About that fiscal cliff

Jonathan Chait:

Bipartisan agreement is not necessary to fix the debt. Nothing is necessary to fix the debt. It is as if the network of activists, wonks, business leaders, and Beltway elder statesmen who have devoted themselves to building cross-party support for a deficit deal have grown more attached to the means of bipartisanship than to the ends for which it was intended. The budget deficit is a legislatively solved problem. It is, indeed, an oversolved problem. In the absence of any agreement between the president and Congress, the deficit will shrink to less than one percent of the economy by 2018, and remain below that level through 2022. The budget deficit declines so sharply and so drastically, and in ways that neither party is entirely comfortable with, that the task for Washington is to pull back on deficit reduction.

Fighting for jobs

David Dayen makes the astute point that Elizabeth Warren is succeeding in her Senate campaign by actually fighting for job creation. Dayen writes:

Warren has not allowed the American Jobs Act to vanish. In every debate, she has brought up the trio of votes the Senate held on elements of the AJA, noting that Scott Brown voted against those bills each time. Brown then mumbles something about taxes. But only one of the two is seen as fighting for jobs, with an actual plan in writing to create them.

It’s pointless for Obama to have generated the American Jobs Act in the first place if he never planned to use it in his re-election as a second term set of agenda items. Otherwise, his “jobs plan” is a warmed-over stew of long-term goals with little differentiation from what Mitt Romney has on offer. Obama borrowed from Elizabeth Warren once before, culminating in the “you didn’t build that” speech. Her borrowing from Obama has been much more politically successful. He should learn from it.

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.

Occupy Our Homes on HuffPost Live

Home occupiers Deborah Harris of Occupy Our Homes DC and Bobby Hull of Occupy Homes Minnesota appear on Huff Post Live to talk about foreclosures and foreclosure resistance. Also in the discussion are David Dayen, Richard Zombeck and Anthony Randazzo. They get at a real discussion of the foreclosure crisis and the failures of the mortgage settlement to do anything approaching what was needed to hold banks accountable. It’s a long segment, but definitely worth watching in my book.

Duncan Black on Social Security

Writing in the USA Today, Duncan Black addresses our national problems with saving for retirement and making sure people have what they need to get by once they’ve retired:

We already have an excellent, if not especially generous, program in place. Workers contribute during their working lives in exchange for a promised benefit level during their retirement years. This program is called Social Security.

Instead of considering some exciting new program to try to encourage workers into saving more, another Rube Goldberg incentive contraption designed to nudge individual behavior in the right direction, we should increase the level of retirement benefits in the existing Social Security program.

The goal of a retirement system should be to ensure that retired people have sufficient income to live out the remainder of their lives without a radical reduction in quality of life after they stop working. Our current system, a modest mandatory government retirement program combined with individual savings, is failing to do that. Strengthen Social Security now, not by cutting benefits, but by increasing them.

Amen.

Michael Lewis on Obama on Wall Street

From Politico’s Ben White:

Michael Lewis at a PEN@Bloomberg event: “It’s a very odd Presidency. It’s odd that the stock market has doubled and [Obama is] regarded as a socialist. It’s odd that given what [Obama] could have done to big Wall Street interests, and what he actually did, that he’s as reviled on Wall Street. … Obama has been in some ways their best friend – he could have really thrown the institutions to the wolves and he didn’t do it. And it cost him a lot of good will to the left.’

‘I was surprised how calm and moderate President Obama was [about the financial crisis]. And it was one of the first things we talked about … It didn’t end up in the piece, but [President Obama] basically said, as much as one would like some Old Testament vengeance, it’s not very useful in public policy. He wasn’t angry. He didn’t have an anger about the whole thing. He was just trying to figure out the best solution to how to handle this whole mess.’

I had assumed that after the Obama administration shepherded a 49 state robosigning settlement that cost the banks as close to nothing as realistically imaginable, the Wall Street cash would have gone rushing into his campaign coffers. The crimes and misdeeds connected to fraudulent mortgage origination, fraudulent securities sales, fraudulent foreclosure, forgery, perjury, and everything associated with robosigning could have, in a just world, put every one of these banks out of business. But Obama saved them from facing real consequences for their action, just as he pivoted Congressionally funded homeowner aid programs to function to “foam the runway” for banks to prevent them from going bust.

Given that Wall Street’s gambling and excesses and illegality could have (and likely should have) derailed his presidency before it even started, it’s shocking that President Obama was incapable of being angry about it. Anger may not be the best vehicle for crafting and maintaining public policy, but anger is what should compel public policy responses in situations like these. No, I can’t help but conclude that the President wasn’t angry because (as he’s said in the past) he doesn’t believe Wall Street did anything wrong. Thus he has been their friend and protector at a time when we needed a President to rail against their gambling and hold them to account for the damage they inflicted on our country.