the day the Senate was voting on the legislation. Since the measure disproportionately benefited Baucus' rich donors, the question was simple: Did the campaign cash influence his "yes" vote in the same decisive way that his Senate colleagues said tax-cut cash would affirmatively influence employer hiring?

"Money has no influence on how Sen. Baucus makes his decisions," said the senator's spokesperson.

The refrain epitomizes how Washington regularly writes cash out of the political narrative. But it's merely one of many examples, and not just from politicians either. The whitewashing pervades much of the political press, too.

Last week, for instance, The New York Times' Matt Bai penned a slobbering paean to Rahm Emanuel that simultaneously omitted the Chicago mayoral candidate's investment banking career and aggressive corporate fundraising, while definitively declaring that Emanuel has "spent most of his adult life doing the people's work."

This week, most of the political press touted two prospective White House staffers, Bill Daley and Gene Sperling, primarily as "former Clinton officials" rather than as a JPMorgan executive and a Goldman Sachs contractor, respectively. Next week, you can bet it will be more of the same.

"The political and media class says money never motivates anyone in politics at the same time they insist we live in a free market whose only motivating factor is money," says MSNBC's Cenk Uygur, summing up the paradox.

Which is reality? Does money play a major role in human behavior – and specifically in both economic and political decision-making? Or does money play no role at all? It simply cannot be both at the same time. So which is it?

The answer should be obvious in this golden age of political corruption. As alien and bizarre as Washington, D.C.'s culture has become, money is still money – even in the nation's capital. It buys, incentivizes and persuades, no matter if the transaction is documented on a grocery-store receipt or a campaign finance report. The paradox may distract us from that axiom, but it is, indeed, an axiom – and it holds true regardless of whether a widget or a congressman is up for sale.

David Sirota is a bestselling author whose newest book is "The Uprising." He is a fellow at the Campaign for America's Future and a board member of the Progressive States Network-both nonpartisan organizations. Sirota was once US Senator Bernie Sanders' spokesperson. His blog is at www.credoaction.com/sirota.

Center Moves to the Center, Courting the Middle

by Peter Hart

Obama's selection of conservative Democrat William Daley as his new chief of staff didn't surprise anyone. So reporters were left to explain the political shift behind the move. Some saw little movement at all, since Daley's political views would seem more or less in line with his predecessor Rahm Emanuel. The Washington Post (1/7/11) offered this somewhat confused explanation:

"His moderate views and Wall Street credentials make him an unexpected choice for a president who has railed against corporate irresponsibility and tried, with limited success, to appease restive liberals who think he has not been tough enough on bankers."

Actually, the opposite would seem more accurate; the choice of a right-leaning banker with deep ties to corporate America would suggest that Obama doesn't really "rail" against corporations, and certainly has done little to "appease restive liberals." Daley's selection is more evidence of this general trend. Tell that to USA Today, which headlines its piece "Daley Choice Puts a Moderate in Play"--as if there weren't many "moderates" around to begin with. The piece leads with this:

President Obama's choice of Chicago business executive William Daley to run his White House operation is the clearest sign yet that he intends to move toward the political center as he approaches a likely 2012 re-election campaign, members of both parties say.

And over at the L.A. Times, "Obama Chooses Former Clinton Staffers in a Move to the Center" is the headline; readers are told that these moves are "a signal to business leaders and independent voters that he is resolved to steer a more centrist course after two years of intense partisan clashes."

The obvious point here is that Obama "intends to move" towards the center--meaning that he's not there already. The media preference for a Democrat is one who continuously moves to the right. In order to convince readers that Obama isn't already there, reporters magnify certain political disputes in order to prove this point. Today's Wall Street Journal headline, "President Revs Up Campaign to Make Peace With Business," is a perfect example: Obama's been too tough on corporate America, and now he's moving the other direction by hiring a businessman to run the White House.

William Daley: AT&T's Man in the White House

When President Obama said he was going to "bring change to Washington," no one expected William Daley to be his choice to get the job done.

Obama's incoming chief of staff is about as corporate friendly as any Democratic insider can be, which is saying a lot.

For supporters of an open Internet, Daley's appointment raises the prospect that the president will break all promises to defend Net Neutrality at the urging of a chief of staff determined to cozy up with industry and protect the status quo.

The outlook for any progress under Daley is dim.

Daley currently serves as a top executive at J.P. Morgan Chase & Co -- concerning those who had hoped to see this president rein in a reckless financial sector.

Daley once told the New York Times that the Obama administration had "miscalculated" by moving too far to the left on health care reform -- concerning those who had hoped the president would fight Republican efforts to repeal the law.

Daley served as a special counsel to President Clinton in 1993, helping the administration's successful push to ratify NAFTA -- concerning those across the labor movement, who delivered supporters to Obama by the busload.

It's worse for advocates of open and democratic media. From 2001 through 2004, Daley led lobbying efforts for SBC Communications, Inc. His first assignment was to lock in the company's local monopolies while allowing it to charge extortionate rates for competitors seeking to share SBC's lines, defying a basic communications principle known as "common carriage."

He was a top executive at SBC as the company laid the groundwork for its 2005 takeover of AT&T Corporation, after which it rebranded the merged entity as AT&T Inc. During that time, Daley worked very closely with Randall Stephenson, who has since risen through the ranks to become AT&T CEO and chairman.

He joined Stephenson and former AT&T CEO Ed Whitacre in a 2002 meeting to lobby the FCC's top brass for industry deregulation. Daley, Stephenson and Whitacre wanted the FCC to declare that high-speed Internet access would no longer be considered a "telecommunications service," but rather an "information service." The regulatory change would give phone and cable companies broad latitude to raise prices, stifle competition and control consumer choice on the Web.

An all-too-compliant FCC obliged later that year, removing high-speed Internet access services from regulation under common carriage. Daley supported this radical move, which reversed the long-held rule establishing nondiscriminatory communications networks as essential to economic opportunity and innovation. (Read Aparna Sridhar's 2010 report for a good history of this deregulatory process).

In so doing, the FCC undercut its own ability to keep Internet providers from gutting Net Neutrality and interfering with our right to connect to any website, service or application on the Web.

AT&T Stakes Its Claim to the Oval Office

Now companies like Comcast and AT&T are vying to be the Internet's new gatekeepers -- creating special lanes for their own websites and services, or for those of a few big corporate partners, while leaving the rest of us on a digital dirt road.

However you look at it, there are very few degrees that separate Daley from his successor at AT&T, James Cicconi, who now leads lobbying efforts for the communications giant.

Daley's appointment to the White House brought praise from the U.S. Chamber of Commerce, where Cicconi serves as a director. The Chamber marches in lockstep with AT&T in opposing Net Neutrality. Working together, the two groups have been very effective in buying up opposition to Net Neutrality among Democrats and Republicans alike.

AT&T is the largest single corporate contributor to congressional campaigns, since 1989 giving more than $45 million in donations to both Republican and Democratic candidates. It spent nearly $13 million on DC lobbyists just in 2010.

AT&T has staked out the legislative branch. With Daley to start work in days, it can now make a claim to the White House, too.

Thus far, AT&T-funded Republicans have introduced one bill, designed to strip the FCC of its power to protect the open Internet. The president was expected to veto this and other anti-Net Neutrality legislation should it make its way to his desk.

But with Daley at his side, how long will it be before Obama caves?


Banksters, Racketeers and the 'Mafioso' We Should Worry About

The Mafia and Me: Reflections on Being Italian

by Michael Parenti

Like many others of  Italian-American heritage, I experienced some discomfort when in 1951 Senator Estes Kefauver, a Democrat from Tennessee, launched his highly publicized investigation into the organized rackets, uncovering scores of thugs with Italian surnames. Subsequent decades produced an endless parade of such rogues whose mugs were repeatedly splashed across the print and broadcast media.  

I must admit that when it came to names, the mafia operatives really had them: Lucky Luciano, Scarface Al Capone, Sammy the Bull Gravano, Joey Bananas Bonanno, Crazy Joey Gallo, Jimmy the Weasel Fratianno, Sonny Red Indelicato,  and Sonny Black Napolitano. 

One could go on with Joey Kneecap Santorielli, Johnny Bingo Bosco, Itchy Fingers Zambino, Big Paulie Castellano, and Lupo the Wolf Saietta. Also Johnny Blind Man Biaggio, Vinny Gorgeous Basciano, and Fredo the Plumber Giardino. 

Finally, none of us will ever forget Anthony Chicken Fucker Bastoni (don't ask). 

Then there were the dons who needed no monikers. Their unadorned Christian names struck sufficient terror in the hearts of their "clients," such notables as Frank Costello, Vito Genovese, and Carlo Gambino.  

Listed in the crime reports was one mafia boss from Philadelphia named Angelo Bruno. The name caught my eye. I knew something about him. Years earlier in Washington D.C., I had a conversation with a good friend of mine, Michael Maggio. Michael was a political progressive, an award-winning, nationally recognized lawyer dedicated to fighting for social justice.  

He devoted much energy in struggling for the rights of immigrants who were fleeing from the US-sponsored counterinsurgency terrorism in Central America. Michael was a highly regarded humanitarian who stood up to the Washington autocrats. On one occasion he publicly compared the Immigration and Naturalization Service to "Dante's rings of hell." 

Along with being a fighter for the downtrodden and a genuinely nice person, Michael was one of the best Italian cooks I ever met. He could produce platters of the finest Southern Italian meals, as delizioso as anything my grandmother or my father created.  

One day in the mid-1980s, as I sat with him in his Washington office, Michael Maggio revealed to me that Angelo Bruno, the noted Philadelphia mafia don, was his uncle. He went on to say that Mario Puzo, author of The Godfather, the best-selling novel that was made into a smash-hit movie, had modeled his lead character Don Corleone after Angelo Bruno.  

Michael claimed (accurately) that his Uncle Angelo had refused to deal in narcotics and sex trafficking, just like Don Corleone in the movie. For awhile Bruno also displayed an ability to keep the peace within the Philadelphia mafia. But because he was unwilling to enter the lucrative narcotics racket, he was blasted into a premature grave by some of the hungry younger guns who wanted a piece of that action.   

"If there was ever such a thing as a nice mafia boss," Michael Maggio ventured, "it was my Uncle Angelo." Well, there is no such thing as a nice mafia boss once you look at their operations on the ground. In the Godfather movie Don Corleone is just magically prosperous. We don't hear about the crimes he commits in order to live in the style to which he had grown accustomed.  

In the real world Angelo Bruno-even if he eschewed narcotics and sex trafficking--was up to his ears in gambling, bootlegging, hijacking, loan sharking, and protection racket. He tried to keep the peace but when he had to come down hard in order to collect, he did. All this said, when I came across Bruno's name in the official crime listings, his designated nickname was The Gentle Don.  

Michael Maggio would have liked that. Too bad he never lived to hear his uncle so benignly described. Although Michael kept himself in good shape, he tragically died in 2008 at the age of 60, at the height of his valiant but very taxing career as a fighter for friendless political refugees.  

One might wish that the media gave more attention to the courageous struggles for social justice waged by Italian-Americans like Michael Maggio, and a little less exposure to the mafia dons, be they "gentle" or not.  

Let's go back to the aftermath of the Kefauver hearings. America, O America, God's glorious but ever besieged country, was in the grip of an organized crime network that threatened to destroy the very fabric of our society, or so we were repeatedly alerted. In fact, what the mafia bosses stole from the public was a pittance compared to the hundreds of billions of dollars that Corporate America regularly plundered from workers, consumers, small investors, and taxpayers.  

This went largely unnoticed in all the hoopla. That Congress actually attempted to confront the mafiosi was proof enough that these hoodlums were men of limited power. They did not sit on the governing boards of corporations, banks, investment houses, foundations, universities, museums, and churches as do the "captains of industry and finance." They could not buy Capitol Hill, the way the big corporations and financiers have repeatedly done.  

Unlike the boardroom plunderers, the mafiosi did not occupy high positions in Washington or on Wall Street. They didn't cavort with the top White House decision-makers and Pentagon contract fixers with their million-dollar kickbacks and mysterious billion-dollar budgetary evaporations.  

The mafia dons did not relax or play golf with the paladins of wealth as did Dirty Dickie Cheney, or Georgie the Blood Sucker Bush, or Slick Willie Clinton, or Barack Legs Obama, or Bernie Two-Faced Madoff, or Jack Casino Abramoff, or Andy Fasthands Fastow or Ken the Weasel Lay.   

Now that's organized crime: the policymakers not the bookmakers, the banksters not the gangsters.  

The uneducated mafia thugs never did get near the real money. As already noted, they had to content themselves with smalltime scams, numbers rackets, loan sharking, cargo thefts, extortion---even pathetic exploits like busting open parking meters for the coins. If they had a corrupting influence on public officials, it was usually at the local level and in a limited sphere.  

Besides being small-time, these few hundred villains composed but a tiny sliver of an Italian-American population estimated at over fifteen million people, but this datum was lost in all the media hype. In the American psyche, the thugs became representative of the many millions of Italian-Americans who were and still are predictably, accurately, and fruitlessly described as decent, hardworking, law-abiding citizens. 

This phrase repeated again and again like a desperate mantra--decent, hardworking, law-abiding citizens-was no match for the romanticized Hollywood makeover given to Don Corleone, who makes you an offer you can't refuse and who along with Tony Soprano implants himself in the public imagination as a rough, tough, but basically decent and even loveable patriarch. 

Years ago I was being interviewed for a teaching job at an east coast university. The interview was being conducted by the president and the dean of the school. The three of us got into a discussion about the sociology of the family.  I mentioned that the family for many ethnic groups and low-income people in general functioned as a unit of survival, for instance, the Italians.  

Ah yes, the Italians, chimed the president and the dean, suddenly keenly aware of my ethnic background. The two of them immediately launched into a discussion about Italians, referring not to the rich Italian American historical and sociological literature-of which they were ignorant--but to the movie The  Godfather!  In almost sentimental singsong fashion, they went on about how closely knit the gangster family was and how important such loyalty was for the risky ventures pursued.  

Uh no, I tried to say, um, excuse me, those are not the Italians I'm referring to. For me the conversation was not going well. But they persisted. Having seen the movie, they could speak with expert confidence. They even took kindly care not to mention the numerous brutal murders and assaults that must have composed the more stressful side of my Italian family life as they imagined it. 

I found myself thinking that I might just slip out into the parking lot and slash their tires--if only to give some real-life confirmation to the pictures in their heads. 

More recently, I was sitting with a group of friends who were discussing the difficulties encountered when naming ethnic groups. Should people from Latin America be called Latinos or Hispanics or Latin-Americans? And should people of African heritage be called African-American or Black or Mixed Race?  

At one point I interjected: "People of my ethnic group are still trying to get labeled Italian-American [pause] instead of mafiosi."  It got some sympathetic laughs.

Michael Parenti's recent books include: God and His Demons (Prometheus), Contrary Notions: The Michael Parenti Reader (City Lights); Democracy for the Few, 9th ed. (Wadsworth); The Assassination of Julius Caesar (New Press), Superpatriotism (City Lights), and The Culture Struggle (Seven Stories Press), .  For further information, visit his website: www.michaelparenti.org.

Morning Line: Making the victim pay for the crime

by Sam Smith

Add Obama's budget to numerous actions at the state and local level and one thing is clear about the current fiscal crisis: the victim is going to be made to pay for the crime and most of the perps will either get off free or actually come out ahead.

The media and pols are treating the crisis as though it were just another economic catastrophe, sort of like a hurricane or tornado. It is nothing of the sort.

It is the result of deliberate, reckless and wanton actions by those whose control over the economy vastly outstrips the aggregate power of ordinary citizens. And it is the result of deliberate, reckless and wanton actions by those whose control over the economy has substantially increased thanks to the deliberate undermining of legal protections designed to protect ordinary citizens, such as the bipartisan repeal (with Bill Clinton's happy signature) of the 66 year-old Glass-Stegel Act, an early step in recovering from the Great Depression.

Yet, while 50 state attorneys general - 43 of them elected by the people - have joined in an investigation of the subprime scandal (in no small part the result of the Glass-Stegel repeal), the main thing we have heard from the federal attorney general, Eric Holder, is a vague promise to look into the matter.

Aside from the fact that this strengthens the argument for an elected federal attorney general, it illustrates how indifferent the Obamites are to dealing with obvious criminal and civil offenses that have been committed in the guise of a "free market economy" by bankers and others.

One could, for example, argue that the RICO conspiracy laws should be used as forcefully against Wall Street as they are against drug dealers. Or consider this definition of the felony known as reckless endangerment: "A person commits the crime of reckless endangerment if the person recklessly engages in conduct which creates a substantial risk of serious physical injury to another person. Reckless conduct is conduct that exhibits a culpable disregard of foreseeable consequences to others from the act or omission involved. The accused need not intentionally cause a resulting harm or know that his conduct is substantially certain to cause that result. The ultimate question is whether, under all the circumstances, the accused’s conduct was of that heedless nature that made it actually or imminently dangerous to the rights or safety of others."

But nothing like this is about to happen in our corporatist Congress and White House. Instead, according to Obama's plan, heating assistance for the poor will be cut by fifty percent, the community development of poorer communities will be slashed, Pell grants will be cut, cleaning up the Great Lakes shoved to the back of the line and so forth.

In other words, the ordinary citizen - the victim of a major bipartisan fiscal felony - is going to have to pay still more while those responsible for the offense escape and/or find new ways to profit upon it.

In other words, the crime continues and gets worse.


A Straightforward Criminal Case Against Wall Street CEOs & Execs

Various people who ought to know better, such as the New York Times’ Joe Nocera, haven taken to playing up the party line of the banking industry and I am told, the SEC, that we should resign ourselves to letting senior financial services industry members get away with having looted their firms and leaving the rest of us with a very large bill.

It is one thing to point out a sorry reality, that the rich and powerful often get away with abuses while ordinary citizens seldom do. It’s quite another to present it as inevitable. It would be far more productive to isolate what are the key failings in our legal, prosecutorial, and regulatory regime are and demand changes.

The fact that financial fraud cases are often difficult does not mean they are unwinnable. And a prosecutor does not need to prevail in all, or even most, to serve as an effective cop on the beat.

Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations. I’ll call them “dealer banks” or “Wall Street firms” to distinguish them from very big but largely traditional commercial banks like US Bank.

Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.

The responsible officers must certify that, among other things, they:

(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;

These officers must also have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial
data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls

The premise of this requirement was to give assurance to investors as to (i) the integrity of the company’s financial reports and (ii) there were no big risks that the company was taking that it had not disclosed to investors.

This section puts those signing the certifications, which is at a minimum the CEO and the CFO, on the hook for both the adequacy of internal controls around financial reporting (to be precise) and the accuracy of reporting to public investors about them. Internal controls for a bank with major trading operations would include financial reporting and risk management.

It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack. It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and I’ll toss AIG in here as well, had no idea they were betting the farm every day with the risks they were taking.

Not surprisingly, it isn’t difficult to find widespread shortcomings in risk management at major dealer banks. Risk management deficiencies most relevant to Sarbanes Oxley are related to pricing. The accuracy of the accounts, meaning the valuations, is the primary focus. Risk management weaknesses that impact reportable disclosures (in the accounts or the notes) have highest relevance. However, crappy risk management that leads to poor positioning may not be germane to the Sarbanes Oxley violations issue.

We discussed the issue at some length in ECONNED. Risk management was kept weak; if push came to shove, it was subordinate to the producers. Richard Bookstaber, a former chief risk officer, discussed at some length how most chief risk officers were engaged in what amounted to busywork. While they might indeed prevent particularly egregious excesses, their form over substance exercises also provided useful cover for the top brass and the board of directors. As he noted in 2007:

If you are the Chief Risk Officer and everything blows up, don’t you bear some responsibility?…

In the CRO job 99% of the days there is nothing going wrong. The only test you get of how well you are doing – short of pouring out risk reports and looking ponderous and prudent in meetings – is what happens to the firm during times of market crisis. Every few years something calamitous happens in the market; if the firm gets blown away, that suggests you did not do a very good job.

Readers may have better suggestions of where to start, but I’d target Lehman. First, it already has a smoking gun: a May 2008 letter written by former senior vice president Michael Lee to senior management, including the CFO Erin Callan. It describes numerous accounting shortcomings, none of which look to be new and many of which look to be Sarbanes Oxley violations.

Second, its derivatives books were by all accounts an utter disaster at the time of its collapse: multiple non-intergrated systems, to the point where the bank did not even have a good tally of how many positions it had (bankruptcy overseers Alvarez & Marsal first said the bank had 110,000 positions; they later changed their tally to 120,000). This is important because despite all the efforts to identify why the Lehman losses were so massive, most analysts have focused on the asset side, and the numbers don’t add up. That means understatement of positions and/or gross understatement of risk on the liability side is the probable culprit.

This is an egregious accounting 101 control breakdown, It indicates that the most basic operatonal controls, reconciliation of accounts, were not effective (see here for further support). Lehman would have to take the position that its basic control weaknesses were all immaterial. At all times there’s an inventory of control weaknesses that exist. That inventory must be constantly monitored and reviewed (and attested to in the 404 internal control assesments signed by the responsible officers). Materiality determinations are decided by managers, internal and external audit and ultimately the CFO and CEO. Dick Fuld also made statements in Congressional testimony about his ignorance of his ignorance of Repo 105 and a failure to include commercial real estate in stress tests starting with the end of 2007 that also seems consistent with a lack of adequate risk controls.

At other banks, prosecutors will probably need to proceed in a bottom’s up manner. The structured credit and CDO desks are targets even now for criminal securities fraud actions (the statue of limitations has not expired). These units, as Bloomberg’s Jonathan Weil has pointed out, were also ground zero of misreporting at Citigroup. The bank’s defenders claim it has a free pass by virtue of a letter from the bank lapdog OCC that did not rise to the level that would force disclosure but its basis was that the valuations Citigroup used were with market ranges. This seems a dubious argument. The fact that a defective speedometer happened to provide a 60 mile per hour reading when the car was going 57 miles per hour does not prove the device was reliable.

Moreover, anyone with an operating brain cell knows “market prices” were being gamed by dealer banks passing small trades between them or with friendly clients, typically hedge funds who might also like to show high valuations, to establish flattering marks. If the marks Citi was relying on were the result of collusion, and the bank was either involved in or aware of the collusion, this undermines the OCC view of the validity of the marks at Citi and other banks. If yours truly knew of this practice, it had to be widespread and well known at the firms themselves.

My understanding (and reader input is welcome here) is that the authorities could file a civil suit for Section 302 certification violations. If they prevailed in that, a criminal case under Section 902 should be an easy win. The 906 certification basically says the reports are fully compliant with all regulations, including those specifically certified in the 302. (Note that the SEC initiated a criminal case against HealthSouth CEO Richard Scrushy which included Section 302 charges. Scrushy was acquitted in a jury trial, but having followed the proceedings a bit, and also seeing another example of a trail in Birmingham, I’d be careful of generalizing from Alabama courts to other jurisdictions. The deck, even more than in other jurisdictions, is stacked in favor of the local bigwigs).

Will any of this happen? Of course not. The decision was made at the time of the TARP, and reaffirmed early in the Obama administration when there was serious talk of resolving Citigroup and Bank of America, that no one at the helm of the senior banks would be subject to serious scrutiny, much the less actually expected to be held accountable for actions that wrecked the economy and have imposed serious costs on ordinary Americans. The case we described above is relatively simple to explain to a jury and has the advantage of being the sort where the plaintiffs could build on their experience in one action in subsequent cases.

But that sort of truth, that most, probably all, of the major Wall Street banks were engaged in the same sort of misconduct and the violations extended to the very top of the firms, would expose numerous other parties as complicit. So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.


Lisa Madigan's Pathetic Dog-&-Pony Show on Crooked Mortgagers

The Bizarre Mortgage “Settlement” Negotiations

We are getting only odd tidbits out of the so-called settlement negotiations among the fifty state attorneys general, various Federal banking regulators, and mortgage servicing miscreants (meaning all of them). As Matt Stoller pointed out last weekend, the lack of transparency is troubling. Nevertheless, certain things are apparent.

1. There has not been anything even remotely resembling an investigation. As we have said earlier, the eight week Federal exam was a joke. As Adam Levitin noted:

…we don’t actually have a tally of servicer malfeasance. Neither the AGs nor the federal regulators have done the sort of investigation necessary to really know the full extent of servicer wrong-doings. Servicers might downplay the harms, but we just don’t know. This isn’t just robosigning. The banks forfeited their ability to make the “trust me” argument some point in fall of 2008.

How can you possibly settle when you don’t know the extent of the abuses? Yes, I know this is intended to be a whitewash, but in the stress tests, the Administration engaged in a lot of persuasive-looking theatrics to somewhat disguise the fact that the end result was pre-determined. This time, they aren’t even bothering to make the cover-up look credible. This is yet another sign of how the banks are effectively beyond the reach of the law.

2. The fact that the AGs and the Federal regulators have joined forces is another sign that no one has the guts to administer anything more than a slap on the wrist relative to the damage done. I should have realized Tom Miller, the Iowa AG who is acting as the leader of the AG effort, when he spoke warmly of the cooperation he was getting from Treasury in Congressional hearing last November.

The state and Federal issues are very different. It is one thing to coordinate, another to combine forces. The reason a joint effort is less powerful is that each group has the ability independently to do considerable damage to the banks. An effort with participants this disparate (the 50 AGs already have divisions within the group as to how tough to be on the banks, as do the Federal regulators) almost assures lowest common denominator, meaning less ambitious, demands.

3. The latest sign of the weak stance being taken by the supposed enforcers is that they have offered an outline of standards separate from an economic deal. From the Wall Street Journal:

U.S. banks received a 27-page proposal late Thursday from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, according to people familiar with the matter.

The document, sent to the nation’s largest mortgage servicers, doesn’t specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan-modification process, these people said….

The proposal outlines formulas that would force banks to consider offering loan write-downs to troubled borrowers more regularly during the modification process. Banks have resisted reducing loan balances in part because of concerns that it could encourage more borrowers to stop making payments in order to receive smaller loan.

This is not normal negotiating process. You put all your demands on the table at once. And as much as the banks might howl, the authorities have the upper hand. Their timidity has very little to do with what could or should be extracted from the banks and everything to do with the authorities being reluctant to inflict much pain (or in the case of the OCC, being completely captured by the banking industry). This posture, that the powers that be cannot ask too much of those fragile banks, is completely contradicted by the fact that the banks have apparently gotten the New York Fed to agree that they are in such robust health that they should be permitted to increase dividends.

So you might still ask, why is it bad to put this part of the deal out first? Aha, see what is at work. The enforcer types have said “This is what we want you to do.” They might fight over details, but the next step is the banks will say, “That is gonna cost us $X.” That will then be traded off against any settlement amount that this group had in mind.

Of course, given how terrible the bank compliance was with HAMP and the failure of Treasury to set goals, supervise properly, and claw back payments to servicers, any “$X” that the banks say they will lose as a result of any new programs will wind up being much larger than the costs they actually incur.

Frankly, the best we can hope for is that no deal results. The Arizona Senate, by a 28 to 2 margin, passed a bill that would void foreclosure sales that lacked a full title history. The language is draconian:


The award of attorney’s means servicers have a lot to lose (sadly, the losses on the inability to foreclose are borne by the investors, not the servicer). If the failure to convey notes to trusts is as widespread as we believe it to be, having one or two of the epicenters of the foreclosure crisis effectively halt foreclosures (by only letting servicers that really do have standing to proceed), investors are not likely to take that sitting down. This may force them to pull the trigger and take action against trustees for falsely certifying that notes had been conveyed to securitization trusts in accordance with the terms of the pooling and servicing agreement.

Thus you could expect the banks to start offering mods if they had the sort of pressure on them that this legislation would provide, and indeed that might be happening. A reader in comments said Bank of America had suddenly gotten religion about offering mods. And having banks offer mods quietly, on a case by case basis, is less likely to produce resentment by other homeowners than a highly visible program. Of course that assumes the banks become competent at doing mods. They’ve had every reason to be bad at them, since saying they can’t possibly work operates to their advantage.

So we can hope that the banks overplay their hand, and that it results in no deal, but the Administration and the attorneys general are not doubt very eager, in classic Vietnam “peace with honor” fashion, to declare victory and go home. So the next best hope is that some of the AGs break rank with this “settlement” and declare it to be the farce that it so patently is.


Banks Beef About Fraudclosure Settlement As Their Stocks Rise

I’ve pointed out how effective a non-negotiable posture can be, at least until the other side pulls out its ammo or threatens to walk from the deal. Most people in negotiations go on the assumption that the other side is reasonable or at least sincere (even if sincerely deluded) and will offer concessions on the assumption the other side will reciprocate.

The poster child of the usual outcome of offering concessions to a party who is non-negotiable is can be summarized in one word, as in “appeasement” circa 1939. And the ridiculous part is that the banks are being allowed to cop a ‘tude when the other side holds all the cards.

Let’s get this straight: this “settlement” should not be a negotiation. Virtually all the items in the 27 page outline of mortgage settlement terms that was leaked yesterday simply restates existing law or existing contractual obligations. If the officialdom wants to rely on mechanisms beyond the courts (since some judges are more pro-bank than others, which can produce the dreaded disease of “uncertainty”), the same results could be achieve by rulemaking without regulators or state attorneys general providing any releases from legal liability to the banks.

As banking/mortgage expert Josh Rosner said in an e-mail to clients:

Very high level sources within the CFPB point out that every item in this AG proposal could be required of servicers by CFPB rule-making. This begs the question, why release servicers and banks from claims and tie state Attorneys General for items that can be had free?

Following on that point, Iowa AG Tom Miller has apparently been unwilling to discuss the substance (even with the AGs) of the releases of claims he is asking the AG’s to sign onto. From the term sheet is seems that it is likely he is seeking to release claims not only related to robosigning but to other servicer practices and likely to front end assignment and underwriting issues.

The White House has supposedly begun to assist Miller in an arm twisting campaign to pressure state AGs to sign onto the agreement and release claims. We have heard that President Obama supposedly had a private meeting with Tom Miller and at least one Democrat AG who has been on the fence regarding the deal. For the White House to pressure state representatives appears to blur the lines between federal and state interests.

But instead of recognizing that their days of rule-breaking might be coming to an end, servicers are complaining bitterly, as Kate Berry tells us in an American Banker article:

Privately, mortgage servicers are fuming.

The proposed settlement agreement with state attorneys general and federal regulators, the companies will tell you, is unfair and impracticable.

I’ll spare you several paragraphs of the “but they were deadbeats and no one was hurt by robo-signing and all our foreclosures were warranted.” Well, if you normally operate as judge, jury, and executioner, and it’s too costly for borrowers to counteract predatory servicing, in your little self-referencing world, everything will look hunky-dory and challenges to your authority will be deemed to be improper and unwarranted. For borrower to fight “servicer driven foreclosures” on the issue of erroneous charges and the impermissible fee pyramiding requires hiring costly expert witnesses. That’s something beyond the reach of broke borrowers. So they fight the cases based on issues of standing, which allows the banks to preserve the myth that their records are always accurate. Estimates I’ve gotten from attorneys fighting foreclosures of how many cases they handle are the result of servicer driven foreclosure ranges from 50% to 70% (note that people who fight foreclosure more often than not feel they are the victim of origination or servicing abuse, and they want a mod, not a free home).

The interesting next bit is that Berry undermines the banks’ biggest excuse for not giving mods (emphasis ours):

Lawyers for the servicers maintain that the proposal does not distinguish between loans a bank services for itself and a loan it services for others. And servicers insist they don’t have the authority under the pooling and servicing agreements governing securitizations to do a great deal of what the proposal calls for them to do.

The servicers say they are not authorized by PSAs to make principal reductions on loans held in private-label securities, as the draft settlement calls for them to do, so the companies argue it is unclear if a proposed government settlement would override such contracts.

Industry lawyers are saying the AGs are “shooting the messenger.” But the industry has been pinning the blame for the glacial pace of loan mods on the alleged straightjacket of the PSA for several years now. And when pressed, officials quietly acknowledge that no one at a servicer ever goes back to the investors asking for authority. (It’s also worth noting that the regulators’ term sheet does try to address the issue. If a borrower requests a modification and the servicer believes the PSA prevents one, the servicer must still perform a net present value test and, when that test indicates a mod would be less costly than foreclosure, present that result to trustees or other authorized parties to obtain consent for a modification.)

Some PSAs do prohibit mods, some limit them, and some have no restrictions. The fact that the industry has never mad any effort to reduce principal is due to two reasons. First, their fees are set as a percentage of outstanding principal, so a principal mod works directly against their economic interests. Second, as we have discussed before, writing down a first mortgage would require a writedown of a second mortgage, and banks usually hold seconds on their own books. That writedown would be a hit to capital.

But it appears investors think this settlement is a great deal. And it is. Even if the banks wind up incurring the dreaded $20 billion among them and get a broad waiver from liability (not private suits, but regulators and AGs are far more logical parties to pursue some actions than others), this will be a steal.

As Barry Ritholtz pointed out:

Today’s bank rally lets you know exactly what the Street thinks about the proposed mortgage settlement. The big up could reflect the belief that it is a giveaway/bailout, and lets the banks get off scott-free from their criminality.


- Yves Smith


How to Put Wall Street CEOs in Jail

“Forgive me,’’ director Charles Ferguson said in receiving an Academy Award for his documentary Inside Job, “I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail — and that’s wrong.”

In New York, Tuesday marked the beginning of the long awaited trial of hedge fund manager Raj Rajaratnam–who ran the $7 billion Galleon Group  and whose personal wealth is estimated at $1.3 billion. He is being prosecuted by the SEC for insider trade deals. Rajaratnam is said to have made $45 million in illegal profits. He has denied the charges and is free on $100 million bond. If he is convicted he could go to prison for as long as 20 years. The SEC historically has been such a handmaiden of the finance business that it’s hard to imagine anything serious coming out of its prosecutions, but one never knows.

Whatever happens to Rajaratnam, it  would be simple enough to prosecute many of the high rollers on first civil, then criminal charges, fining them millions of dollars and taking them out of circulation for up to 20 years.

“Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operation,” writes Yves Smith in her popular Naked Capitalism blog.  “I’ll call them ‘dealer banks’ or ‘Wall Street firms’ to distinguish them from very big but largely traditional commercial banks.’’ She proceeds to lay out the case, the key points of which I have excerpted below:

Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.

The responsible officers must certify that, among other things, they “are responsible for establishing and maintaining internal controls’” and making sure everyone concerned knows about them–and beyond that, for taking steps to have these controls evaluated and reported. Smith continues:

It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack.

Readers may have better suggestions of where to start, but I’d target Lehman. First, it already has a smoking gun: a May 2008 letter written by former senior vice president Michael Lee to senior management, including the CFO Erin Callan. It describes numerous accounting shortcomings, none of which look to be new and many of which look to be Sarbanes Oxley violations. Second, its derivatives books were by all accounts an utter disaster at the time of its collapse: multiple non-intergrated systems, to the point where the bank did not even have a good tally of how many positions it had….

 Naked Capitalism concludes:

Will any of this happen? Of course not. The decision was made at the time of the TARP, and reaffirmed early in the Obama administration when there was serious talk of resolving Citigroup and Bank of America, that no one at the helm of the senior banks would be subject to serious scrutiny, much the less actually expected to be held accountable for actions that wrecked the economy and have imposed serious costs on ordinary Americans. The case we described above is relatively simple to explain to a jury and has the advantage of being the sort where the plaintiffs could build on their experience in one action in subsequent cases.

But that sort of truth, that most, probably all, of the major Wall Street banks were engaged in the same sort of misconduct and the violations extended to the very top of the firms, would expose numerous other parties as complicit. So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.

In other words, the power structure forges ahead, while the poor and middle classes will pay for their own screwing with reduced social security, medical care, and social welfare services of all sorts. All this is being arranged by both Democrats and Republicans, in response to a recession that will only serve to deepen the already enormous divide between rich and poor in American society.

- Jimmy Ridgeway

Unsilent Generation


We have heard that President Obama supposedly had a private meeting with Tom Miller and at least one Democrat AG who has been on the fence regarding the deal. For the White House to pressure state representatives appears to blur the lines between federal and state interests.

Anyone want to take bets on whether or not that "at least one Democrat AG" might be?

Hmm, president is Illinois favorite son?

Haughtily ambitious AG from same party, looking to keep her silver-spoon leg-up by driving a "hard bargain" -- and no doubt eager to claim credit for it at the next election, whatever office she may run for?

Is there still plenty of space for that and selling out the public's interest, too?

Wouldn't want to do anything to piss off big campaign contributors, right?

You betcha, runs in the family.

Obama Acts on Mortgage Fraud vs Military, Denies to Civilians

We have yet another example of media cravenness. You would assume that when official positions presented in the media contradict each other, it would represent an obvious opportunity for reporting, and an intrepid young journalist would take up the task. But since the job of US news outlets is increasingly to distribute propaganda, they manage not to notice.

We’ve had a stenography masquerading as reporting on the results of the recent Foreclosure Task Force “review” of servicer practices. After looking at 2800 severely delinquent loans, it found only some operational shortcomings and no unjustified foreclosures. Given that all that this cross agency effort did was to have tea and cookies with the servicers while reviewing their documents, as opposed to doing any validation of their data, this means the “exam” was a garbage in, garbage out exercise.

Similarly, today the Fed made the similarly ludicrous statement that there were “no wrongful foreclosures” based on a review of a mere 500 loan files. Given that there are 14 major servicers, that means it looked at 36 files on average per servicer. Heck of a job, Brownie!

Aside from the fact that there have been numerous reports of colossal errors that should be impossible in a system with any integrity (homes with no mortgages or where the mortgage had been paid off, where borrowers had been given letters that they had been approved for permanent HAMP mods being foreclosed upon), there are also numerous accounts of servicer-driven foreclosures. As Karl Denninger noted:

We have myriad reports of homeowners who are told to intentionally default by servicers, a clear act of bad faith. We have documented instances of banks breaking into homes that are occupied, an apparent serious state felony. We have documented instances of banks playing games with forced-placed insurance, escrow accounts and similar acts leading to foreclosure.

But the most telling contradiction of the banking regulators’ “nothing to see here” stance is the Administration’s aggressive pursuit of servicing abuses against active duty soldiers. When a Congressional hearing focused on how JP Morgan illegally foreclosed on soldiers, the bank went into overdrive to do damage control. As David Dayen reported:

The big bank went out of their way to fix the problem yesterday, knowing that abusing service members could get you in big trouble in this country, and lead to further scrutiny of their abusive practices. Calling these violations a “painful aberration” on a track record of honoring military families, JPM CEO Jamie Dimon announced:

• New pricing. Under the Servicemembers Civil Relief Act, servicers are required to cap mortgage interest rates for active duty personnel at 6%. JPM will lower that cap to 4%.

• Military modification program. JPM will go beyond HAMP requirements for all personnel who served on active duty going back to 9/11. If the borrower has a second lien with them, they will reduce the interest rate on it to 1%.

• No foreclosures. JPM will not foreclose on any active duty military personnel overseas. Anyone who was wrongly foreclosed upon previously will not only get their home back, but JPM will forgive all remaining home debt. They promise to do that in the future with any other wrongful foreclosure of a military family.

• Donations. JPM will donate 1,000 homes to military and veterans, through a non-profit partner, over the next five years.

• Jobs. They will commit to hiring 100,000 military and veterans over the next ten years. They will also offer a Technology Education certificate for veterans to take free to get technology training for future careers.

• Advisory Council. They’ll form an Advisory Council to determine other ways to help military families. They’re also opening a bunch of Homeownership Centers near military bases to assist families.

Needless to say, this is a PR gambit to the nth degree. But look how incredibly scared JPM is that anyone will look past the abuse of military families. They are going out of their way to burnish and repair their public image on this one, and the goal is to whitewash the fact that they were merely engaging in standard servicer practices of abusing homeowners and illegally foreclosing.

To underscore Dayen’s point, servicers are factories with highly routinized, bad procedures. If you see one abuse reported more than a time or two in the media, like force placed insurance or fee pyramiding, it is not a mistake. It’s policy.

Not surprisingly, JP Morgan appears to have company in the “grinding up servicemen for fun and profit” school of banking. And while the Administration has bent over backwards to protect servicers by disputing any suggestion that they’ve made unwarranted foreclosures, they’ve been fast to saddle up the Department of Justice to investigate over the very same issue,20 probably impermissible foreclosures at Saxon, a servicer owned by Morgan Stanley, because it involved active duty personnel. From the New York Times:

The Justice Department is investigating allegations that a mortgage subsidiary of Morgan Stanley foreclosed on almost two dozen military families from 2006 to 2008 in violation of a longstanding law aimed at preventing such action.

A department spokeswoman confirmed on Friday that the Morgan Stanley unit, Saxon Mortgage Services, is one of several mortgage and lending companies being investigated by its civil rights division. The inquiry is focused on possible violations of a federal law that bars lenders from foreclosing on active-duty service members without a court hearing.

Mark Lake, a Morgan Stanley spokesman, declined on Friday to comment on the investigation. However, in the fine print of a recent regulatory filing, Morgan Stanley disclosed that it was “responding to subpoenas and requests for information” from various government and regulatory agencies concerning, among other issues, its “compliance with the Servicemembers Civil Relief Act,” the law that governs the actions creditors can take against service members on active duty.

This two-tier approach is intriguing: aggressive pursuit of abuses when members of the armed forces are the victims, flat-out denials for the rest of us. Dave Dayen thinks it’s politics, but I wonder if something deeper is at work. The Pentagon has been aggressive in blocking other forms of exploitation of soldiers, such as locating payday lenders near military bases (the Pentagon sought and won interest rate ceiling. My 2007 post on that tussle was “The Pentagon as Financial Regulator.” Maybe that’s an idea we need to entertain more seriously. It seems to be the only body with the authority and firepower to take on the mortgage industrial complex.

- Yves Smith


NY Times Report Confirms Lack of Attorney General Investigations

This is the key snippet from Gretchen Morgenson’s New York Times column today, which inveighs against Iowa attorney general Tom Miller’s unseemly and peculiar haste to get a deal with miscreant banks inked:

Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.

And the official denial amounts to a confirmation:

Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”

Really? All you have is complaints to various AG offices, which I sincerely doubt have been investigated in a systematic manner. If they had been, we would have seen more wideranging action in more states by now. But all they have is accounts from irate homeowners, along with court cases and horror stories reported in the media. That’s self-reported sample, regularly dismissed by the banks as anecdotal and not consequential.

Without an investigation, all we have is “he said, she said.” Despite robo-signing having revealed widespread abuse of court procedures, the AGs seem remarkably unwilling to get to the bottom of things. Since the banks are the ones who have a seat at a table in these negotiations, it’s almost a certainty that their version of the story will get more serious consideration.

If the attorneys general had such a such a good overview prior to the eruption of the robo-signing scandal, why did New York state banking commissioner Richard Neiman implement regulation last October to make clear that New York’s business conduct rules for servicers also covered ones exempt from registering with the state (such as ones regulated by the Office of the Comptroller of the Currency)? As Neiman stressed in a letter to the editor of the Washington Post:

With the numerous bank errors that took place in the five months that Dana Milbank tried to refinance his home ["Foreclosures: Big banks' reign of error," Sunday Opinion, March 6], you could almost laugh that a prominent mortgage servicer happened to pick a nationally recognized columnist to harass. But it is not funny.

Bank regulators across the country hear the same story over and over again. In New York we took the unprecedented step of promulgating regulations to govern mortgage servicers’ treatment of homeowners. Now, we can fully examine servicer activities, use the power of law to enforce our rules and require timely responses for homeowners.

We need national standards to govern mortgage servicer conduct now. The Consumer Financial Protection Bureau should put in place such rules as an early priority. For every columnist affected, tens of thousands of people are suffering who do not have an outlet on the opinion pages to voice their frustration. They do not find it funny, either.

The fact that it takes a letter from a non-deadbeat educated person to get the chattering classes to take mortgage abuses a tad more seriously proves that the officialdom has been, and for the most part, continues to be, willfully blind to the extent of the rot.

- Yves Smith


March Madness for Corporate Tax Dodgers

Top seeds in the Tax Haven Tourney: banks and power companies

by Paul Buchheit

The small companies and public didn't have a chance in the early rounds. Now it's down to a few formidable corporate teams, the Cheat 16:

- General Electric made $10.3 billion in 2009, but received a $1.1 billion tax rebate.

- Forbes said about Bank of America in 2010: "How did they not pay any taxes on $4.4 billion in income?"

- Oil giant Exxon made a $45 billion profit in 2009, but paid no taxes in the United States.

- Citigroup had 4 quarters of billion-dollar profits in 2010, but paid no taxes.

- Wells Fargo made $12 billion but purchased Wachovia Bank to claim a $19 billion tax credit.

- Hewlett Packard's U.S. income tax rate was 4.3% in 2008 and 2.3% in 2009.

- Verizon's 10.5% tax rate, according to Forbes, is due to its partnership with Vodafone, the primary target in UK Uncut's protests against tax evaders.

- Chevron's tax rate was 1% in 2008.

- Boeing, which just won a $30 billion contract to build 179 airborne tankers, got $124 million back from the taxpayers in 2010.

- Over the past 5 years Amazon made $3.5 billion and paid taxes at the rate of 4.3%.

- Carnival Cruise Lines paid 1% in taxes on its $11.5 billion profit over the past 5 years.

- Koch Industries is not publicly traded, so their antics are kept private. But they benefit from taxpayer subsidies in ranching and logging.

- In 2008 CorporateWatch said Rupert Murdoch's Newscorp paid "astoundingly low taxes" because of tax havens.

- Google "cut its taxes by $3.1 billion in the last three years by shifting its money around foreign countries.

- Merck, the second-largest drugmaker in the U.S., last year brought more than $9 billion from abroad without paying any U.S. tax.

- Pfizer, the largest drugmaker in the U.S., erased $10 billion in taxes with an "accounting treatment."

All the above has been documented by US Uncut Chicago members on PayUpNow.org .

Who's projected for the Final Frauding Four?

Best Defense: Google uses a game plan called a "Double Irish Defense," which moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Best Offense: GE's 2010 SEC 10-K tax filing boldly states: "At December 31, 2010, $94 billion of earnings have been indefinitely reinvested outside the United States...we do not intend to repatriate these earnings.."

Most Steals: Citigroup: 427 tax haven subsidiaries

Best Trash talk: A General Electric spokeswoman: “G.E. pays many other taxes including payroll taxes on the wages of our employees, property taxes, sales and use and value added taxes."

Most game-ending bailouts: Bank of America received $45 Billion in tax payer bailout funds in 2008 and 2009. In 2009 the company earned a pretax income of $4.4 billion, but claimed a $1.9 Billion tax benefit from the government.

Teams with the most reserves:
General Electric: $77 billion
Google: $24 billion
That's 2 companies holding $101 billion that could be invested in jobs.

Tax Haven Tourney Champion? GE is the Duke of Tax Avoidance.

Paul Buchheit

Paul Buchheit is a faculty member in the School for New Learning at DePaul University, author of UsAgainstGreed.org and RappingHistory.org, and the editor of "American Wars: Illusions and Realities" (Clarity Press). He can be reached at paul@UsAgainstGreed.org.

Several Dem AGs to Withdraw from Proposed Mortgage Fraud Settlmt

Slapping Team Obama: Several Democratic AGs to Withdraw from Proposed Mortgage Fraud Settlement; Federal Negotiations in Disarray

by Yves Smith

The so-called mortgage settlement looks to be coming apart at the seams. That does not mean there will not be a deal of some sort. Remember, a hallmark of the Obama administration is to do things simply to have more “achievements” to discuss. But not only, as has been rumored for some time, are a number of Republican attorneys general saying they will not join in the settlement, so are some Democrats as well.

It’s important to recognize that Democratic withdrawals are a far bigger problem for Obama than the Republicans. Given that a number of AGs signed up at the last minute, and some of the Republicans were not even on board with the concept of a mortgage settlement, defections among the GOP participants can be depicted as partisanship. By contrast, repudiation by Democrats, particularly Democrats that have garnered some attention in the national press by taking mortgage abuses seriously, is much harder for the Administration to explain away. And as David Dayen at Firedoglake reports, if enough AGs defect, the settlement becomes a dead letter:

The master settlement agreement with the tobacco industry in 1998 eventually got the agreement of 46 AGs, with the other four coming aboard later. That would be similar to the necessary outcome here; to become the official position of the National Association of Attorneys General, at least 38-41 of the AGs would have to sign on. And even that has no binding force to supersede state law.

As we anticipated, the AGs are unhappy about how the negotiations have been conducted (they have been kept in the dark and are now being railroaded) and the failure to have any serious investigations. Per Dayen, they are also concerned, as we are, that the banks will be given a broad release:

Democrats in AG offices across the country find themselves uncomfortable with the deal, in particular the speed with which it is being ushered through the system and the lack of clarity over what claims they would have to relinquish under the deal….

While the AG investigation was announced last fall, the settlement term sheet arrived with some surprise a couple weeks ago, just prior to a meeting of all 50 AGs in Washington. Democratic AGs and senior staff, who spoke off the record because of Tom Miller’s lead role in the case, said that they only received the term sheet, seen as a first offer to the banks, a couple days before the meeting, and didn’t know until they got to the meeting that it would be a big topic of discussion. And then, not only were the AGs told about the term sheet and the push for principal write-downs to save as many as 3 million homes from foreclosure, they were told they would have to make someone from their offices available full-time to enforce the terms of the settlement. And they were told that all of this would have to come together in a “window of opportunity” over the next 6-8 weeks…

The investigation hasn’t done much investigating to this point; no subpoenas have gone out and no depositions taken. Instead, the AG working group is mainly going off of consumer complaints and court findings….

Troublingly, there’s been very little indication from Miller and the AG working group on what they would have to give up in this exchange. That raises the spectre of a final agreement that legally indemnifies the banks while providing too little support to homeowners, just enough to make a big press conference full of back-patting about helping the little guy.

As we said earlier, this smacks of Iowa attorney general Tom Miller negotiating AGAINST the AG group on behalf of the Administration (and ultimately the banks) rather than playing his professed role of acting as lead negotiator/representative. If I were one of the AGs who’d been treated this way, I’d be ripshit.

And why all the haste? Well, it appears that cheerleading, letting the banks foreclose when investors would prefer deep principal mods to viable borrowers, ill-conceived Federal mortgage modification programs, and a head-in-the-sand approach to documentation problems and procedural abuses have done wonders for the housing market, which most experts expect to fall another 10% this year. The Administration appears prepared to redouble its efforts in this failed strategy since it lacks the guts to do anything that might actually be effective. But Team Obama still appears to believe that all problems can be solved via public relations. The fact that HAMP was an embarrassment appears to have led to the bizarre conclusion that the remedy is better modification theater:

That need for speed seems to be coming from the White House, who by all accounts want to move on a settlement quickly, and to use it as a way to promote economic recovery more than anything….The rush to settle, driven by Washington, appears to serve a political function of “doing something” about the housing market, which is rapidly falling apart.

But as we indicated, that’s simply delusional thinking. Even if the banks agreed to $20 billion worth of modifications, that’s insufficient to have any real impact. $20 billion on top of principal mods that would involve investors taking hits (which still leaves them well ahead of where they’d be in foreclosure) would be another matter entirely. But bizarrely, homeowners and investors, the parties who have most at stake, seem even less well represented than the AGs in these negotiations. And Dayen gives a simple example of why the proposed settlement may be a complete giveaway:

In just one case this week, a jury awarded a GI $20 million in a case where Coldwell Banker was accused of mishandling the man’s automatic monthly mortgage payment while he was on active duty overseas, improperly reporting him to credit bureaus with a serious delinquency, and then failing to correct the error. This was a standard servicer abuse case, just one of maybe millions, and it netted $20 million. Just 1,000 cases of this type would equal the $20 billion thrown around as a possible settlement number.

In fact, a lot of states would cut back this settlement amount considerably on appeal (in Alabama, the state Supreme court appears to have made a decision that no consumer matter can ever be worth more than $1 million). But more cases like this generate bad headlines and costly appeals and encourage more borrowers to litigate…..which lead to more fact patterns being established that make it easier for both state AGs and class action lawyers to take up much broader scale lawsuits.

The negotiations also are in disarray among the Federal regulators. The Office of the Comptroller of the Currency is trying to cut its own deal. As Reuters reports (hat tip Matt Stoller):

The primary regulator for the largest U.S. banks is preparing to move ahead on its own settlement with lenders over foreclosure practices and may announce a deal in the next few weeks, according to a source familiar with the process.

The Office of the Comptroller of the Currency’s possible split from other U.S. authorities would mark a dramatic shift away from efforts for a coordinated settlement with major mortgage servicers, including Bank of America Corp, Citigroup Inc and Wells Fargo & Co.

U.S. authorities — including bank regulators, the Department of Justice and a coalition of 50 state attorneys general — are probing allegations that banks foreclosed with improper documents and cut corners on repossessing homes from borrowers.

The OCC is in talks with the banks it regulates to prepare so-called consent orders, requiring the banks to fix faulty foreclosure processes within a certain timeframe, and potentially levying fines for violations, the source said.

The OCC, according to the source, has become impatient with infighting over the structure and shape of a coordinated settlement.

This is a more serious threat to the settlement than one might think. The OCC may be engaging in a parallel discussion to pressure the other Federal regulators and give Team Obama a face saving fallback if the AG/FDIC /Elizabeth Warren as member of the Treasury discussions fail. The OCC has been aggressive about preempting state regulation of national banks under the Supremacy Clause of the Constitution. It has said in past regulatory letters (hat tip Lisa Epstein) that its authority does not extend to matters that involve liability to investors in residential mortgages (effectively, in this letter, the trustees were trying to claim pre-emption for the benefit of the securitization certificate-holders; the OCC said that didn’t pass muster).

The open question here is where servicing falls. Geithner claimed that federal regulators have no authority over servicers; it would be interesting to see what theory the OCC uses if it decides to go the pre-emption route, particularly since the Supreme Court has consistently ruled that real estate transactions (as opposed to making real estate loans) is a state matter. Thus the conveyance of mortgage notes might be deemed to be a Federal matter, but it’s hard to see the OCC arguing that foreclosure-related matters are within its purview. But this is over my pay grade; we may see the lawyers duke this one out.

Another indication of disarray are efforts to add more bells and whistles to the proposal. This looks like part of a desperate effort to get to some kind of a deal rather than part of a coherent negotiating strategy. Note that this amounts to the Federal settlement team negotiating against itself; the banks have yet to make a counteroffer. Per the Financial Times:

The five biggest US mortgage servicers were told this week at a private meeting with regulators to consider paying delinquent borrowers up to $21,000 each as part of a broader settlement of the foreclosure crisis.

People who attended the meeting, chaired by the Federal Deposit Insurance Corporation on Monday, said the industry-wide “cash for keys” programme would involve the biggest servicers, led by Bank of America, paying borrowers as an incentive to leave their homes.

Banks would pay borrowers who are more than 90 days behind on mortgage payments up to $1,000 to seek independent financial advice and up to $20,000 in cash as a “fresh start” payment towards living costs in a new home. They would have to vacate their properties quickly and leave them in good condition….

However, prospects for a single “mega settlement” have worsened because officials disagree on the level of penalty and whether money raised in fines should be used for a principal writedown. The banking regulators, who do not agree among themselves, are nonetheless keen to come to an agreement quickly.

One way through the gridlock, which has been discussed among officials, is giving the servicers a menu of options for settlement, which might include principal writedown or a “cash for keys” scheme.

As we indicated, if this deal falls apart, or Obama merely comes up with a Potemkin program that fails to forestall state AG action, the public will be better served. The evidence is that enough judges still care about the rule of law that more and more bank abuses will come to light if the authorities leave matters to the courts.


Questionable US Gov't Mortgage Fraud Prosecution Priorities

In Prison for Taking a Liar Loan

by Joe Nocera

A few weeks ago, when the Justice Department decided not to prosecute Angelo Mozilo, the former chief executive of Countrywide, I wrote a column lamenting the fact that none of the big fish were likely to go to prison for their roles in the financial crisis.

Soon after that column ran, I received an e-mail from a man named Richard Engle, who informed me that I was wrong. There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. It was his 48-year-old son, Charlie.

On Valentine’s Day, the elder Mr. Engle said, his son had entered a minimum-security prison in Beaver, W.V., to begin serving a 21-month sentence for mortgage fraud. He then proceeded to tell me the tale of how federal agents nabbed his son — a tale he backed up with reams of documents and records that suggest, if nothing else, that when the federal government is truly motivated, there is no mountain it won’t move to prosecute someone it wants to nail. And it was definitely motivated to nail Charlie Engle.

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars.  Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned.  Otherwise, he walked.  Thus does the Justice Department display its priorities in the aftermath of the crisis.

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

Tthe film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

Lying on a stated-income loan is, without question, a crime, and one ought not to excuse it even though, as Mr. Engle says, “everybody was doing it” — usually with the eager encouragement of their brokers. But the Engle case raises questions not just about the government’s priorities, but about something even more basic: did he even commit the crimes he is accused of?

Partly, I concede, Mr. Engle is easy to root for. He is a personable, upbeat man who has conquered some serious demons. Part of his Sahara expedition was aimed at raising money for a charity to help bring clean water to Africa. “Every experience in life has the ability to teach lessons if I am open to them,” he wrote on a blog as he prepared to enter prison. How can you not like someone like that?

But the more I looked into it, the more I came to believe that the case against him as seriously weak. No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Perhaps anticipating that problem, when Mr. Nordlander finally arrested Mr. Engle in May 2010, he claims to have elicited a stronger, better confession while Mr. Engle was handcuffed in back seat of his car. Mr. Engle fervently denies this. This second supposed confession, however, was never captured on tape.

As for the loans themselves, on one of them Mr. Engle claimed an income of $15,000 a month. As it turns out, his total income in 2005, according to his accountant, was $180,000, which amounts to ... hmmm ...$15,000 a month, though of course Mr. Engle didn’t have the kind of job that generated monthly income. (In addition to real estate speculation, Mr. Engle gave motivational speeches and earned around $50,000 a year as a producer on the hit show “Extreme Makeover: Home Edition.”)

The monthly income listed on the second loan was $32,500, an obviously absurd amount, especially since the loan itself was for only $300,000. It was a refinance of a property Mr. Engle already owned, allowing him to pull out $80,000 of the $215,000 in equity he had in the property.

Mr. Engle claims that he never saw that $32,500 claim and never signed the papers. Indeed, a handwriting analysis conducted by the government raised the distinct possibility that Mr. Engle’s signature and his initials in several places in the mortgage documents had been forged. As it happens, Mr. Engle’s broker for that loan, John J. Hellman, recently pleaded guilty to mortgage fraud for playing fast and loose with a number of mortgage applications. Mr. Hellman testified in court that Mr. Engle had signed the mortgage application. Early this week, Mr. Hellman received a reduced sentence of 10 months, less than half of Mr. Engle’s sentence, in no small part because of his willingness to testify against Mr. Engle.

Even the jurors seemed confused about how to think about Mr. Engle’s supposed crime. When it came time to pronounce a verdict, the jury found him not guilty of providing false information to the bank, which would seem to be the only fraud he could possibly have committed. Yet it still found him guilty of mortgage fraud. “I think the prosecution convinced the jury that I was guilty of something but they weren’t sure what,” Mr. Engle wrote in an e-mail.

Like many people, Mr. Engle’s biggest mistake was believing that housing prices could only go up. When the market collapsed, Mr. Engle defaulted on the two properties, which of course is not a crime. Although his accountant tried to persuade the banks to do a complicated refinancing, they refused and foreclosed on the properties. Like many Americans, Mr. Engle wound up being punished by the market for his mistake, losing all his remaining equity along with the properties themselves. Thanks to the government, though, his punishment was far more severe than most.

At his sentencing, Mr. Engle told the judge: “I can say with confidence that I can turn negatives into positives. I have no doubt I will make the best of it.” With his inspiring prison blog, Running in Place: A Blog About Surviving Adversity, he has already begun to do that.

Even when he emerges from prison, though, his ordeal will not be over. As part of his sentence, Mr. Engle was ordered to pay $262,500 in restitution to the owner of his mortgages. And what institution might that be? You guessed it: Countrywide, now owned by Bank of America.

Angelo Mozilo ought to get a good chuckle out of that one.

Copyright 2011 The New York Times

The Sandbagging of Elizabeth Warren (and 49 State AGs)

by Yves Smith

I don’t know who is pulling the strings, but any objective look at the so called mortgage settlement negotiations shows that a lot of people are being played for fools. Precisely because Elizabeth Warren is being attacked so forcefully by the Wall Street Journal and other banking industry loyalists, too many of her erstwhile defenders are giving a free pass to the fact that the Administration itself is undermining her, and with her, any attorneys general who sign up for the settlement, assuming it ever sees the light of day.

Recall the Team Obama modus operandi: getting something done, no matter how lame, compromised, or even counterproductive it is, is considered to progress because it presumably can be swaddled in enough propaganda to be made attractive to a presumed to be chump public. Never mind that Obama’s flagging poll ratings and the abysmal mid-term Congressional results, where the Blue Dogs, the Democrats philosophically most aligned with Obama, were mowed down, show that that strategy is becoming less and less effective. Recall in the runup to the mid-terms how many Democratic Congressional candidates were straining to distance themselves from Obama.

The Democratic state attorneys general have even less to gain by playing nice with this Administration. Some are from states that are solidly liberal and/or so hard hit by the mortgage meltdown that being seen to be soft on banks would be political suicide.

Obama himself is clearly enamored with the theatrics of governance. And why not? His assumption is that as long as he looks meaningfully less conservative than the Republicans (which now can be plenty conservative), big swathes of the country will vote for him by default. And now that the Supreme Court Citizens United decision has raised the likely cost of winning the presidency to $1 billion, currying favor with big corporate donors, which of course includes banks, is of paramount importance. So any roughing up is a staged affair.

We have long been of the view that for Elizabeth Warren to think she could make any lasting headway inside with an Administration fundamentally opposed to what she stands for was wishful thinking. Now I have no doubt that this wishful thinking has not developed in a vacuum, that she has been, ahem, encouraged to be unduly hopeful about the odds of her getting the nod as the first head of the Consumer Financial Protection Bureau.

But as with General Petraeus, the move to bring her into the tent was all about keeping the Administration’s enemies closer. It has been particularly keen about neutering critics on the left. Early on, it cut off institutional funding of liberal interest groups that failed to maintain message discipline. Our DC contacts tells us the Obama has now moved up the food chain and is working to defund think tanks deemed to be too pinko (for instance, we were told of one, with all the particulars, that was dumped by a longstanding $1 million a year donor).

Even though Geithner might make a show of considering Warren’s views, he and she are philosophically 180 degrees apart. Not only Geithner’s position has never been so strong, he has managed to stake out a much large scope of authority than past Treasury Secretaries.

It’s quite clear that Warren (and derivatively, the 49 state attorney generals) have been set up even from what little we can see at a remove.

1. It appears she has been given, or fallen for the trap of accepting, a role where she has responsibility but no authority. Anyone who has every worked in a big organization knows they are the kiss of death. At ABN Amro, it was such a well-known way to ruin careers that it was called “the hall of hollow mandates”.

2. Her ability to take ground is further weakened by the strong relationship between Obama and Geithner. She an employee of the Treasury, an advisor to both the Department and the President. She wants to make fundamental changes in the way one of Obama’s most important funding targets does business, which is a hard sell. And even in the absence of those mercenary considerations, Obama is risk averse. Moreover, by all accounts, he and Geithner are so in tune with each other that their relationship has been described as a “man crush.” Unless they have a lover’s spat, what would ordinarily be an uphill battle is more likely to be a Sisyphean exercise.

3. On the mortgage settlement, she is being made the fall guy for an initiative that she joined after it was well underway. She is being presented in the media as the moving force behind the mortgage settlement. In fact, that was initially an affair solely in the hands of the state attorneys general, led by Tom Miller of Iowa. In one of the numerous Congressional hearings on the mortgage mess in November, I recall Tom Miller going out of his way to praise the cooperative relationship with Treasury, in particular, with Michael Barr, then then Assistant Secretary to Financial Institutions. My antennae went up when I heard that; what was Miller doing “coordinating” with Treasury? The Treasury has indicated publicly, repeatedly, that it has little authority over servicers. And the state law issues are very different than Federal. Yes, some polite briefs of Federal regulators might be a smart move, but the state AGs have their own interests and turf to protect.

What happened, it seems, is that the Federal regulators decided to get in front of an incipient mob and try to call it a parade. They announced a complete whitewash of an eight week mortgage exam, apparently as a way to pretend to know something and insert themselves further into the state AG process. As we noted:

And as we saw in the House Financial Services committee hearings on mortgage documentation issues last week, it took persistent grilling by Maxine Waters to establish that regulators aren’t even imposing fines or sanctions for known problems in this arena, which strongly suggests they aren’t even willing to use the powers they do have….

This “review” is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.

4. Miller, as we have indicated repeatedly, is not representing the attorneys general. He is working on behalf of the Administration. The first version of the term sheet that was leaked, a 27 page version, was depicted as a product of the AGs. However, by all accounts, the process is being driven by Federal regulators ex the OCC, which seems out to end run the main effort, or perhaps be positioned to pounce if it implodes. For instance, consider this account by Shahien Nasiripour of Huffington Post:

Sources said many of these details were constantly changing, sometimes from day to day, as proposals zipped from agency to agency. They have not yet been shown to the targeted banks, nor have they been publicly disclosed.

The documents also show that regulators questioned many of their own ideas.

And this, from Dave Dayen of Firedoglake:

Democratic AGs and senior staff, who spoke off the record because of Tom Miller’s lead role in the case, said that they only received the term sheet, seen as a first offer to the banks, a couple days before the meeting, and didn’t know until they got to the meeting that it would be a big topic of discussion. And then, not only were the AGs told about the term sheet and the push for principal write-downs to save as many as 3 million homes from foreclosure, they were told they would have to make someone from their offices available full-time to enforce the terms of the settlement.

Why should any state AG put up with this shabby treatment? They can go their own way and not be part of a window dressing exercise on behalf of Team Obama. Right now, the state AGs and the Administration have no smoking gun. They could easily force the banks to heel by conducting real investigations, but instead seem to prefer bluffing when the banks know they have an empty hand.

And we further have Tom MIller’s office changing his story. We’ve have no evidence of any investigation; his office confessed to as much a couple of weeks ago, as Gretchen Morgenson of the New York Times told us:

Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”

Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.

And per Shahien Nasiripour last week:

The state group has not yet filed a complaint detailing their findings and the violations of various states’ laws. While some states individually have sent banks formal investigative requests for information — and received reams of documents in return — they haven’t yet acted as a group.

Now we suddenly have Miller claiming there was an investigation, per a later story by Shahien:

“That’s a big price to pay for the additional investigations,” Miller said of the potential delay. He added that state regulators had conducted an in-depth audit of Ally Financial, a state-regulated firm and the fifth-largest mortgage handler in the country, according to Inside Mortgage Finance. It was the “most in-depth analysis and investigation of any of the [mortgage] servicers that has been done or will be done,” Miller said.

State regulators will use their findings from Ally as part of the settlement negotiations with the other large mortgage firms, Miller said, as practices were likely the same across the biggest firms.

So we have one quote by Miller, to a publication that is basically a mortgage industry reporting service (as in a large number of its stories are what Eddie Bernays would call propaganda, namely initiated by industry sources trying to make some favorable noise). If you believe this was a meaningful investigation, I have a bridge I’d like to sell you. Given that Ally was the first servicer to be caught robosinging, the odds are high that any investigation was limited to that topic, which the banks have already been trying to clean up.

And “most in-depth exam that ever will be done”? Is this an Administration threat through Miller? This is nonsense. State AG investigations of foreclosure mills and ongoing litigation against Lender Processing Services, which provided the processing backbone to the servicing industry, have the potential to blow open more issues. We are also aware of litigation being readied that is likely to open up additional fronts against the servicers.

For Republicans, it’s a no-brainer not to put up with this rubbish. It takes a bit more intestinal fortitude on behalf of Democrats. Eric Schneiderman of New York has come out vocally against the process, and Lisa Madigan of Illinois has also expressed strong reservations. Catherine Masto of Nevada is by all accounts not going to participate, although she has yet to make a statement to that effect (Nevada and Arizona both have litigation underway against Bank of America; that alone argues against joining the settlement). They should be applauded for refusing to be railroaded by an Administration and an opportunistic state AG that is perfectly content to sell them out. I can only hope that more like minded Democratic AGs will also voice their objections to the process and content of the settlement and better yet, bolt and conduct their own exams and file lawsuits as warranted.

Let me put on my deal-making hat and tell you where my instincts say this is going to come out. Tom Miller’s earlier signals, confirmed by a later report by Dave Dayen, is that the Administration wants a deal in six to eight weeks.

This is a naive approach given the state of play and is likely to backfire. You can only lock people in a room to do a deal (which given the number of moving parts and the lack of consensus even among the Federal regulators, is what this amounts to) if people have agreed to do a deal or you have leverage over them. This does not apply to either the AGs or the banks. Even worse, the Team Obama types can’t even get their own act in gear. The AGs when they signed up to a process that would be driven by the Obama Administration to serve its interests. They didn’t agree to the shape of the table and have every reason to decamp for this reason alone, that what was billed as a negotiation they would conduct with the banks is instead turning into cramdown as far as they are concerned.

The banks have a different calculus. They know the Administration and the AGs are shooting with blanks. The OCC reported in Congressional testimony that the eight week whitewash found only problems when “circumstances had changed”, like HAMP mod problem or changes in terms for active duty servicemen. So the Feds can’t make big threats to bring the banks to heel to do a deal. Similarly, the servicers know the state AGs don’t have a case either, save for robosigning abuses, which is not worth anywhere within hailing distance of the $20 to $30 billion being bandied about We’ve said it is inadequate for the broader abuses and is also too small to have any impact on the housing market. The objective should be to get the servicers to do or pay for principal mods that come out of investors, who’d be happy to have mods to viable borrower rather than costly foreclosures and sales of not-properly-maintained or secured properties, often in markets with a lot of inventory overhang.

But the banks DO know that if anyone got around to investigating, or if things grind on in court long enough, enough Bad Stuff is likely to surface that will embolden some AGs to go after them. And a couple of successful AG cases will lead to more private suites, perhaps even some class action theories. All the AGs have to do is start with low hanging fruit like the foreclosure mills (even an embarrassingly weak settlement with a Florida foreclosure mill yielded $1 million to the AG’s office, so these actions are probably attractive from an economic standpoint) and go up the food chain. The foreclosure mills, when attacked, often turn on Lender Processing Services, which implicates the servicers without violating attorney-client privilege.

So the banks know they are vulnerable if anyone decided to go after them in an organized fashion. So the one thing the AGs can offer that they might want it a broad release, which is exactly the thing we have said the AGs should not provide. How can you release a party when you don’t have the faintest idea of what they might have done?

And the disarray, plus the inexplicable time pressure, works against a sound deal getting done. As international negotiations show, multi-party deals take a lot more groundwork among the participants, and that is utterly wanting here. Artificial time pressure on people who don’t see eye to eye or aren’t persuaded a deal is necessary is likely to lead to various parties jumping ship. And it works to the advantage of the banks, who can simply hang tough, come to meetings, and play non-negotiable (which means either that the folks at the Administration are utterly clueless, or alternatively, are using the phony claims of a need for haste to provide the backdrop for conceding to the banks).

So I see either no deal or a very weak, bank friendly deal with a broad waiver as its centerpiece. And I’d bet the banks trade concessions that have an official price tag of at most $5-$7 billion. Plus given the weak track record of compliance on past servicer settlements and HAMP, there’s no reason to expect them to live up to that.

And if Elizabeth Warren puts her name on a settlement like that to try to increase her odds of getting the CFPB post, she will have proven she’s willing to sell out on what she stands for. I can only hope that she, like some of the Democrat AGs who can already see where this is going, would walk away from it instead.


Take three minutes to keep banks accountable


The Big Banks – yes, the same ones that cause the economic crisis, demanded a bailout, and are back to record profits and bonuses while joblessness remains at crisis levels – are trying to undo the financial reforms we won last year and trying to get out of being held accountable for their financial fraud.

We can’t let them get away with it.  Please take three minutes to keep banks accountable.

  1. Call your state’s Attorney General TODAY at 866-200-6444 to demand a strong settlement against the Big Banks.  Say something like, “My Name is [NAME]. I am a resident of [STATE]. The Attorney General must come out in support a settlement that provides justice for millions of homeowners and holds the big banks accountable for their crimes. Nothing less is acceptable.” Today is a national call-in day.
  2. Email Treasury Secretary Tim Geithner to demand that derivatives, a financial tool that was a major cause of the financial crisis, not be exempted from regulation
  3. Tell Congress:  Don’t strip the bank regulators of the funds to do the job

The big banks have a three-part strategy for getting away with their crimes and continuing the “jobless recovery” that keeps them rich and the rest of us struggling.  They want to:

  1. Cut a deal that lets them off easy for crimes they’ve already committed.
    • As Oscar-winning film-maker Charles Ferguson noted, not a single financial executive has gone to jail, despite massive fraud.  This week, settlement talks are taking place between the big banks and the Attorneys General.
    • Tuesday, March 29 is a national call-in day.  Call 866-200-6444 and tell your AG, “Crime should not pay!  Demand real criminal penalties for any crimes committed and a settlement deal that reduces people’s debt”
  2. Exempt trillions of dollars of dangerous derivative transactions from regulation.
    • The big banks have been lobbying Tim Geithner (himself a product of Wall Street) to let them continue trillions of dollars of risky derivatives trading without any oversight.  Rumor has it that he is listening.
    • Send an email to Geithner, telling home not to exempt these dangerous financial activities.
  3. Strangle the regulators by cutting off funding.
    • Corporations and Wall street banks are trying bold new ways to prevent government from protecting regular Americans from Wall Street and Corporate Greed.  Lately, they’re attempting to simply eliminate funding for the agencies.
    • Tell Congress to give bank regulators the basic tools to do the job.

Please take 3 minutes to stop the Big Banks from turning back the clock on financial reform.

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Banks Win Again: AG Madigan Opposes? Weak Mortgage Settlement

by Yves Smith

Banks Win Again: Weak Mortgage Settlement Proposal Undermined by Phony Consent Decrees

Wow, the Obama administration has openly negotiated against itself on behalf of the banks. I don’t think I’ve ever seen anything so craven heretofore.

As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.

The supposed leader of the effort, Tom MIller of Iowa, promised criminal prosecutions, then promptly reneged. His next move was to get cozy with the Treasury, presumably out of his interest in heading the Consumer Financial Protection Bureau. Federal regulators, such as the OCC and the Fed, who do not like being upstaged by states, were similarly keen to exert “leadership”, which really meant “lead a hasty retreat from anything that might inconvenience the banks.” So Miller, who was supposed to be representing the interests of the states, was instead working with the Treasury et al. to beat the state AGs into line (and separately, since the state and Federal legal issues are very different, the idea of having a joint effort was questionable from the outset). Not only have some Republicans (predictably) rebelled, but so to have the more aggressive Democrats, such as Eric Schneiderman of New York, Lisa Madigan of Illinois, and Catherine Masto of Nevada.

The first sighting of what this group might come up with was a bizarre 27 page proposal. It was bizarre because it represented an incomplete set of demands. You never do that in a negotiating context, you make a complete offer and see what other side’s counter.

The proposal was incomplete because it failed to describe the sort of release the banks would get (would they be released from claims by the state AGs on robosigning, or broader areas of liability?) and there was no section for penalties, despite press rumors and Congressional tooth gnashing about $20 billion and up sanctions. We dissed it not only for those reasons but also because it was largely a recitation of existing law, with only two new provisions: one was the end of dual track (in which servicers keep the foreclosure process moving ahead even as mod evaluation and approvals are also in progress) and single point of contact, in which the borrower has a dedicated person to deal with on his case. We deemed single point of contact to be undoable and unnecessary (as in if servicers straightened out their procedures and trained their staff adequately, they wouldn’t have the screw-ups that led to demands for single point of contact). Yet despite the obvious shortcomings of this deal, the bank lobbyist masquerading as a bank regulator known as the Office of the Comptroller of the Currency has absented itself from this effort in an apparent show of pique.

Given how underwhelming the 27 page leaked proposal was, it was predictable that the banks’ counteroffer verged on being a joke. As we noted last week:

It should really be no surprise that the banksters have the temerity to take a weak mortgage fraud settlement proposal, advanced by the 50 state attorneys general and various Federal agencies, and water it down to drivel. Since March 2009, when the Obama administration cast its lot with them, major financial firms have become increasingly intransigent. And this has proven to be a winning strategy, since Obama’s pattern over his entire political career has been to offer proposals that don’t live up to their billing, then eagerly trade away what little substance was there in the interest of having bragging rights for yet another “achievement”….

What’s striking is the utter lack of any teeth or any procedural requirements. The banks’ position is that they are to be trusted after having demonstrated again and again that they’ll take anything that is not nailed down. It is drafted wherever possible to make current practices fall within the “settlement”, which means the “settlement” is a total whitewash.

We then had wild card enter the picture. American Banker reported that “federal regulators” were about to issue cease and desist orders to force the servicers to take the negotiations seriously. Normally, that would be a potent threat. But the leaked version that American Banker posted didn’t even qualify as a slap on the wrist. As Adam Levitin explained:

The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done…. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine.

(Even if the regulators think the internal controls are inadequate, it’s not clear what the consequence would be. My guess is that it just results in the bank regulator telling the bank to revise and resubmit.)…

(I was struck in some places by the linguistic similarities between the proposed C&D order and the banks’ counterproposal to the AGs. It’s impossible to know who was cribbing from whom, but the similar language is revealing.)

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.

Tonight, a story in the New York Times lends credence to the American Banker account:

The nation’s top mortgage servicers are expected to sign legal agreements by the end of this week compelling them to change their foreclosure procedures, regulatory officials said Tuesday.

The servicers, which violated state and local laws and regulations governing foreclosures, are agreeing to improve their methods in numerous ways. They will be required to have more layers of oversight and proper training of their foreclosure staff. The oversight will extend to third party groups, including the law firms that do much of the actual work of eviction.

The New York Times, however, seems to be buying bank/Adminisration PR hook, line and sinker. For instance:

Under the new rules, every homeowner in default will have a single point of contact with the servicer.

“Single point of contact” does NOT mean a dedicated person. A phone number with a live person answering it would do. This is basically the same level of service as provided with credit cards, minus the prompts to, say, get to the “lost or stolen card” person versus the “balance transfer” person. So it’s better than what servicers provide now, but it is an Orwellian defining down of what “single point of contact” originally meant.

Another Times misconstruction:

One of the most significant measures in the consent agreement will require servicers to hire an independent consultant to review foreclosures done over the last two years. If owners were improperly foreclosed on or paid excessive fees, they will be compensated.

If you read the consent decree the review is NOT comprehensive, as the Times erroneously implies. And as Levitin noted:

By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.

Frankly, this sort of regulatory outsourcing is pretty astounding–the OCC has resident examiner teams at the major servicer banks. Shouldn’t they be the ones auditing the internal controls and performance, not a third-party compensated by the bank? (Oh wait, I forgot that the OCC is paid by the banks–it’s budget comes from chartering fees and assessments on the banks is regulates.)

However, the Times does confirm what I suspected last week, that this move was to end the Federal push for monetary damages which would be used for principal reductions:

The attorneys general have larger goals than the regulators. They are seeking to make the banks to cut the debt of delinquent owners. The servicers are balking at this.

The part I am puzzled by is who is behind this rearguard action. It clearly guts the Federal part of the settlement negotiations. If you pull out your supposed big gun (ex having done a real exam to find real problems, and it’s weaker than your negotiating demands, you’ve just demonstrated you have no threat. Now obviously, a much more aggressive cease and desist order could have been presented; it’s blindingly obvious that the only reason for putting this one forward was not to pressure the banks, as American Banker incorrectly argued, but to undermine the AGs and whatever banking/housing regulators stood with them (HUD and the DoJ were parties to the first face to face talks).

So the only part that I’d still love to know was who exactly is behind the C&D order? Is it just the OCC? I have a sneaking suspicion that Treasury has been playing both sides of the street on this one, and that the Fed either aligned with the OCC or pretending to sit it out, which has the effect of supporting the OCC. The only regulator certain to have been keen to take action against the banks was the FDIC (despite the Administration having put a target on Elizabeth Warren’s back, she is a mere advisor and the CFPB is merely a regulator in waiting).

But on another level, having the talks come to naught is a good outcome. It makes it easier for the AGs that believe in the rule of law to build and launch cases against servicers, and for the courts to continue to pile up examples of miscreant servicing and botched chain of title (these Potemkin reforms are going to change virtually nothing on the ground). So once a new set of abuses generates more lawsuits (fee pyramiding? force placed insurance? or just plain old “can’t find the note/chain of title”) the Federal banking regulators will again be scrambling to try to get ahead of a mob and call it a parade.


Copyright © 2011 Aurora Advisors Incorporated

Banks Are Off the Hook Again

Americans know that banks have mistreated borrowers in many ways in foreclosure cases. Among other things, they habitually filed false court documents. There were investigations. We’ve been waiting for federal and state regulators to crack down.

Prepare for a disappointment. As early as this week, federal bank regulators and the nation’s big banks are expected to close a deal that is supposed to address and correct the scandalous abuses. If these agreements are anything like the draft agreement recently published by the American Banker — and we believe they will be — they will be a wrist slap, at best. At worst, they are an attempt to preclude other efforts to hold banks accountable. They are unlikely to ease the foreclosure crisis.

All homeowners will suffer as a result. Some 6.7 million homes have already been lost in the housing bust, and another 3.3 million will be lost through 2012. The plunge in home equity — $5.6 trillion so far — hits everyone because foreclosures are a drag on all house prices.

The deals grew out of last year’s investigation into robo-signing — when banks were found to have filed false documents in foreclosure cases. The report of the investigation has not been released, but we know that robo-signing was not an isolated problem. Many other abuses are well documented: late fees that are so high that borrowers can’t catch up on late payments; conflicts of interest that lead banks to favor foreclosures over loan modifications.

The draft does not call for tough new rules to end those abuses. Or for ramped-up loan modifications. Or for penalties for past violations. Instead, it requires banks to improve the management of their foreclosure processes, including such reforms as “measures to ensure that staff are trained specifically” for their jobs. The banks will also have to adhere to a few new common-sense rules like halting foreclosures while borrowers seek loan modifications and establishing a phone number at which a person will take questions from delinquent borrowers. Some regulators have reportedly said that fines may be imposed later.

But the gist of the terms is that from now on, banks — without admitting or denying wrongdoing — must abide by existing laws and current contracts. To clear up past violations, they are required to hire independent consultants to check a sample of recent foreclosures for evidence of improper evictions and impermissible fees.

The consultants will be chosen and paid by the banks, which will decide how the reviews are conducted. Regulators will only approve the banks’ self-imposed practices. It is hard to imagine rigorous reviews, but if the consultants turn up problems, the banks are required to reimburse affected borrowers and investors as “appropriate.” It is apparently up to the banks to decide what is appropriate.

It gets worse. Consumer advocates have warned that banks may try to assert that these legal agreements pre-empt actions by the states to correct and punish foreclosure abuses. Banks may also try to argue that any additional rules by the new Consumer Financial Protection Bureau to help borrowers would be excessive regulation.

The least federal regulators could do is to stress that the agreements are not intended to pre-empt the states or undermine the consumer bureau. If they don’t, you can add foreclosure abuses to other bank outrages, like bailout-financed bonuses and taxpayer-subsidized profits.

Copyright 2011 The New York Times

Regulators Issue Weak Consent Orders to Whitewash Mortgage Abuse

by Yves Smith

Last week, we inveighed against an effort by Federal banking regulators to undermine the 50 state attorney general settlement negotiations on foreclosure and mortgage abuses. This affair is becoming a pathetic spectacle, in that the state initiative, which looks to be an exercise in form over substance, still might prove to be enough of a nuisance to the banks that the Powers that Be in Washington feel compelled to do what they can to hamstring it. The first effort was to have a joint settlement, which we dismissed as a barmy idea given the disparity in state and Federal issues. Not surprisingly, the Feds withdrew after the first negotiating session with the banks.

The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).

This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets they eye.

The Fed published an interagency report that gave an overview of the Foreclosure Task Force effort and consent decrees which confirms the regulators “see no evil” posture. It admits the Foreclosure Task Force effort was inadequate:

While the reviews uncovered significant problems in foreclosure processing at the servicers included in the report, examiners reviewed a relatively small number of files from among the volumes of foreclosures processed by the servicers. Therefore, the reviews could not provide a reliable estimate of the number of foreclosures that should not have proceeded.

Even more telling, not only was the examination insufficient in scope, but it was also procedurally flawed:

The loan-file reviews showed that borrowers subject to foreclosure in the reviewed files were seriously delinquent on their loans. As previously stated, the reviews conducted by the agencies should not be viewed as an analysis of the entire lifecycle of the borrowers’ loans or potential mortgage-servicing issues outside of the foreclosure process. The reviews also showed that servicers possessed original notes and mortgages and, therefore, had sufficient documentation available to demonstrate authority to foreclose.

The interesting question is whether the regulators are as dumb as that paragraph indicates, or merely playing dumb on the no doubt accurate assumption that the vast majority of readers won’t detect what is amiss. As we said we suspected earlier, and this text confirms, the authorities made no independent verification of whether the charges were warranted; their review merely confirmed that the bank’s own records did show borrowers to be in arrears. There was no effort to check servicer records against borrower payments (an issue in a case we highlighted yesterday which led a bankruptcy court judge to sanction both Lender Processing Services and the foreclosure law firm) or whether the charges resulted from improper deduction of fees first (by contract and Federal law, borrower payments are to be credited to principal and interest first, fees second), padded or double charged fees, force placed insurance, and other abuses that can greatly increase the amount a borrower allegedly owes.

Similarly, the authorities are playing dumb as far as chain of title issues are concerned, and are accepting the American Securitization Forum party line that possessing the note is sufficient to initiate a foreclosure, when courts in many jurisdictions are responding favorably to chain of title issues. It’s simply impossible that the regulators involved in this review haven’t heard of the Massachusetts Supreme Judicial Court Ibanez decision, but there is absolutely no admission that servicers are having considerable difficulty foreclosing when challenged due to their inability to produce properly endorsed notes.

The Fed document also provides an overview of the consent decrees, but we thought readers might enjoy reading the actual text of one (the example is Bank of America):

Bank of America Servicing Consent Order

Note that the overview document, after ‘fessing up to doing a less than adequate job of investigating, then fobs the effort over to the miscreants themselves. They are supposed to hire an “independent consultant” to investigate “certain residential foreclosure actions” from January 1, 2009 to the end of December 2010.

You can drive a truck through this language. First, anyone competent to do this job will not be independent. They will have or want to develop a relationship with the servicer. Second, “certain residential foreclosure actions” means only a subset need to be examined, and their is no language requiring that the sample be representative or even of meaningful size. A review of 5 foreclosures would meet the standard set forth in the text. Admittedly, the OCC gets to review the engagement letter, and the section discussing what goes in the letter indicates they expect a statistical sample will be used. But let’s not kid ourselves as to what is really going on. As Adam Levitin wrote:

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.

The tipoff to the lack of seriousness of this effort is the timelines. The engagement letter is submitted for review after the consultant is hired, meaning that the officials expect to change it as at most only around the margins. The review is supposed to be concluded 120 days after the letter is approved. Given that it will probably take 2-3 weeks to develop and review the final report with the client before submitting it to the regulators, that allows only a bit over three months to do the investigation, which is insufficient if it were to be done in sufficient depth.

Some other faux tough features:

1. A compliance committee which has a majority of non-bank employees as members. See our earlier comment re independence. There are plenty of people who’d be delighted to have a sinecure like this and be amenable to not rocking the boat

2. Auditable trail requirement. This could be a nuisance and entail costs.

3. Review of customer complaints. Any properly run business would be doing that now; presumably, it gets kicked over to the compliance committee.

4. The fines. These could in theory be onerous but in practice, since they come out of a self-administered exam, I’d not get my hopes up here.

Lenders Processing Services and MERS are getting separate consent orders, but since they are perceived to be critical infrastructure to the mortgage industrial complex, expect them to get a kid glove treatment as well.

For the most part, the consent orders throw a lot of stern language but little in the way of real teeth around requirements to follow existing law. Since that servicers have violated past consent orders, and there’s no reason to think anything has or will change, this looks to be yet another example of Potemkin reforms.


Copyright © 2006, 2007, 2008, 2009 Aurora Advisors Incorporated

One Lawman With the Guts to Go After Wall Street

by Robert Scheer

The fix was in to let the Wall Street scoundrels off the hook for the enormous damage they caused in creating the Great Recession. All of the leading politicians and officials, federal and state, Republican and Democrat, were on board to complete the job of saving the banks while ignoring their victims ... until last week when the attorney general of New York refused to go along.

Eric Schneiderman will probably fail, as did his predecessors in that job; the honest sheriff doesn’t last long in a town that houses the Wall Street casino. But decent folks should be cheering him on. Despite a mountain of evidence of robo-signed mortgage contracts, deceitful mortgage-based securities and fraudulent foreclosures, the banks were going to be able to cut their potential losses to what was, for them, a minuscule amount.

In a deal that had the blessing of the White House and many federal regulators and state attorneys general—a settlement probably for not much more than the $5 billion pittance the top financial institutions found acceptable—the banks would be freed of any further claims by federal and state officials over their shady mortgage packaging and servicing practices and deceptive foreclosure proceedings.

At the same time, the SEC and other federal regulatory bodies are making sweetheart deals with the bankers to close off accountability for creating and collecting on more than a trillion dollars’ worth of toxic mortgage-based securities at the heart of the nation’s economic meltdown—a meltdown that has seen the national debt grow by more than 50 percent, stuck us with an unyielding 9 percent unemployment and left 50 million Americans losing their homes to foreclosure or clinging desperately to underwater mortgages. On top of which an all-time high of 44 million people are living below the official poverty line and fewer new homes were started in April than at any other time in the past half century. With housing values still in free fall, we continue to make the bankers whole. 

As Gretchen Morgenson reported in The New York Times, the Justice Department division responsible for checking for fraud in the bankruptcy system has found a widespread pattern of deception by banks foreclosing homes, and she concluded: “So an authoritative source with access to a lot of data has identified industry practices as not only pernicious but also pervasive. Which makes it all the more mystifying that regulators seem eager to strike a cheap and easy settlement with the banks.” 

Not really surprising given both the enormous hold of Wall Street money over the two major political parties and the revolving door through which executives travel between firms like Goldman Sachs and the top positions in the U.S. Treasury Department and elsewhere in the government. The financial crisis occurred only because Republicans and Democrats passed the laws that Wall Street lobbyists wrote ending reasonable banking industry regulation installed in the 1930s in response to the Depression. And when the greed they enabled threatened the foundations of our economy, under Bill Clinton, George W. Bush and Barack Obama, it was the bankers who were assisted into lifeboats that had no room for ordinary people.
Not surprising then to find all of the power players in on the latest deals: the Obama administration that had bailed out the banks but not troubled homeowners; the regulators and Fed officials who all looked the other way when the housing bubble was inflated; and the state attorneys general who backed away from going after the perpetrators of robo-signed mortgages and other scams used to foreclose homes.

But now Schneiderman has a chance to derail the deals, given that he is supported by the state’s tough 1921 Martin Act, which one of his predecessors as New York state attorney general, Eliot Spitzer, had used to good advantage in exposing the financial behemoths that are so heavily based in New York. The Wall Street Journal describes the Martin Act as “one of the most potent prosecutorial tools against financial fraud” because, as opposed to federal law, it doesn’t carry the more difficult standard of proving intent to defraud.

Last week, it was revealed that Schneiderman’s office has demanded an accounting from Bank of America, Morgan Stanley and Goldman Sachs as to the details of their past practice of securitizing those mortgage-based packages that proved so toxic. Maybe he will fail against such powerful forces, as did Spitzer and Andrew Cuomo after him, but it is a test worth watching, since no one else, from the White House on down, seems to be concerned with holding the bailed-out banks accountable for the massive pain and suffering they inflicted on the public.

Robert Scheer

Robert Scheer is editor of Truthdig.com and a regular columnist for The San Francisco Chronicle.






A New Wall Street Investigation: Is Hammer Finally Coming Down?

by Matt Taibbi

Got a chance to meet Josh Rosner (co-author, with Times reporter Gretchen Morgenson, of the new book Reckless Endangerment) last night during an appearance on Eliot Spitzer’s In the Arena. We were brought in to talk about the new investigation of the banks that apparently is being launched by New York State Attorney General Eric Schneiderman, which looks like it might be the first for-real attempt at a prosecution of the systemic corruption that led to the financial crisis.

Schneiderman’s probe, news of which came out yesterday in this piece by Morgenson, reportedly targets the banks’ mortgage securitization process during the bubble years. Morgenson reported that Schneiderman is focused on at least three companies: Morgan Stanley, Bank of America, and old friend Goldman, Sachs.

This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons. For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era. Again, the business model during this time was a giant bait-and-switch scam. Sleazy lenders like Countrywide and New Century first created huge masses of bad loans, committing every conceivable kind of fraud to get people into loans (from doctoring income statements with white-out to phonying FICO scores to engineering fake appraisals). They then moved the bad loans quickly to the big banks, which pooled them and chopped them up (this is the “securitization” process), sprinkled hocus-pocus math on them, and them sold them to suckers around the world as AAA-rated securities.

The questions Schneiderman will seek to answer are these: did the banks securitize loans they knew were fraudulent, throwing the rotten mortgages into the stew before serving them to customers? Did they also commit insurance fraud by duping the bond insurers (known as “monoline” insurers) into thinking the mortgages were not as risky as they really were? And did they participate in the fraud scheme on a more basic level by lending huge amounts of money to the Countrywides of the world, knowing that they in turn would immediately use that money to create the bad loans? In other words, did the banks finance the fraud in addition to brokering it?

The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free. There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done. The expectation for some time has been that the banks would eventually have to pay a significant, but eminently survivable, settlement for abuses during the bubble era. Although the Miller probe was focused on practices like robo-signing and other such documentation abuses, it could theoretically have covered securitization as well.

But if the AGs were to sign off on a friendly global settlement for mortgage abuses prematurely, it would be like a DA offering a millionaire murderer a 2-year plea bargain before the cops even had a chance to interview all the eyewitnesses. It would be a blatantly political arrangement. Such a desire to get some kind of deal done and sweep the mortgage mess under the rug once and for all seems almost universal among high-ranking politicians, and particularly in the Obama administration, which has acted throughout like it wants more than anything to simply get all of this over with and put in the past.

Schneiderman’s investigation throws a monkey wrench into all of this. The banks cannot enter into a settlement with 49 states. They need all 50 at the table. But if Schneiderman breaks ranks and goes off on an end-run investigation that plunges right into the rotten core of the fraud era, then the whole pipe dream of an easy settlement vanishes in an instant. This is particularly true since Schneiderman is the most important AG, being from the state of New York, where most of the crime was probably committed.

The amount of money investors lost in this fraud scheme is probably gigantic. The ill-gotten money the banks made off that same fraud is probably similarly huge. And the damage to society, in the form of mass foreclosures and other losses, is incalculable. If the banks end up being found liable for all of these offenses, they could face truly crippling fines and penalties. This goes far beyond the question of whether one bank like Goldman defrauded a client or two or lied to investigators. This probe could be asking whether the banks’ entire revenue model during the crisis years was based on fraud.

Everything I’ve heard so far indicates that Schneiderman’s investigation is not a publicity stunt and is an in-earnest attempt to get to the bottom of things. Which is cool. As Terrell Owens would say, Getcha Popcorn Ready!

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SEC Worked Hard to Ignore Failings of Subprime Fraud

by Yves Smith

Saying that regulators ignored danger signs in the run up to the financial crisis now verges on being a “dog bites man” account. But the New York Times excerpt from the new book Reckless Endangerment by Gretchen Morgenson and Josh Rosner show that the SEC was not merely asleep at the switch, but apparently peopled with higher ups who were looking hard for reasons not to pursue suspicious conduct.

The extract is about a particularly rancid case, that of subprime originator NovaStar, which was one of the twenty biggest. Not only did it issue the drecky mortgages in impressive volumes, but it engaged in obvious financial misreporting. While the frauds it foisted on borrowers fell largely between regulatory cracks, since NovaStar as a non-bank mortgage broker was regulated only at the state level, and those offices are chronically understaffed, misstatements in public reports reside squarely in the SEC’s beat.

Morgenson’s and Rosner’s account follows the efforts of short seller Marc Cohodes. Admittedly, the SEC has reason to take the claims of short-sellers with a grain of salt, but the evidence that Cohodes provided over time was extensive and troubling, including:

¶ Extremely aggressive accounting (no loan loss reserves, overvaluation of loans in inventory, acceleration of future income)

¶ Failure to report regulatory sanctions (cease and desist orders in Massachusetts and Nevada; a HUD inspector general report that determined that NovaStar branch system and use of contractors violated federal regulations)

¶ Failure to report loss of important business relationships, such as with its mortgage insurer, PMI, or one of its main loan buyers, Lehman

¶ Frequent deceptive and inaccurate statements in analyst conference calls

¶ Obvious false statements in SEC reports (for instance, phantom branches, with addresses that corresponded to unrelated businesses, like massage parlors)

The damage to investors wasn’t simply that NovaStar shares were overvalued in the secondary market (they went from over $30 at their peak to below $0.50). The company was able to do more damage via floating new shares during the time frame in which Cohodes was trying to get the SEC to take action.

The remarkable bit is not that the SEC ignored him. Lower level staff appeared to take his charges seriously. But it appears the more senior officials were more interested in finding excuses to do nothing than do their jobs and take the matter seriously. From the book:

Mr. Cohodes reckons that over roughly four years, he conducted hundreds of phone calls with the S.E.C. about NovaStar. Each time, he would walk them through his points. Sometimes, a higher-up would get on the phone and contend that while NovaStar’s practices were indeed aggressive, the company did not appear to be breaking the law. NovaStar’s selective disclosures — it was quick to report good news but failed to own up to problems on many occasions — seemed to be infractions that the S.E.C. should have dealt with. But its investigation went nowhere….

NovaStar’s shares collapsed, wiping out roughly $1 billion in market value from the peak of the stock price. Despite the implosion, between 2003 and 2008, [founders] Mr. [Scott] Anderson and Mr. [Lance] Hartman each made about $8 million in salary, bonuses and stock grants.

Neither man was ever sued by the S.E.C. or any other regulator. As is its custom, the S.E.C. declined to comment on the NovaStar inquiry or the agency’s discussions with short-sellers. But documents supplied by the S.E.C. under the Freedom of Information Act show the extensive communications between Mr. Cohodes and the agency. Ms. Miller, still at the S.E.C., declined to comment.

Even though the public has become accustomed to complacent regulators, the fact that staff interest in the NovaStar case appears to have been stymied at higher levels signals how deep the rot at the SEC is. And with coddling of banksters now the order of the day in Washington, there’s no reason to expect any meaningful change.


Copyright © 2006, 2007, 2008, 2009 Aurora Advisors Incorporated

Too Big to Jail

by Danny Schecter

This week the financial crisis finally went prime time in the form of a big budget HBO docudrama called “Too Big To Fail.”

It was a well-acted docudrama focused on the BIG men and some women in the banks and in government who tried to put Humpty Dumpty back together again up on that wall to prevent a total economic collapse when panic dried up credit and financial institutions faced failure.

Based on the work of a New York Times reporter, it offered a skillfully-made but conventional narrative which, like most TV shows, showcase events but miss their deeper context and background.

We heard all the explanations, save one.

There was greed, ambition, ego and money lust. There were personal rivalries and ideological battles, parochial agendas and narrow self-interest. There was panic on THE Street and in the halls of mighty institutions. In many ways, the program recycled and made an official narrative compelling viewing. In the end, everyone was to blame so no one was to blame.

But... what was missing was any notion of intentionality and premeditation, almost no mention of systemic fraud and CRIME, that one word that sums up what really happened for those millions of Americans who have lost jobs and homes. We never saw victims or felt their pain and bewilderment. We were never shown how a shadow banking system emerged or how the finance industry worked with their counterparts in finance and insurance to transfer wealth from the poor and middle class to the superrich,

When I was but a precocious lad, my elementary school encouraged students to take out a savings account at the nearby Dime Bank in the Bronx. We were each given a bankbook and taught to put in $.50 a week to show us how to build wealth by being thrifty. It was with a sense of pride that I watched my balance grow.

It may have been peanuts in the scheme of things, but to me, at the time, it was the way to plan for the future.

At the same time, in those year I watched TV shows glamorize the bank robbing antics of a man named Willie Sutton who also staged jail breaks wearing masks and costumes. When he was asked why he robbed banks, he responded famously, “That’s where the money is.”

And it still is, except in our era, it is the banks that are robbing us.

That’s because what’s now called the “financial Services sector” has gone from about 30 percent of our economy to over 60 percent. Through a process called financialization, they have transformed how all business is done.

Making money from money soon began to surpass making money from making things. What we were never warned about was the danger of getting too deeply in debt, or how the economy was shifting from production to consumption.

Private equity, credit swaps, derivative deals and collateralized debt obligations soon drove the economy. Markets became captives of high performance trading by powerful computers.

When Wall Street became the defacto capital of the country, the bankers accrued more power than the politicians who they bought up with impunity. Their lobbying power deregulated the economy and decriminalized their activities. They killed many of the reforms enacted during the New Deal designed to protect the public. They built a shadow (and shadowy) banking system beyond the reach of the law.

And now, here we are, in 2011, five years after the meltdown of 2007, four years after the crash of 2008 and the passage of the TARP bailout that pumped money into their treasuries at taxpayer expense. Since then, there has been a steady parade of scandals and the disclosures that have come out since. Every week, more banks close and or consolidate and run into problems with regulators.

Take “my” old bank in the Bronx. It has been through as many changes as I have been. A website on bank histories runs it down:

Dime Savings Bank of New York, The
04/12/1859 NYS Chartered Dime Savings Bank of Brooklyn
09/10/1930 Acquire By Merger Navy Savings Bank
06/30/1970 Name Change To Dime Savings Bank of New York, The
09/30/1979 Acquire By Merger Mechanics Exchange Savings Bank
07/01/1980 Acquire By Merger First Federal S & L Assoc. of Port Washington
08/01/1981 Acquire By Merger Union Savings Bank of New York
06/23/1983 Convert Federal Dime Savings Bank of NY, FSB
01/07/2002 Purchased By Washington Mutual Inc.
01/07/2002 Name Change To Washington Mutual Bank

And then, of course, some years later, Washington Mutual itself, went bust and was bought up for a song by JP Morgan Chase. Here are some of the latest headlines about the bank now known as WAMU:

WaMu agrees on post-bankruptcy control -- report‎ - Reuters
WaMu, Shareholders, Biggest Creditors Said to Settle ...‎ - Bloomberg
WaMu shareholders are offered $25M-plus to drop claims

On the day I wrote this commentary, the New York Times reported:

“The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac.”

And to whom does the Times turn for expertise on the subject, but a key former operative at Washington Mutual who was with the bank in the go-go era of shoveling out subprime mortgages? Now, he gives advice on risk management:

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

What were people’s homes are now “inventory” to be stockpiled even though it has a negative cumulative effect on economic recovery of the housing market.

The banks that are increasingly despised and blamed for their role in engineering the financial disaster, are now trying to play nice to change their negative image.

Explains the Times:

“Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

So, they are still foreclosing, but with a smile. Is it a ‘lot different than it used to be’?
Just last month, Huffington Post reported:

“Top executives at Washington Mutual actively boosted sales of high-risk, toxic mortgages in the two years prior to the bank's collapse in 2008, according to emails published in a wide-ranging Senate report that contradicts previous public testimony about the meltdown.

The voluminous, 639-page report on the financial crisis from the Senate Permanent Subcommittee on Investigations singles out Washington Mutual for its decision to champion its subprime lending business, even as executives privately acknowledged that a housing bubble was about to burst.”

The truth is that most of the bigger banks have emerged from the financial crisis stronger than ever, with executives cashing in with higher salaries and bigger bonuses. That old saying about criminals who “laughed all the way to the bank” has to be revised because in this case they never left the bank.

More shocking has been the largely passive response by our government and prosecutors. At last, the Attorney General of New York is said to be investigating but none of the big bankers have yet gone to jail or suffered for the scams and frauds they committed. Most of the State officials who vowed to after the banks in the absence of aggressive federal actions have backed down.

So what can “we the people” do? We can do nothing and watch more of what’s left of our wealth vanish, or we can join others in demanding a “jailout,” not a bailout.

A well-known international banker was just arrested for a high profile alleged sex crime but not one of possibly thousands have been prosecuted for well documented financial crimes.

Where are the political leaders and activist groups willing to “fight the power” and demand accountability and transparency on Wall Street?

Why are so many us banking on a financial recovery to bring back jobs and a modicum of justice created by the very people and institutions responsible for the crisis?

And why didn’t I learn about these dangers when I first discovered the wonderful world of banking? Isn’t that what schools are for?

Danny Schechter

Mediachannel’s News Dissector Danny Schechter investigates the origins of the economic crisis in his book Plunder: Investigating Our Economic Calamity and the Subprime Scandal (Cosimo Books via Amazon). Comments to dissector@mediachannel.org

7 Ways to Stop Wall Street's Con Game

by David Korten

Wikipedia defines a “confidence trick” as “an attempt to defraud a person or group by gaining their confidence. The victim is known as the mark, the trickster is called a confidence man, con man, confidence trickster, or con artist, and any accomplices are known as shills. Confidence men exploit human characteristics such as greed and dishonesty.”

Ever hear a business reporter on the evening business news say, “Today, investors drive up the price of commodities to create a hundred billion in new value,” or some such? Sounds great, almost implying we should offer thanks to these champions of the public good who are risking their fortunes to expand the pool of wealth to enrich us all. The reporter is manipulating the language to set us up as marks in the Wall Street con.

A more honest report might have said, “Today, hedge fund traders speculating with other people’s money walked away with multimillion dollar commissions for inflating the commodities bubble by a hundred billion dollars.” In a more honest world, the report would clearly distinguish between real investors creating real wealth through real investments and speculators creating phantom wealth with financial games. People who bet on the price of pieces of paper would be called “gamblers.” Those who hold the bets and distribute the winnings would be called “bookies.”

Boil it down to the basics and you see that Wall Street is in the business of operating four sophisticated, large-scale confidence games.

  • Securities fraud: Selling shares in asset bubbles that are maintained solely by the constant inflow of new money is, in effect, a Ponzi scheme.
  • Reverse insurance fraud: Insurance fraud, by common definition, occurs when the insured deceives the insurer. In reverse insurance fraud, the insurer deceives the insured. In Wall Street practice this involves collecting premiums to cover risks the insurer lacks adequate reserves to cover and then refusing to pay legitimate claims.
  • Predatory lending: Using a combination of extortion, fraud, deceptive promises, and usury, predatory lenders lure the desperate into perpetual debt at exorbitant interest rates.

Because of Wall Street’s hold on lawmakers, these may all be perfectly legal, but phantom wealth is still phantom wealth, and these are all forms of theft. In three-card monte the dealer shuffles the cards so fast you can’t follow them, while talking even faster. Complex derivatives are a fast shuffle that makes it virtually impossible to follow the connection to any real value.

What makes the Wall Street con so much better for the dealers than a typical street con is that Wall Street dealers bet on their own game using other people’s money and then manipulate the market outcome in their own favor, rewarding themselves with huge bonuses when they win and taking billions in taxpayer bailouts when they lose.

Real financial reform would render unproductive speculation either illegal or unprofitable. Here are a few suggestions:

  1. Prohibit selling, insuring, or borrowing against an asset not actually owned by the seller, and issuing any security not backed by a real asset—all common Wall Street practices.
  2. Place strict limits on how much a financial institution can borrow in order to buy a property, and establish conservative reserve and capital requirements for institutions in the business of selling insurance of any kind.
  3. Regulate bond-rating agencies and impose strict penalties for fraudulent ratings.
  4. Impose a small financial-speculation tax of a penny on every $4 spent on the purchase and sale of financial instruments such as stocks, bonds, foreign currencies, and derivatives. This would have no consequential impact on real investors making long-term investments in real businesses and assets. But it would discourage short-term speculation and arbitraging.
  5. End the obscure tax loophole that allows hedge fund managers to report their billion-dollar compensation packages as capital gains, taxed at only 15 percent.
  6. Assess a 100 percent capital gains surcharge on profit from the sale of assets held less than an hour, 80 percent if held less than a week, and perhaps falling to 50 percent on assets held more than a week but less than six months. This would render most forms of speculation unprofitable, stabilize financial markets, and lengthen the investment horizon without penalizing real investors.
  7. Eliminate debt slavery by raising the wages of working people and the taxes of the moneylenders.

Opponents will claim that such regulation and taxes will stifle financial innovation. Good. That is the intention. Wall Street’s financial innovations are mostly ever more sophisticated and deceptive forms of theft. They should be discouraged. Keep the casinos in Vegas. The need to rebuild financial institutions that meet our needs for basic financial services will be the subject of next week’s blog.

David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, TheGreat Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group.

The Bernanke Scandal: Full-Frontal Cluelessness

by Robert Scheer

How I wish that Ben Bernanke would get caught emailing photos of his underwear-clad groin. Otherwise we don’t stand a chance of reversing this administration’s economic policy, which is shaping up to be every bit as disastrous as that of its predecessor.

Indeed, the Fed chairman’s much anticipated remarks on Tuesday take one back to the contemptuous indifference of a Herbert Hoover to the public’s suffering: Bernanke dismissed the wobbly economy with its anemic 1.8 percent first-quarter growth as merely “somewhat slower than expected.” The rise in unemployment to 9.1 percent was “some loss of momentum.”

The problem with Bernanke is that he is utterly clueless as to the stark pain and fear endured by the 50 million Americans who have experienced, or face the prospect of, losing their homes. His remarks reflected the insularity of a ruling-power elite that is magnificently impervious to the damage that Bernanke’s policies in the current and past administration helped inflict on what used to be called the American way of life. This is a man who assured us there was no housing crisis, while his policies at the Fed encouraged the mortgage securitization swindles that caused the meltdown of the economy.

His full statement stands as a classic example of the limits of economic language as morally descriptive: “Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.” Frustratingly slow—how about going bat nuts with fear over not being able to make your mortgage payment and losing your home? Tell it to workers who must contend with stagnant wage rates and sharply rising gas and food costs as better jobs and therefore consumer demand move offshore. Bernanke takes low wages to be reassuring news on what he sees as the all-important inflation front: “subdued unit labor costs should remain a restraining influence on inflation.”

At home we are experiencing a social tsunami with the disappearance of a middle-class workforce of stakeholders who were assumed by observers as varied as Thomas Jefferson and Alexis de Tocqueville to be the very bedrock of America’s experiment in freedom. Many with jobs are struggling desperately to get by as the average workweek and pay scales fall, and countless workers find themselves settling for rewards well below their skill sets. Even those slim pickings are denied to the unemployed. Bernanke concedes: “Particularly concerning is the very high level of long-term unemployment—nearly half of the unemployed have been jobless for more than six months.”

The jobs that have been created by our large multinational corporations, like the bailed-out GE, are primarily outside of the country, as Bernanke admitted: “Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets.” Those foreign gains, fueled by far more successful anti-recession policies in China, Brazil and Germany, have driven up demand and prices abroad in the areas of petroleum, food and key construction commodities. 

Bernanke, speaking at a monetary conference in Atlanta, conceded that “the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like,” and that the “U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression.” 

But he offered not a word as to how the severe effects of that housing bust might be mitigated. Not a word about assisting people to stay in their homes. Yet he claimed that the relief that the Fed provided to the bankers by buying up more than $1.2 trillion of the toxic mortgages those bankers had created “has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.” 

This is the Big Lie technique at work, employed by a huge banking lobby that stresses the direct cost of the TARP program while ignoring other programs that will not be paid back, as well as the additional cost of $5 trillion to the national debt that a proper Fed policy could have avoided.

The record is by now indelibly clear that the economic approaches pursued by George W. Bush and Barack Obama, with Bernanke playing a key role in both administrations, can be most accurately summarized as a policy of government of the bankers, by the bankers, and for the bankers. 

Assurances of stability to the financial markets, meaning the ability for companies to borrow government funds at a near-zero interest rate without giving anything back to the public in the form of mortgage relief or job creation, have been the overwhelming goal. But even by that standard, as the latest statistics on job creation and construction starts attest, the government’s effort is not working. Putting the bankers first has represented pushing on a string, what Paul Volcker condemns as a “liquidity trap,” a situation in which taxpayer money has been made available to major corporations that invest in job creation that benefits foreigners instead of U.S. workers. Now that’s an obscenity we should be concerned about.

Robert Scheer

Robert Scheer is editor of Truthdig.com and a regular columnist for The San Francisco Chronicle.


Lame Federal/”50″ State AG Mortgage Negotiations Continue

by Yves Smith

I’m having trouble understanding why anyone is still treating the Federal/state attorney general mortgage “settlement” negotiations as anything other that a fiasco. The more news reports come out, the more the parties aligned against the banks look like fools.

The latest confirmation comes in an article by Shahien Nasiripour in the Huffington Post that a member of the Department of Justice briefed state attorneys general and reported that the biggest banks in the servicing business had resigned themselves to paying $20 billion:

The nation’s largest mortgage companies are operating on the assumption that they will have to pay as much as $20 billion to resolve claims of widespread foreclosure abuse, an amount four times what they had originally proposed, the top federal official overseeing the discussions told state officials Monday, according to people who participated in the conversation.

Associate U.S. Attorney General Tom Perrelli told a bipartisan group of state attorneys general during a conference call that he believes the banks have accepted the realization that a wide-ranging settlement to the months-long probes will cost them much more than the $5 billion offer they floated last month, according to officials with direct knowledge of the call. Perrelli said he’s basing his belief on his recent conversations with representatives of the five targeted firms: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.

Sounds impressive, right? It’s not.

You don’t negotiate price without negotiating terms, and yet this exactly what is happening. The dollar figure utterly meaningless unless you know what is being traded off against it. A bigger dollar figure means the banks will demand a broader waiver against liability, which is precisely what we warned against (actually, we advised this craven political exercise be dropped, since no investigations had been conducted and hence the Federal/state negotiators had no bargaining leverage). You don’t give a waiver unless you have an idea the depth and nature of the abuses and the likely costs associated with them. As Dave Dayen at FireDogLake points out, the Abigail Field report, based on one person’s work, suggest the mortgage chain of title abuses are pervasive. We’ve been told that other investigations under way are coming up with similar results. That confirms that banks have a sinkhole of exposure. As we said early on, they’d be getting a fantastic deal if they got a broad waiver for a mere $20 billion.

And any “$20 billion” is likely to be a lot less in real economic terms. It’s not hard to imagine that any costs would be spread out over years, reducing its value in current dollar term, or might come the form of promises to change business practices, or fund certain activities, and those actions might not take place (how much monitoring do you think really will take place once the settlement team takes its photo op?)

But the banks may be playing the negotiators for fools on more than one level. Many of the state AGs are not keen to give the banks a “get out of jail free” card. New York, Illinois, California, Nevada, and Arizona are pursuing investigations and/or suits of their own, which means they are effectively out of the settlement. Shahien reports that Delaware has stated a probe of MERS, which suggests it will also exit the state AG effort. More states will withdraw if the waiver is, ahem, generous. And certain Republican AGs, by contrast, are opposed to having the banks subjected to even a slap on the wrist. They joined the negotiations for the sole purpose of quitting in a huff when the deal was finalized.

So the AG settlement looks to be a PR fabrication to make this whole exercise look serious. And as we’ve said repeatedly, the notion that this Administration will get tough with banks when they’ve gotten so deeply in bed with them and need their contributions for the 2012 election is sheer fantasy.

Dayen says, “I’ve lost sight of why we’re still having this conversation.” And I’m getting frustrated as well with this ridiculous PR effort which has only the potential to make matters worse (by letting the banks off easy) on the generous assumption that a deal actually gets done. But this ranks as one of the most utterly incompetent negotiations I have even seen. I’m assuming that this is simply a half-hearted effort to provide credible cover for a “the banks are putting this behind them” story, when that’s untrue too (a Federal/state won’t stop private lawsuits).

But after the buttoned-down stress test charade, the Obama Administration seems to be dialing its performance in on the banking front, not even bothering to go to the trouble to have its conduct look consistent or credible (pretty much everyone who has been paying attention has taken a dim view of everything it has done on the mortgage front, from HAMP to its continued bad foreclosure policies at Fannie and Freddie (continuing a speedy foreclosure process which encourages servicer abuses, continued reliance on foreclosure mills) to its phony investigation last fall (which we have repeatedly attacked) to the phony consent orders which appeared to be an OCC effort to undermine the HUD-DOJ-attorneys general negotiations. This Administration is not only showing how deeply it is in bed with the banks, but also its inability to shoot straight.

Copyright © 2006, 2007, 2008, 2009 Aurora Advisors Incorporated

Fed Needs Accountability, Not Secrecy, Starting at the Top

by Mark Weisbrot

The recent release of documents showing that the Federal Reserve loaned tens and possibly hundreds of billions of dollars to foreign banks in 2008 and 2009 has raised more questions about Ben Bernanke’s Chairmanship of the Fed.

The lending may or may not have been the right thing to do at the time, given the financial crisis. But it was done in secret, and the only reason that we have the information now is because Bloomberg News and Fox Business News won a two-year court battle, using the Freedom of Information Act, to get the documents released.

The official excuse for such secrecy at the time of lending is that the borrowing institutions could suffer “bank runs” if their loans were made public. That is debatable, but there is no excuse for keeping the information secret for years after the crisis has passed.

This kind of secrecy is maintained to avoid political accountability, not for reasons of financial stability. Such practices are what we would expect from authoritarian governments, not the government of a democratic republic.

Accountability is really the main problem at the Fed – if there were any significant accountability, Ben Bernanke would never have become Chair of the Fed in 2006, and certainly wouldn’t have kept his job after the economy collapsed.

Bernanke was a governor of the Federal Reserve in 2002, when the housing bubble was already identified by my colleague Dean Baker. Bernanke was oblivious to the bubble as it continued to expand to $8 trillion in 2006, before bursting and causing our worst recession since the Great Depression.

Bernanke should have been aware of Baker’s analysis, which looked at house prices over the post-World-War II era, and especially the record run-up of 70 percent – after adjusting for inflation – from 1996-2006. Before the bubble burst, Baker became the most cited source on the housing market for the New York Times. Economist Robert Schiller followed with an analysis of a century of house price data and came to the same conclusion – that this was a bubble that would inevitably burst. He was also frequently cited in the major media.

Baker showed clearly that this price run-up could only be explained by an asset bubble – that other explanations attributing it to demographics, building restrictions, or other changes in demand or supply were not consistent with the data. This was not rocket science for an economist of Bernanke’s skill level. He is well-versed in economic history, including that of the Great Depression.

Yet as late as July 2005, Bernanke was asked directly if there was a housing bubble, and he replied:

“I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy.”

In May of 2007, just seven months before the Great Recession began, Bernanke stated:

“.. .we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”

Bernanke therefore missed the biggest asset bubble in U.S. history, and then failed to anticipate the inevitable destruction that its bursting would cause in the overall economy. This is analogous to Japan’s nuclear regulators’ determination that the Fukushima Dai-ichi nuclear power plant was safe from any tsunami.

The problem with rewarding incompetence and failure in high places is that even a well-regulated financial system – which we are still very far from achieving – cannot serve the public interest if the chief regulators don’t do their jobs. Secrecy, lack of accountability, and incompetence – these are weapons of mass destruction for America’s economy.


This op-ed was distributed by McClatchy Tribune Information Services on June 15, 2011 and published by the The Sacramento Bee and other newspapers.

Copyright 2011 McClatchy

MA AG Signals Likelihood of Nixing “50 State" Mortgage Settlemnt

by Yves Smith

“50 State” Mortgage Settlement

The market-moving stories, namely the US debt ceiling drama and the rolling Greek/Eurozone mess, are crowding out anything other than tragedies (the Norway bombing, Chinese train wrecks) and good old fashioned high profile prurient interest (DSK and the Murdochs).

Let’s briefly cover an important development in the US mortgage saga. I’m told that the Department of Justice is putting the thumbscrews on state attorneys general to sign a mortgage settlement deal this week (how exactly the DoJ can pressure state officials is beyond me, since the Feds typically ignore state investigations until they look like they are about to be end run, but hopefully readers can enlighten me). New York and Delaware, as we already indicated, are out via having launched their own investigations, as is Nevada (ground zero of the mortgage mess) and likely California. We’ve been told Arizona was out a while ago, but haven’t gotten confirmation that that is still true.

We are also told the banks are pressing (as we predicted) for a very broad release, and the announcement today from Martha Coakley, the Massachusetts state AG, strongly suggests she is another dissenter. Per Bloomberg:

The banks in settlement talks with state and federal officials are seeking broad releases to protect them from legal claims. Massachusetts Attorney General Martha Coakley said yesterday she won’t support an agreement that includes releases for securitization of mortgages and conduct related to a database of mortgages known as MERS.

“Massachusetts will not sign on to any global agreement with the banks if it includes a comprehensive liability release regarding securitization and the MERS conduct,” Coakley wrote to the Norfolk County register of deeds in Dedham, Massachusetts. “These investigations must continue.” The registry keeps real estate records.

“Conduct related to MERS,” from what I can tell (and I did a fair bit of checking) does not mean the banks are on the hook for MERS in a direct manner. MERS is not a shell company, even though its corporate governance was particularly unorthodox, to put it politely. A past efforts to pierce its corporate veil failed and corporate veil-piercing has not succeeded in the past save for closely-held companies. It would be an uphill battle with questionable returns, since running a private mortgage registry per se is not illegal. Even though there is a potential elephant in the room, whether local recording fees not paid thanks to the use of MERS can somehow be clawed back, that liability might not sit with the undercapitlized MERS. It most likely rests with the poor chump investors rather than the banks.

What Coakley likely means is bank liability for foreclosures that relied on MERS as part of chain of title. When creates chain of title problems, that means problems for the servicers. But that liability does not result from MERS. Rather, it is liability they created all on their own by having relied on a defective registration/transfer.

Massachusetts has become an important front of the mortgage crisis both by virtue of having handed down an important decision, Ibanez, which was a major blow to the securitization industry’s argument that the pooling and servicing agreement (the contract that governed the securitization) was sufficient to effect transfer of the mortgages to the trust. The Massachusetts Supreme Judicial Court is very well regarded, so that decision carried more weight than a normal state supreme court decision would. \

In addition, Massachusetts is also a state where one of the registers of deeds, John O’Brien, in South Essex County, has ascertained that both that there was considerable evidence of robosigning right in his records (which more recently reports show is continuing, despite industry lies claims to the contrary). O’Brien has also estimated the recording fees lost due to the MERS system in his county alone are $22 million and he’d very much like to get it back. Dave Dayen at FireDogLake wrote:

It’s telling that Coakley had to respond to a register of deeds, the unassuming, ministerial recorders of real estate transactions who are starting to wield considerable weight as a settlement is discussed….

They have the evidence. A simple crowd-sourced movement of registers can document years and years of fraud. MERS is central to that, because that’s the electronic registry which basically superseded the public land recording system in this country during the bubble years. This is entirely tied up with securitization failures, and liability for this mess, which is at the heart of the foreclosure fraud issue, should never be signed away. And now, Coakley is saying she won’t. I hope more AGs join her.

Amen to that.

Copyright © 2006, 2007, 2008, 2009 Aurora Advisors Incorporated


Obama Wants NY AG Schneiderman to Back Off Banks: NYT Reports

by Marcy Wheeler

The NYT has an article about efforts to strong-arm Attorney General Schneiderman to get him to put rule of law aside for yet another bank bailout.

First, it quotes HUD Secretary Shaun Donovan as saying,

The disagreement is around whether we should wait to settle and resolve the issues around the servicing practices for him — and potentially other A.G.’s and other federal agencies — to complete investigations on the securitization side. He might argue that he has more leverage that way, but our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market. [my emphasis]

And it quotes DOJ spokeswoman Alisa Finelli saying,

The Justice Department, along with our federal agency partners and state attorneys general, are committed to achieving a resolution that will hold servicers accountable for the harm they have done consumers and bring billions of dollars of relief to struggling homeowners — and bring relief swiftly because homeowners continue to suffer more each day that these issues are not resolved. [my emphasis]

You see, the Administration has an “immediate opportunity to help a huge number of borrowers stay in their homes,” without any action from Eric Schneiderman. They have a way to do so more swiftly, in such a way the servicers actually would be held accountable. It would involve offering refis with principal reductions to all the underwater homeowners whose loans are owned by Fannie and Freddie. That would not only help a huge number of borrowers stay in their home, but it would be massive stimulus.

But instead they’re sending Donovan to pressure Schneiderman to pursue a measure that would benefit far fewer homeowners and probably take more time, while putting the last nail in the coffin of the rule of law in this country.

And then there’s Kathryn Wylde, who spins her shilling for Bank of America as an effort to protect NYC’s “Main Street.”

The lawsuit angered Bank of New York Mellon, and as Mr. Schneiderman was leaving the memorial service last week for Hugh Carey, the former New York governor who died Aug. 7, an attendee said Mr. Schneiderman became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public. Ms. Wylde, who has criticized Mr. Schneiderman for bringing the lawsuit, is also chief executive of the Partnership for New York City.

Characterizing her conversation with Mr. Schneiderman that day as “not unpleasant,” Ms. Wylde said in an interview on Thursday that she had told the attorney general “it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

Now why would Wylde believe she’s a more appropriate person to decide what is “defensible” than NY’s top state law enforcement official?

And while Wylde is directly doing the bidding of BNYM, ultimately this is about saving Bank of America from admitting that it is insolvent.

You know … Bank of America.

One of just a few of the big banks that is not headquartered in NYC?

One that considered–and then decided against–moving its HQ and related jobs to NYC a few years ago?

Why is Kathryn Wylde fighting so hard to get an elected NY official to put his constituents’ interests behind the interests of a Charlotte company? Why is the CEO of the Partnership for New York City working so hard to benefit a company that doesn’t even want to move to her city?

But then this effort to further erode rule of law isn’t about constituencies–about actual people rather than Mitt’s corporate people–is it?


Schneiderman Foe Wylde Leading Bankster Fraud, China Sellout

Matt Stoller: Sell America to Communist China Faster, Says New York Fed Official and Schneiderman Foe Kathryn Wylde

By Matt Stoller, a fellow at the Roosevelt Institute. He is the former Senior Policy Advisor to Rep. Alan Grayson. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller

The elite consensus in American politics is held together by a small group of well-paid and well-connected insiders who are marbled throughout the world of corporations, banks, government service, and elite nonprofits. Who are they? And what do they believe?

One way to start is to look at who is being recruited to attack Eric Schneiderman, the liberal New York Attorney General going after the big banks. Normally these people stay behind the scenes, but in this case, we’re getting a nice peak behind the curtain. The best example so far is Kathryn Wylde, the chief of the nonprofit Partnership for New York City, a big bank/corporate-funded lobbying group that advises political officials on how to build a more business-friendly New York.

Wylde, importantly, sits on the Board of the New York Federal Reserve as a Class C Director, the group that is supposed to represent “the public”. Yet, after Schneiderman got into a contentious legal fight with Bank of New York Mellon over foreclosure fraud, the bank literally referred reporters to Wylde for her comment. She even went so far as to confront Schneiderman at a funeral. Because she’s a director of the New York Fed, her actions reflect on the Fed. Let’s start there. Wylde is appointed, and can be fired, by the Federal Reserve Board in Washington, DC, according to Section 11(f) of the Federal Reserve Act (these Board members are Ben Bernanke, Janet Yellen, Elizabeth Duke, Dan Tarullo, and Sarah Bloom Raskin).

Should she be fired? Let’s look at the facts. Wylde is subject to this restriction in the Federal Reserve Act.

“Class C Directors as Employees or Stockholders of Banks No director of class C shall be an officer, director, employee, or stockholder of any bank.”

The odds are high that she owns mutual funds or bank shares. She made $466,000 last year. Unless she has profligate spending habits, or is unusually risk averse, she probably has a decent sized investment portfolio, and if she invested along orthodox lines, a chunk of it would be diversified holdings of domestic stock, which would have to include bank shares. The NY Fed is pretty sloppy about its ethics issues. For instance, former NY Fed class C director and ex-Goldman co-chariman, Steve Friedman, bought Goldman shares while privy to and probably influencing Fed “save the bank” efforts in early 2008. Eliot Spitzer pointed to clear conflicts of interest regarding Jeff Immelt. You’d expect the Federal Reserve Board in DC to put a stop to this, but so far, it has allowed Wylde to continue in her role.

Wylde’s open opposition to New York attorney general Eric Schneiderma’s objecting to a proposed $8.5 billion Bank of America mortgage settlement appears to run afoul of these NY Fed bylaws.

“As a Reserve Bank directorship is a form of public service, directors also must limit their participation in partisan politics. Specifically, directors should not engage in any political activity or serve in any public office where such activity or service might:

associate the Reserve Bank with any political party or partisan political activity;
raise questions as to the director’s independence and ability to perform the duties of his or her position with the System; or
bring embarrassment to the Reserve Bank or the Federal Reserve System.

She’s violated these quite clearly. Meddling in the work of a law enforcement officer is obviously embarrassing and risks the independence of the system. That Bank of New York Mellon is openly referring reporters to her shows that she is not operating independently, or even on behalf of the public. Whether that’s a firing offense is up to Bernanke and company.

Just checking into Kathryn Wylde’s background shows that she’s a standard issue Rubinite who wants to sell out America to bankers and Chinese elites. As head of the Partnership for New York City, she went after unions by attacking education expert Diane Ravitch (aligning her with Obama Education Secretary Arne Duncan to complement her alliance with HUD Secretary Shaun Donovan). Wylde opposes a living wage for New Yorkers, as well as paid sick leave. Not letting employees go home when they are sick is unsanitary, dangerous and authoritarian. These positions are literally pro-poverty.

But nothing screams “I represent America” like this post of hers.

Within a generation, the U.S. will no longer be the world’s largest economy. Partnerships with foreign-controlled businesses and investors will be more important than ever. China will be larger and is already the most important market for U.S.-based international businesses. Chinese leadership is fed up with U.S. policies and politics that discourage foreign investment in business and real estate, at the same time their country is holding much of our national debt.

Locally, New York is trying to counter this negative sentiment by supporting investment by one of China’s largest real estate companies in five floors of the Freedom Tower that is being constructed on the World Trade Center site. The Beijing-based Vantone Group will develop a 200,000 square foot business and conference center designed to encourage business ties between the two nations and to house the Western headquarters of Chinese companies that are going global.

And let’s be clear – Wylde is excited that this deal is approved by the Communist Chinese government, which is explicitly trying to reduce America’s wealth and power. And this woman is on the board of the New York Fed representing the public. So there you have it. If you feel like American multinationals are too warm and fuzzy for your tastes, you have Kathryn Wylde out there representing you at the New York Fed, making sure that Chinese multinationals are waiting in the wings to take over for them. That, of course, assumes there is anything left worth having in the US once the big financial players are done with their looting.

via http://www.nakedcapitalism.com

Iowa AG Miller Punks Schniederman, Flaks for Easy Bank Fix

by Yves Smith

Iowa Attorney General Tom Miller’s Yawning Credibility Gap

Even though it turns out that Eskimos (Inuit) don’t have as a rich vocabulary of words for snow as urban legend would have you believe, the Welsh do have a plethora of expressions for various types of rainfall.

Since corruption is becoming as rich, complex, and important a topic as precipitation apparently is in Wales, the time has arrived for devising more nuanced ways to describe its many manifestations. And it’s always preferable to take advantage of established terminology.

So to encourage the revival of the Johnson Administration coinage, “credibility gap,” we’ll discuss a prime example: Iowa attorney general Tom Miller’s conduct in his role as head of the 50 state attorney general mortgage “settlement”. His latest claims, contained in a letter defending his ouster of New York attorney general Eric Schneiderman from the executive committee of the 50 state AG efforts, is more than a tad disingenuous, but that simply makes them par for the course for Miller.

The term “credibility gap” came into use in the days when most people trusted authority and the media was protective of political leaders unless they became tainted by a fairly serious scandal (JFK’s affairs were kept under wraps, for instance). But Johnson and his staffers made such unabashed misrepresentations about the undeclared war in Vietnam that the press broke out of its usual military conflict role of respectful stenography.

I have no idea how truthful Miller is on a routine basis. But he has told so many whoppers as well as carefully crafted exercises in truthiness that I now assume that whatever he says about the mortgage settlement talks is the opposite of what is actually happening. Maybe not the polar opposite, but at least 120 degrees away from reality.

Let’s do a quick recap:

1. Shortly after the 50 state effort begins, Miller promised to put people in jail, them quickly distanced himself from that claim. We argued there was a path to prosecution, starting with the foreclosure mills. Matt Taibbi later divulges that Miller

raised $261,445 from finance, insurance and real estate contributors since he announced that he was going to be coordinating the investigation into improper foreclosure practices. That is 88 times as much as they gave him not over last year, but over the previous decade…

Miller’s office argued those donations don’t mean what they seem to mean, they were from long-standing supporters or not the banks involved in the settlement discussions.

2. Various critics, including yours truly, took MIller and Federal banking regulators to task for having not done any meaningful investigation of mortgage abuses prior to entering into settlement talks (there was an 8 week Federal sham effort that made the stress tests look good). The whole premise of a settlement discussion is that the reason for the other side to entertain signing an agreement, coughing up dough and maybe also agreeing to changes in behavior is that you have a credible threat, meaning a big, costly lawsuit that you are prepared to drop on their head. No investigation means it is bloomin’ obvious all you have is bluster.

We’ve since had our dim views confirmed, as someone working for one of the Federal banking regulators and was involved in the negotiations has confirmed that the 50 AGs didn’t even do document discovery. Yet his office tried to claim otherwise Per the New York Times:

Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”

So Miller’s minion tried to claim that their knowledge of the terrain was a sufficient basis for negotiating a settlement. If that was the case, pray tell why had no state taken action?

3. After New York attorney general Eric Schneiderman filed his motion objecting to the so-called $8.5 billion Bank of America settlement, Miller dismissed Schneiderman from the executive committee of the attorneys general mortgage settlement group. Whether it was a show of pique, a desire to keep Schneiderman away from the most influential AGs, or perhaps a request of the Administration (the news that Team Obama had been pressuring Schneiderman had also broken recently), isn’t clear, but Miller did not offer terribly convincing responses when New York Congressmen complained about his action.

Miller’s letter accuses Schneiderman of “walking away from the negotiations” and asserts that he was not dismissed to “quash dissent” yet states later in the same letter:

Attorney General Schneiderman was removed from the executive because he has, over the last several months, undermine our efforts to reach an agreement. In (pursuing a different path) Mr. Schneiderman and his staff have sought to undermine our settlement efforts through strategic statements outside of the multistate framework and encouraging groups to oppose our settlement negotiations among other efforts.

Schneiderman made a point of avoiding the media, but it appears the remark that got him on Miller’s bad side was a simple statement in June of the obvious: that there had been no investigation, which meant the AG group had no leverage, and he was not going to condone it. Via Dave Dayen at FireDogLake:

New York Attorney General Eric Schneiderman expects to lead opposition to what he called a “quick, cheap settlement” of a 50-state investigation into foreclosure practices. Schneiderman put the monetary settlement being discussed with the largest U.S. mortgage servicers at $20 billion to $25 billion and said he will take “the hardest line” against it.

The probe began in October. New York launched its own investigation two months ago and, Schneiderman said, has found the problem is much deeper. He said he was “stunned” to find the multi-state probe so lacking that no documents or witness depositions had been obtained.

“We have no leverage,” Schneiderman said during a meeting Monday with the Democrat and Chronicle editorial board.

In other words, an attorney general that wants to do his job and investigate and if the facts warrant, prosecute cases is not what the “50 state” settlement is supposed to be about. And contrary to Miller’s claim, dissent is an excommunicable offense.

4. Marcy Wheeler has done an admirable job of shredding another MIller piece of artwork. He suddenly claims that he can sorta pretend to have done an investigation, since HUD has provided the executive committee (notice the group from which Schneiderman was just banned) with a copy of a report on robosigining! Wowiee!

Marcy notes that the HUD study is not complete and that the story at Housing Wire came entirely from Miller’s’ office. I must add: robosigning isn’t worth the amount the AGs are seeking in a settlement. The banks, as we have stressed repeatedly, are out to get a much broader waiver on the cheap. So some additional information on robosigining is worth bupkis.

In addition, and more important, the negotiations are too far advanced to incorporate major new information if the AGs somehow put themselves in the position to obtain it. They presented an outline of terms back in March, for Chrissakes. If they were to somehow find major new liability, they’d have to go back to the drawing board, when all of the messaging from Miller’s camp since January has been that the intent is to get a deal (meaning any deal with enough zeros attached to it to mask the fact that it is a sell out) as soon as is humanely possible.

5. Housing Wire, which as reliable defender of bank interests, is now a Miller cheerleader, managed to craft a second story out of Miller’s letter to the New York Congressmen. Its headline highlights the fact that any settlement allegedly won’t forestall criminal prosecutions. But have a look at the Milller letter:

This sounds like a big deal, right? Not really. First, there is a LOT of straw mannning in this section. The letter asserts that critics have said that the state/Federal effort is out to give the banks a waiver of all mortgage-related liability. The Congressmen did not make that argument, nor have any critics I am aware of said that. What they have said is the AGs are likely to give an overly broad release way too cheaply, particularly if chain of title issues are included.

Similarly, the Congressmen did not mention criminal prosecutions. And Milller is merely reiterating his ongoing stance, per Bloomberg in January:

The group isn’t pursuing a criminal investigation, Miller said. “Our focus is to reform the servicing process and that’s inherently civil, not criminal,” he said.

Per Miller, a settlement, assuming that there ever is one, will not forestall criminal prosecutions. But the reality is if state AG’s can’t launch civil cases (because they’ve settled civil liability) they are effectively precluded from developing criminal cases. Why? State AGs are resource constrained. If they launch an investigation, they typically look to see if they can build a civil case, and as discovery proceeds, they can up the ante to criminal charges if they think the facts merit it. To set the bar for litigation at criminal charges will make pursuing this area a non-starter.

Finally, Miller disingenuously points out that Schneiderman is always free to opt out and go his own way. Duh.

Miller’s increasingly defensive responses to well deserved criticism suggest that he really does not understand that he has aligned himself with a bad cause. If so, that makes him a very valuable human shield for the Administration.


California Refuses to Accept Obama’s Banking Fraud Sellout

by Robert Scheer

There is no three-strikes law for crooked bankers, not even a law for a fifth strike, as The New York Times reported in the case of Citigroup, cited last month in a $1 billion fraud case. Unlike the California third-striker I once wrote about whom a district attorney wanted banished forever to state prison for stealing a piece of pizza from the plate of a person dining outdoors, Citigroup executives get off with a fine and by offering a promise not to do it again, and again and again.

As the Times reported when Citigroup agreed to settle SEC charges last month: “Citigroup’s main brokerage subsidiary, its predecessors or its parent company agreed to not violate the very same antifraud statue in July 2010. And in May 2006. Also as far back as March 2005 and April 2000.”

Not that the bankers face prison time, since the Justice Department has refused to act in these cases, and the Securities and Exchange Commission is bringing only civil charges, which the banks find quite tolerable. This time, the fine against Citigroup was $285 million, which may sound like a lot except that the bank raked off as much as $700 million on this particular toxic securities deal. As the Bloomberg news service editorialized, “... there should be only one answer from Jed S. Rakoff, the federal judge in New York assigned to weigh the merits of the agreement: You’ve got to be kidding.”

Not to pick on Citigroup, the too-big-to-fail bank that Clinton administration Treasury Secretary Robert Rubin helped make legal before he was paid off with a $126 million job on Wall Street; that corporation was not the only serial offender. “Citigroup has a lot of company in this regard on Wall Street,” the Times noted, “nearly all of the biggest financial companies—Goldman Sachs, Morgan Stanley, J.P. Morgan Chase and Bank of America among them—have settled fraud cases by promising that they would never again violate an antifraud law, only to have the SEC conclude they did it again a few years later.”

So forget relying on the federal government to hold the Wall Street swindlers accountable. Indeed, the Obama administration has been involved in negotiating a deal with state attorneys general to settle their complaints with the banks for a pittance of compensation for the victims. In return, the states would promise not to institute further legal proceedings against the banks.

The fix was in for what a New York Times editorial on Tuesday headlined “Letting the Banks Off Easy” described as “paltry” mortgage relief, reducing by less than $20 billion the balances of 14.5 million underwater homeowners who are “drowning in some $700 billion of negative equity.” The deal has been stalled by the refusal of California Attorney General Kamala Harris to accept this sellout. Among its other disastrous concessions would be ending further investigation by the states into financial skullduggery connected with the housing meltdown.

In September, Harris, elected in a Democratic sweep of the state’s top offices in 2010, went against the dictates of the Democrat in the White House, stating that she refused to release the banks from legal liability for the mortgage crisis. That is the nub of the pending White House-brokered deal with the banks. As the Times summarized it: “The proposed settlement reportedly would prevent the states from pursuing claims against banks relating to fraud or abuse in the origination of the bubble. It would also prevent states from pursuing claims for foreclosure abuses, like improper denial of loan modifications.”

Traditionally the states provided the essential regulation of mortgage origination, ownership and sales as a transparent process duly recorded and subject to public examination at the county level. But in order to facilitate the gathering of those mortgages into the sort of collateralized debt obligations that the banks could then bet on and trade worldwide, homeownership became a murky matter. Many of the mortgages now in question, including the ones that Citigroup’s “synthetic” derivative was based on, are no longer owned by the banks that originated them. They are instead part of the Mortgage Electronic Registration Systems (MERS) database, owned by a consortium of banks and residing in computers in Reston, Va.

The MERS system is described by the Times as “a land registry system implicated in bubble-era violations of tax, trust and property law.” The Obama-supported settlement would make it very difficult if not impossible to investigate at long last the workings of MERS and other systemic sources of what is now a full-blown international economic crisis. As the Times editorial put it, “In effect, the legal waivers being contemplated would let the banks pay up to sweep wrongdoing under the rug.”

Thankfully, we have a few state attorneys general, most prominently California’s Harris, standing up for the American people, but it is outrageous that a president who avowedly committed to defending the public interest would now be subverting that effort rather than leading it.

© 2011 Robert Scheer

Robert Scheer is editor of Truthdig.com and a regular columnist for The San Francisco Chronicle.

Secrets of the Bailout, Now Told

by Gretchen Morgenson

A  FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.

It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.

But that’s the way our world works. Billions are secretly showered on troubled financial institutions to stave off disaster. Individuals get little or no help.

Here are some of the new figures:

Among all the rescue programs set up by the Fed, $7.77 trillion in commitments were outstanding as of March 2009, Bloomberg said. The nation’s six largest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — borrowed almost half a trillion dollars from the Fed at peak periods, Bloomberg calculated, using the central bank’s data.

Those six institutions accounted for 63 percent of the average daily borrowings from the Fed by all publicly traded United States banks, money management and investment firms, Bloomberg said.

Numbers for individual companies were equally astonishing. For example, the Fed provided Bear Stearns with $30 billion to see it through its 2008 shotgun marriage with JPMorgan. This was in addition to the $29.5 billion in assets purchased by the Fed from Bear to assist in the buyout by JPMorgan. Citigroup, meanwhile, tapped the Fed for almost $100 billion in January 2009 — its peak during the crisis — and Morgan Stanley received $107 billion in Fed loans in September 2008.

Some may see all this as ancient history or as ho-hum disclosures that confirm what everybody already knew — that our banks were on the precipice and that only hundreds of billions of dollars could save them. The Fed says that the money it lent in these programs was paid back without generating any losses.

But the information is revealing nonetheless. The fact is, investors didn’t know how dire the situation was at these institutions. At the same time that these banks were privately thronging the teller windows at the Fed, some of their executives were publicly espousing their firms’ financial solidity.

During the first three months of 2009, for example, when Citigroup’s Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company’s performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed “the strength of Citi’s franchise.”

Citi’s earnings release didn’t detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.

These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.

The rules are found in a section of the S.E.C.’s Codification of Financial Reporting Policies titled “Effects of Federal Financial Assistance Upon Operations.” They state that if any types of federal financial assistance have “materially affected or are reasonably likely to have a future material effect upon financial condition or results of operations, the management discussion and analysis should provide disclosure of the nature, amounts and effects of such assistance.”

Given these rules, Mr. Turner said: “I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks’ operating results. The borrowings had to have an impact on their liquidity and earnings, but I don’t ever recall anybody saying ‘we borrowed a bunch of money from the Fed at zero percent interest.’ ”

I asked officials at Citigroup and Morgan Stanley about these disclosures. Jon Diat, a spokesman for Citigroup, said the bank’s disclosures in its quarterly filings with the S.E.C. “were entirely appropriate.” He added that Citi and other financial services firms “utilized numerous government programs that provided significant funding capacity and liquidity support which helped increase the flow of credit into the economy.”

Morgan Stanley pointed to its annual report for 2008, which mentioned the various Fed programs and the bank’s ability to tap them. The filing noted that the Fed was authorized to extend credit to Morgan Stanley’s broker-dealer units in both the United States and Britain but contained no dollar amounts used.

Of course, there is stigma associated with a company tapping into federal assistance programs. This is the Fed’s main argument for keeping its operations under wraps. And companies want to avoid frightening investors by disclosing their reliance on this type of emergency cash, even if it is only temporary.

But keeping this information from shareholders is no way to engender their trust. And a lack of investor confidence often translates to depressed valuations among companies’ shares. If investors doubt that a company is coming clean about its financial standing — the current worry is how exposed our banks are to European debt woes — its stock price will suffer. This is very likely one of the reasons that big bank stocks trade at such low price-to-earnings multiples today.

It will be interesting to see whether the S.E.C. does anything to enforce its rules that companies disclose federal assistance in financial filings, either in the recent past or in the future. You could certainly argue that requiring such disclosures is even more important nowadays, given that so many banks are considered too big to fail and that the taxpayer will undoubtedly be asked once again to rescue them from their mistakes.

“These banks and the Fed have never believed in transparency,” Mr. Turner said. “I actually think their thought process is sorely flawed. If the banks knew this stuff was going to be made public they’d behave differently. Instead of runs on the bank you’d have bankers doing things intelligently to avoid getting into trouble.”

What an idea!

Copyright 2011 The New York Times

Obama to Use Pension Funds to Pay for Mortgage Fraud Settlement

Obama to Use Pension Funds of Ordinary Americans to Pay for Bank Mortgage “Settlement”
by Yves Smith

Obama’s latest housing market chicanery should come as no surprise. As we discuss below, he will use the State of the Union address to announce a mortgage “settlement” by Federal regulators, and at least some state attorneys general. It’s yet another gambit designed to generate a campaign talking point while making the underlying problem worse.

The president seems to labor under the misapprehension that crimes by members of the elite must be swept under the rug because prosecuting them would destabilize the system. What he misses is that we are well past the point where coverups will work, and they may even blow up before the November elections. If nothing else, his settlement pact has a non-trivial Constitutional problem which the Republicans, if they are smart, will use to undermine the deal and discredit the Administration.

To add insult to injury, Obama is apparently going to present his belated Christmas present to the banking industry as a boon to ordinary citizens. He refused to appoint a real middle class advocate, Elizabeth Warren, to the Consumer Financial Protection Bureau, but he’s not above stealing her talking points.

We and other commentators have discussed how the mortgage settlement negotiations nominally led by Iowa attorney general Tom Miller had descended into farce. Almost nothing the Miller camp said was believable. They were presented as “attorney general” discussions when the Administration was pulling the strings. They’ve described a deal as weeks away for over a year. They kept claiming that they had undertaken investigations when not a single subpoena was issued by the AGs still involved in the negotiations. They’ve argued from the get go that a pact will be good for homeowners when the deal reached by under-resourced Nevada attorney general Catherine Cortez Masto with a single servicer, Saxon, resulted in a payout that is 10 to 20 times what the Administration is calling a victory. And that assumes that the banks will live up to their side of the deal when past settlements of servicing abuses have shown that they don’t.

The administration has finally woken up to the fact that the housing mess is almost certain to get worse before it gets better, and Obama must therefore be armed with better propaganda. The Miller-led talks have become a bit of an embarrassment and needed to be put out of their misery. So Team Obama and Federal banking regulators have agreed on terms and as we discussed last Friday, are upping the pressure on state attorneys general to fall into line. As reported by Shahien Nasiripour of the Financial Times:

"Banks and government negotiators have cleared a big hurdle in efforts to resolve allegations of widespread mortgage-related misdeeds, agreeing on terms for a settlement that are being circulated to the 50 US states for approval, state officials and a bank representative say.

"The proposed pact would potentially reduce mortgage balances and monthly payments by more than $25bn for distressed US homeowners…

"State prosecutors have already received a set of documents detailing new mortgage servicing standards that the banks and the government negotiators have agreed to. The states were also being sent documents detailing other main components of the deal, such as the liability release for the banks, the so-called “menu” of options describing the various forms of aid to be given to borrowers, as well as the precise language of the so-called “most favoured nation” clause, which spells out how participating states in the deal would be eligible to receive more advantageous terms should a holdout state strike a more favourable deal on its own with the five targeted banks."

The story did not outline terms, but previous leaks have indicated that the bulk of the supposed settlement would come not in actual monies paid by the banks (the cash portion has been rumored at under $5 billion) but in credits given for mortgage modifications for principal modifications. There are numerous reasons why that stinks. The biggest is that servicers will be able to count modifying first mortgages that were securitized toward the total. Since one of the cardinal rules of finance is to use other people’s money rather than your own, this provision virtually guarantees that investor-owned mortgages will be the ones to be restructured. Why is this a bad idea? The banks are NOT required to write down the second mortgages that they have on their books. This reverses the contractual hierarchy that junior lien-holders take losses before senior lenders. So this deal amounts to a transfer from pension funds and other fixed income investors to the banks, at the Administration’s instigation.

Another reason the modification provision is poorly structured is that the banks are given a dollar target to hit. That means they will focus on modifying the biggest mortgages. So help will go to a comparatively small number of grossly overhoused borrowers, no doubt reinforcing the “profligate borrower” meme.

But those criticisms assume two other things: that the program is actually implemented. The experience with past consent decrees in the mortgage space is that the servicers get a legal get out of jail free card, a release, and do not hold up their end of the deal. Similarly, we’ve seen bank executives swear in front of Congress in late 2010 that they had stopped robosigning, which turned out to be a brazen lie. So here, odds favor that servicers will pretty much do nothing except perhaps be given credit for mortgage modifications they would have made anyhow.

There are two clever features of the deal, but neither look intended to benefit ordinary citizens. One is that the deal throws some funding at chronically cash stressed mortgage counselors. They are thus certain to voice approval of the pact. The other is (per the FT story) the deal’s “most favored nations clause” is designed to reduce the bargaining leverage of any AGs that go their own way. It means that any servicer will have the incentive to fight hard against giving any state a better deal because it will automagically trigger improved terms across the states that signed on to the Federal deal. But this may have interesting perverse effects, since banks that refuse to settle with breakaway AGs will ultimately have damages awarded by a court. That means longer and most costly fights by the states, but in most cases, ultimately bigger awards (frankly, the fact set is so bad that all the state AGs need to do is focus on fairly conservative legal theories to have good odds of scoring big wins).

Dave Dayen seemed to think that the AG rebellion was likely to stay firm, given how few of the Democrats were going to Chicago on Monday for an arm-twisting meeting with HUD head Shaun Donovan and an unnamed emissary from the Department of Justice. I would not be so certain. With states so budget starved, I don’t see how anyone can justify sending a live body to Chicago when a phone briefing would work just as well. More important, the most favored nation clause is nasty, and may nudge some fence-sitters over the line.

And I have also been told that Donovan was on the Hill late last week pressuring Congressmen to support the deal. Since this is a regulatory measure that does not require Congressional approval, this move is meant to deprive dissenting state AGs from any support in local media from sympathetic Congressmen. For instance, 31 California representatives wrote the Justice Department, the Federal Reserve and the Office of the Comptroller of the Currency calling on them to “investigate possible violations of law or regulations by financial institutions in their handling of delinquent mortgages, mortgage modifications and foreclosures.” Clearly they could be expected to support California attorney general Kamala Harris’ withdrawal of the deal. Donovon is trying to get them and like minded solons speaking from the Obama script.

But the Administration’s scheme may not be playing out according to script. Senator Sherrod Brown sent a letter last week to associate attorney general Thomas Perelli, Donovan, the CFPB’s Richard Cordray and Tom Miller criticizing the settlement pact. It could have been written by Naked Capitalism readers. Key section:

Now while Republicans may relish the specter of Democrats infighting, the fact is no one is going to want to be seen to be undermining the leader of the party in an election year. So that will put a damper on how aggressive the opponents will be. And media outlets have been amplifying Obama’s efforts to take credit for gravity. For instance, the Administration is touting the fall in foreclosures as an indicator of success when their policies have ranged from do nothing to disasters like HAMP. The fall in foreclosures is actually a sign of failure, as banks are attenuating the process more and more, in some cases due to their inability to come up with necessary documentation, in others out of a desire to wring even more fees out of investors (when a borrower can’t pay, the bank’s fees come first out of the eventual sale of the house).

Either a Gingrich nomination or Romney getting too dented during Republican primary fights increase the odds of what heretofore seemed impossible: an Obama win in November. So if the Republicans were smart, they’d take advantage of a serious weakness in this deal: that it violates the 5th Amendment takings clause. I am told by Bill Frey of Greenwich Financial that a servicer safe harbor provision in HAMP, which was supposed to shield servicers from investor lawsuits over mortgage modifications, was passed by both the House and Senate but was removed in reconciliation because that provision would have run afoul of the 5th Amendment. This settlement is intended to have servicers engage in even more aggressive mortgage modifications and would thus seem to have precisely the same Constitutional problem.

As I urged last week, please call your state attorney general and tell them you think taking from your pension to enrich banks for abusing homeowners is a lousy idea and they should therefore refuse to sign on to the settlement. You can find their phone numbers here. Please call today if you haven’t already. Thanks!

© 2012 Yves Smith

Yves Smith is the pen name of Susan Webber, a Principal of Aurora Advisors, Inc. and publisher of the Naked Capitalism blog.

Is Obama's 'Economic Populism' for Real?

by Matt Taibbi

There is a lot to digest in a recent series of events on the Prosecuting Wall Street front – the two biggest being Barack Obama’s decision to make New York Attorney General Eric Schneiderman the co-chair of a committee to investigate mortgage and securitization fraud, and the numerous rumors and leaks about an impending close to the foreclosure settlement saga.

There is already a great debate afoot about the meaning of these two news stories, which surely are related in some form or another. Some observers worry that Schneiderman, who over the summer was building a rep as the Eliot Ness of the Wall Street fraud era, has sold out and is abandoning his hard-line stance on foreclosure in return for a splashy federal posting.

Others looked at his appointment in conjunction with other recent developments – like the news that Tim Geithner won’t be kept on and Obama’s comments about a millionaire’s tax – and concluded that Barack Obama had finally gotten religion and decided to go after our corruption problem in earnest.

At the very least, Obama’s recent acts were interpreted as a public move toward economic populism: if the president was looking to associate himself with that word, he did a good job, since there were literally hundreds of headlines about Obama’s "populism" the day after his State of the Union speech.

I think it’s impossible to know what any of this means yet. There is a lot to sort out and a lot that will bear watching in the near future. Just to recap, here’s what’s at stake right now:

The impending, much-discussed foreclosure settlement is the Obama administration’s great bailout initiative. If it goes through with the kind of tiny numbers being discussed ($25 billion from the banks if California is in the deal, $19 billion if California AG Kamala Harris stays out), then what we’re talking about is a bailout on par with TARP.

The potential liability each of the banks faces from foreclosure litigation is vastly greater than $25 billion, and uncertainty surrounding that litigation is holding the stock prices of all of the major companies (in particular struggling ones like Bank of America) down.

A settlement would release those firms from that potential liability and likely bring massive surges in stock-market investment. It would therefore have a profound strengthening effect on the Too-Big-To-Fail banks. If the Obama administration wanted to be 100% real on the Wall Street crime front, it would suspend this deal pending the investigation by the new mortgage committee. But if the deal does indeed go through, we’ll know that the banks still have major influence with our populist president.

Some people have been confused about Schneiderman’s new role. The new Unit on Mortgage Origination and Securitization Abuses will not be investigating the same abuses covered in the foreclosure settlement. When the public thinks about corruption in the housing markets on the part of the big banks, what it mostly thinks of is robosigning and the other mass-perjury issues, which is the stuff targeted in the foreclosure settlement.

But in fact those problems were a tawdry little sideshow to the more serious crimes of the housing crisis. Schneiderman himself outlined the difference after the announcement of the new unit’s creation:

Schneiderman said Wednesday his dual roles — raising concerns about a multi-state settlement with the major banks and investigating the mortgage problem — wouldn’t be at odds.

“These are abuses in the foreclosure process. Our working group is focusing on the conduct related to the pooling and the creation of mortgage-backed securities and issues relating to the conduct that created the crash, not the abuses that happened after the crash.”

My first thought, when I heard about this deal, was that Schneiderman was deciding to compromise on robosigning and other post-securitization abuses, in exchange for a mandate to go after the much bigger crimes, which took place in the origination/securitization stages.

The securitization offenses were massive criminal conspiracies, identically undertaken by all of the big banks, to defraud investors in mortgage-backed securities. If you’re looking for an appropriate target for a massive federal investigation, one that would get right to the heart of the corruption of the crisis era... well, they picked the right target here.

If they were to do a real clean sweep on securitization, the federal prisons would end up literally teeming with senior executives from the biggest banks. A lot of very big names would end up playing ping-pong and cards in Otisville and Englewood.

The question is, how real of an investigation will we get? The fact that Schneiderman’s co-chairs are Lanny Breuer and Robert Khuzami make me extremely skeptical. I’m actually not sure that both men, in an ideal world, wouldn’t be targets of their own committee’s investigation.

Before joining the SEC, Khuzami was senior counsel of the fixed-income desk at Deutsche Bank, which was creating exactly the sort of dicey CDOs that this investigation ought to be targeting.

Breuer, meanwhile, worked for the hotshot defense firm Covington and Burling, which among other things provided legal help that led to the creation of the electronic mortgage registry system MERS.

The MERS issues are probably more the province of the foreclosure settlement, but the banks’ joint efforts to evade the paper registry system are certainly an element of the larger effort to defraud MBS investors that will be covered by this committee. In fact, I’m not sure that mortgage securitization and the proliferation of CDOs and CDS could have taken place on anywhere near the scale that it did without MERS.

So having those two guys attached to Schneiderman’s hip makes me wonder what is going on here. Khuzami’s presence is especially odd. The theoretical reason we need a committee like this in the first place is because the federal agency that is supposed to be doing this work – the SEC – has stubbornly refused to do so.

If as SEC enforcement chief Bob Khuzami has not investigated the vast corruption involved with the creation of mortgage backed securities (it’s called “securitization” – it should be policed by the SECURITIES and exchange commission), then why would he start now? Even leaving out his potential culpability from his Deutsche days, Khuzami has been part of the problem, if anything.

I would feel better about a committee that not only didn’t have a White House flack and a failed/compromised SEC enforcement chief sitting on it, but had nobody with any ties to Wall Street at all. The argument for them would be that we need someone with expertise on the committee, but I’m not buying it. I’d rather see Schneiderman hole up in an abandoned warehouse with ten vice detectives from someplace like Detroit or Miami. And Charles Martin Smith, if they can get him.

Seriously: despite what people think, the crimes we’re dealing with are not terribly complicated, and any veteran investigator would grasp the basic concept – taking worthless crap and selling it as high-end merchandise – within ten minutes. The most important element contributing to the success of a committee like this is a locked room full of clean hands. And Breuer and Khuzami are not a good start.

But it’s too early to say what is going on. Everything that I’ve heard about Schneiderman in the last year leads me to believe that he’s the genuine article. I haven’t heard a single thing suggesting otherwise. But there are certainly a lot of curious elements here. For one thing, as Yves Smith points out (http://www.nakedcapitalism.com/2011/12/james-stewart-provides-pr-on-beha...), Schneiderman really isn’t getting much extra authority by taking this post. As New York AG he could already have taken this investigation anywhere he wanted:

It’s clear what the Administration is getting from getting Schneiderman aligned with them. It is much less clear why Schneiderman is signing up. He can investigate and prosecute NOW. He has subpoena powers, staff, and the Martin Act. He doesn’t need to join a Federal committee to get permission to do his job. And this is true for ALL the others agencies represented on this committee. They have investigative and enforcement powers they have chosen not to use. So we are supposed to believe that a group, ex Schneiderman, that has been remarkably complacent, will suddenly get religion on the mortgage front because they are all in a room and Schneiderman is a co-chair?

One thing we do know: Obama’s decision to tap Schneiderman publicly, and dump Geithner, and whisper about a millionaire’s tax, signals a shift in its public attitude toward the Wall Street corruption issue. The administration is clearly listening to the Occupy movement. Whether it’s now acting on their complaints, or just trying to look like it’s doing something, is another question. It’s way too early to tell. But it’s certainly very interesting.

© 2012 Rolling Stone

As Rolling Stone’s chief political reporter, Matt Taibbi's predecessors include the likes of journalistic giants Hunter S. Thompson and P.J. O'Rourke. Taibbi's 2004 campaign journal Spanking the Donkey cemented his status as an incisive, irreverent, zero-bullshit reporter. His books include Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History, The Great Derangement: A Terrifying True Story of War, Politics, and Religion, Smells Like Dead Elephants: Dispatches from a Rotting Empire.

Task Force Leader Doesn’t Show For Mortgage Fraud Press Conf.

Lanny Breuer, Task Force Leader, Doesn’t Bother Showing Up For Mortgage Fraud Press Conference
by Matt Stoller

Eric Holder has come out with details on the task force. But first, let’s look at a smoke signal. At this press conference announcing the task force, Holder had to apologize for Lanny Breuer, Assistant Attorney General for the Criminal Division, one of the key leaders of the investigative unit. Breuer, you see, couldn’t make it to the press conference because he was traveling. That’s how important this task force is to Breuer, so important that his travel schedule couldn’t brook interference. Such a bureaucratic snub has been no doubt noticed by the various underlings at the DOJ and the US Attorney offices.

Ok, let’s go to the substance.

I am pleased to report that this Working Group has considerable Department resources behind it as it builds on activities that have been underway through the broader Task Force. Currently, 15 attorneys, investigators, and analysts – here at Main Justice and throughout our U.S. Attorneys’ Offices – are supporting the investigative efforts that this Working Group will be focusing on going forward. And the FBI has assigned 10 agents and analysts to work with the group immediately. In the coming weeks, another 30 attorneys, investigators, and support staff from U.S. Attorneys’ Offices will join the Group’s work.

So that’s a total of 55 people, 10 of whom are FBI agents. Let’s do a few comparisons. During the Savings and Loan crisis, Bill Black reminds us that there were about a thousand FBI agents working on the various cases. That’s one hundred times the number of people working on a scandal that is about forty times larger and far more complex.

To put it another way, let’s say that this scandal cost the American public $5-7 trillion in lost home equity. That’s about $100 billion of lost home equity per person assigned to this task force. If someone stole $100 billion a corporation, like say, if somehow Apple’s entire cash hoard which is roughly that amount, suddenly disappeared, I’m guessing that the FBI would assign more than one person to the case.

Another comparison might be Enron, which had 100 FBI agents assigned to the case. Or the stress tests. Remember this?

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

Yup, roughly four times as many people were assigned to conduct sham stress tests as are assigned to investigate the causes of the financial crisis and prosecute the people responsible. So we see that this is a not a serious deployment of government resources to unmask a complex economy-shaking financial scheme. It just isn’t. And as if to emphasize this, Breuer didn’t even show up to the press conference announcing it.

And finally, the fissures I warned about are already beginning to appear. Here’s more of what Holder said:

On Tuesday night, the President referenced this initiative, asking us to, “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”

That is precisely what we intend to do. And the good news is that we aren’t starting from scratch.

Over the past three years, we have been aggressively investigating the causes of the financial crisis. And we have learned that much of the conduct that led to the crisis was – as the President has said – unethical, and, in many instances, extremely reckless. We also have learned that behavior that is unethical or reckless may not necessarily be criminal. When we find evidence of criminal wrongdoing, we bring criminal prosecutions. When we don’t, we endeavor to use other tools available to us – such as civil sanctions – to seek justice. My number one to commitment to the American people is that we will continue to devote significant resources to combating financial fraud and be as aggressive and creative as we can be in holding accountable those who, in violating the law, contributed to the financial crisis.

For example, in just the last six months, the Department has achieved prison sentences of 60, 45, 30, and 20 years in a variety of financial fraud cases charging securities fraud, bank fraud, and investment fraud. And, just last month, I announced the largest fair lending settlement in history, resolving allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against minority borrowers from 2004 through 2008.

I keep coming back to this point – the administration and its cabinet members truly believes they have worked hard to get to the bottom of the financial crisis, and has done so as best as anyone possibly could. To them, “mortgage fraud is a top priority”, and has been for years. They might think they have mishandled the politics, but as Holder makes clear, they have brought criminal cases where they felt they could, and they settled where they thought they needed to. Even the anecdote about Countrywide is weak – note he says they resolved “allegations”, because Countrywide didn’t even have to admit wrongdoing!

There are reasons Schneiderman wants to have Federal resources to bear on this problem, but this is a drop in the bucket compared to what is needed, and the leadership with whom Schneiderman needs to work simply doesn’t believe they have done anything wrong. To them, this is business as usual.

Now on to the other news of the week, which is a $25 billion settlement for foreclosure fraud, which is supposedly done along the lines of a narrow release just for robosigning. I haven’t seen the language, and until I do, I wouldn’t be comfortable describing it as a narrow release. But if it is, then it isn’t a real shift in the landscape. The banks simply don’t want to pay that much for so little, and they’ll probably end up gaming the financing so that they claim to have paid $25 billion by engaging in loan modifications and principal write-downs they would have engaged in already. And if it’s a broader release, it seems unlikely to be something the recalcitrant state AGs would agree to.

The real anchor in our financial system is the heavy burden of unpayable mortgage debt, as well as rampant servicer conflicts that render modifying this burden impossible. We need to find a way to cut that debt through a negotiated workout, which can’t happen without a real investigation of the people who are grabbing as much as they can. There are ways Schneiderman and the state AGs can force movement even without a big commitment of Federal resources by better leveraging the people on the ground who are fighting foreclosure fraud on a regular basis. And depending on how it’s organized, this task force gives state AGs more jurisdiction, access to the investigative resources and documents done by the Feds so far, and a few FBI agents and lawyers. Still, that’s not nearly enough. The administration saw this as a way of co-opting the issue for the reelection and stopping the bitter undercurrent from the Democratic base (similar to floating the rumor that Geithner won’t come back in term two). Will it work? I’d expect a few semi-significant actions in the months ahead, complaints or indictments perhaps. We’ve already seen some subpoenas. But without a major figure investigated and prosecuted (like if Vikram Pandit were really prosecuted for Sarbox violations), the administration’s policy of preserving the existing banking structure is the dominant policy framework.


Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller.

Eric Schneiderman: Hero or Goat?

by Robert Kuttner

The activation of the administration's long dormant task force on criminal misconduct in the financial collapse, with New York's progressive attorney general Eric Schneiderman as co-chair, could be the most fateful political and economic development of the election year. There are still immense pitfalls ahead, as Wall Street allies inside the administration and on Wall Street itself try to reduce Schneiderman's role to that of symbolic fig leaf.

But President Obama has done something potentially momentous for which he deserves our praise, even if he himself does not fully grasp the implications. The significance of the shift is still in play, of course, and will be made clearer as events unfold over the next several weeks.

Some skeptics in the progressive community have raised questions both about the upside for Schneiderman and his motives. Given the administration's feeble record on prosecutions to date, the critics are right to flag the likelihood that people like Attorney General Eric Holder and SEC enforcement chief Robert Khazumi will try to sandbag Schneiderman. But my reporting suggests that they underestimate both the man and the dynamics that have been set loose.

The surprising move raises several questions.

First Big Question: Why did Obama, after letting the Treasury, Justice Department, and SEC sit on potential criminal prosecutions for three years, do this now? There was, after all, an inter-agency Financial Fraud Enforcement Group appointed in November 2009, and it contented itself with going after small and medium-sized fraudsters and settling mostly for slap-on-the-wrist civil fines, rather than getting to the bottom of the systemic crimes and bringing major cases.

The answer is in a harmonic convergence of three forces.

First, as illustrated by the larger themes of his recent State of the Union Address, Obama belatedly recognized an urgent political need for a more populist posture. What better bogeyman than Wall Street? Polls show that the single most damning factor that leaves voters skeptical about Obama's economic credibility is his coziness with the big banks. Pecking Paul Volcker on the cheek once a year just doesn't do it. Obama needed Schneiderman -- and not just as a symbol.

Second, the administration has fervently pushed, via HUD and the Treasury Department, for a soft settlement of the mortgage industry's failure to legally document the conversion of mortgages into securities and the systemic fraud in mortgage servicing that resulted. A series of court rulings have blocked foreclosures, because of such abuses as "robo-signing" of documents. Bankers, weaker state A.G., and the administration have been trying to close a deal where the banks are fined $20-25 billion, which goes for mortgage relief, in exchange for a general legal cleanup and protection from further liability. But this bad bargain was blocked by the steadfast opposition of the most important state attorneys general, notably the same Eric Schneiderman, plus California's Kamala Harris, Martha Coakley of Massachusetts and Beau Biden of Delaware. (Virtually all the trusts that hold securitized mortgages are created under the laws of New York or Delaware, so without Schneiderman and Biden, forget any deal.) In exchange for his cooperation with the administration on what is essentially a sideshow, Schneiderman held out for both a much tougher deal, and a major league prosecutorial task force.

Third, it has dawned on even relative conservative forces in Washington that the continuing mortgage crisis is a major economic drag on the recovery. With real estate values flat or continuing to decline, with homeowners out trillions of dollars of net worth, and tens of millions of mortgages still under water, the economy remains stuck in a deflationary cycle. The administration's small-bore relief programs, all of which are voluntary to the banks, have not done the job.

Surprisingly (and hopefully), the Federal Reserve -- of all institutions -- has been publicly pressing for more mortgage relief. This is crucial, since in the end game the Fed will be essential to a successful pivot from the leverage of criminal prosecutions to the remedy of much deeper mortgage relief -- if Schneiderman prevails. Pressure from the Fed to do more to fix the housing deflation will also serve as a political counterweight to those in the administration who hope Schneiderman will be just window dressing. More on that in a moment.

Next Big Question: Why did Schneiderman accept this appointment? Who is rolling whom? Some critics on the left have argued that Schneiderman has all the authority he needs under New York State law (via the Martin Act that was also used by Eliot Spitzer in extracting a global settlement of conflicts of interest by the banks a decade ago). This critique has been all over such blogs as nakedcapitalism.com and firedoglake.com. The critics conclude that since the Obama administration has not been serious about criminal prosecutions thus far, it logically follows that Schneiderman has been co-opted into a process that will tie his hands. But the real dynamics are far more complex.

There are certainly those in the administration who hope to sit on Schneiderman. You can see this in the dueling press releases to date. For instance, Eric Holder, in his Friday statement, included the unhelpful comment that "behavior that is unethical or reckless may not necessarily be criminal." This is of course true, but why on earth make that point in the context of announcing a new task force that is supposed to signal new toughness? It suggests that Holder, if left in charge, would pursue the same weak prosecutorial policies of the past three years.

But Schneiderman turns out to have a lot of leverage. Although the outlines of a narrow deal on the legal problems of mortgage servicers have been leaked, Schneiderman has not yet signed off on the deal. As noted, he has already gotten major concessions. The deal will only address the relatively narrow (but outrageous) abuse of robo-signing, and nothing in it will provide release from criminal prosecutions. Other details are still being negotiated. It is likely that Schneiderman will not give his final assent until he receives assurances on who will really be in charge of these broader investigations and with what level of resources.

The other main reason Schneiderman joined: The New York A.G. may have plenty of legal authority, but what he does not have is sufficient ground troops. In a scandal like this one, where the frauds and criminal misrepresentations are buried in millions of documents, it takes very major investigative resources, of the sort that the FBI, the IRS, the SEC, and the force of postal inspectors have, and the New York A.G. simply doesn't. Something like a thousand Federal investigators and prosecutors brought crooks to justice in the savings and loan scandals of the late 1980s. Though the numbers of people attached to the task so far are small -- Holder has announced a total of 55 attorneys and investigators to be assigned to the new working group -- we will soon find out whether enough people will be assigned to confirm to Schneiderman that this is a serious effort.

If not, we can expect him and the other progressive AGs to walk. And that is Schneiderman's other main source of leverage. In the jockeying for control, you might think that the odds overwhelmingly favor the insiders like Holder and Khazumi. But a high-profile criminal investigation that fizzled, with Schneiderman walking away, would be a massive political setback to the White House, more massive even than alienating some Wall Street campaign donors.

It would take a lot of guts for a Democratic attorney general to walk away from a presidentially created process in an election year. But if Schneiderman and the other progressive A.G.s conclude they are being rolled, they will walk and then do the best they can with the resources they have.

Schneiderman's goal, as far as I can tell, is to serve both justice and macroeconomic recovery. With fresh federal investigative resources, he can threaten bankers with legal Armageddon. Then, in addition to sending the worst malefactors to prison, he can entertain a settlement not in the tens of billions but in the hundreds of billions -- sufficient to provide very major write-downs of mortgage principal owed. That, in turn, changes the dynamics of the housing crisis as a drag on the recovery, which not incidentally serves the administration's economic and political needs.

As all this sinks in, you can just imagine the editorial in the Wall Street Journal. Extortion! The feds are threatening to send bankers to the slam in order to extort hundreds of billions for mortgage deadbeats. But extortion compared to what? The systematic, illegal fraud in mortgage securitization cost innocent homeowners trillions and the economy tens of trillions. The taxpayers went directly on the line to the banks for nearly a trillion in the TARP bailouts, and the Fed risked its own balance sheets to the tune of trillions more. Several hundred billion dollars of mortgage relief is pretty modest by comparison.

Though President Obama finally sounded more in tune with the anxieties of the average American in his State of the Union Address, he missed a huge opportunity by failing to challenge the "deadbeat" narrative long ago. For the most part, it was illegal behavior by the banks, and not the occasional deliberately improvident home buyer, that caused this collapse. Now, finally, we may get a reckoning.

This administration does not speak with one voice. While some senior officials may wishfully view Schneiderman as a useful idiot, the career prosecutors who have been champing at the bit and some on the White House political team view him as a heaven-sent counterweight to men like Geithner and Holder.

In less than a week, the momentum has already shifted. Critics who were skeptical a few days ago, Matt Taibbi for instance, are now applauding. Bloggers who were questioning Schneiderman's bona fides in taking the job are now making lists of legal angles for him to pursue. As public expectations build for a serious investigation and prosecution, it becomes progressively harder for Wall Street's cronies in Washington to shackle Schneiderman.

Big Question Number Three: Are plausible criminal prosecutions really possible? Short answer: yes. But it will take serious effort and resources.

One of the most irritating phenomena of the past three years has been the whining by protectors of banks to the effect that it's hard to get convictions in cases of financial fraud. But when the government decides to act in concert and throw the book at bank illegality, the dynamics change.

There was criminal fraud in every stage of the daisy chain of sub-prime mortgages and the creation and sale of securities backed by them -- in the misrepresentation of the quality of the loans, in the packaging of loans into securities, in the fakery of what documents were actually in the trusts, and in the marketing of mortgage-backed securities to investors. Mortgage servicers, in their attempts to collect payments, levy penalty charges, and to foreclose, also committed fraud when they misrepresented their documentation and property rights. At every step of the way, there were layers of lies. These lies violate innumerable statutes that carry criminal penalties.

Mail Fraud. While the statute of limitations has already run on some crimes, it is ten years in the case of mail fraud. The process of creating securities based on packages of high-risk mortgages that were misrepresented in trust documents, or the false notification of homeowners that they were delinquent, may have used Fedex some of the time, but it also relied on the U.S. Postal Service. The scale of manpower in the corps of postal inspectors and investigators, if deployed, gives Schneiderman resources simply not available to the New York A.G.

Securities Fraud. The entire structure of the securities laws in the United States is based on disclosure of risks that are material to the decisions of investors. The willful misrepresentation of actual risks was the essence of the strategy that enriched bankers and other middlemen, and crashed the economy. Mortgage-backed securities sold to the public are covered by the securities laws, as are sales of shares in banks. Misrepresentations were rampant. It was this prosecutorial leverage that led to the (paltry) civil settlements with Goldman Sachs, Countrywide Mortgage, and other malefactors -- that were and still are vulnerable to criminal prosecutions.

Bank Fraud. If the value of the underlying mortgages were misrepresented in official filings with bank regulators, that's bank fraud under the relevant banking statutes, which have long statutes of limitations that have not yet run. False accounting statements and false claims about internal controls are also a crime under the Sarbanes-Oxley Act. If statements are sworn, that's also perjury.

Tax Fraud. The entire process of securitization of bogus mortgages used tax-exempt conduits known as REMICs (The details are mind-numbing, but masochists are invited to Google the word REMIC). The sums were huge. The point is that if the packaging of mortgages was fraudulent and the IRS cracked down, everyone from bankers to individual trustees would be on the hook for hundreds of billions in back taxes and tax penalties. Faced with this kind of nightmare and the hit to their stock price while investigations proceeded, bankers would be inclined to settle.

Simply the fact of bringing serious criminal cases puts the fear of God into bankers and their lawyers.

Big Question Number Four: What signs should we be looking for to indicate success or failure?

For starters, will Schneiderman be operationally as well as nominally in charge? Will he get the investigative resources that he needs? Will Eric Holder stop being so defensive about his own record and give Schneiderman his full backing? Will President Obama stay focused on the infighting and support Schneiderman?

What back channel efforts will be used to blunt or block this initiative? You can just imagine the shudder that went though the ranks of the biggest banks, which have gotten off just about scot-free, when this task force was announced. They could now face massive fines, much reduced paydays, and even prison time. A progressive prosecutor like Schneiderman, wielding federal investigative resources, was their worst nightmare.

The banksters, of course, have close friends in high places. Jack Lew, President Obama's new chief of staff, was a protégé of Citibank's Robert Rubin. Lew served as Rubin's chief of staff at the Treasury Department in the mid-1990s, and then followed Rubin to Citi. Without the longtime patronage of Rubin, Obama's chief economic adviser Gene Sperling would be just another bright career policy-wonk. Sperling, in fairness, has tried to do the right thing within the very narrow confines of the Administration's mortgage relief policy to date. But this will be a whole new test of his judgment, principles, and ultimate loyalties.

Wall Street is also a principal funder of President Obama's re-election campaign. With the administration divided on whether this task force should be real or sham, the president will need to decisively conclude that economic recovery and his own credibility with the voters is more important than protecting his banker friends.

What about the timing? Subpoenas have already been issued, indictments are possible within months or even weeks, but the task force will have to go on overdrive to get a settlement this year that includes enough mortgage relief to make a near-term difference to housing markets and the macro-economic picture. Justice delayed is justice denied, and with the clock running on both the recovery and various statutes of limitations, that old saw was never truer.

A very encouraging sign would be the early exit of one Timothy Geithner. Secretary Geithner recently told a reporter that he would not be staying around for a second term. But if Geithner stays in office and is a decisive policy voice between now and November, Obama may not get that second term. Whether or not the president fully appreciates it, the new emphasis on prosecuting financial fraud is more than anything else a repudiation of Geithner and his policies. So why keep Geithner around to undermine the task force's work?

Last Big Question: What is the end game?

Bankers have escaped prosecution, and housing has stayed in a deep hole, in large part because of a disastrous decision that Geithner made in early 2009 -- the policy of extend and pretend. Rather than cleaning out and breaking up big banks, Geithner claimed that "market confidence" required the Treasury to collude in the fiction that all was well. It was just a temporary problem of liquidity.

Propping up the banks and their balance sheets, in turn, precluded serious relief of the mortgage crisis, since a write-down of mortgage debt would require banks to acknowledge real losses.

In some ways, a successful prosecutorial initiative returns us to the debates of early 2009: if cleaning up the mortgage mess requires banks to take a big hit to their balance sheets, how then do we proceed with a restructuring of the banks?

Since markets have already acknowledged reality by driving down the value of the banks' share prices, a settlement with much larger penalties, principal write downs, and even some prison sentences would actually be good for the banking industry because it would provide a fresh start with honest books. We could get beyond the "Japan" phase of this crisis, where the Fed has to keep pumping in trillions of dollars to disguise the real weakness of the economy and the banking industry.

It's helpful that the Fed recognizes the perilous effect of the mortgage collapse on the recovery, since Fed intervention will be central to restructuring and recapitalizing the banking industry after the task force brings bankers to justice.

Political junkies are fixated on the danse macabre of Newt Gingrich and Mitt Romney. But I could argue that the Mitt and Newt show is only the second most fateful election-year spectacle. More important is the question of whether Eric Schneiderman will be able to do his work.

Schneiderman has taken a stunning gamble. He may get the full cooperation that he needs, he may not. But one thing should already be clear. This is not a man who has been co-opted. He is nobody's window dressing.

© 2012 Robert Kuttner

Robert Kuttner is co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for Business Week, and continues to write columns in the Boston Globe and Huffington Post. He is the author of A Presidency in Peril: The Inside Story of Obama's Promise, Wall Street's Power, and the Struggle to Control our Economic Future, Obama's Challenge, and other books.

Why the AGs Must Not Settle: Robo-signing Is Tip of Iceberg

by Ellen Brown

A foreclosure settlement between five major banks guilty of “robo-signing” and the attorneys general of the 50 states is pending for Monday, February 6th; but it is still not clear if all the AGs will sign. California was to get over half of the $25 billion in settlement money, and California AG Kamala Harris has withstood pressure to settle.

That is good. She and the other AGs should not sign until a thorough investigation has been conducted. The evidence to date suggests that “robo-signing” was not a mere technical default or sloppy business practice but was part and parcel of a much larger fraud, the fraud that brought down the whole economy in 2008. It is not just distressed homeowners but the entire economy that has paid the price, resulting in massive unemployment and a shrunken tax base, throwing state and local governments into insolvency and forcing austerity measures and cutbacks in government services across the nation.

The details of the robo-signing scam were spelled out in my last article, here. The robo-signing fraud and its implications are expanded on below.

Why All the Robo-signing?

Over half the homes in the country are now held in the name of an electronic database called MERS—Mortgage Electronic Registration Services. MERS is a smokescreen concealing the fact that these mortgages were sold to trusts that sold them to investors. The mortgages were chopped into pieces and sold as “mortgage-backed securities” (MBS), which traded in a supposedly liquid market. That meant the investors could sell them in the money market at any time on a day’s notice. Yale economist Gary Gorton gives this example:

Suppose the institutional investor is Fidelity, and Fidelity has $500 million in cash that will be used to buy securities, but not right now. Right now Fidelity wants a safe place to earn interest, but such that the money is available in case the opportunity for buying securities arises. Fidelity goes to Bear Stearns and “deposits” the $500 million overnight for interest. What makes this deposit safe? The safety comes from the collateral that Bear Stearns provides. Bear Stearns holds some asset‐backed securities [with] a market value of $500 millions. These bonds are provided to Fidelity as collateral. Fidelity takes physical possession of these bonds. Since the transaction is overnight, Fidelity can get its money back the next morning, or it can agree to “roll” the trade. Fidelity earns, say, 3 percent.

That is where the robo-signing came in. Foreclosure defense attorneys armed with the tools of discovery have discovered that robo-signing -- involving falsified signatures assigning mortgages back to the trusts allegedly owning them -- occurred not just occasionally or randomly but in virtually every case. Why? Because the mortgages had to be left free to be bought and sold on a daily basis in the money market by investors. The investors are not interested in making 30 year loans. They want something short-term with immediate rights of withdrawal like a deposit account.

The Hazards of Borrowing Short to Lend Long

The problem is that when panicked investors all exercise that right at once, there is no cheap funding available to back the 30 year mortgage loans, rendering the banks insolvent. And that is what happened on September 15, 2008, when Lehman Brothers, a major investment bank like Bear Stearns, went bankrupt.

According to Representative Paul Kanjorski, speaking on C-SPAN in January 2009, the collapse of Lehman Brothers precipitated a $550 billion run on the money market funds. A report by the Joint Economic Committee pointed to the fact that the $62 billion Reserve Primary Fund had “broken the buck” (fallen below a stable $1 per share) due to its Lehman investments. The massive bank run that followed was the dire news that Treasury Secretary Henry Paulson presented to Congress behind closed doors, prompting Congressional approval of Paulson’s $700 billion bank bailout despite deep misgivings.

The sleight of hand that brought the banking system down was that the mortgages backing the money market were supposedly held by trusts that had lent money to homeowners for 15 years or 30 years. It was the classic “borrowing short to lend long,” a form of shell game in which banks have engaged for hundreds of years, routinely precipitating bank panics and bank runs when the depositors or the investors all pull their short-term money out at the same time.

The Shadow Banking System Is Still Unregulated

Periodic bank panics were averted in the conventional banking system only when the government agreed to insure the deposits of individual depositors in 1933. But FDIC insurance covered only $100,000 (now $250,000), and large institutional investors had far more than that to invest. The shadow banking system, in which deposits were “insured” with mortgage-backed securities, developed in response. But the shadow banking system is unregulated and is just as prone to another collapse today as it was in 2008. The Dodd-Frank banking “reforms” barely touched it. As noted in an article titled “Risky Debt Use on Repo Market Hits 2008 Levels” in Friday’s Financial Times:

In the repo market, banks pledge their securities as collateral for short-term loans from money managers and other investors. The market played a key role in the build-up to the 2008 financial crisis. Banks used toxic assets, such as repackaged subprime loans, to secure trillions of dollars worth of cheap funding.

When the US housing bubble burst, the banks’ trading partners refused to accept such securities as collateral and the repo market rapidly contracted.

However, a study by Fitch Ratings says the proportion of bundled debt being used as security in repo transactions has returned to pre-crisis levels.

Using the repackaged loans can increase risk in the repo market, the rating agency says. This is because the securities may be prone to sudden pullbacks such as the one experienced in 2008.

We could be looking at another banking collapse at any time; and to fix the problem, we first need to know what is going on. The AGs should not agree to drop the curtain on the robo-signing scandal until all the evidence is on the table. It is not just a matter of punishing the guilty; it is a matter of a banking scheme based on fraud, one that ultimately does not work and has jeopardized the homes, savings and investments of the public not just recently but for hundreds of years.

The Way Out

There is another way to design a banking system. The deposits of large institutional investors do not need to be backed by sliced and diced pieces of our homes to be “safe” (something that has proven not to be safe at all). The large institutional investors seeking safety are largely “us” – the pension funds and mutual funds in which we have stored our savings and on which we rely for support when we can no longer work. Hundreds of years of history have demonstrated that the only reliable guarantor is the government itself.

Our pension funds and mutual funds need a government guarantee just as much as our individual deposits do. But we don’t want to be guaranteeing the gambling and derivatives schemes of too-big-to-fail, for-profit Wall Street banks playing fast and loose with our money. Banking and credit need to be public utilities, operated for the benefit of the public in plain sight of the public.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest of eleven books, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. She is president of the Public Banking Institute, http://PublicBankingInstitute.org, and has websites at http://WebofDebt.com and http://EllenBrown.com.

How to Score a Foreclosure Fraud Settlement Deal

by Richard Eskow

Once again we're hearing that a foreclosure fraud deal is about to be announced between major banks, the U.S. government and most or all of the states. We've heard that before, only to have the deadline pushed back so that holdout Attorneys General can be brought on board with the agreement.

Deal, or no deal? We're not sure, but it's certainly possible we'll hear something today, tonight or tomorrow.

How will we know if it's a good deal for the American people? After all, this is an issue with a lot of moving parts. It includes all of the states and multiple agencies within the Federal government, and involves a multitude of allegations involving several different kinds of crime that come under different jurisdictions. Even the statutes of limitations are a moving target.

That doesn't mean we don't know enough to judge the deal, if and when it's announced. There are well-established facts to guide us, and the principles involved are clear.

Moral and Legal Context

We keep hearing about what is and isn't possible, practical or politically feasible. Media discussions of the topic keep mixing the quotidien problems of the process with the underlying principles involved. So let's take a second to perform a moral and legal reset and put this issue in the right context.

Legally, banks stand accused of securities fraud, investor fraud, racial discrimination, tax evasion, defrauding borrowers, and perjury (in the filing of false "robo-signed" documents). Each of the major banks has already settled charges with the SEC involving these crimes and more.

Banks committed a number of moral offenses, too, some of which may also have been illegal. Here's a quick overview:

We know that bank executives fueled the housing bubble, convinced borrowers to take out loans based on inflated home values, sold deceptively packaged mortgage-backed securities to investors (including state and local governments and working people's pension funds) concealed their true financial situation from investors while taking massive secret assistance from the Federal Reserve, were bailed out by taxpayers, took huge bonuses anyway...

.... and never even said they were sorry.

That's what we're dealing with here. But if that's the context, how do we evaluate a settlement proposal?

Five Principles

Any deal should be measured against five basic principles: openness, justice, restitution, deterrence and reconciliation.

Openness: Do we know what happened? Has the truth been brought to light? Do we finally understand what happened to us, why it happened and who's responsible?

Justice means exactly what it says: Is the deal just? The American people should be able to review it and know in their hearts that justice has been served. The guilty have been held responsible, laws have been upheld and we know once again that we live in a society of laws.

Restitution: Have those that were wronged been made whole?

Deterrence: Has the punishment been proportional to the crime? Is it severe enough to deter future criminal behavior?

Reconciliation: When major crimes disrupt a nation, the final element is reconciliation -- the restoration of social calm, renewed trust between the parties involved and a return to confidence in the institutions of government.

These goals may be too much to ask of a single settlement deal, although we shouldn't accept that without a convincing argument. Either way, they form the moral constellation by which any deal should be scored. The fact that we can never achieve perfection -- perfect justice, perfect truth, or whatever -- doesn't mean we should abandon our search for justice and truth, does it?

So let's take a look at what we know of the proposed deal so far. (We'll update this as further information becomes available.)


A great deal of information has come to light about bank misdeeds. Some has come from excellent shoe-leather reporting. The Financial Crisis Inquiry Commission and the Levin Subcommittee have also provided troves of useful information on the subject.

But there's a lot that we don't know about bank malfeasance, and specifically about the roles of individual executives in condoning, approving or encouraging these crimes.

Every time I see a banker on television complaining about his industry's bad reputation -- and by implication his own -- it occurs to me how easy it would be to clear his name: Just subpoena his emails and phone records, especially during the times that his bank was engaged in the fraudulent behavior for which it has already paid huge settlements through the SEC.

Any settlement that prevents further investigation into bank crime should get a much lower score. The ideal settlement would be one where banks agree to cooperate with ongoing investigations as part of the deal.

And remember: Good DAs use information about one or two crimes -- in this case there are more than that -- to sweat their suspects, and especially lower-level ones, into revealing information about all their criminal behavior. Any settlement that removes this leverage should be scored very low on Openness.

Indicators: Continuation of ongoing investigations; commitment of major Federal resources to the Schneiderman co-chaired Task Force and other investigative bodies.


A lot of people got shafted by the banks: borrowers, mortgage investors and bank shareholders. Housing Secretary Shaun Donovan suggested this weekend that mortgage investors -- many of whom are state and local governments, or the retirement funds of ordinary working Americans -- will have to take the lion's share of the loss as part of the deal.

They've already been screwed once by bankers. That could mean the deal does it to them again. And justice isn't served when third parties pay the price for the misdeeds of others.

What's more, government settlements have almost always been paid by the bank itself, which means that shareholders foot the bill. Many of those shareholders bought bank stocks because they'd been deceived by bank executives, who lied to investors and then pocketed their bonuses. Any settlement should force bankers to pay the cost out of their own pockets.

Neither banks nor individual bankers should be given blanket immunity, either civil or criminal.

And speaking of those deceived shareholders: Why haven't any of them pressed their boards of directors to fire the executives that drove their banks -- and the economy -- into the ground? You were deceived once, folks, but there comes a point when it's caveat emptor time.

Indicators: Immunity/non-immunity from criminal prosecution for individuals; immunity/non-immunity from civil suits; financial penalties for individuals.


Borrowers who were misled or defrauded -- all of them -- must have what was taken from them returned to them. Most official estimates say that homeowners are paying $700 billion in nonexistent value back to the banks, as mortgage payments on nonexistent home value. (I think that number could be low.)

We keep hearing that "greedy homeowners" are to blame, but most of these homeowners believed their banks -- and the pundits who reinforced the banks -- when they were told that housing values would keep going up. Many homeowners were also misled by bank-friendly appraisers who overstated the value of their homes.

In that context, how much does $17 or $20 or $25 billion achieve in restitution?

Some will argue that the restitution in this settlement should be limited to the harms caused by robo-signing. The strategy should be this: When you have a wrongdoer dead to rights, clear evidence of a crime is leverage. If this settlement doesn't use that leverage -- or if it can't, for reasons yet to be revealed -- it should leave the door open for future investigations, prosecutions and/or negotiations.

The deal must also insure that banks themselves don't dispense the funds. That's like asking a pickpocket to go back on the subway and give all the wallets back.

Indicators: Scope of settlement relative to misdeeds being settled; ability for further civil suits; as much as possible, avoid having third parties pay for the misdeeds of others; retain as much leverage as possible to obtain additional restitution.


The principle here is simple: Bankers will keep committing crimes and other misdeeds over and over, until some of them pay a price that's severe enough to make them think twice. Those misdeeds will hurt customers, investors and, sooner or later, the entire economy.

What is price is severe enough? Criminal prosecution and the seizure of ill-gotten gains.

Without the threat of prosecution and the certain knowledge that they'll lose the money they've made if they're caught, bankers will never change.

Indicators: Ongoing criminal investigations; added resources to aid criminal probes; deal is structured so that bankers can be personally fined if found guilty.


South African officials committed many crimes under apartheid. Many observers were astonished by the generosity and clemency displayed by President Mandela and his government after apartheid ended.

But that reconciliation was only made possible because the Truth and Reconciliation Commissions were not empowered to grant forgiveness to anyone who didn't admit what they'd done wrong.

By contrast, banks have repeatedly been able to settle criminal allegations with huge financial settlements in which they "neither admit nor deny wrongdoing." That's unacceptable.

The institutions of government have also been soiled by this process. Most Americans believe that their government has failed them under both political parties, as far as Wall Street is concerned -- and they're right. Our faith in government, and in the political process, will not be restored with another unjust deal for bankers.

Indicators: Agreement requires banks to admit wrongdoing; Federal government pledges additional resources for investigation; rules for ongoing behavior are announced which include improved government oversight.

The Real World

The deal has to be negotiated in the real world, not on some idealized Aristotelian plane. We understand that. A 100-percent deal may be impossible.

But remember this: Right now the only ones who have all the facts are the banks. That means that any deal they sign, no matter how aggressive, is better than what would happen if the truth came out.

So the deal must push them, and push them hard.

More importantly, these principles and ideals offer a way to interpret and measure whatever deal is announced. The deal may not be perfect, but it will have to be a whole lot better than the ones that have been proposed over the past few months or it will be completely unacceptable.

The politicians and others who are negotiating this deal understand the "real world" of bankers, bank influence, and obstacles that make it hard work at times to prosecute bank fraud. But the world of justice is the real world, too. So is the world of morality. And those obstacles didn't prevent the conviction of thousands of people after the much-smaller savings and loan scandal of the 1980s.

Our society hasn't become so debased that people have stopped caring about moral principles. Public outrage over Wall Street greed proves that. These angry Americans are part of the real world, too -- and they'll be watching.

© 2012 Huffington Post

Richard has worked on long-range health policy and forecasting. His predictions are included in the recently-released Rough Guide To the Future in it's review of "the hopes, fears, and best prediction of fifty of the world's leading futurologists." Richard is also a freelance writer and occasional radio host. He's a regular columnist for the science and culture blog 3 Quarks Daily and a Contributing Editor for Tricycle magazine. His reflections on blogging and spiritual principles were included in Best Buddhist Writing of 2008.

The Top 12 Reasons Why You Should Hate the Mortgage Settlement

by Yves Smith


As readers may know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.

The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they’ll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.

The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.

The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.

The mortgage settlement terms have not been released, but more of the details have been leaked:

1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.

Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:

“It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.

The Times is also subdued:

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

2. Schneiderman’s MERS suit survives, and he can add more banks as defendants. It isn’t clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.

3. Nevada’s and Arizona’s suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been “folded into” the settlement.

4. The five big players in the settlement have already set aside reserves sufficient for this deal.

Here are the top twelve reasons why this deal stinks:

1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.

4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.

5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.

6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.

7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.

8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.

9. There is plenty of evidence of widespread abuses not that are appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.

10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.

11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.

12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.

As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.

© 2012 Yves Smith

Mortgage Settlement No Bailout for Main Street America

In reality, a $25bn mortgage deal with banks is a drop in the ocean – given US homeowners' $700bn of negative equity
by Richard Wolff

Big announcements of breakthrough legislative deals during election campaigns should be taken with huge grains of salt. Generally more rhetoric than reality, they sometimes contain real concessions made by politicians seeking votes. So it is with Thursday's Washington announcement of $25bn to help homeowners. Something significant is happening, but it lies below the surface of the headlines.

Typically, modern governments intervene in two ways when – as has been true since 2007 – free-enterprise capitalist economies produce particularly bad versions of their recurring economic "downturns". One economic policy is aptly called "trickle down" economics. It involves throwing heaps of money at the top of the economic pyramid – to mammoth banks, insurance companies, and other corporations at or near economic collapse. Policy-makers hope that such help for these institutions will revive their activity and thereby trickle down – as credit and orders for medium-sized and small businesses, and then, finally, to jobs and maybe wage increases for the majority of workers.

The alternative is "trickle up" economic policy. It involves government financial aid aimed chiefly at helping the mass of workers. That policy's goal is for the assisted workers to resume purchasing, which will, in turn, boost business revenues and so rebuild prosperity.

The historical record is quite clear: trickle down is no better or more effective a policy to end deep recessions and depressions than trickle up. In the last great capitalist downturn of the 1930s, the Roosevelt administration first tried trickle down. Its poor results, coupled with profound political pressures from below – the Congress of Industrial Organizations (CIO) membership drives that brought new millions into labor unions and the surging socialist and communist parties – forced Roosevelt to add major trickle up policies. They worked better, but not well enough to overcome the Great Depression.

Of course, large corporations, their shareholders and stock markets prefer trickle down. They get bailed out and they "recover", while the rest of us watch to see what may or may not trickle down. The US working class has been waiting for over four years. Precious little has yet trickled down. The majority of citizens prefer trickle up and for parallel reasons. Which kind of policy prevails depends on which side wields more power over the policy-makers.

Under Bush and Obama, trickle down has dominated overwhelmingly since the current crisis began in 2007. There were a few trickle-up measures: modest individual income tax cuts, repeated but very ineffective efforts to help those subjected to foreclosure, and extensions of unemployment compensation benefits. However, they were utterly dwarfed by what the Treasury and the Fed poured out in trickle-down bailouts. By 2011, it was clear that the Bush-Obama trickle-down policy had failed to end this second-worst economic downturn in a century.

The Obama team was beginning to learn what the Roosevelt team had learned sooner in their Great Depression. It turns out that bailouts for the top of the economic pyramid, which never trickle down, leave an economically depressed mass at the bottom. Governments that also try to pay for trickle-down policies by imposing "austerity programs" on the bottom only make matters worse. Sustained depression at the bottom eventually threatens the top: first economically and then also politically.

That happened sooner and more powerfully in the more depressed and more politically mobilized conditions of the 1930s. But the Tea Parties and the Occupy Wall Street movement, in their radically different ways, suggest something comparable unfolding now in the US. In Europe, the process is further along, as the Greek example shows.

The Obama team began in 2011 to supplement a wholly inadequate trickle-down approach with some limited trickle-up elements. The biggest of these have been the reductions in the social security deduction on paychecks. Another small step is this week's modest help for homeowners facing foreclosures. It will not help the majority of those in such danger – for example, the 50% of mortgages owned by Fannie Mae and Freddy Mac are ineligible. It will help the rest, but not much.

Consider simply that the negative equity of US homeowners is estimated now at $ 700bn. That is how much more they owe on their homes than those homes are worth. This new bill proposes $26bn in aid for that problem. No such timidity attended the trillions provided for the trickle-down bailouts since 2007. The banks are happy with this proposed settlement's low cost to them.

While the government's help to homeowners is far from adequate or just, it represents a partial and late recognition of trickle-down economics' inadequacy as policy. It further concedes the need for some trickle up. What happens next depends on the evolution of this crisis and of the political forces gathering strength.

© 2012 Guardian News and Media Limited

Richard D Wolff is professor of economics emeritus at the University of Massachusetts, Amherst, where he taught economics from 1973 to 2008. He is currently a visiting professor in the graduate program in international affairs of the New School University, New York City. Richard also teaches classes regularly at the Brecht Forum in Manhattan. His most recent book is Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It (2009). A full archive of Richard's work, including videos and podcasts, can be found on his site

Mortgage Settlement: States Settle for…a Poke in the Eye

...and a photo-op for Lisa Madigan.

by Maria Tomchick

The $26 billion settlement that state authorities wrangled out of the nation’s five biggest banks amounts to peanuts compared to the damage that was done to homeowners across the country.

The five banks who’ve agreed to the settlement are Bank of America (who purchased the nation’s largest mortgage lender, Countrywide Financial), JP Morgan Chase (who bought Bear Stearns), Wells Fargo (who bought Wachovia), Citigroup (who was a major recipient of federal government bailout money), and Ally Financial (formerly GMAC and now majority owned by the US Treasury).

Are you seeing a pattern here? All of these banks have been the recipient of federal bailout funds and some, like Ally Financial, are still dependent on US taxpayers. Nevertheless, they’ve stockpiled enough cash that they could pay the $26 billion settlement today and not take a hit to their bottom lines. But that’s not what they’ll have to do. The settlement terms are much sweeter than that.

Over three years, the banks will help about one million homeowners who owe more than their homes are worth to restructure their mortgages. This is estimated to provide about $20,000 in debt relief per homeowner. Unfortunately, most homeowners in that situation are underwater on their mortgages by an average of $50,000 each, so this provision won’t be enough to stop the rise in foreclosures and bankruptcies. Furthermore, the three-year timeline is too long; people are in debt and in financial trouble right now, and in three years a lot of people could lose their homes before they see any debt relief from the big five banks.

The settlement also sets aside funds for people who lost their homes to foreclosure: about 750,000 people will receive between $1,500 to $2,000 in cash. Whoopee. When you’ve lost your home, a $2,000 check doesn’t mean very much, especially when the bank that foreclosed on you has been accused of forging documents and was completely unresponsive to your requests to refinance or negotiate better payment terms. And these banks will be released from prosecution by the states for their criminal activity, which makes the settlement that much more painful for the American people.

The banks say this settlement will help the nation put the mortgage mess behind it, and it will ultimately help the housing market recover. They’re wrong. Four million people have lost their homes to foreclosure since 2008. The settlement barely covers less than one-fifth of those households. And most US homeowners won’t qualify for debt relief, either. Fannie Mae and Freddie Mac own over half of the mortgages in the US, but they’re not a party to the settlement, and neither are people whose mortgages were bundled and sold to private investors as mortgage-backed securities. That mess could take more than a decade to unravel.

In short, the settlement is a very, very good one for the big five banks. It will help them put the mortgage scandal behind them so they can get back to record profits, huge executive pay packages, and business as usual. And because the penalty was so small, the banks won’t be cleaning up their act any time soon.

We’ll have to wait and see if the federal government, particularly Obama’s new mortgage crime-fighting unit, can extract meaningful penalties from these scofflaws. So far, the federal government’s record isn’t good: over the past 20 years, the SEC has let these banks off the hook time and time again for the same violations, with only minimal financial penalties. And the federal government, unlike the states, has a vested financial interest in seeing these banks succeed, so we can’t expect them to be more aggressive in taking these big banks to court.

But somebody needs to do something, and the best move would be for Congress to pass legislation to reinstitute Glass-Steagall or another law that would break up the big banks into smaller entities. This would reduce their lobbying power in Washington DC, reduce the amount of resources they can bring to bear against state and federal regulators, and make the failure of any one of them less likely to jeopardize the entire financial system. This necessary reregulation is long overdue and, while Congress is paralyzed with partisanship, at least one of the presidential candidates should be taking up this issue. So far, all of them are avoiding the most important campaign issue of all: what to do about the economy.

It’s up to the voters—ordinary people like you and me—to force a shift in the political discussion. To ask each candidate, “What will you do to reregulate the banking industry?” and “What is your solution to help homeowners who are underwater on their mortgages?” and “Four million people have lost their homes to foreclosure, and many of them are out of work. What are you going to do about that?”

Keep asking. Shout if you have to.

Maria Tomchick has been writing articles and editorials on local, national and international politics since 1997 for numerous publications, including Common Dreams, Znet, Alternet, CounterPunch.org, AntiWar.com and EatTheState.org. Some of her past articles can be found at her website www.MariaTomchick.com

They Lied, Mortgage Settlement Grants Broad Immunity to Banks

North Carolina has posted an executive summary of the foreclosure settlement (hat tip Abigail Field), and it is a a troubling document. The first aspect is the very fact that an executive summary, rather than actual text of an agreement, is what is being released. And it’s not being released for the worst of reasons: the deal has not been finalized. We explained in an earlier post why this is completely outside the pale, and we’ll turn the mike over to Frederick Leatherman for a recap:

David Dayen mentioned that the settlement agreement has not been reduced to writing.

That is astonishing.

Let me repeat. That. Is. Astonishing.

The biggest problem with settlement agreements in particular, and all agreements in general, is reaching a so-called ‘meeting of the minds’ regarding the details and ‘chiseling them into stone’ by reducing them to writing. As I used to warn my clients when I was practicing law, we do not have an agreement until it has been reduced to writing, thoroughly reviewed, and signed by each of the parties. That has obviously not happened in this case.

Experience has taught us that humans dealing in good faith make mistakes, no matter how careful they are, and the potential for mistakes, misunderstandings and subsequent disagreements about the terms of an agreement cannot be overestimated. That potential becomes a certainty when one or more parties to an agreement is dealing in bad faith.

That, my friends, is why we have a law called the Statute of Frauds, which requires that certain types of agreements be in writing or they are invalid and unenforceable.

Needless to say, the odds of misunderstanding rise when you have many parties participating, and when some are very likely to be acting in bad faith (the banks and the Administration).

Second, and even worse, the description of the release in this summary is at odds with what various attorneys general have said about it. See Section VII:

Mortgage Settlement Executive Summary

This is the critical part:

The proposed Release contains a broad release of the banks’ conduct related to mortgage loan servicing, foreclosure preparation, and mortgage loan origination services. Claims based on these areas of past conduct by the banks cannot be brought by state attorneys general or banking regulators.

The Release applies only to the named bank parties. It does not extend to third parties who may have provided default or foreclosure services for the banks. Notably, claims against MERSCORP, Inc. or Mortgage Electronic Registration Systems, Inc. (MERS) are not released.

This is sufficiently general so that it is hard to be certain, but It certainly reads as if it waives chain of title issues and liability related to the use of MERS. That seems to be confirmed by the fact that made by local recorders for fees are explicitly preserved (one would not think they would need to be preserved unless they might otherwise be assumed to be waived). This is exactly the sort of release we feared would be given in a worst case scenario. The banks have gotten a huge “get out of jail free” card of bupkis.

Now it is possible that AGs can pursue claims against the banks via MERS, since executives of MERS have claimed that MERS members have given MERS an indemnification. But tell me how the liability nets out:

MERS shall indemnify and hold harmless the Member, and any employee, director, officer, agent or affiliate of the Member (“Member Party”), from and against any and all third-party claims, losses, penalties, fines, forfeitures, reasonable attorney fees and related costs, judgments, and any other costs, fees and expenses (“indemnified Payments”) that the Member Party may sustain directly from the negligence, errors and omissions, breach of confidentiality, breach of the Terms and Conditions, breach of the Rules and Procedures, or willful misconduct of MERS, or any employee, director, officer, agent or affiliate of MERS (“MERS Indemnified Claim”). Notwithstanding the foregoing, MERS shall not be liable or responsible under the terms of this Paragraph for any losses or claims VC10052000VA resulting from the actions or omissions of any person other than an employee, director, officer (who is also an employee of MERS), agent or affiliate of MERS.

The Member shall indemnify and hold harmless MERS, and any employee, director, officer, agent or affiliate of MERS (“MERS Party”), for any Indemnified Payments which do not result from a MERS Indemnified Claim and which such MERS Party incurs (i) from the negligence, errors and omissions, breach of confidentiality, breach of the Terms and Conditions, Rules and Procedures, or willful misconduct of a Member Party, (ii) with respect to a transaction on the MERS® System initiated by such Member, or (iii) as a result of compliance by MERS with instructions given by the Member, or its designee, as beneficial owner, servicer or secured party shown on the MERS® System (“Member Indemnified Claim”).

The issue here (at a minimum) is that MERS is arguably responsible for running a terrible database (from what we have been able to infer, it is lacking in normal protocols to assure the accuracy and integrity of information, such as audit trails) and in failing to devise procedures that were permissible in all the states in which it operated. That presumably constitutes negligence. In turn, the MERS members were arguably liable for taking impermissible actions, such as assigning mortgages when they did not own the note, or making assignments after foreclosures had been started. So they were also negligent. How do you net out who was responsible for what, and to what degree, since both parties are likely to argue that their indemnification isn’t operative due to the negligence (and also possibly bad faith) of the other party. Put more simply: even with the indemnification of MERS by MERS members, don’t expect it to be easy to pin liability on banks.

While the full terms have not been agreed upon, this seems to call into question the claim that Schneiderman got a carve-out for his MERS suit (and Biden had separately insisted that he had wanted to be able to add banks to his case against MERS).

But even with all these caveats, it’s hard to read the executive summary, which no doubt was vetted by the bank, Administration and AG sides, as meaning other than what it intends to mean: that the banks have been released of the meteor-wiping-out-the-dinosaurs-and-the-MBS-market liability they were most afraid of, that of the monstrous mess they made in their failure to convey notes as stipulated in their own contracts, and with their failure to use MERS as a mere registry, rather than a substitute for local recording offices. That in turns means that various cheerleaders for this deal, such as Mike “Settlement Release Looks Tight” Lux and Bob Kuttner have badly misled readers in their assertions that the release was narrow and the deal is good for homeowners.

And to add insult to injury, they’ve given thumbs up to a deal that, as Pimco’s Scott Simon put it:

“….treats people’s 401(k)s and pensions,” which hold mortgage securities, “like perpetrators as opposed to victims,…

“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.”

As we said before, this deal has put a price on fraud and document forgeries, and it’s $2000 per loan. And Democratic party operatives want you to believe that’s just dandy, that we should be happy as long as the masses gets some crumbs.

© 2012 Yves Smith

Volcker Rule: Occupy Fiscal Gurus Take On, In Depth, the SEC

by Abby Zimet

Fighting Wall Street (http://motherjones.com/mojo/2012/02/occupy-sec-letter-volcker-rule) on their own turf, the dirty hippies and know-nothing malingerers of the Occupy movement have fired off a 325-page comment letter (http://www.occupythesec.org/index.html) to the Securities Exchange Commission, months in the making, that methodically, knowledgeably, passionately defends the Volcker Rule (http://www.salon.com/2012/02/15/occupy_defends_the_volcker_rule/) - a key provision of the Dodd-Frank Wall Street reforms aimed at prohibiting banks from the kind of speculative "proprietary" trading that caused the financial crisis in the first place - against lobbyists' attempts to dismantle it.

Occupy the SEC's "vast array of specialists, including traders, quantitative analysts, compliance officers, and technology and risk analyst" notes, straight-faced, that, "The Agencies involved in the Volcker rulemaking process have an historic opportunity to redress many of the economic wrongs of the past, and create a future that privileges the interests of the many rather than the few."

Obama Sells Out Homeowners Again: Mortgage Settlement a Sad Joke

by Ted Rall

Joe Nocera, the columnist currently challenging Tom Friedman for the title of Hackiest Militant Centrist Hack--it's a tough job that just about everyone on The New York Times op-ed page has to do--loves the robo-signing settlement announced last week between the Obama Administration, 49 states and the five biggest mortgage banks. "Two cheers!" shouts Nocera.

Too busy to follow the news? Read Nocera. If he likes something, it's probably stupid, evil, or both.

As penance for their sins--securitizing fraudulent mortgages, using forged deeds to foreclose on millions of Americans and oh, yeah, borking the entire world economy--Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo have agreed to fork over $5 billion in cash. Under the terms of the new agreement they're supposed to reduce the principal of loans to homeowners who are "underwater" on their mortgages--i.e. they owe more than their house is worth--by $17 billion.

Some homeowners will qualify for $3 billion in interest refinancing, something the banks have resisted since the ongoing depression began in late 2008.

What about those who got kicked out of their homes illegally? They split a pool of $1.5 billion.
Sounds impressive. It's not. Mark Zuckerberg is worth $45 billion.

"That probably nets out to less than $2,000 a person," notes The Times. "There's no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file."

Readers will recall that I paid more than that for a speeding ticket. 68 in a 55.
This is the latest sellout by a corrupt system that would rather line the pockets of felonious bankers than put them where they belong: prison.

Remember TARP, the initial bailout? Democrats and Republicans, George W. Bush and Barack Obama agreed to dole out $700 billion in public--plus $7.7 trillion funneled secretly through the Fed--to the big banks so they could "increase their lending in order to loosen credit markets," in the words of Senator Olympia Snowe, a Maine Republican.

Never happened.

Three years after TARP "tight home loan credit is affecting everything from home sales to household finances," USA Today reported. "Many borrowers are struggling to qualify for loans to buy homes…Those who can get loans need higher credit scores and bigger down payments than they would have in recent years. They face more demands to prove their incomes, verify assets, show steady employment and explain things such as new credit cards and small bank account deposits. Even then, they may not qualify for the lowest interest rates."

Financial experts aren't surprised. TARP was a no-strings-attached deal devoid of any requirement that banks increase lending. You can hardly blame the bankers for taking advantage. They used the cash--money that might have been used to help distressed homeowners--to grow income on their overnight "float" and issue record raises to their CEOs.

Next came Obama's "Home Affordable Modification Program" farce. Another toothless "voluntary" program, HAMP asked banks to do the same things they've just agreed to under the robo-signing settlement: allow homeowners who are struggling to refinance and possibly reduce their principals to reflect the collapse of housing prices in most markets.

Voluntary = worthless.

CNN reported on January 24th: "The HAMP program, which was designed to lower troubled borrowers' mortgage rates to no more than 31% of their monthly income, ran into problems almost immediately. Many lenders lost documents, and many borrowers didn’t qualify. Three years later, it has helped a scant 910,000 homeowners--a far cry from the promised 4 million."

Or the 15 million who needed help.

As usual, state-controlled media is too kind. Banks didn't "lose" documents. They threw them away.

One hopes they recycled.

I wrote about my experience with HAMP: Chase Home Mortgage repeatedly asked for, received, confirmed receiving, then requested the same documents. They elevated the runaround to an art. My favorite part was how Chase wouldn't respond to queries for a month, then request the bank statement for that month. They did this over and over. The final result: losing half my income "did not represent income loss."

It's simple math: in 67 percent of cases, banks make more money through foreclosure than working to keep families in their homes.

This time is different, claims the White House. "No more lost paperwork, no more excuses, no more runaround," HUD secretary Shaun Donovan said February 9th. The new standards will "force the banks to clean up their acts."

Don't bet on it. The Administration promises "a robust enforcement mechanism"--i.e. an independent monitor. Such an agency, which would supervise the handling of million of distressed homeowners, won't be able to handle the workload according to mortgage experts. Anyway, it's not like there isn't already a law. Law Professor Alan White of Valparaiso University notes: "Much of this [agreement] is restating obligations loan servicers already have."

Finally, there's the issue of fairness. "Underwater" is a scary, headline-grabbing word. But it doesn't tell the whole story.

Tens of millions of homeowners have seen the value of their homes plummet since the housing crash. (The average home price fell from $270,000 in 2006 to $165,000 in 2011.) Those who are underwater tended not to have had much equity in their homes in the first place, having put down low downpayments. Why single them out for special assistance? Shouldn't people who owned their homes free and clear and those who had significant equity at the beginning of crisis get as much help as those who lost less in the first place? What about renters? Why should people who were well-off enough to afford to buy a home get a payoff ahead of poor renters?

The biggest fairness issue of all, of course, is one of simple justice. If you steal someone's house, you should go to jail. If your crimes are company policy, that company should be nationalized or forced out of business.

Your victim should get his or her house back, plus interest and penalties.

You shouldn't pay less than a speeding ticket for stealing a house.


The Best Congress the Banks’ Money Can Buy

by Bill Moyers and Michael Winship

Here we go again. Another round of the game we call Congressional Creep. After months of haggling and debate, Congress finally passes reform legislation to fix a serious rupture in the body politic, and the President signs it into law. But the fight’s just begun, because the special interests immediately set out to win back what they lost when the reform became law.

They spread money like manure on the campaign trails of key members of Congress. They unleash hordes of lobbyists on Capitol Hill, cozy up to columnists and editorial writers, spend millions on lawyers who relentlessly pick at the law, trying to rewrite or water down the regulations required for enforcement. Before you know it, what once was an attempt at genuine reform creeps back toward business as usual.

It’s happening right now with the Dodd-Frank Wall Street Reform and Consumer Protection Act -- passed two years ago in the wake of our disastrous financial meltdown. Just last week, for example, both parties in the House overwhelmingly approved two bills that already would change Dodd-Frank’s rules on derivatives -- those convoluted trading deals recently described by the chairman of the Commodity Futures Trading Commission as "the largest dark pool in our financial markets."

Especially vulnerable is a key provision of Dodd-Frank known as the Volcker Rule, so named by President Obama after the former Federal Reserve Chairman Paul Volcker. It’s an attempt to keep the banks in which you deposit your money from gambling your savings on the bank’s own, sometime risky investments.

It will come as no surprise that the financial sector hates the Volcker Rule and is fighting back hard.

On March 26, Robert Schmidt and Phil Mattingly at Bloomberg News published an extensive account on the coordinated campaign being waged by the banking industry to persuade regulators to scale back reform. Headlined, "Bank Lobby’s Onslaught Shifts Debate on Volcker Rule," their report chronicles the many ways in which banks are turning up the heat, enlisting the help of clients, customers, and other companies, among others.

"Some banks recommended consultants and law firms," they write, "... to help clients write letters arguing that the proposed language defines proprietary trading too broadly. Partnering with trade associations, the banks also commissioned studies, tested messages with focus groups, distributed talking points and set up a phone hotline for Capitol Hill staffers."

The banks found another ally in the US Chamber of Commerce, the biggest pro-business lobby in America, which helped put together a coalition of companies, including Boeing, DuPont, Caterpillar and Macy’s department stores.

In one instance, the banking behemoth Credit Suisse got an assist from a man named Robert Auwaerter, who oversees hundreds of billions as the fellow in charge of the fixed income group at Vanguard Group, a mutual fund company. He came to a briefing Credit Suisse held for three congressmen who belong to the New Democrats, a group of House members known "for their centrist and pro-business leanings."

Auwaerter led the 90-minute meeting and said the three Democrats "were really receptive to our comments." We’ll just bet. According to the Bloomberg News reporters, one of them, Joe Crowley of New York, "pushed back at one point, telling the group that he’d recently marched in a Lunar New Year parade in Queens with Thomas DiNapoli, the New York State Comptroller who oversees a state retirement fund of about $140 billion. Why wasn’t DiNapoli complaining about Volcker?

"The asset managers told Crowley they have a closer view of how the markets work than the pension funds that hire them. The proposed rule, they said, would slow bond trading, making it harder for them to execute their strategies. They predicted that would mean lower returns for funds like DiNapoli’s, as well as for 401(k) plans and individual investors.

"Less than two weeks after the Credit Suisse visit, 26 New Democrats signed a letter to regulators noting that 'millions of public school teachers, police officers and private employees depend on liquid markets and low transaction costs' to retire with ‘dignity and ease.'"

In other words, fellow members and regulators, lighten up on the Volcker Rule! A thick wallet helps, of course -- lobbyists for the financial sector spent nearly half a billion dollars last year. And the congressional newspaper The Hill reports, "Members of Congress pressuring regulators to go easy on the 'Volcker Rule' received roughly four times as much on average in contributions from the financial industry than lawmakers pushing for a stronger rule since the 2010 election cycle, according to Public Citizen, a left-leaning group advocating for strict implementation.

"When it is all added up, opponents of a tough Volcker Rule received over 35 times as much from the financial industry -- $66.7 million -- than advocates for a strong stance, who received $1.9 million."

All of which makes it darkly amusing to read in the April 4 edition of the financial newspaper The American Banker that, in the words of Roger Beverage, president and CEO of the Oklahoma Bankers Association, "Congress isn’t afraid of bankers. They don’t think we’ll do anything to kick them out of office. We are trying to change that perception."

Which is why Beverage and his colleague are creating the industry’s first Super PAC. They’re calling it -- we’re not making this up -- "Friends of Traditional Banking," a smokescreen of a sobriquet if we ever heard one, vaguely reminiscent of the Chicago mobsters in Billy Wilder’s Some Like It Hot who dub themselves "Friends of Italian Opera."

Matt Packard, the Super PAC’s chairman, told The American Banker, "If someone says I am going to give your opponent $5,000 or $10,000, you might say, 'Yea, okay.' But if you say the bankers are going to put in $100,000 or $500,000 or $1 million into your opponent's campaign, that starts to draw some attention." Don Childears, president and CEO of the Colorado Bankers Association chimed in, "It would be nice to sit on the sidelines or sit on our hands and say, 'Oh we don't get involved in that stuff,' but that just means you get run over. We need to get more deeply involved as an industry in supporting friends and trying to replace enemies."

All of which demonstrates, as per Bloomberg News, "that four years after Wall Street helped cause the worst economic downturn since the Great Depression and prompted a $700 billion taxpayer bailout, its lobby is regaining its power to blunt or deflect efforts to rein in the banks."

Nonetheless, just last week, The Wall Street Journal reported on how a movement to challenge big banks at the local level has gained momentum around the country. Activists want to restructure Wall Street from the bottom up. As a result, the Los Angeles City Council is considering an ordinance that would gather foreclosure and other data on banks that do business with the city. Officials in Kansas, City, Missouri, passed a resolution directing the city manager to do business only with banks that are responsive to the community. And here in New York City, legislation is pending to require banks to reinvest in local neighborhoods if they want to hold city deposits. Similar actions are underway in other cities.

They’re turning up the heat. You can, too.

Journalist Bill Moyers is the host of the new show Moyers & Company, a weekly series of smart talk and new ideas aimed at helping viewers make sense of our tumultuous times through the insight of America’s strongest thinkers.. His previous shows on PBS included NOW with Bill Moyers and Bill Moyers Journal. Over the past three decades he has become an icon of American journalism and is the author of many books, including Bill Moyers Journal: The Conversation Continues, Moyers on Democracy, and Bill Moyers: On Faith & Reason. He was one of the organizers of the Peace Corps, a special assistant for Lyndon B. Johnson, a publisher of Newsday, senior correspondent for CBS News and a producer of many groundbreaking series on public television. He is the winner of more than 30 Emmys, nine Peabodys, three George Polk awards and is the author of three best-selling books.

Michael Winship, senior writing fellow at Demos and president of the Writers Guild of America, East, is senior writer of the new public television series Moyers & Company, premiering in January 2012.

Go to http://www.billmoyers.com

Banks Got Their TARP $$, but Not Homeowners: Report

Important TARP funds targeted for homeowners have not been released
by Common Dreams staff

Only 3 percent of the $7.6 billion in TARP funds that are targeted for troubled homeowners facing foreclosure have been spent, according to a report by the Office of the Special Inspector General for the Troubled Asset Relief Fund.

The Hardest Hit Fund was created in 2010 to help struggling homeowners, but the Treasury Department has failed to distribute the vast majority of the money in the last two years due to "a lack of comprehensive planning," the report said.

"Look at the TARP money that goes out to the banks," said Special Inspector General Christy Romero in an interview with The Huffington Post. "That goes out in a matter of days. This has been two years and only 3 percent of these funds have trickled out to homeowners."

Chris Hayes, a host at MSNBC, said in a Tweet responding to the report, that the White House's "foreclosure mitigation failure has been so egregious and cruel, it makes me question their motives on everything."

The report is available here.

* * *

NY Times: Treasury Faulted in Effort to Relieve Homeowners

A fund to support homeowners in the communities hit hardest by the collapse of the housing bubble has disbursed just 3 percent of its budget and aided only 30,640 homeowners in the two years since its creation, according to a report released on Thursday by a federal watchdog office.

The Hardest Hit Fund, which was created in the spring of 2010, grants money to state housing finance agencies for efforts to help families that are facing foreclosure. It has “experienced significant delay” because of “a lack of comprehensive planning” by the Treasury Department and limited participation by Fannie Mae, Freddie Mac and the large mortgage servicers, said the report by the special inspector general for the Troubled Asset Relief Program.

“TARP wasn’t supposed to be just a bank bailout,” said Christy L. Romero, the special inspector general for TARP, in an interview. “It was specifically designed with the goal of helping homeowners, and our concern is that that goal may not be met.”

As of the end of 2011, the Hardest Hit Fund had spent $217.4 million out of its $7.6 billion budget, the report found. The program is intended to reach homeowners who are unemployed, or living in areas with high unemployment rates or steeply falling home values.

The report is just the latest to criticize the Obama administration’s efforts to relieve homeowners battered by the nationwide drop in housing prices and the broader recession. The office of the special inspector general has repeatedly criticized Treasury’s management of the Home Affordable Modification Program, Washington’s main initiative to prevent foreclosures.

The Treasury Department had estimated that the program would reach three million to four million homeowners. It has aided fewer than a million, though the program has been completing more and more permanent modifications recently.

* * *

Huffington Post: TARP Bailout Money Fails To Reach Neediest Homeowners After Two Years: Report

The Hardest Hit Fund, a $7.6 billion initiative established by the federal government in February 2010 to help families in states most crippled by the collapsed housing market, has distributed just 3 percent of its money -- or $217.4 million -- to help homeowners, according to a report released Thursday by the Office of the Special Inspector General for the Troubled Asset Relief Fund, or SIGTARP.

"Look at the TARP money that goes out to the banks," said Special Inspector General Christy Romero in an interview with The Huffington Post. "That goes out in a matter of days. This has been two years and only 3 percent of these funds have trickled out to homeowners."

The Hardest Hit Fund has helped just slightly more than 30,000 homeowners, or 7 percent of the roughly 480,000 homeowners targeted for assistance by the end of 2017 when the program expires, according to the report. The program is funded by TARP, the 2008 legislation that has provided a $600 billion to bail out various banks and other companies in the wake of the nation's financial crisis.

"The Hardest Hit Fund is really struggling to get off the ground and it's a real concern about whether this money can get out to these homeowners," Romero said.

The 76-page report reads like the autopsy of a dead housing program, placing the blame for the program's paltry performance squarely on the Treasury Department, the government agency responsible for TARP and, in turn, the Hardest Hit program.

According to the report, Treasury initially dragged its heels in getting the largest mortgage servicers to participate in the initiative, instead relying on the individual states to broker arrangements with the servicers. Some of the states lacked the necessary clout to secure servicer participation, thus limiting the program's ability to reach needy homeowners, concluded the report.

# # #

Democrats and Bain

Executives at Romney's old private-equity firm have donated more to the Democratic Party than the GOP. Why?

by Glenn Greenwald

We all know that Bain Capital, Mitt Romney’s former firm, is the paragon of capitalist evil, destroying the middle class in order to enrich greedy vulture oligarchs. We also all know that the Democratic Party is the defender of the middle class and the bold adversary of corporate pillaging. That’s why these facts generate so much cognitive dissonance:

Democrats have accepted more political donations than Republicans from executives at Bain Capital, complicating the left’s plan to attack Mitt Romney for his record at the private-equity firm.

During the last three election cycles, Bain employees have given Democratic candidates and party committees more than $1.2 million. The vast majority of that sum came from senior executives.

Republican candidates and party committees raised over $480,000 from senior Bain executives during that time period.

While Romney himself has received more contributions from his former firm than Obama has, “President Obama received a sizable share as well.” More generally, “campaign finance records show that Democrats collect more money from Wall Street than does the GOP.”

Why would these cunning Master of the Universe villains want so robustly to fund a party that is so adverse to their interests? The only coherent answer is that the party which they’re funding is anything but adverse to their interests. From today’s Washington Post, comparing White House visitor logs to lobbyist registration records:

The lobbying industry Obama has vowed to constrain is a regular presence at 1600 Pennsylvania Ave. The records also suggest that lobbyists with personal connections to the White House enjoy the easiest access. . . .

The White House visitor records make it clear that Obama’s senior officials are granting that access to some of K Street’s most influential representatives. . . . Lobbyist Marshal Matz, for example, who served as an unpaid adviser to Obama’s 2008 campaign, has been to the White House roughly two dozen times in the past 2 1/2 years. He has brought along the general counsel for the Biotechnology Industry Organization, the chief executive of cereal maker General Mills and pro bono clients, including advocates for farmers in Africa. . . .

Among the lobbyists with close ties to the White House is former New York congressman Tom Downey, who is married to Carol Browner, until last year Obama’s energy czar. Downey is the head of Downey McGrath Group, a lobbying firm whose clients include Time Warner Cable and Herbalife, which sells nutrition and dieting products. He has been to the White House complex for meetings and events 31 times. . . .

On Dec. 10, 2010, Downey held a meeting with economic adviser Lawrence H. Summers and Bill Cheney, the head of the Credit Union National Association, one of Downey McGrath’s clients. John Magill, the top lobbyist for the association, said that the group was pushing to lift the cap on the percentage of assets its members can lend out. The group asked Downey to request the meeting because he is a well-known Democrat.

“Had it been the Bush administration, we probably would have asked one of our Republican consultants to make the call,” Magill said. “That’s the way it works.”

That is indeed “the way it works” — as much as ever (the Obama administration agreed to release the visitor logs in order to settle a lawsuit, and it is the first administration to do so). Some of the lobbyists identified by the Post as frequent White House visitors are advocating for liberal causes rather than corporate interests, but many are simply there to shill for the industries that pay them to peddle their influence.

Yesterday, Newark Mayor Cory Booker went on Meet the Press and angered hordes of Democrats when he condemned the Obama campaign’s attacks on Bain as “nauseating,” equated the anti-Bain messaging to the GOP’s sleazy use of Jeremiah Wright, and then demanded: “stop the attacks on private equity” (in response to the backlash, Booker then released a hostage-like video recanting his criticisms and pledging his loyalty to President Obama). But as my Salon colleague Steve Kornacki noted, this was not some aberrational outburst from Booker; to the contrary, as Mayor of Newark, home to numerous Wall Street executives and firms, “financial support from Wall Street and, more broadly speaking, the investor class has been key to Booker’s rise, and remains key to his future dreams.”

But there’s nothing unique in that regard about Booker, who has long been regarded as a rising star in the Party. The same can be said of the Democratic Party generally. There was more or less a conscious decision in the early 1990s that the Party would transform itself into a servant of Wall Street and corporatism. It became the party of Robert Rubin and Larry Summers as it presided over massive de-regulation of the financial industry. And in response, the corporate money poured into the Party’s coffers and hasn’t stopped pouring in. Recall this December, 2008 New York Times article on key Party fundraiser Chuck Schumer — entitled “A Champion of Wall Street Reaps Benefits” — detailing the New York Senator’s loyalty to the banking industry and how crucial it has been in building and sustaining Democratic Party power in Washington:

As the financial crisis jolted the nation in September, Senator Charles E. Schumer was consumed. He traded telephone calls with bankers, then became one of the first officials to promote a Wall Street bailout. . . .

The next day, Mr. Schumer appeared at a breakfast fund-raiser in Midtown Manhattan for Senate Democrats. Addressing Henry R. Kravis, the buyout billionaire, and about 20 other finance industry executives . . . “We are not going to be a bunch of crazy, anti-business liberals,” one executive said, summarizing Mr. Schumer’s remarks.

The message clearly resonated. The next week, executives at firms represented at the breakfast sent in more than $135,000 in campaign donations. . .

Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress. . . .

As a result, he has collected over his career more in campaign contributions from the securities and investment industry than any of his peers in Congress, with the exception of Senator John F. Kerry of Massachusetts, the Democratic nominee for president in 2004, according to the Center for Responsive Politics, which analyzed federal data. (By 2005, Mr. Schumer had so much cash in reserve that he shut down his fund-raising efforts.)

In the last two-year election cycle, he helped raise more than $120 million for the Democrats’ Senate campaign committee, drawing nearly four times as much money from Wall Street as the National Republican Senatorial Committee. Donors often mention his “pro-business message” and record of addressing their concerns. John A. Kanas, the former chief executive of North Fork Bank, said: “He would solicit my opinion, listen to my advice and he appeared to take it into consideration.”

Lee A. Pickard, a lawyer representing clients including the Bank of New York, whose employees have been significant donors to Mr. Schumer and other Senate Democrats, turned to Mr. Schumer last year to successfully beat back a regulatory initiative by the Securities and Exchange Commission. “If you get Chuck Schumer on your side, you are O.K.,” he said.

And then there’s the always-annoying fact that Wall Street poured far more of its money into President Obama’s 2008 campaign than it did into John McCain’s, then placed large numbers of its former lobbyists and officials in key administration positions beyond just Summers and Tim Geithner, then received full-scale protection for the crimes leading to the 2008 financial crisis. Thus far, the banking industry — angered by Obama’s tepid anti-oligarch rhetoric and symbolic Election Year populist proposals, and excited to elect one of their own — has donated substantially more to Romney than Obama. It remains to be seen if that trend continues, but whatever else is true, the Democratic Party has been the recipient of ample amounts of Wall Street largesse for two decades now, and with good reason.

Romney’s record at Bain, like everything else about a presidential candidate, deserves real scrutiny, and the private equity and hedge fund conduct that made him rich has indeed played a substantial role in exploding levels of income inequality and the relentless assault on basic middle class security. But the Democratic Party has been nothing close to a force standing in opposition to any of that. They’ve been, and continue to be, enthusiastically along for the ride. Despite the industry’s petulant anger, Wall Street has thrived under the Obama administration, and even in those areas where the White House had full authority and the ability to help ordinary Americans — such as the HAMP fund to aid defaulting homeowners — they displayed overwhelming indifference. Not only did President Obama propose large cuts to Social Security and Medicare, he has been assuring Washington insiders such as GOP Sen. Tom Coburn that he intends even larger ones if re-elected:

If President Obama is president again, those problems are still there and we have to solve them. He knows that. We’ve had conversations where he’s told me he’ll go much further than anyone believes he’ll go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.

In sum, as is typically true, there is a huge gap between tactical Election Year rhetorical posturing and the reality of whose interests the two parties are serving.

UPDATE: Here are the all-time leaders in receiving campaign contributions from the securities and investment industry, including the employees of organizations within the industry, their family members, and their political action committees, through the end of 2011:
Copyright © 2011 Salon Media Group, Inc.

In The Audacity of Hope, President Obama himself explained why this matters (h/t The Ox):

Increasingly I found myself spending time with people of means – law firm partners and investment bankers, hedge fund managers and venture capitalists. … As a rule, they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing of their opinions in exchange for their checks. But they reflected, almost uniformly, the perspectives of their class: the top 1 percent or so of the income scale that can afford to write a $2,000 check to a political candidate. … They had no patience with protectionism, found unions troublesome, and were not particularly sympathetic to those whose lives were upended by the movements of global capital. … I know that as a consequence of my fundraising I became more like the wealthy donors I met.

Romney spent much of his professional adult life on Wall Street, but in a different though real sense, as Obama himself recounted, so has the President. That chart above cannot be dismissed as meaningless.

Copyright © 2011 Salon Media Group, Inc.

Snarling Banks

by Jim Hightower

We're sick and tired of being bullied and stomped on by the Powers That Be in Washington, and by gollies, we're not going to take it anymore!

Hooray! It's about time that workers, consumers, small farmers and other "small fry" joined together in a populist rebellion to make big-shot Congress critters of both parties listen to us. But — uh-oh — wait a minute. These mad-as-hellers aren't wielding pitchforks and torches, but big bags of cash. Holy Thom Payne — they're bankers!

Very few Americans on this side of the ATM machine think that the biggest problem in Washington is that the moneychangers don't have enough clout. But, incredibly, here they come with a super PAC intended to force lawmakers to bow even deeper to their needs.

"Congress isn't afraid of bankers," declared one of the bank honchos who organized the Friends of Traditional Banking super PAC. "They don't think we'll do anything to kick them out of office," he said, but that's exactly the plan.

In a dramatic and wholly destructive escalation of Big Money's assault on America's democracy, FTB's funders are not out to support candidates, but "to defeat our enemies." A Utah banker who chairs the new super PAC explains that giving $10,000 or so to the opponent of an incumbent who sides with the people has no impact, "but if you say the bankers are going to put ... $1 million into your opponent's campaign, that starts to draw some attention." He calls this a "surgical" approach to carving out political power. Yeah — like doing surgery with a chainsaw and sledgehammer!

Thank you, Supreme Court, for making this crass money play possible with your plutocratic Citizens United decision. Now that bankers are going to intimidate officeholders with the threat to put unlimited campaign cash against them, we can expect Big Oil, Big Pharma and all the other Bigs to join the fun.

But bankers don't throw their weight around only in terms of campaign contributions. Indeed, Woody Guthrie wrote a song titled "Jolly Banker," a perfect-pitch parody of the propensity of Depression-era bankers to feel good about gouging their small borrowers.

Woody's song could also apply to the gouging we're getting from today's national chain banks (the very ones that have a super PAC), except the song's title should be "Snarling Banker." Only a couple of years ago, Bank of America, Citigroup, Wells Fargo and others were quite jolly, because they were piling up mountains of profits through such sneaky schemes as secretly enrolling customers in checking accounts that charged $35-a-pop for every overdrawn check, then rigging the flow of checks so unwitting customers would be overdrawn.

Public outrage exploded, especially because only a year earlier, We the People had bailed out these same banks. Thus, Congress shut down some of the worst gouges. This pinched bankers' exorbitant profits a bit, and they've been snarling ever since. "Banks aren't charities," they barked — apparently thinking that someone might've mistaken them as such.

One thing you can count on is that banker greed is bottomless, and it's now coming back with a vengeance. Of course, they could make money honestly (as community banks and credit unions do) by making good loans and delivering good service, but instead they're returning to what they call "creative banking." You would call it "fee gouging."

Wells Fargo now hits you for $15 a month just to have a checking account, unless you keep at least $7,500 in your account. Citibank charges $20 a month, unless you keep $15,000 on deposit — more than double last year's level. Bank fees for money orders have doubled, and fees for cashier's checks have quadrupled.

There is a way out of this endless abuse-the-customer game: Move your money out of their vaults! For help, go to www.MoveYourMoneyProject.org.


National radio commentator, writer, public speaker, and author of the book, Swim Against The Current: Even A Dead Fish Can Go With The Flow, Jim Hightower has spent three decades battling the Powers That Be on behalf of the Powers That Ought To Be - consumers, working families, environmentalists, small businesses, and just-plain-folks.

CME Annual Meeting Disrupted by Chanting Activists

CHICAGO (Reuters) - CME Group ejected about 50 activist shareholders from a raucous annual meeting on Wednesday after they shouted for the exchange operator to pay its "fair share" of taxes.

"Pay your fair share! Pay your fair share!" demonstrators chanted as they were escorted out of the meeting room by CME security guards.

Several Chicago police took the group outside, where they were joined by several hundred who had convened at CME's headquarters. Their chants could be heard as CME Executive Chairman and President Terrence Duffy resumed the meeting.

"There is a perception that we got a tax break," Duffy said at the outset of the meeting. "This is not true."

He said the company had been taxed unfairly as if all its business was conducted in Illinois, when much of it is conducted electronically from elsewhere.

CME shareholders, many of whom are traders on CME's exchanges, are traditionally vocal at their annual meetings, and that tradition continued in an orderly fashion after the activists had left.

Several asked pointed questions about brokerage firm MF Global, whose failure on October 31 rocked the futures industry and hurt volume at CME. Duffy repeatedly defended CME staff's actions, saying they did everything they could to keep customers' money safe.

Former MF Global clients are still missing an estimated $1.6 billion that was missing from accounts when the brokerage collapsed.

Shareholders complained about a drop in CME's share price and one blamed a recent decline on CME's failed bid for the London Metal Exchange. CME pulled out of the bidding earlier this week.

CME's stock has gained nearly 3 percent so far this year, but is still down about 9 percent since MF Global filed for bankruptcy.

Duffy declined to comment on the LME, but blamed the share price decline on what he said was a misperception that a new designation of CME as a "systemically important" institution would force the company to come up with new capital to guard against failures of its top customers.

A U.S. risk council on Tuesday put CME on its list of systemically important financial institutions, and Duffy said the move was expected and CME was prepared.


The demonstrators who disrupted the meeting were protesting a move last year by the Illinois legislature to cut about $85 million from CME's annual tax bill by 2014 after the massive exchange operator threatened to move out of state.

The Rev. Jason Coulter of Ravenswood United Church of Christ in Chicago told CME executives to return the money "to people who so desperately need it" in Illinois. Illinois legislators are facing a May 31 deadline to craft a deal to plug the state's chronic budget deficit.

Earlier on Wednesday, Chicago police arrested 15 people protesting the tax breaks outside CME's Chicago Board of Trade building.

Inspired by the Occupy Wall Street movement, demonstrators have been targeting corporate shareholder meetings this spring to keep a spotlight on concerns about economic disparity in the United States.

More than 500 demonstrators engulfed Wells Fargo & Co's meeting site in April to express anger over home foreclosures, resulting in 24 arrests.

(Reporting By Tom Polansek and Ann Saphir; Additional reporting by James B. Kelleher in Chicago; Editing by Tim Dobbyn)

Copyright 2012 Reuters

GOP and Dems Perform the 'Bain Hustle'

by Robert Scheer

Obviously Barack Obama was right in criticizing Mitt Romney’s stewardship of Bain Capital. How else to evaluate the business experience that Romney has made a central tenet of his campaign?

As Obama put it all too accurately: “My opponent, Governor Romney—his main calling card for why he thinks he should be president is his business experience. He’s not going out there touting his experience in Massachusetts. He’s saying: ‘I’m a business guy. I know how to fix it.’ ”

And the fixing of the beleaguered companies acquired under Romney’s leadership at Bain Capital involved the very practices that have led to the loss of good American jobs to ensure the outrageous rewards that made Romney so wealthy.

Although Romney presents his activities as a form of venture capitalist investment, giving life to new enterprises, his practice has been quite the opposite. Ninety percent of Bain Capital’s deals by the end of his tenure involved dismembering once-thriving enterprises and selling off the parts, along with the jobs connected to them. “He made his money mainly through leveraged buyouts,” The New York Times reported five years ago in a detailed survey of Bain Capital’s practices under Romney, “mortgaging companies to take them over in the hope of reselling them at big profits in just a few years.”

Those immense profits were taxed at the capital gains rate of 15 percent instead of the 35 percent that income earners at that level were otherwise required to fork over. “The amounts of money are so vast that it is truly a matter of time before the taxation of private equity is front and center of the public agenda,” noted James E. Post, an expert on such matters at Boston University. He added,“Increasingly, this world of private equity looks like a world of robber barons, and Romney comes out of that world."

Those comments were made back in 2007, when Romney was gearing up for an ultimately failed run at the Republican presidential nomination. But the expected outrage over the pirate practices of the hedge fund hustlers never much materialized, and the Romneys of the world have sailed through the subsequent years of economic implosion free of any serious accountability. The money they are able to dispense to politicians is that good.

Take the case of Newark Mayor Cory Booker, whose comments about being nauseated by Obama’s Bain Capital remarks were quickly exploited in Republican ads. What is truly nauseating is that Booker did not reveal that his own rise to power was floated by contributions from Bain and other leading financial hustlers.

As Josh Israel wrote on Think Progress, an “examination of New Jersey finance records for Booker’s first run for mayor—back in 2002—suggests a possible reason for his unease with attacks on Bain Capital and venture capital. They were among his earliest and most generous backers.”

Indeed, what is surprising is not that Democrats like Booker are on the take from the hedge funds, as Obama himself has been, but rather that the president has dared to criticize those who have been so supportive of his campaigns.

Although Obama is to be applauded for questioning Romney’s legacy, his motives seem to be as opportunistic as those of Romney’s opponents in the Republican primaries who took the same tack. After all, Obama has had three years to regulate the unbridled power of private equity funds and he has done nothing in that regard. The president chose as his key economic adviser Lawrence Summers, who was paid $4.5 million as a consultant to the D.E. Shaw hedge fund while counseling then-candidate Obama.

Then there’s Rahm Emanuel, who was appointed Obama’s chief of staff despite the fact that his rise to power as an Illinois congressman was financed by Magnetar Capital, a hedge fund that had trafficked in subprime mortgage-backed securities. Emanuel’s replacement as chief of staff was no improvement. William M. Daley was paid $5 million a year by JPMorgan Chase—not a hedge fund, but a financial institution that has proved to be no less reckless and exploitative in its banking practices.

The point is not that the Democrats are virtuous— they are not. The power of finance capital has corrupted both parties ever since Bill Clinton collaborated with the Republicans in Congress to reverse the New Deal of Franklin Delano Roosevelt, the last truly great president of either party. The difference is that the Democrats must still respond to the demands of the party’s base for a modicum of economic justice for those who are hurting most. With the selection of hedge fund grifter Romney, the Republicans are now irredeemably defined as the party of the rapacious plutocrats.

© 2012 TruthDig.com

Robert Scheer is editor of Truthdig.com and a regular columnist for The San Francisco Chronicle.

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