Moderators: Elvis, DrVolin, Jeff
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - explained last month before to the Financial Crisis Inquiry Commission why banks gave home loans to people who they knew couldn't repay. The whole piece is a must-read, but here are excerpts from the introduction:
The data demonstrate conclusively that most liar’s loans were fraudulent, which means that there were millions of fraudulent mortgage loans because liar’s loans became common (Credit Suisse estimates that they represented 49% of new originations by 2006). The data also demonstrate that even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of such fraudulent liar’s loans. No honest, rational lender would make large numbers of liar’s loans. The epidemic of mortgage fraud was so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble (and the depth of the ultimate Great Recession.
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In the cases where there have been even minimal investigations (New Century, Aurora/Lehman, Citi, WaMu, Countrywide, and IndyMac) senior lender officials were aware that liar’s loans were typically fraudulent. The lenders could not make an honest business out of selling overwhelmingly fraudulent mortgages.
Liar’s loans were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” (Akerlof & Romer 1993). A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by following a four-part recipe:
A. Extreme Growth
B. Making bad loans at a premium yield
C. Extreme leverage
D. Grossly inadequate loss reserves
Note that this same recipe maximizes fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy. This explains Akerlof & Romer’s title – Looting: The Economic Underworld of Bankruptcy for Profit. The failure of the firm is not a failure of the fraud scheme. (Modern bailouts may even recapitalize the looted bank and leave the looters in charge of it.)
The first two “ingredients” are related. Home lending is a mature, reasonably competitive industry. A lender cannot grow extremely rapidly by making good loans. If he tried, he’d have to cut his yield and his competitors would respond. His income would decline. But he can guarantee the ability to grow extremely rapidly by being indifferent to loan quality and charging weaker credit risks, or more naïve borrowers, a premium yield.
In order to become indifferent to loan quality the officers controlling the lender must eviscerate its underwriting.
***
There is no honest reason for a secured lender to seek or permit inflated appraisal values. This is a sure marker of accounting control fraud – a marker that juries easily understand.
In other words, banks made loans to borrowers who they knew couldn't really repay because the heads of the banks could make huge bonuses based on high volumes and fraudulent appraisals, and they didn't care if their own companies later failed.
In short, they looted their companies and the economy as a whole.
Professor Black brings us current to where we are today:
History demonstrates that if the control frauds get away with their frauds they will strike again.
By allowing the banks to use their political power to gimmick the accounting rules to permit them to hide their massive losses on liar’s loans we have made it far harder to take effective administrative, civil, and criminal sanctions against the elite frauds that caused the Great Recession. Hiding the losses also adopts the dishonest Japanese approach that cripples economic recovery and public integrity.
Prosecuting the elites control frauds can be done successfully. Create a new “Top 100” priority list and appoint regulators that will make supporting the Justice Department a top agency priority. That’s how we obtained over 1000 priority felony convictions of elite S&L criminals. No controlling officer of a large, non-prime specialty lender has been convicted of running a control fraud. Only one has even been indicted.
The FBI has written that any discussion of the crisis that ignores the role of mortgage fraud is “irresponsible.”
On a related note, Chris Whalen (co-founder of Institutional Risk Analytics, who has been hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system) told me that the collection of credit default swap payouts might also have played into the banks extending loans to borrowers who couldn't repay:
There are some really bad incentive structures in this industry. Default increases servicing fees, etc. So yes, your example is not outlandish. And the wonder of CDS lets us all bet that the other’s home burns down. Speculative madness, but consistent for a culture that prizes sales about all else.
Whalen also notes that Freddie and Fannie helped to create the epidemic of mortgage fraud, and - like Black - blasts the government for covering it up:
The invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.
Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."
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The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.
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The fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason.
***
And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?
Avoiding Disruption
Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting large-scale asset purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.
“Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.
The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.
The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and $1 trillion.
The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.
“Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,” analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.
BizWeek Reports a Bank of America Threat to Fannie
Which corporate-welfare recipient will end up holding the bag on toxic mortgages?
By Ryan Chittum
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Bloomberg BusinessWeek’s cover story this week has a very interesting piece of reporting that has flown under the radar. No wonder: It’s buried deep in the long story.
It reports that Bank of America is threatening Fannie Mae to keep it from pushing BofA to buy back its crappy loans:Bank of America, the nation’s largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.
The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. “If the tactic worked, I’d be shocked and appalled,” said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. “The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat.”
What a spectacle: one massive corporate-welfare recipient blackmailing another public company-turned-government ward over who’s going to end up holding the bag (I’ll note that Fannie ought to win here: Bank of America underwrote the things).
Taxpayers can only sit and watch: We’re paying for it one way or another. BBW (Hey, I didn’t name the thing!) is good to point that out:For policymakers, the dilemma is this: Enormous losses will cause problems wherever they end up. They could further harm Fannie and Freddie, which insure the vast majority of the nation’s mortgages and have already received nearly $150 billion in taxpayer support. Or, if Fannie and Freddie succeed in pushing the burden back to the banks, the losses could cripple some of the major institutions that have just emerged from a government bailout… “The Treasury is very aware that they can’t push too hard on this because if you do push too hard it might put the companies in negative capital again,” says Paul J. Miller, an analyst at FRB Capital Markets. “There’s a lot of regulatory forbearance going on.”
The BofA/Fannie info is the newsiest part of this excellent piece by Peter Coy, Paul M. Barrett, and Chad Terhune, and should have been put up higher in the story. But that’s a quibble—you should read the whole thing, which capably surveys the field on the foreclosure fraud scandal. It takes a look at MERS, has an excellent lede anecdote that shows the potential consequences if the banking industry has really destroyed much of the original paperwork, and it has a lot of great reporting on Lender Processing Services, which appears to be one of the key enablers and/or perpetrators in the scandal.“We are killing our competition!” says Greg Whitworth. It’s a perfect October day on the Jacksonville, Fla., campus of Lender Processing Services (LPS), and Whitworth, a division president, is rallying a crowd of 200 employees inside a big white tent on the sun-drenched banks of the St. Johns River. The company is celebrating what it calls “the Year of the Megas”—key customers Bank of America, Wells Fargo (WFC), and JPMorgan Chase—with a picnic of Mediterranean chicken salad, lemon cooler cookies, and sweet tea.
One gray patch hovers over the celebration: The back-office technology provider’s runaway success means it is tangled up in the foreclosure crisis. “I was thinking about the dark clouds over the company,” Joe Nackashi, the chief information officer, tells the crowd. “Sure, we have made mistakes. But I don’t want to let that cloud this day.”
No, don’t do that, buddy! I mean after all, what are a few investigations when you’re pulling in money hand over fist?LPS employees “seem to be creating and manufacturing ‘bogus assignments’ of mortgage in order that foreclosures may go through more quickly and efficiently,” the Florida Attorney General’s Office says in an online description of its civil investigation. “We’re concerned that people might be put out of their houses unfairly and unjustly,” Bill McCollum, the attorney general, told Bloomberg Businessweek. In a third investigation, the U.S. Trustee Program, the branch of the Justice Dept. that polices bankruptcies, is looking into whether LPS is “improperly directing legal action” to hasten foreclosures, according to a 2009 opinion issued by the bankruptcy court in Philadelphia. A Trustee spokeswoman declined to comment.
BusinessWeek describes the problems with Lender Processing Services better than I’ve seen elsewhere.
And this is just good context:Wall Street’s unspoken strategy has been to kick mortgage losses down the road until an economic recovery reinflates the housing market. The faulty-foreclosure crisis has forced the issue back into the present tense, triggering a fight over who will bear the brunt of those losses. The combatants—all of whom are trying to minimize their share of the damage—include homeowners, lenders and mortgage brokers, loan servicers and the underwriters of mortgage-backed securities, the buyers of those securities, title insurers, rating firms, and the federally controlled mortgage buyers Fannie Mae (FNM) and Freddie Mac (FRD)
I always like it when journalists end their pieces on FUBAR situations with ideas to fix or at least ameliorate the situation. BusinessWeek does that here. And its kicker gets at one of the most critical points, noting that:The longer it drags on, the more the foreclosure crisis corrodes Americans’ faith in their financial and legal systems. A pervasive sense of injustice is bad for the economy and democracy as well.
Amen to that.
.
Bank of America hires former Va. AG, former justice official for foreclosure defense
Former state and federal prosecutors are among the growing phalanx of lawyers being hired by Bank of America as it seeks to defend itself against accusations of wrongdoing in processing foreclosures.
Richard Cullen, former attorney general of Virginia, and Brian Boyle, who served as a deputy assistant U.S. attorney general during President George W. Bush's tenure, are among those who have been helping the company deal with a multistate probe launched by all 50 states.
Reuters reported that Cullen already has been communicating with the offices of various state attorneys general and that Boyle participated in a conference call between the bank and representatives from the Florida attorney general's office.
Cullen, chairman of the McGuireWoods law firm, was Virginia's attorney general from 1997-1998. Boyle is a partner in the D.C. office of O'Melveny & Myers.
Guest Post: The Tipping Point has Arrived
Submitted by Tyler Durden on 10/28/2010 10:24 -0500
Bill Gross Federal Reserve Fresh Start Guest Post PIMCO SWIFT Turkey
Submitted by Mike Krieger of KAM LP
The Tipping Point has Arrived
Our age is retrospective. It builds the sepulchres of the fathers. It writes biographies, histories, and criticism. The foregoing generations beheld God and nature face to face; we, through their eyes. Why should not we also enjoy an original relation to the universe? Why should not we have the a poetry and philosophy of insight and not of tradition, and a religion by revelation to us, and not the history of theirs? Embosomed for a season in nature, whose floods of life stream around and through us, and invite us, by the powers they supply, to action proportioned to nature, why should we grope among the dry bones of the past, or put the living generation into masquerade out of its faded wardrobe? The sun shines today also. There is more wool and flax in the fields. There are new lands, new men, new thoughts. Let us demand out own works and laws and worship.
- Ralph Waldo Emerson, Nature
I believe we have finally breached the tipping point in the socio-political landscape of the United States of America. There will be no going back from here. Everyone on all levels of society including the elites must make a choice. Will you stand for real reform and an end of the feudalistic rule of the oligarchs and their paid-off puppets that line the streets of Washington D.C., or will you keep your mouth shut and play the old and dying game in the context of a completely different cultural environment?
While many will disagree with what I am about to say, I believe the oligarchs and the Federal Reserve have already lost.
This will not be clear to the vast majority at this time because the powerful institutions that dominate and rob us will continue to fight for survival but the wind is already blowing in a different direction and cannot be reversed. The smart elites are starting to see this and are hedging their bets. The dumb or stubborn ones may want to start looking at countries with non-extradition treaties or start blowing the whistle on someone above them and fast. The window of opportunity to make the choice is closely quickly. “I was just following orders” will not cut it when the dollar collapses and Disneyland shuts down. There have not been any major arrests and people have seemingly gotten away with all their frauds and crimes. This too will change and 2011 will represent a change in trend in this regard. We have entered the terminal phase of this ponzi scheme economy and those responsible for its creation and its continued support at the expense of the vast majority of the populace will see their foul deeds rise to the surface.
Earlier this year I wrote two piece that I think are worth re-reading and I have attached links to them. The first was “A Time to Speak Out” http://www.zerohedge.com/article/time-speak-out and the second was the “The Elites Have Lost the Right to Rule” http://www.zerohedge.com/article/elites ... right-rule. When I wrote these articles many of the themes addressed were completely out of the mainstream, yet in an amazingly brief period of time many of the frustrations I voiced are now popping up everywhere I look. It’s strange and rewarding to see the topics I and countless others have been discussing on the “fringe” break into the light of day. Now that these concepts are out there is no stopping the avalanche that is about to hit the oligarchs smack in the face. As Gandhi said “An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.”
This brings me to discuss what I think is one of the most important letters from an elite I have seen in 2010. I am referring to Bill Gross’ most recent piece. Now when I say he is an “elite” I am not saying he is part of some vast conspiracy to turn us further into serfs. What I mean is he is one of the most fabulously wealthy people in America. He also happens to have made his fortune in the financial services industry and runs the country’s largest bond fund. This is a person that has every reason and incentive to play nice with the other elites and their corrupt institutions at the top of which lies the Federal Reserve banking cartel. What he did in his latest letter was far from “playing ball.” Here are some of the notable quotes and the entire letter can be found here http://www.pimco.com/Pages/RunTurkeyRun.aspx.
“Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike.”
“Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.”
“Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.”
“The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.”
Ok, so what is Bill Gross up to you ask? I will give you my two cents. This guy is not as fabulously wealthy as he is for being a dope (although this cannot be said for a lot of people in this industry that are merely financial engineers that would become extinct overnight without 0% interest rates but that’s another story). Bill Gross sees the writing on the wall. He see the winds of change and is hedging his bets. He is throwing out a carrot to those that criticize the completely corrupt and ponzi scheme economy and financial system we have today which benefits only those that speculate on the taxpayers dime. We could end this fake and destructive economy by ending the Fed in its current form (at the very least everything they do must be transparent) and restoring the rule of law. He attacks the false left/right paradigm and rightly points out that both the Democrat and Republican establishment have sold out the people to line their own pockets. In the second quote he actually explores the notion that “our paper-based foundation of wealth deserves to be buried.” Then finally he points out what many others have but almost no one is the mainstream ever admits. The U.S. government is running a giant ponzi scheme with regard to its debt. Hmmm do you want to own gold or treasuries?
Truth be told, what Bill Gross did in this letter is to create the ultimate hedge for himself. He didn’t say these things earlier when they were just as true as they are today and certainly must have been clear to someone of his intelligence. He said it now. He said it now because he can see the writing on the wall. The important thing is not that he ultimately defends what the Fed is doing (which he unfortunately does) but that he felt the need to hedge himself and distance himself from the system. As he writes in the final paragraph, “We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter.” Indeed, the axe is going to fall on the oligarchs and if you don’t want to be a turkey on a platter you had better choose sides and fast. As the great Ralph Waldo Emerson wrote in his 1836 essay Nature, “There are new lands, new men, new thoughts. Let us demand out own works and laws and worship.” Well said sir, well said.
All the best,
Mike
(quotes fromWSJ, with commentary by bluerum at DU)
http://online.wsj.com/article/SB2000142 ... 87762.html
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In two letters released Friday, Attorney General Richard Cordray criticized a number of banks and loan-servicing companies, including Wells Fargo & Co.; Ally Financial Inc.'s GMAC Mortgage; Bank of America Corp.; and J.P. Morgan Chase & Co. Mr. Cordray said the banks are trying to paper over fraud committed in foreclosures with temporary fixes that don't address underlying problems in the banks' practices.
"It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a 'do-over,' " he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify Mr. Cordray when banks file substitute affidavits.
-/-
So that is what the banks meant by 'fixing the problem'. It looks like the banks are learning that they are in deeper doo-doo than they thought. It appears that their internal business cultures are not the same as the at-large legal system, and that not enough judges are on their payroll - yet.
-/-
Mr. Cordray's letters come as several banks say they have reviewed their foreclosure procedures and are resuming evictions. But his insistence that they go beyond replacing affidavits by employees who have been labeled "robo-signers"—who didn't adequately review underlying foreclosure documentation—threatens to upend banks' efforts to resolve their foreclosure problems.
-/-
Banks are trying to 'paper' over the depths of the fraud they committed and continue to perpetrate on the public.
-/-
"The banks are committing fraud on the court, essentially perjury, and then saying 'Whoops! You caught me! Here's some different evidence and use that instead,' " Mr. Cordray said in an interview Friday. "I know a lot of judges are not going to take kindly to that."
-/-
What!? You mean we can't taxpayer money, jobs AND their homes? What good is court system that doesn't rubber stamp organized crime activities?
Link to article on RICO Act:
http://en.wikipedia.org/wiki/Racketeer_ ... ations_Act
Criticism of U.S. Fed move mounts ahead of G20
Sun Nov 7, 2010 11:40pm EST
Washington's latest move to print more money is a form of
indirect currency manipulation that could lead to a new round of
currency wars and even global economic collapse, a leading
Chinese newspaper warned on Monday.
The comments were the latest in a string of strongly-worded
criticisms of U.S. economic policies by Chinese economists ahead
of a G-20 summit in Seoul this week. A number of other nations
including Germany have also criticised the U.S. decision to
inject an extra $600 billion into the banking system.
Efforts to reduce imbalances that are destabilising the
global economy will top the agenda of the Nov. 11-12 summit.
2012 Countdown wrote:
Nordic wrote:
Yet another time in my life, always with money, where I'm right. 100% right. Hell maybe 500% right. And it does me NO GOOD.
I bought a lot of silver at $13.
It's all gone.
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