Category: Rule of Law

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.

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.

Sen. Cantwell demands DOJ investigate foreclosure fraud before a settlement

Senator Maria Cantwell (D-WA) issued a blistering letter calling on the Department of Justice to investigate big banks for fraudulent foreclosure practices before agreeing to any settlement deal which would grant them immunity for these practices. In her letter to Attorney General Eric Holder, Cantwell writes:

I am concerned that recently reported settlement proposals will effectively absolve these financial institutions of substantial civil and criminal liability in one of the largest alleged fraud schemes during the financial crisis. Specifically, I am concerned that the proposed settlement includes a release from liability that may be far too sweeping, does not adequately compensate victims, does not require enough of banks to reform the system that led to the crisis in the first place, and is being made before all the facts are known and without the backing of a full inquiry into the size and scope of the alleged fraud.
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Without a thorough investigation, it is impossible to truly estimate just how pervasive the defects in the foreclosure and securitization process are. Continued reports of wrongful foreclosures, forged documents, and an inability of servicers and banks to prove chain of title and the legal right to foreclosure, raises the very alarming possibility that these defects were endemic to the mortgage servicing industry across the country. The sheer magnitude of the potential fallout from these defects demands that we undertake a full investigation to uncover the true scope of wrongdoing before providing blanket immunity to the perpetrators.

I am also concerned that reports of a settlement in the range of $20 billion, as recently reported, may not adequately compensate the victims of the foreclosure crisis. As a result of the pump-and-dump scheme perpetrated by the nation’s largest banks that inflated – and burst – the housing bubble, an estimated 14 million Americans are underwater, owing $700 billion more on their homes than those homes are worth. A $20 billion settlement is woefully inadequate to compensate the wrongfully evicted or homeowners struggling to stay in their homes. Much more should be required of banks to provide meaningful help underwater homeowners and compensate foreclosure fraud victims.

Boom goes the dynamite.

Washington is an important state in the context of the foreclosure crisis and the ongoing settlement talks between AGs and banks. Washington’s Republican Attorney General Rob McKenna is running for governor and has long been viewed as being a potential get for people trying to stop a bad deal. McKenna’s Democratic opponent in the gubernatorial race is Congressman Jay Inslee. Inslee has made stopping a bad settlement a major campaign issue and is collecting signatures on a petition against the rumored deal. Inslee is trying to wedge McKenna – either by making him look like a tool of the banksters or forcing him to do the right thing and help his constituents who were defrauded of their homes by the banks. It looks like Cantwell is aiding Inslee in that squeeze play, but the politics are really secondary to the potential outcome. Simultaneously, we are seeing another major politician standing up to the banks and demanding a halt to the consideration of a bad settlement deal. This is a very good thing.

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.

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.

NV AG indicts LPS & the prospects of the rule of law

Earlier this week Nevada Attorney General Catherine Cortez Masto indicted two mid-level employees of Lender Processing Services (LPS) for 606 counts of robosigning, specifically “directing fraudulent notarization and filing of foreclosure documents.” LPS is a major company hired by banks to process foreclosure documents and has been at the center of the robosigning scandal. LPS would allegedly help banks forge documents that were used to foreclose on homeowners in situations where the banks didn’t have any of the required documentation to prove that they had a right to foreclose.

The two employees under indictment are mid-level people, not CEOs and not people who in themselves represent an indictment of the entire industry response to the failure to properly track mortgage documentation during the securitization process. 600 counts likely represents at most a day of work for two robosigners and this is a crisis that has been going on fore years. At Naked Capitalism, Matt Stoller notes that, “These would be the only charges served involving the housing crisis and its link with the structurally corrupt securitization chain so far.” So even if nothing else comes from these indictments and Masto isn’t able to roll them up on their bosses, this is still an important moment for the rule of law as it relates to private property and the housing crisis. Stoller goes on:

At this point, Masto has gone further than any other official in terms of restoring some sort of social contract. And that’s saying something. Leadership can come from anywhere, especially when the corruption seems to be everywhere. And with California AG Kamala Harris putting immense pressure on Fannie/Freddie on foreclosures, it suggests the tide is turning on this issue somewhat.

Our essential economic problem is that our economy allocates resources through a mediating system of banks that are broken and/or corrupt. If you look at a chart of the recession, and then the recovery, you’ll notice that business investment perked up, but residential investment did not. The Fed lowered rates, bought Treasury bonds, and bought mortgage backed securities to lower rates for homeowners. But it’s not really working, because the monetary channel is corrupt. This indictment gets to that problem, it alleges tens of thousands of forged documents (or as a friend told me sarcastically, an afternoon’s worth of work for LPS). These documents represent foreclosures, economic loss, and clouded title. The indictments handed down, and the ones to come, show that corrupting our property laws and the basis of our economy is a crime.

This is incredibly important, since there just hasn’t been the sort of criminal investigation into robosigning and the way it has corroded the entire system of property ownership. With 11 million foreclosures already and quite possibly as many to come in the next few years, the impacts of robosigning are devastating. When a bank can’t prove they have a right to a particular property and hire a company like LPS to forge documents saying they do, and they are allowed to take someone’s home this way without punishment, there can be no functional expectation that any individual’s property is safe from theft. When the improperly foreclosed home is then eventually sold, that new owner will be taking over a property with unquestionably cloudy title.

Plenty of people have been saying robosigning is a criminal act for a long time now. Nevada AG Masto has now validated those people and confirmed that criminal behavior in connection to the housing crisis will not be tolerated, at least not in Nevada. There’s no reason why Attorneys General in every other state cannot do the same, nor is there a reason why the Department of Justice can’t hold people criminally responsible for illegal behavior during the housing crisis and continuing today.

Inside the Schneiderman and Biden investigation of the foreclosure crisis

Originally posted at AMERICAblog.com

New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have a joint op-ed in Politico yesterday. The dynamic duo have lead the charge to investigate the nation’s largest banks around robosigning, foreclosure fraud, and mortgage securitization fraud. They’ve also resisted a deal being worked out by Iowa AG Tom Miller and the Obama administration to grant a broad release of liability for matters connected to foreclosure fraud which haven’t even been investigated. They have been joined in that effort by a few other Justice Democrats, including Nevada’s Catherine Cortez Masto, Minnesota’s Lori Swanson, and Kentucky’s Jack Conway (Kamala Harris of California has left the Miller/Obama talks, but not joined the independent investigation of Schneiderman and Biden).

The Politico op-ed looks at the investigation that Schneiderman and Biden have undertaken.

The key to our strategy to root out the conduct that triggered the biggest financial crisis since the Great Depression is recognizing that a comprehensive effort requires an attack from both sides — looking at harm both to borrowers and to investors. So we are investigating four distinct, but interdependent, areas of abuse. Only one of those areas is being discussed in the negotiations now under way among the banks, the administration and some of our colleagues.
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The American people deserve a full investigation and public exposure of the conduct that got us into the economic quagmire we face today. We must ensure that it never happens again. And we must restore public confidence that ours is a nation committed to the goal of equal justice for all.

This is a critically important investigation and one that should be conducted by all fifty state attorneys general, as well as the federal government. But sadly it hasn’t happened. Schneiderman and Biden have shown tremendous leadership in this area, as has Masto in Nevada. If there’s ever going to be accountability for actions which helped create the need and energy around Occupy Wall Street, it’s going to come through the work of Biden and Schneiderman.

Occupy Wall Street protests Obama admin pursuit of bank immunity for foreclosure fraud

TheStreet.com recently reported that the Obama administration is pushing hard for a broad foreclosure fraud settlement between the federal government, all fifty states, and the nation’s five largest banks.

According to FBR’s Washington contacts, “the Obama Administration, especially Housing and Urban Development Secretary Shaun Donovan, has stepped up efforts to come to a settlement,” along with the U.S. Justice Department, ” on behalf of claims related to FHA loans.” Attorneys General Tom Miller (D-Iowa) and Lisa Madigan (D-Ill.) continue to lead the negotiations, with New York Attorney General Eric Schneiderman continuing to oppose a multistate settlement.

According to the report, the major remaining hurdles to the settlement — which will include penalties for improper foreclosure filings, as well as large outlays for principal reductions to facilitate mortgage loan refinancing — are “to convince California Attorney General Kamala Harris that the deal is large enough and provides enough political cover to sign onto,” and “to convince the servicers, especially Bank of America, that the liability release is worth the penalty it will be paying.”

The Obama administration is putting pressure on California’s Harris, so the nation’s largest state would add the patina of this being an actual national deal. Everything that’s been reported about this deal says it’s a horrible deal for homeowners and a disgrace to the rule of law.

As a result, it’s not shocking that a movement that is going directly after Wall Street lawlessness and the power of financial elites would specifically target the Obama administration around the pending retroactive immunity for bank fraud connected to the financial and foreclosure crises. Occupy Wall Street is marching today around the foreclosure deal, calling on President Obama to be Wall Street’s puppet:

“This is a clear, moral issue that cuts to the core of why we occupy,” said Max Berger, an Occupy Wall Street participant helping to plan the event. “Instead of throwing corrupt bankers in jail, the administration is pushing to give them a get-out-of jail-free card.”

“President Obama and the attorneys general have a choice: do they stand with Wall Street, or do they stand with the 99%?” he said.
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“We will not stand for a system that gives campaign contributors a right to immunity, while serving foreclosure papers to the 99%,” said Beth Bogart, a volunteer with Occupy Wall Street. “We will not stand for a country where bankers that issued deadly mortgage-backed securities are bailed out, but homeowners with mortgages are illegally thrown out on the street.”

This is an important and savvy foray by Occupy Wall Street into a very specific policy issue. But the foreclosure crisis is core to the problems of our economy and any efforts by the Obama administration to bail out the banks at the expense of homeowners should be opposed by the Occupy movement.

Tammy Baldwin introducing resolution against weak foreclosure fraud settlement

Tammy Baldwin, a Wisconsin Senate candidate and current member of the House of Representatives, is going to introduce a resolution on foreclosure fraud and the ongoing negotiations between the nation’s five largest banks, fifty forty-four state Attorneys General, and the Obama administration. Amanda Terkel of Huffington Post reports:

Baldwin’s resolution states that any settlement should follow three guidelines: 1) Banks that engaged in fraudulent behavior “should not be granted criminal or civil immunity for potential wrongdoing related to illegal mortgage and foreclosure practices,” 2) the federal government and state AGs should “proceed with full investigations into claims of fraudulent behavior by mortgage servicers” and 3) any monetary sum paid by the banks should “appropriately compensate for, and accurately reflect, the extent of harm to all victims.”

“We have to do the best we can to make innocent victims whole. But secondly, especially in light of the taxpayer bailout of the biggest banks, we owe taxpayers a solemn effort to do everything we can do to uncover what went wrong and whether laws were broken,” Baldwin said in an interview with The Huffington Post. “Part of that is to make certain this won’t happen again. That, to me, is one of the most basic responsibilities we have.”

David Dayen at FireDogLake has a copy of Baldwin’s proposed legislation. It’s simple and powerful, while including a stinging indictment of the big banks who have systematically been stealing peoples’ homes.

I don’t know that this resolution has much hope of passing the Republican-controlled House of Representatives, but it’s a strong statement that the anger we see around the country in the Occupy movement has made its way into the Capitol building. Good for Tammy Baldwin, a new member of the Justice Democrats.