Category: Economy

No bank settlement deal on housing for now

Originally posted at AMERICAblog

Yesterday I posted on the news of a pending settlement between the federal government, some state Attorneys General and the nation’s five largest banks around robosigning and other foreclosure fraud issues. The deal looked really bad and there was strong opposition coming not only from large progressive organizations, but a core of Justice Democrat AGs. HUD Secretary Shaun Donovan and Iowa AG Tom Miller, who’s lead the settlement talks, met yesterday in Chicago with Democratic AGs and their staffs, ostensibly (based on reports citing Donovan and Miller’s offices) to finalize a deal. Surprisingly, no deal was reached and Miller’s office put out a statement saying, “We have not yet reached an agreement with the nation’s five largest servicers, and we won’t reach a settlement any time this week.” This is a huge victory for the officials, citizens, and organizations who have been pushing to stop a bad deal from moving forward.

Not surprisingly, though, the New York Times is reporting today that a deal is “inching closer.” This despite the fact that yesterday’s meeting in Chicago was allegedly going to result in the approval of a finalized deal. The Times does look at some of the numbers in the deal and how much aide it would conceivably bring to underwater homeowners and to those people whose homes were fraudulently stolen from them by banks using false documentation. The second number, according to the Times, is $1,800 per stolen home, which isn’t much more than two months’ rent for most people as compensation for their entire house being stolen. David Dayen looks at the aid that underwater homeowners would get and notes:

I would add that underwater borrowers with a second lien, like a home equity line of credit, owe more like $84,000 on average. So this barely gets them back a quarter of their equity, and the second will probably remain untouched (because that’s on the bank’s books, usually, even though it’s worthless).

Given that the single largest predictor of foreclosure is if a home is underwater, aid which keeps a home substantially underwater is not aid at all. At best it’s kicking the can down the road. These realities are no doubt part of the reason that there hasn’t been a deal yet, no matter how badly the Obama administration and Tom Miller want their to be a deal. As a result, I doubt that the President will mention anything in connection to the bank settlement talks in tonight’s State of the Union address, though I find it hard to believe that there won’t be some mention of the foreclosure crisis and how the administration hopes to deal with it in 2012.

Obama admin on verge of a horrible bank settlement deal

There’s lots of talk about the pending deal between what used to be 50 state Attorneys General and the nation’s five largest banks around what started out around robosigning, but seems to have expanded to broadly include foreclosure fraud and securities fraud. It looks like the Obama administration is on the verge of announcing a deal with some number of state AGs, a handful of regulatory bodies, and the nation’s five largest banks. There’s a meeting today between HUD officials and an undisclosed number of Democratic AGs or their staffs. Liberal groups are pushing to make this as strong as possible, with lots of activity from New Bottom Line, Color of Change, MoveOn, Rebuild, and many blogs who have been covering this crisis for years. The expectation is that the Obama administration wants to announce this deal in connection to Tuesday’s State of the Union address.

A couple pieces worth highlighting are by Simon Johnson at Politico and Van Jones and George Goehl of NPA at Huffington Post. Johnson makes a strong case against a quick, small settlement (that is, what we are now looking at), noting that “If there is a settlement after all the facts are known, the amount involved would likely be far greater than what is now on the table for robo-signing. Jones and Goehl likewise outline the principles for what a deal would have to do to actually be helpful to homeowners.

But if you’re wondering what the reported terms of the deal actually mean and if this is something which should be supported by Democrats or liberals or anyone else, I highly recommend you read Yves Smith’s post from this morning at Naked Capitalism. There are lots of reasons in my mind to oppose the deal as it’s been reported, but perhaps none greater than this:

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 lienholders 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. [Emphasis original]

I’ve yet to see an explanation of why transferring money from public workers’ and retirees to major banks is a good idea. There are other large, constitutional issues at play regarding how this deal mandates the breaking of contracts (which again is OK, it seems, as long as it is to benefit major banks), which Smith outlines in her post.

Unless and until the banks are forced to pay legal, economic, social and political costs in connection to their foreclosure fraud and securities fraud schemes, there’s no reason to expect them to treat homeowners an better and there’s no reason to expect that a similar crisis will not happen again in a few years’ time. Of course, a deal like this being driven by the Obama administration clearly belies the notion that there would be any meaningful federal investigation by law enforcement with an eye towards criminal prosecution. The only hope for criminal prosecution is with a handful of Justice Democrat AGs (Eric Schneiderman in New York, Catherine Cortez Masto in Nevada, Martha Coakley in Massachusetts, Beau Biden in Delaware, and Kamala Harris in California, to name a few). These investigations become even more critical in the face of a deal that would dramatically curtail the banksters civil liabilities. If you can’t change their behavior by forcing a huge cost for their crimes, putting executives in jail becomes even more important as a means of stopping this from happening again in the future.

One can only hope that AGs continue to balk at the deal being pushed by the Obama administration to forestall them from moving it forward. We should know in the next 36 hours whether or not this will happen as described.

Major offensive on Romney and Bain Capital

The half-hour documentary on Mitt Romney’s tenure at Bain Capital, When Mitt Romney Came To Town, is a huge story this week. Watch it – it’s devastating and the interviews of workers who lost their jobs after Romney’s Bain came in and broke their companies are heart-breaking.

“When Mitt Romney Came To Town” is the product of a pro-Newt Gingrich Super PAC, but both Gingrich and Rick Perry have been hammering Romney over his job-destroying ways at Bain for a while now. What’s incredible to watch is two 1%-coddling politicians adopt the rhetoric of the Occupy Wall Street movement to wage attacks on Romney. What’s even more incredible is to watch these attacks explode the internal contradictions of the Republican Party.

On the one hand, you have Fox News’ Eric Bolling treat accusations against Romney and Bain as an attack on capitalism itself. Rush Limbaugh has likened Gingrich to Fidel Castro for his attacks. Likewise the right wing US Chamber of Commerce is calling for a halt to attacks on private equity. On the other hand, conservative icon Bill Kristol has criticized those reflexing defending Bain and Romney as “silly“. You even have Sarah Palin saying Romney should back up his claims that he created a 100,000 jobs in his tenure at Bain.

What’s most remarkable, though, is that this debate isn’t happening at Occupy encampments, but on Fox News and The Weekly Standard (well, presumably folks at Occupy are talking about the destructive thievery of Romney’s tenure at Bain Capital). I don’t think any of us knew that the GOP had this sort of rhetoric in it! The reality is, of course, that they don’t. This is pure politics, as Robert Reich notes, otherwise Gingrich and Romney would be making some sort of prescription of how they would stop the newly-discovered evils of private equity and Wall Street greed. Reich writes:

Is Newt proposing to ban leveraged buyouts? Or limit the amount of debt a company can take on? Or prevent financiers – or even CEOs and management teams – from taking a public company private and then reselling it to the public at a higher price?

None of the above.

Rick Perry criticizes Romney and Bain pushing the quest for profits too far. “There is nothing wrong with being successful and making money,” says Perry. “But getting rich off failure and sticking someone else with the bill is indefensible.”

Yet getting rich off failure and sticking someone else with the bill is what Wall Street financiers try to do every day. It’s called speculation – and at least since the demise of the Glass-Steagall Act, investment bankers have been allowed to gamble with commercial bank deposits, other people’s money.

So is Perry proposing to resurrect Glass-Steagall? Not a chance.

This is politics, plain and simple. Romney’s opponents are making a last, desperate plea to knock him off of the winner’s podium. Had they made this case for the better part of the last year and had they backed it up with prescriptions to stop companies like Bain Capital from committing these crimes against American workers, they may have even succeeded in defeating Romney. While it’s certainly possible that these attacks can gain traction against Romney, neither Gingrich nor Perry are credible messengers. Reich concludes that, “the only serious question here is what kind of serious reforms Obama will propose when, assuming Romney becomes the Republican nominee, Obama also criticizes Bain Capitalism.” I think that’s right, though it remains to be seen if Obama splits off the path being set by faux populists Gingrich and Perry.

Shocker – more bad developments in AG settlement talks

Via Yves Smith, Financial Times is reporting new developments in the talks between the nation’s five largest banks, 40+ state Attorneys General, and the Obama administration around robosigning and foreclosure fraud. Not so shockingly, the news isn’t good:

Investors in US home mortgage bonds may have to swallow losses as part of a wide-ranging settlement being discussed between leading banks and the Obama administration to resolve allegations of foreclosure misdeeds…

As a result, the five largest US mortgage servicers – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – would avoid some of the cost of the potential $25bn settlement…

According to the terms of the settlement currently under discussion, each of the banks involved will have to meet a certain dollar target to fulfil their end of the deal. Each dollar of reduced payments or overall loan balances would be treated like a credit. A dollar of principal reduction on loans held on the banks’ own books would get a higher credit – for example, 100 cents on the dollar – than reducing a dollar of loan principal on mortgages owned by bond investors.

The servicers would have to determine that a mortgage restructuring would be more beneficial to the investor than a foreclosure, and the contracts governing the mortgage securities would have to allow for loan modifications. Investors probably would have no say in the decision, according to people familiar with the matter.

The Financial Times also reports that, in contrast to logic, banks would mark off loans from their own books as opposed to loans owned by investors.

This is a really ridiculous supposition and course of events. Essentially what would almost certainly happen is that banks would have investors eat losses. Who are these investors? Well, in part, unions, public pensions, and senior citizens. To put it differently, the general public would be bailing out banks via their second lien mortgages.

Yves Smith points out that this would likely go towards higher value mortgages and leave many people out in the cold:

In fact, I can tell you exactly what will happen: all the mortgage mod money will come out of investors, and it will come out of the very biggest loans, since the bigger the loan, the fewer the number of mods the bank has to make (the cost of making a mod is not related to the size of the loan). So that means that this approach assures that the mods will go to comparatively few people in big ticket homes and will do nada to help middle and lower middle class people.

The AG settlement talks were already headed in a really ineffectual direction. But this development, if true, would be a massive step backwards away from even the patina of accountability for the banks’ illegal behavior.

Moral Hazard

Matt Taibbi:

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.

Stoller on Obama, Wall Street, and Fraud

Matt Stoller has another great piece in Politico on the criminal behavior of the mortgage industry and the failures of the Obama administration to prosecute these crimes.

President Barack Obama has argued, as recently as last Sunday on “60 Minutes,” that what happened on Wall Street wasn’t criminal. “Some of the most damaging behavior on Wall Street,” the president told Steve Kroft, “in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

Obama is wrong. Fraud was illegal before the crisis; it’s illegal now. The Servicemember Civil Relief Act was signed in 2003. So it was already on the books. During the savings and loan crisis, the George H.W. Bush administration sent about 3,000 white-collar criminals to jail. This administration has yet to send one.

And it is for lack of trying. Attorney General Eric Holder and his network of U.S. attorneys haven’t brought one criminal suit on illegal military foreclosures or foreclosure fraud. There have been enough books and investigations revealing rampant criminality in the housing bubble and now in foreclosure crisis. Yet Holder’s DOJ is still settling with banks to let them off the hook for illegal foreclosures on active duty troops.

Stoller goes on:

The housing bubble, in other words, was not just due to tragic herding behavior. It also involved the financial sector’s aggressive responses to democratic attempts to rein in creditor abuses. Now Ally, a bank 74 percent owned by taxpayers and controlled by the administration, is continuing this abusive trend.

Turning our markets into playpens for predatory behavior didn’t happen overnight, and it will not be fixed overnight. But until we have public servants strongly focused on justice for all, we can expect the crime spree to go on. After all, what we’re all learning is that, at least for large banks, crime pays.

It’s really hard to properly capture how great the failure of the Obama administration to hold banks responsible for breaking the law is to changing bank behavior and helping homeowners today.

Rakoff ruling a victory, but it’s not pepper spray

Metaphor fail:

This time it is the Wall Street bankers and not the Occupiers who are getting hit with pepper spray.

The spray comes straight from the laser printer in the chambers of a federal judge, Jed Rakoff, in New York. The victory that Rakoff gave to the Occupy Wall Street movement Monday came from the federal courthouse — not far from Zucotti Park, the lower Manhattan headquarters of OWS.

I agree with Jonathan Macey that Judge Rakoff’s rejection of the piddling SEC settlement with Citigroup was a big victory. But it wasn’t a physical assault on Citigroup. It didn’t violate their rights nor did it violate due process. It was done entirely within the confines of the law.

Macey goes on to write:

It is a significant victory for the ideals of the Occupy Wall Street Movement. And it just might be the first step on to restoring accountability to both Wall Street and the SEC.

I think this could be the case, though while Rakoff and the Occupy movement have expressed shared values, I would not attribute Rakoff’s anger at being treated like a dunce by the SEC and Citigroup to be caused by Occupy. No, Rakoff is an actual sheriff on the beat, who still cares about the rule of law and making sure that government regulators aren’t working for the company’s they are tasked to regulate.

Programmed mortgage servicer fraud

Matt Stoller at New Deal 2.0 writes about how mortgage servicing companies are programming fraud into their software to ensure they extract the maximum amount of money from homeowners and force them into foreclosure. Long quote:

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

And still there are no criminal indictments of banksters for foreclosure fraud, no indictments of servicers for institutionalizing fraud, just silence as banks steal peoples’ homes.

Federal judge blocks SEC settlement with Citigroup

The New York Times is reporting that federal judge Jed Rakoff has thrown out a proposed settlement between Citigroup and the SEC. The SEC had agreed to $285 million in exchange for no admission of wrongdoing in a complaint about Citigroup defrauding investors in a 2007 residential mortgage backed security. Citigroup had told the investors a third party was picking what assets were securitized, when in fact the firm did it themselves. To make matters worse, Citigroup put bad mortgages into the security and then bet against them without telling their investors of their position. According to the Times, “Investors lost $700 million in the fund, according to the S.E.C., while Citigroup gained about $160 million in profits.” They don’t call them banksters without reason!

Judge Rakoff thought $285 million and no admission of wrongdoing or the facts of the case was not good enough for the SEC and wants them to go back and try again, this time with justice in mind – as opposed to what’s good for Citigroup.

The judge, Jed S. Rakoff of United States District Court in Manhattan, ruled that the S.E.C.’s $285 million settlement, announced last month, is “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with evidence on which to judge the settlement.

The ruling could throw the S.E.C.’s enforcement efforts into chaos, because a majority of the fraud cases and other actions that the agency brings against Wall Street firms are settled out of court, most often with a condition that the defendant does not admit that it violated the law while also promising not to deny it.

It truly is remarkable that the SEC thinks a small sum and no admission of guilt is a sufficient punishment for the banks they oversee. What’s worse, this sort of agreement protects banks like Citigroup from being held accountable by the investors they defrauded. This cuts to the core of Rakoff’s objection.

It will be nice to see Citigroup and their captured regulators at the SEC sweat following Rakoff’s ruling.

Debt & Forgiveness

This summer, Yves Smith at Naked Capitalism opted an interview of social anthropologist David Graeber on the history and evolution of debt in human society. In light of the Occupy Wall Street movement and the expanding debt crisis in Europe, the post is worth revisiting.

First, I highly recommend the entire interview, as it is fascinating to read about the different theories for how debt and money emerged, as well as seeing Graeber offer thoughtful disproofs of common assumptions – namely that barter emerged prior to currency and debt.

But what’s more important in the current moment is the connection between debt, morality, and power. Financial and political elites have made clear in the last three years that their own debts must be wiped out at will, at the expense of the 99%. Graeber responds to a question about the current crisis in Europe:

Well, I think this is a prime example of why existing arrangements are clearly untenable. Obviously the ‘whole debt’ cannot be paid. But even when some French banks offered voluntary write-downs for Greece, the others insisted they would treat it as if it were a default anyway. The UK takes the even weirder position that this is true even of debts the government owes to banks that have been nationalized – that is, technically, that they owe to themselves! If that means that disabled pensioners are no longer able to use public transit or youth centers have to be closed down, well that’s simply the ‘reality of the situation,’ as they put it.

These ‘realities’ are being increasingly revealed to simply be ones of power. Clearly any pretence that markets maintain themselves, that debts always have to be honored, went by the boards in 2008. That’s one of the reasons I think you see the beginnings of a reaction in a remarkably similar form to what we saw during the heyday of the ‘Third World debt crisis’ – what got called, rather weirdly, the ‘anti-globalization movement’. This movement called for genuine democracy and actually tried to practice forms of direct, horizontal democracy. In the face of this there was the insidious alliance between financial elites and global bureaucrats (whether the IMF, World Bank, WTO, now EU, or what-have-you).

When thousands of people begin assembling in squares in Greece and Spain calling for real democracy what they are effectively saying is: “Look, in 2008 you let the cat out of the bag. If money really is just a social construct now, a promise, a set of IOUs and even trillions of debts can be made to vanish if sufficiently powerful players demand it then, if democracy is to mean anything, it means that everyone gets to weigh in on the process of how these promises are made and renegotiated.” I find this extraordinarily hopeful.

This strikes me as exactly what one of the main thrusts of the Occupy movement is about – a desire for debt forgiveness, especially in the face of a system that forgives every bad gamble of financial elites.

Moreover, as we’ve seen recently with Robert Cruickshank’s piece calling for student debt forgiveness and some larger calls for a debt jubilee, there is a growing demand for this to happen. For a long while, those fighting the foreclosure crisis have demanded principle write downs, a moderate form of debt forgiveness that has been strenuously rejected by both political and financial elites. Or, to put it more differently, given the situation of crisis financial and political elites have put the world in, it’s hard to imagine there being a solution on scale to address the depths of the crisis other than jubilee.

This moment of popular anger isn’t going to be solved by a piece of tepid legislation regulating corporate money in politics. This anger isn’t going to be quelled by a financial transaction tax. While a massive infrastructure spending and jobs creation effort in the US could reduce some anger here, it would do little to stop the rage felt by the students and unemployed in Greece, Italy, Spain, and Portugal. Throwing all the banisters in jail would probably help things, at least in so far as restoring a sense of the rule of law, without changing the underlying fundamental problems of our economic system, it’s unlikely that change would be forestalled.

What Occupy Wall Street teaches us is that the scale of the problems we face demand solutions which realistically meet the problem. Occupation is a tactic fit for this crisis. But if we are to begin to answer the complaints of the Occupy movement or Los Indignados or any of the protesters in Greece and beyond, we have to look at how individual people and families have been broken by this elite-centric economy. The problem is debt and solution is forgiveness. The only question will be how long will it take, as Graeber says, for sufficiently powerful people to arrive at this position or for the public to amass enough power to make it happen democratically.