Author: Matt Browner Hamlin

http://holdfastblog.com

NY files lawsuit against JPMC (Bear Stearns)

Yesterday New York Attorney General Eric Schneiderman filed suit against JP Morgan Chase for the actions of Bear Stearns (which it acquired in 2008) surrounding the issuance of $87 billion in residential mortgage backed securities. Though Schneiderman is a co-chair of the RMBS task force working group, which includes the Department of Justice and the Securities Exchange Commission, the suit was filed under New York law and no federal lawsuits have accompanied it.

David Dayen and Yves Smith both have strong analyses of the lawsuit and what it means in the grand scheme of things.

Dayen has the most detailed look at the lawsuit’s substance and context:

This is a pretty straight securities fraud case. Bear Stearns (bought by JPMorgan Chase in 2008) stands accused of creating and selling mortgage backed securities to investors that contained multiple defects, mostly from faulty underwriting that did not follow the prescribed procedures, and deliberately so. Bear forced the underwriters to cut corners by speeding up the volume of loans churning through the system; one underwriter reported being asked to finish 1,594 loans in five days.

Bear made commitments to its investors that they studiously evaluated all the loans they packaged into the pools that made up the mortgage backed securities. However, they did not evaluate the loans sufficiently, and when they did subject them to limited reviews from third-party due diligence specialists, the reviewers turned up multiple problems. Bear did not inform investors of these defects, which were massive: in one study by the FHFA, 523 out of 535 loans studies did not meet the underwriting standards. This all violates the representations and warranties that they made to investors about their responsibility to deliver loans into the MBS that went through rigorous underwriting.

The kicker is that Bear instituted a post-purchase quality control process, which also turned up defects, including loans that very quickly went into early payment defaults (EPDs) within the first 30-90 days. Bear was responsible for taking these EPDs out of the securitization pools, but they didn’t. They actually entered into secret settlements with the originators of the loans, where the originators would pay to repurchase the loans, at a fraction of the price. And Bear kept the money, $1.9 billion in all, despite being contractually obligated to turn that money over to the investors.

David notes that this is a pretty familiar story for the fraud that was perpetrated by banks on investors during the inflation of the housing bubble and many lawsuits have been brought by investors against banks on these types of issues. In fact, Dayen writes, “One, from the mortgage bond insurer Ambac, covers the exact same territory as it relates to JPMorgan Chase, Bear Stearns and EMC.”

Gretchen Morgenson of the New York Times reports that the investigation in the lawsuit was done by Schneiderman’s office beginning in spring 2011, prior to his joining the federal RMBS working group. It looks like the extent of the federal contribution to the case was interviews of Bear’s outside due diligence firm, Clayton Holdings — though Dayen points out that even this is a stretch, given the information from Clayton Holdings was covered in both the Financial Crisis Inquiry Commission and an agreement between the Clayton and Schneiderman’s predecessor, Andrew Cuomo.

It’s also not clear how much Schneiderman’s office will seek in damages from JP Morgan Chase. The deals in question cost investors $22.5 billion, but we don’t know how much money the New York AG will try to get as punishment, let alone what sort of settlement would be accepted. It’s common for the initial figure to be orders of magnitude higher than what is accepted as a cash penalty to make the lawsuit go away.

Reports from the AG’s office and statements from Schneiderman allies suggest that this is hoped to be the first suit of this type to be brought against banks by the NY AG’s office. However Yves Smith notes that if this is what we’re going to get, it’s not necessarily a reason to celebrate:

More cookie cutter suits of this order are nuisance-level for the banks and will be settled after the election, when voters hopefully won’t notice if the results fall short of the grandstanding. In many ways, filing suits that generate settlements vastly lower than the actual harm they did are worse than not acting at all. They will serve to reinforce the false Obama narrative that it’s just too hard to go after the banks, while the timing and the half-heartedness of the effort will correctly stoke criticisms by bank allies that this is just a politically motivated shakedown operation.

I’m not worried about what bank allies have to say in response to any and all efforts to sanction banks, regardless of the issue. Their line never changes. But Smith is right to note that in an environment where only civil suits are brought and small settlements are sought or accepted, it reinforces President Obama’s story that the banks didn’t do anything illegal and it’s too hard to go after them. Add in the fact that no individual bankers are charged in this suit and it’s easy to come away with the same core assumption as I’ve held for the last four years: namely that if you’re a banker and you break the law, you have no reason to fear being held criminally accountable for your actions.

There may well exist a parallel universe where a series of large civil suits by state attorneys general, the federal government, and private investors were able to extract enough of a cash penalty from the banks which fraudulently inflated the housing bubble and subsequently stole millions of families homes to ensure that these banks would never, ever consider doing these things again. But that’s not the universe we exist in. The lawsuits we have seen are small and sporadic, the settlement figures amounting to little more than the cost of doing business, while robosigning and foreclosure fraud occur to this day. As someone who believes the Wall Street banks should face criminal and civil charges for every instance of illegality and fraud they committed, I’m glad that this lawsuit has been brought. But it’s no panacea and it speaks to the fundamental unlikelihood of these banks ever being held to account for the full scope of their lawlessness.

Krugman on Social Security & the election

Paul Krugman is right:

if a re-elected president were to endorse [Simpson-Bowles], he would be betraying the trust of the voters who returned him to office.
…
This election is, as I said, shaping up as a referendum on our social insurance system, and it looks as if Mr. Obama will emerge with a clear mandate for preserving and extending that system. It would be a terrible mistake, both politically and for the nation’s future, for him to let himself be talked into snatching defeat from the jaws of victory.

The big problem with Krugman’s analysis is that while it is certainly true that the public re-electing Obama would be a strong statement in support of our social safety net and against fiscal austerity, it is not clear that the President would view it that way. Instead, Obama would like view his re-election as support for him and his views, regardless of whether or not they were driving components of the discussion in the election. He may not be publicly campaigning on his support for a Simpson-Bowles framework, but if that’s what he believes is right, it’s what he will pursue. I’m not quite sure what there is to be done about that.

Someone tell Michelle Rhee that Dan Malloy just isn’t that into her

Disgraced former DC schools chief Michelle Rhee is on a quixotic search to pretend she’s a Democrat in good standing, despite her pursuit of taking away workers’ rights and helping Republican governors bust teachers unions. In her Washington Post op-ed on how real Democrats support her education prioritization strategy, which reads like a Joe Lieberman op-ed arguing that real Democrats support endless war, Rhee offers up an example of how Democratic governors have worked with her on education issues.

Increasingly, those who staunchly side with unions at any cost appear to be in the minority, while more Democrats are saying we have to look at education differently. In Connecticut, Gov. Dannel Malloy (D) pushed through a law bringing more accountability into schools over early and strong union objections.

Gee Michelle, that sounds really impressive! Except, oh um, this statement from Malloy’s Senior Communications Adviser Roy Occhiogrosso:

“As much as the governor respects people’s rights to be a part of the education dialogue, Ms. Rhee has at times been a divisive figure. And the governor is determined to try and have this discussion about education reform in a way that’s not divisive.”

Governor Malloy actually worked with the teachers’ unions on education reform, not Rhee, who as you can see above, from whom he has publicly distanced himself.

There’s certainly a question about where the Democratic Party stands when it comes to supporting workers’ rights. There are certainly some elected officials like Rahm Emanuel, Andrew Cuomo and Arne Duncan who support Rhee’s brand of union busting. But there are also a lot of Democrats who still stand up for workers’ rights, including the rights of public teachers. For Rhee to say that the Democratic Party is squarely in her camp is an overstatement. But to say Dan Malloy is with her is an outright lie.

Conor Friedersdorf on why not to vote for Obama

Conor Friedersdorf, a conservative-leaning commentator who supported Obama in 2008 at The Atlantic, has a thoughtful argument on why he is refusing to vote for Obama again, even while recognizing that Obama is likely better than Mitt Romney. Friedersdorf specifically identifies three areas in which Obama’s actions are beyond his personal moral comfort zone, making it impossible to vote for him. The areas area the President’s bombing campaign in Pakistan, his authorization of extrajudicial killing of American citizens, and his decision to wage a war in Libya without Congressional approval.

What I am saying is that Obama has done things that, while not comparable to a historic evil like chattel slavery, go far beyond my moral comfort zone. Everyone must define their own deal-breakers. Doing so is no easy task in this broken world. But this year isn’t a close call for me.
…
Obama ran in the proud American tradition of reformers taking office when wartime excesses threatened to permanently change the nature of the country. But instead of ending those excesses, protecting civil liberties, rolling back executive power, and reasserting core American values, Obama acted contrary to his mandate. The particulars of his actions are disqualifying in themselves. But taken together, they put us on a course where policies Democrats once viewed as radical post-9/11 excesses are made permanent parts of American life.

He goes on to note that in the absence of public objections to these policies, they will continue. But if the public makes a big stink, then they will be stopped.

Sometimes a policy is so reckless or immoral that supporting its backer as “the lesser of two evils” is unacceptable. If enough people start refusing to support any candidate who needlessly terrorizes innocents, perpetrates radical assaults on civil liberties, goes to war without Congress, or persecutes whistleblowers, among other misdeeds, post-9/11 excesses will be reined in.

I think there’s a final key point that Friedersdorf makes which is worth highlighting:

The whole liberal conceit that Obama is a good, enlightened man, while his opponent is a malign, hard-hearted cretin, depends on constructing a reality where the lives of non-Americans — along with the lives of some American Muslims and whistleblowers — just aren’t valued. Alternatively, the less savory parts of Obama’s tenure can just be repeatedly disappeared from the narrative of his first term, as so many left-leaning journalists, uncomfortable confronting the depths of the man’s transgressions, have done over and over again.

It’s been incredibly frustrating to watch liberals, progressives, and Democrats come to either silently or vocally accept as Good and Fine things done by President Obama which, only a few years previous, they were properly decried as radical, evil and un-American when they were perpetrated by President Bush. We waged multi-year campaigns to stop President Bush from spying on Americans without warrant, yet there has been effectively no liberal outcry when President Obama asserted and then used his power as president to kill American citizens without trial. Had President Bush done this, there would have likely been riots in the streets.

Friedersdorf asks us where our lines in the sand are. This is an important question and one which we must think about when we consider who we will vote for. I believe it is entirely possible to say that Mitt Romney is not worthy of your vote and neither is Barack Obama. It’s a personal choice, but one which should not be made on the presumed limits of the election as a binary choice. It is not. There are alternate party candidates in most states. There is also the ability to write-in your pick. Voting is a civic action, but a personal choice. In some places it has more weight than others (my vote in DC will have zero bearing on the allocation of any electoral college votes). But as we begin to think deeply as a country about what values we want expressed in our vote, know that this is not as simple as the press nor the campaigns tend to make it.

Vice Documentary: The Mexican Mormon War

Vice Magazine has created a truly fascinating documentary on the Mexican drug cartels, the Mormons who live in northern Mexico, and the state of near constant war between them. Many of the Mormons interviewed in the documentary are either close or distant relatives of Mitt Romney, whose family fled the USA to avoid prosecution for polygamy. Many Mormon polygamists settled in Mexico to be able to live as polygamists without fear of arrest. Mitt’s father George was born in Mexico and immigrated to the US. Mitt Romney is himself a first-generation American.

While the fact that Romney’s family moved to Mexico to be polygamists should be a relevant part of his biography as a presidential candidate, his religion and his family’s dubious legal history have not been issues in neither the Republican primary nor the general election.

The Vice documentary is one of the best made for the web documentaries I’ve ever seen. It’s a really excellent piece of journalism and a fascinating look at a brutally violent conflict, one driven by a bizarre two-way trafficking of drugs into the US and guns into Mexico. The Mormon families in the documentary come across as very sympathetic in their fight against the cartels, so don’t assume that just because a liberal outlet is telling the story of Mitt Romney’s Mexican polygamist family history that it reflects poorly on him. In fact, the only thing that reflects poorly on Romney in this video is his opposition to sane immigration and drug policies which would diminish the risk his family in Mexico faces on a daily basis.

What the lockout is all about

Chuckling, a commenter at Alicublog:

One would hope the NFL referee lockout helps wake more people to the realization that plutocracy is ugly and getting uglier. The issue isn’t about money. The retirement contributions in question aren’t even pocket change for the billionaire NFL owners. No, they don’t feel their employees deserve a good retirement. They don’t feel their workers efforts are worth even a smidgen of their enormous net worth. They want it all not because it buys them anything extra, but in order to punish the lesser folk for their failings. It’s a bizarro meritocratic thing for people that don’t have a lot of merit.

This sounds spot-on to me.

The cost of the what the refs want and the owners refuse to agree with is about $3 million per year. That’s around $62,000 per team or less than $13,000 per individual game played. It could likely be covered by the sale of literal peanuts at each game, or perhaps foam fingers. This is not a lockout about money. It’s a lockout about breaking organized labor and taking away benefits from people who do high quality work and help make the owners billions of dollars.

Jim Himes: Pro-Austerity Wanker

This ad from Wall St Democrat and CT-04 incumbent Jim Himes is worth flagging.

In it, he compares his desire for “bipartisan” budget cuts to social spending alongside the raising of the US flag at Iwo Jima, walking on the moon and Martin Luther King Jr. He then approvingly cites the Pete Peterson funded Concord Coalition to support his pro-austerity position. Himes has worked closely with David Walker, the face of Peterson’s pro-austerity, anti-Social Security work, so this ad is no surprise. Himes, a former Goldman Sachs VP, has always been a voice for austerity from within the Democratic Party. But man does this wank hard.

Sports labor disputes & doing what’s right

There’s a ton of talk of how bad the NFL’s scab refs have been, especially after last night’s complete debacle between Seattle and Green Bay. It’s received less attention, but the NHL owners have locked out the players as well and as of now, there is no hockey this year. Sarah Jaffe has a great piece on both NFL and NHL lockouts, in which she gives a good rundown of why we should care about these two efforts by management to squeeze more revenue out of their workers (big or small).

I’m not sure what the way out for the NFL is. Right now the league is trying to take away the refs’ pensions. The amount of difference between the league’s position and the refs’ position amounts to a measly $62,000 per team per year – probably as much a team sells in pretzel concessions in a given home game. The NFL is purely in this for greed and an exertion of power of owners over some of their workers – there is no legitimate financial justification for a difference of $62,000 in a multi-billion industry. But as long as fans keep watching NFL games – something that is certainly going to happen – there’s little financial incentive for the NFL to end their lockout of the regular refs.

Daniel Hanson, an economist from the conservative think tank AEI, has called on the NFL Players Association to walk off the job given the dangerous playing conditions the NFL has created with the scab refs:

The ref situation constitutes what the U.S. government calls “an undue hazard to the health and safety of [an employee].” Accordingly, under the regulations of the Occupational Health and Safety Administration, the situation must be remedied to the satisfaction of a representative “selected by a trade union representing the worker.” The NFLPA has the right to review the ref situation and refuse to work until it is fixed.

Indeed, the law protects unionized employees from reprisal in the event that a risk hinders their ability to work safely. The National Labor Relations Act, to which the NFL’s collective bargaining agreement is subject, contains a provision regarding “abnormally dangerous conditions” and makes it clear that workers are under no obligation to work if their employers aren’t competent enough to fix these dangers.

And again, this is coming from a guy who works at a conservative think tank.

The NFL has to end the lockout of the real refs by Thursday night’s game. The scab refs have now cost a team a victory by making the absolutely wrong call on the final play of the game. There have been multiple injuries that went unpenalized. Barring a full on bench clearing brawl, I don’t know how much worse the scab refs impact on the game can be before the NFL has to cave. I mean, what else does Roger Gododell need to see to recognize that the integrity of this sport is worth more than $62,000?