NEW YORK — One of Bernard Madoff’s sons was found dead of an apparent suicide Saturday on the second anniversary of his father’s arrest, according to a law enforcement official.
Mark Madoff, 46, was found hanged in his apartment in Manhattan’s fashionable SoHo section, according to the official. A family member notified police around 7:30 a.m.
The official was not authorized to speak publicly about the case and spoke to The Associated Press on the condition of anonymity.
Mark Madoff and his brother, Andrew, were under investigation but hadn’t faced any criminal charges in the massive Ponzi scheme that led to their father’s jailing.
This is the second installment of a two-part series. Read the first here.
We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two–part post called on the U.S. to begin “foreclosing on the foreclosure fraudsters.” We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud. We obviously cannot on rely solely on Bank of America assessing its own culpability.
Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds — the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds. All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks’ failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the “shadow inventory” of loans that have received no payments for years, yet have not led to foreclosure:
After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:
A government review of botched foreclosure paperwork so far has found that the problems do not pose a “systemic” threat to the financial system, a top Obama administration official said Wednesday.
Yes, that’s right. HUD reviewed the “paperwork” problem to see whether it threatened the banks — not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.
The Justice Department is leading an investigation of possible crimes involving mortgage fraud.
That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its “partnership” with the Mortgage Bankers Association (MBA). The MBA is the trade association of the “perps.” It created a ridiculous on its face definition of “mortgage fraud.” Under that definition the lenders — who led the mortgage frauds — are the victims. The FBI still parrots this long discredited “definition.” That is one of the primary reasons why — in complete contrast to prior financial crises — the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds.
Note that the Justice Department is not investigating foreclosure fraud. HUD Secretary Donovan’s statement shows why:
“We will not tolerate business as usual in the mortgage market,” he said. “Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible.”
Note the language: “mistakes”, “errors”, “processes” (following the initial use of “paperwork”). No mention of “fraud”, “felony”, “criminal investigations”, or “prosecutions” for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to “fix” “processes” — not repair the harm their frauds caused to their victims.
The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers’ trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.
“If the people cannot trust their government to do the job for which it exists
– to protect them and to promote their common welfare – all else is lost.”
– BARACK OBAMA, speech, Aug. 28, 2006
Economics Editor, AlterNet; Fellow, Campaign for America’s Future
Posted: September 12, 2010 02:52 PM
The Washington Post has published a very silly op-ed by Chrystia Freeland accusing President Barack Obama of unfairly “demonizing” Wall Street. Freeland wants to see Obama tone down his rhetoric and play nice with executives in pursuit of a harmonious economic recovery. The trouble is, Obama hasn’t actually deployed harsh words against Wall Street. What’s more, in order to avoid being characterized as “anti-business,” the Obama administration has refused to mete out serious punishment for outright financial fraud. Complaining about nouns and adjectives is a little ridiculous when handcuffs and prison sentences are in order.
Freeland is a long-time business editor at Reuters and the Financial Times, and the story she spins about the financial crisis comes across as very reasonable. It’s also completely inaccurate. Here’s the key line:
“Stricter regulation of financial services is necessary not because American bankers were bad, but because the rules governing them were.”
Bank regulations were lousy, of course. But Wall Street spent decades lobbying hard for those rules, and screamed bloody murder when Obama had the audacity to tweak them. More importantly, the financial crisis was not only the result of bad rules. It was the result of bad rules and rampant, straightforward fraud, something a seasoned business editor like Freeland ought to know. Seeking economic harmony with criminals seems like a pretty poor foundation for an economic recovery.
The FBI was warning about an “epidemic” of mortgage fraud as early as 2004. Mortgage fraud is typically perpetrated by lenders, not borrowers — 80 percent of the time, according to the FBI. Banks made a lot of quick bucks over the past decade by illegally conning borrowers. Then bankers who knew these loans were fraudulent still packaged them into securities and sold them to investors without disclosing that fraud. They lied to their own shareholders about how many bad loans were on their books, and lied to them about the bonuses that were derived from the entire scheme. When you do these things, you are stealing lots of money from innocent people, and you are, in fact, behaving badly (to put it mildly).
The fraud allegations that have emerged over the past year are not restricted to a few bad apples at shady companies– they involve some of the largest players in global finance. Washington Mutual executives knew their company was issuing fraudulent loans, and securitized them anyway without stopping the influx of fraud in the lending pipeline. Wachovia is settling charges that it illegally laundered $380 billion in drug money in order to maintain access to liquidity. Barclays is accused of illegally laundering money from Iran, Sudan and other nations, jumping through elaborate technical hoops to conceal the source of their funds. Goldman Sachs set up its own clients to fail and bragged about their “shitty deals.” Citibank executives deceived their shareholders about the extent of their subprime mortgage holdings. Bank of America executives concealed heavy losses from the Merrill Lynch merger, and then lied to their shareholders about the massive bonuses they were paying out. IndyMac Bank and at least five other banks cooked their books by backdating capital injections.
Lets not act surprise…by now we all know ANYTHING the US GOVERNMENT touches turns to ___________!
Because these lying banksters get away with ________________! We should foreclose on their _____________and kick them to the curb! Get your stress out and fill in the blank!
WE are not fools and we do not believe one thing they say!
First Posted: 06-29-10 06:22 PM | Updated: 06-29-10 06:22 PM
Potentially “thousands” of troubled homeowners were denied opportunities to lower their monthly mortgage payments under the Obama administration’s signature foreclosure-prevention plan due to servicer errors and inadequate oversight by the Treasury Department, a government audit has found.
Mortgage servicers failed to comply with basic guidelines, used different criteria to evaluate borrowers, recorded error rates up to six times their established thresholds, and couldn’t provide evidence that potentially eligible homeowners had been solicited for the administration’s Home Affordable Modification Program, also known as HAMP.
The errors are partly due to Treasury’s failure to issue specific guidelines for servicers to follow, and the administration’s lack of quality-control standards. Because servicers aren’t required to adhere to the same set of standards, there’s a risk that firms aren’t identifying practices “that may lead to inequitable treatment of borrowers or harm taxpayers through greater potential for fraud or waste,” according to a Thursday report by the Government Accountability Office.
But even if servicers were fraudulently modifying loans or improperly denying modifications to distressed homeowners, Treasury “has yet to establish specific consequences or penalties for noncompliance,” the GAO notes. The department has yet to fine any servicers for noncompliance, according to the report.
Already, “Treasury specifically allows some differences in how servicers evaluate borrowers… that could result in inconsistent outcomes for borrowers,” the report found.
The end result could be the “inequitable treatment” of struggling homeowners who were looking to an administration for help during the worst economic downturn since the Great Depression. HAMP is the centerpiece of the administration’s $75 billion effort to stem the rising tide of foreclosures.
“I find it saddening and frustrating that none of these problems, which we among other people identified to Treasury over a year ago, have been meaningfully addressed,” said Diane E. Thompson, a lawyer with the National Consumer Law Center. “And as a result, we lost a major opportunity to stem the foreclosure crisis.”
OUR nation’s Congressional machinery was humming last week as legislators reconciled the differences between the labyrinthine financial reforms proposed by the Senate and the House and emerged early Friday morning with a voluminous new law in hand. They christened it the Dodd-Frank bill, after the heads of the Senate Banking and House Financial Services Committees who drove the process toward the finish line.
The bill is awash in so much minutiae that by late Friday its ultimate impact on the financial services industry was still unclear. Certainly, the bill, which the full Congress has yet to approve, is the most comprehensive in decades, touching hedge funds, private equity firms, derivatives and credit cards. But is it the “strong Wall Street reform bill,” that Christopher Dodd, the Connecticut Democrat, said it is?
For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed.
On the final item, the bill fails completely. After President Obama signs it into law, the nation’s financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets.
Speaking of large and politically connected entities, Dodd-Frank does nothing about Fannie Mae and Freddie Mac, the $6.5 trillion mortgage finance behemoths that have been wards of the state for almost two years. That was apparently a bridge too far — not surprising, given the support that Mr. Dodd and Mr. Frank lent to Fannie and Freddie back in the good old days when the companies were growing their balance sheets to the bursting point.
So what does the bill do about abusive financial products and curbing financial firms’ appetites for excessive risk?
For consumers and individual investors, Dodd-Frank promises greater scrutiny on financial “innovations,” the products that line bankers’ pockets but can harm users. The creation of a Consumer Financial Protection Bureau within the Federal Reserve Board is intended to bring a much-needed consumer focus to a regulatory regime that was nowhere to be seen during the last 20 years.
It is good that the bill grants this bureau autonomy by assigning it separate financing and an independent director. But the structure of the bureau could have been stronger.
For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending.
And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.
Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked.
Given that financial regulators — and the comptroller’s office is not alone in this — often seem to think that threats to bank profitability can destabilize the financial system, the consumer protection bureau may have a tougher time doing its job than many suppose.
ONE part of the bill that will help consumers and investors is the section exempting high-quality mortgage loans from so-called risk retention requirements. These rules, intended to make mortgage originators more prudent in lending, force them to hold on to 5 percent of a mortgage security that they intend to sell to investors.
But Dodd-Frank sensibly removes high-quality mortgages — those made to creditworthy borrowers with low loan-to-value ratios — from the risk retention rule. Requiring that lenders keep a portion of these loans on their books would make loans more expensive for prudent borrowers; it would likely drive smaller lenders out of the business as well, causing further consolidation in an industry that is already dominated by a few powerful players.
“This goes a long way toward realigning incentives for good underwriting and risk retention where it needs to be retained,” said Jay Diamond, managing director at Annaly Capital Management. “With qualified mortgages, the risk retention is with the borrower who has skin in the game. It’s in the riskier mortgages, where the borrower doesn’t have as much at stake, that the originator should be keeping the risk.”
In the interests of curbing institutional risk-taking, Dodd-Frank rightly takes aim at derivatives and proprietary trading, in which banks make bets using their own money. On derivatives, the bill lets banks conduct trades for customers in interest rate swaps, foreign currency swaps, derivatives referencing gold and silver, and high-grade credit-default swaps. Banks will also be allowed to trade derivatives for themselves if hedging existing positions.
But trading in credit-default swaps referencing lower-grade securities, like subprime mortgages, will have to be run out of bank subsidiaries that are separately capitalized. These subsidiaries may have to raise capital from the parent company, diluting the bank’s existing shareholders.
Banks did win on the section of the bill restricting their investments in private equity firms and hedge funds to 3 percent of bank capital. That number is large enough so as not to be restrictive, and the bill lets banks continue to sponsor and organize such funds.
On proprietary trading, however, the bill gets tough on banks, said Ernest T. Patrikis, a partner at White & Case, by limiting their bets to United States Treasuries, government agency obligations and municipal issues. “Foreign exchange and gold and silver are out,” he said. “This is good for foreign banks if it applies to U.S. banks globally.”
That’s a big if. Even the Glass-Steagall legislation applied only domestically, he noted. Nevertheless, Mr. Patrikis concluded: “The bill is a win for consumers and bad for banks.”
Even so, last Friday, investors seemed to view the bill as positive for banks; an index of their stocks rose 2.7 percent on the day. That reaction is a bit of a mystery, given that higher costs, lower returns and capital raises lie ahead for financial institutions under Dodd-Frank.
Then again, maybe investors are already counting on the banks doing what they do best: figuring out ways around the new rules and restrictions.
A version of this article appeared in print on June 27, 2010, on page BU1 of the New York edition.
The big mortgage financing company, which owns or guarantees millions of mortgages, announced on Wednesday that it would sue homeowners who have the capacity to pay but default anyway. It also said it would prevent these strategic defaulters from getting a new Fannie Mae-backed loan for seven years, which could potentially shut millions of buyers out of the market.
But it was unclear, the experts said, why Fannie Mae was threatening delinquent owners and what it hoped to achieve. The new direction seems to run counter to the Obama administration’s efforts to reinvigorate the housing market. And there were basic questions about how Fannie would be able to distinguish between those homeowners who defaulted intentionally and the unfortunate ones who had no choice.
“How are they going to do this, and for what result?” asked Grant Stern, president of the Morningside Mortgage Corporation on Bay Harbor Islands, Fla. “So they can find the people who have a little money left after their house crashed and take it away from them?”
A Fannie Mae spokeswoman said that the goal of the new punitive policies was to force defaulting homeowners to work with their servicers to surrender their houses through either a lender-approved short sale or by formally giving up the deed.
“We really want to encourage borrowers to pursue alternatives to foreclosure,” said the spokeswoman, Janis Smith.
Fannie’s newly aggressive stance comes as the debate is heating up over how much, if at all, borrowers should be held liable for their foreclosures.
Republicans recently added a measure to a Federal Housing Administration financing bill in the House of Representatives that would forbid strategic defaulters from getting an F.H.A.-insured loan.
The California Legislature is debating a proposed law that goes in the other direction, shielding many more delinquent borrowers from debt collectors.
Fannie and its sister company, Freddie Mac, control 30 million mortgages, providing liquidity to the housing market. They have been under government conservatorship since September 2008; the ultimate cost of the rescue to taxpayers might hit $400 billion.
Chris Dickerson of the Federal Housing Finance Agency, which regulates Fannie, said, “We support Fannie Mae taking a policy position that discourages borrowers who can afford to pay their mortgage from walking away.”
Fannie Mae will announce the details of its new program next month, when the servicers who collect mortgage payments on Fannie’s loans will get explicit instructions on how to make recommendations for lawsuits.
But for some in the mortgage business, the new direction seemed little more than a cruel joke.
“Fannie wants to lock people up in a jail of negative net worth for much of the rest of their lives,” said Lou Barnes, a Colorado mortgage banker. “They’re bringing back the debtor’s prison.”
The plan poses some political problems as well as practical ones. Fannie Mae might be a ward of the government but its new policy is at distinct odds with the Obama administration, which has been trying to restart the fragile housing market by lowering interest rates, offering tax credits and insuring millions of new loans.
A Treasury Department spokesman said Fannie Mae’s plan did not represent official Obama administration policy. A spokesman for Freddie Mac said it was closely following Fannie’s moves but had not yet adopted them.
Strategic defaults have been a rising concern for years. Lenders first noticed people purposefully ditching their houses early in the financial crisis. In late 2007, Kenneth D. Lewis, then chief executive of Bank of America, said people were remaining current on their credit cards but defaulting on their home loans, a phenomenon that he said “astonished” him.
The lenders are less surprised now, but perhaps more worried. Bank of America said recently that it was putting owners in danger of foreclosure into payment plans that were supposed to be affordable — but that a third of the borrowers were failing to pay anyway.
“You could say the customer is choosing not to make those payments,” said Jack Schakett, credit loss mitigation executive for Bank of America Home Loans.
Borrowers who stop paying the mortgage can get a year of free rent, and sometimes two. “There is a huge incentive for customers to walk away,” Mr. Schakett said in a recent media briefing.
Fannie is not saying how many of its borrowers are strategically defaulting. The firm’s delinquency rate, traditionally about 0.5 percent of its portfolio, began sharply ascending in mid-2007. At the beginning of this year, it leveled off at 5.5 percent.
About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.
Fannie was established as a federal agency in 1938 but was chartered by Congress as a private company in 1968. For years it prospered by virtue of its special status as a government-sponsored entity charged with increasing the nation’s homeownership rate, enriching its shareholders and executives in the process.
During the housing boom Fannie overreached and bought many loans of buyers who were ill-equipped to pay them. Its fate is uncertain; it is not even clear it will be around in seven years to enforce any edicts.
Christopher F. Thornberg, a principal at Beacon Economics who correctly forecast that the housing boom would implode, said he understood what Fannie was trying to do, and even sympathized to a degree.
It is rational economics, he said, to assume that someone who walked away from an unpaid mortgage once might do so again. It also made sense, he said, for Fannie to try to limit strategic defaults from becoming an even bigger problem. And the new program also addresses the moral hazard question, Mr. Thornberg said: If borrowers are not punished for their missteps, they might not learn their lesson and might do it again.
And yet, he noted, the banks were bailed out, and their executives walked away rich. “Why should I pay my dues when they did not?” he said. “There is no clean answer on this.”
Once more they are going after the WRONG PARTY and they KNOW IT!
Fannie and Freddie were responsible for so much of this meltdown – and now we have to listen to their ranting and thuggery. Is there a hole deep enough for these guys?
They are so angry because their precious RMBS trusts are being exposed as schemes to loot pension funds, and that will make it harder to sell the next batch of poison they are cooking up.
First Posted: 06-23-10 11:03 PM | Updated: 06-23-10 11:28 PM
Taxpayer-owned mortgage giant Fannie Mae is targeting families by going after struggling homeowners who strategically default on their mortgage, the firm announced Wednesday.
A default is considered strategic when homeowners have the capacity to pay, yet choose to walk away from their mortgage. The trigger, researchers say, is negative equity: When the value of a home is less than what the lender is owed on it, borrowers are more likely to strategically default.
About 11.3 million homeowners with a mortgage, or 24 percent, owe more on their mortgage than the home is worth, according to real estate research firm CoreLogic. Another 2.3 million have less than 5 percent equity in their homes. All told, about 29 percent of all homeowners with a mortgage are either underwater or very close to it. The firm estimates that the typical underwater homeowner won’t return to positive equity until late 2015 or early 2016.
And Fannie Mae, an arm of the federal government and a big part of the Obama administration’s housing policy, wants to make sure that if struggling families walk away, they suffer for it.
Homeowners who strategically default or did not work “in good faith” to avert foreclosure through other means will be ineligible for new Fannie Mae-backed mortgages for seven years. The firm said it will also pursue homeowners in court, seeking so-called “deficiency judgments” to recoup outstanding debt by seizing borrowers’ other assets. Thirty-nine states do not limit the ability of lenders to recover what they’re owed.
Fannie Mae said that next month the firm “will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.”
“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, Fannie’s executive vice president for credit portfolio management, said in a statement.
Strategic defaults among homeowners have been on the rise. More than a million homeowners went that route last year, nearly double the amount in 2008 and more than four times the level in 2007, according to a recent analysis by the credit reporting company Experian and Oliver Wyman, a management consulting firm. A study by a team of academics from the University of Chicago and Northwestern University estimated that nearly a third of home mortgage defaults in March were strategic. The deeper underwater homeowners are, the more likely they are to walk away from their mortgage, the researchers noted.
Earlier this month, the House of Representatives passed a bill barring strategic defaulters from obtaining home mortgages backed by the Federal Housing Administration. The agency guarantees nearly one in four new mortgages.
“I can’t help but notice that every group now frantically calling for tough penalties for homeowners who walk away was virulently opposed to judicial modification of mortgages in bankruptcy,” Rep. Brad Miller, a North Carolina Democrat, told the Huffington Post.
Bank of America and Citigroup, the nation’s largest and third-largest banks by assets, respectively, support changing existing law to give federal judges the power to modify mortgages in bankruptcy, otherwise known as “cramdown.” Proponents argue that if homeowners were able to modify their mortgages in bankruptcy, the number of strategic defaults would substantially decrease, if not nosedive.
About 3 million homes will receive foreclosure notices this year, real estate research firm RealtyTrac estimates. More than 1 million will be repossessed by lenders, adding to the nearly 2.2 million homes that lenders took over from 2007 to 2009.
Fannie Mae and its sister firm Freddie Mac guarantee nearly three out of every four new mortgages, according to leading industry publication Inside Mortgage Finance. The two firms control about $5.5 trillion in home mortgages, according to their federal regulator. That’s nearly half of all outstanding mortgage debt in the U.S. Their share of the mortgage market is nearly double what it was 20 years ago.
Because Fannie controls such a large portion of new mortgage issuance, the freezing out of homeowners for seven years could prove devastating.
Brent T. White, a law professor at the University of Arizona, recently wrote in an academic paper that most homeowners can recover from a foreclosure within two years. In fact, defaulting on a mortgage is not as bad as most people think, White notes.
“Lenders are unlikely to pursue a deficiency judgment even in recourse states because it is economically inefficient to do so; there is no tax liability on ‘forgiven portions’ of home mortgages under current federal tax law in effect until 2012; defaulting on one’s mortgage does not mean that one’s other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within two years (and, meanwhile, two years of poor credit need not seriously impact one’s life),” he writes.
There is a “huge financial upside” for seriously underwater homeowners to strategically default on their mortgages, White said.
While it’s still taboo among most homeowners, it’s common behavior among corporations.
In December, Morgan Stanley, the nation’s sixth-biggest bank by assets, walked away from five San Francisco office buildings the $820-billion firm purchased as part of a landmark $2.43-billion deal near the height of the real estate boom. A group led by Tishman Speyer Properties gave up a 56-building apartment complex in Manhattan in January after defaulting on some $4.4 billion in debt. A spokesman for the California Public Employees’ Retirement System, the nation’s biggest municipal pension fund and one of several investors in the venture, told the Huffington Post that they “basically walked away from it.”
Fannie was effectively nationalized in September 2008. Taxpayers own 79.9 percent of Fannie and Freddie. The Obama administration announced on Christmas Eve that it would provide unlimited financial assistance to the firms, disregarding what was a $400 billion cap on taxpayer bailouts. Their debt is backed by the U.S. government.
The two firms, facing growing losses on sour mortgages in perhaps a worsening housing market, have already taken $145 billion from taxpayers. Fannie Mae is responsible for $83.6 billion of that bailout.
Freddie Mac did not say it would take a similar position on strategic defaulters.
“Such so-called strategic defaults, once rare, are now common enough to jeopardize the already-weak housing and mortgage markets,” wrote economists Celia Chen and Cristian deRitis of Moody’s Economy.com in an April 13 note. “If the trend continues, strategic defaults could both accelerate the pace of home foreclosures and also make it harder for new borrowers to obtain mortgages. Both factors would in turn worsen the decline in house prices.”
JPMorgan Chase, the nation’s second-largest bank by assets with more than $2.1 trillion, warmed investors last month that underwater homeowners may not continue to make their payments even when they’re able to, according to a May 10 filing with the Securities and Exchange Commission.
A top executive at Freddie Mac posted a note on the firm’s website pleading with homeowners to not intentionally walk away from their homes.
“Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy,” Freddie Executive Vice President Don Bisenius argued in a May 3 note.
The firm warned investors and analysts about the risk of increased strategic defaults in March 2008. Referring to it as “ruthlessness,” Dick Syron, Freddie’s former chairman and CEO, said the firm was “seeing an increase in ruthlessness” that had “the potential for changing consumer behavior.”
Fannie Mae said Wednesday that borrowers who have “extenuating circumstances may be eligible for new loan in a shorter timeframe” than the seven-year period it’s warning about.
Republicans in the House recently tried to rein in the twin mortgage giants. Rep. Darrell Issa, the top Republican on the House Committee on Oversight and Government Reform, attempted Wednesday to amend the financial reform bill under consideration by the House and Senate to mandate that the federal government appoint an inspector general to oversee Fannie and Freddie. The mortgage behemoths’ federal regulator has been operating without an independent watchdog looking over it and Fannie and Freddie since 2008.
Republicans have also tried to amend the bill to subject Fannie and Freddie to the Freedom of Information Act so members of the public can keep tabs on the firms by compelling the disclosure of documents and records.
Both efforts were thwarted by House Financial Services Committee Chairman Barney Frank (D-Mass.), who ruled that they were not “germane” to the legislation under consideration.
Emails sent after normal business hours to spokesmen for the White House and Treasury Department requesting comment were not returned.
Ryan Grim contributed reporting. THE HUFFINGTON POST
Cenk UygurHost of The Young Turks
Posted: May 24, 2010 06:44 AM
Sometimes when you explain to people that some of the most complicated financial transactions in the country were just side bets, they don’t really believe you. They think it’s an oversimplification. We couldn’t have wrecked the global economy because some people made side bets. These are sophisticated bankers with sophisticated financial instruments, so it must be more complicated than that. It isn’t. They bet one another, whoever lost got paid by the American taxpayer.
To be fair, sometimes they had the money to pay off one another without government bailouts, but not often. That’s because they were largely betting with money they never had. AIG is the perfect example. Their executives made hundreds of millions of dollars in bonuses from the early wins in these bets, but then stuck the taxpayers with a $182 billion bill when they lost.
A credit default swap is when you bet that a certain asset is going to default. If you’re wrong, then you have to pay a little bit. If you’re right, you get paid a ton. So, AIG collected a lot of little winnings when they bet that mortgage backed securities would not go into default. But then when they did go into default, they lost big.
So, what does all of this have to do with us? Well, Hank Paulson, Tim Geithner and Ben Bernanke in their infinite wisdom decided that we should pay AIG’s bets for them. Did they go back and take the money the AIG executives got for their earlier so-called winnings? No, of course not. Did they even inquire into whether these bets were on actual assets that the other parties were on the hook for? Apparently not.
Let me explain that more. If you bought a package of mortgage backed securities and wanted to insure it in case anything went wrong, that’s a fairly normal derivative. That basically works as insurance for your security. So, if we paid off people who actually owned those securities, it still wouldn’t be right in my opinion but it would be a lot more understandable. The argument would be that it would destabilize the economy too much if all of the people holding the mortgages all of sudden lost most of their value.
But what if they didn’t hold the mortgages, they just bet on them? That’s like the difference between bailing out the Dallas Cowboys to help the local Dallas economy versus bailing out bookies who bet too much on the last Cowboys game. The latter is what we did with AIG. We paid off people’s bets for almost no reason.
I explain all of this because it’s very important that you understand that when we paid $62 billion to AIG “counterparties,” we weren’t saving the economy, we were paying off the bookies. The money we gave them didn’t go toward saving one house or one mortgage or even a package of mortgages or even investors who bought the packages of mortgages. It went to paying off people who made side bets on the mortgages (and even sometimes put down bets on a made up collection of mortgages that didn’t even exist in the real world called “synthetic” collateralized debt obligations).
This is insanity. When you understand what really happened, you have one natural reaction – I want my money back. It’s like we paid Donald Trump for a bet he made against Steve Wynn. Why did we do that? I don’t give a damn if The Mirage or Caesar’s Casino won. Why did you pay them with my money?
So, we’re now starting a campaign to get our money back. I’d love to get the whole $62 billion paid out to the AIG counterparties (let alone the whole $182 billion we’ve sunk into AIG all together). But, we’re going to start out nice and modest. We’d like to have Goldman Sachs pay us our $12.9 billion back that they got from AIG.
That’s all taxpayer money. All of it went to Goldman for some silly bet they made with a buffoonish company that never had the money in the first place. As “sophisticated investors” they should have realized that AIG never really had the cash to pay them.
It’s like making a million dollar bet with your deadbeat friend. Do you really expect to get paid when he doesn’t have ten bucks to his name? How sophisticated can you be if you don’t even realize that your counterparties are broke? So, sad day for you, you made a bet with the wrong guy. That’s capitalism, baby. Go home, lick your wounds.
Except as we all know, that’s not how it worked out. Instead the former CEO of Goldman Sachs, Hank Paulson decided to give them the money anyway, from the United States Treasury. Paulson had made $700 million dollars earlier when he made the same kind of deals as the head of Goldman before he became our Treasury Secretary. Not much bias there, right?
So, other than this enormous conflict of interest, why target just Goldman Sachs? Many reasons. They were one of the largest beneficiaries of this “backdoor bailout” from AIG. They were the ones who set up many of the securities in the first place. In fact, they sold $23 billion worth of this junk to AIG (they’re lucky we’re not asking for all of that back).They set them to blow and then bet against them. And they said they didn’t need the money away. Great, then we’ll take it back please.
Yes, they actually said they didn’t need the taxpayers to pay them. They said many times on the record that they were “properly hedged” and that they could have gotten paid off by other companies and didn’t need AIG to pay them. Fantastic! Out with it. We’re going to be generous and not charge much interest, so we’ll take a check for $13 billion made to the United States Treasury.
I’m not kidding. We are going to start applying pressure to both Goldman and the Treasury Department to return that money to its rightful owners, the American taxpayer. Of course, we need your help. We want everyone across the political spectrum to put pressure on the Treasury Department to ask for that money back and for Goldman to give it back.
I invite conservatives, libertarians and tea party activists to join us as well. Don’t you want your money back? Weren’t you angry about the bailouts? Don’t you have a sense that the people in Washington and Wall Street are screwing you? Well, this is how they’re doing it. Time to stand up and fight. Tell Goldman not to tread on you.
I have a question for the tea party participants, have you ever wondered why you’ve never protested the one guy in the Obama administration most responsible for the bailouts and the economy? That’s the Treasury Secretary. And the reason you’ve never protested him is because the corporate front groups who organize your protests love Geithner and want to look out for him. Isn’t it time you corrected your mistake, too?
Come join us. Let’s do a real protest of the people who caused this mess in the first place. And let’s get our damn money back.
Join us on Monday, June 7th at noon in front of the Treasury building to demand our $13 billion back from Goldman Sachs. First job is to get Geithner to recognize that he should have never given that particular money to that particular bank for that particular transaction. Or to come out and justify his actions. Let him step out, greet us and tell us why it was such a smart idea to pay off AIG’s side bets with Goldman. I’ll be looking forward to that.
And I’ll be looking forward to seeing you at the protest, no matter what your politics are. You can RSVP by going to the Facebook page for this event. See you there.
UPDATE: Progressive Change Campaign Committee has joined our effort now and we are doing a joint petition to get our money back. Please sign the petition here so your voice can be heard on this even if you can’t make it out to the DC protest.
Everyone in the country should be able to agree to this. I was just on the Dylan Ratigan program on MSNBC and even the conservative on the panel agreed. Sign the petition and help get our money back.
After nine months of hard fighting, yesterday financial reform came down to this: an amendment, proposed by Senators Jeff Merkley and Carl Levin that would have forced big banks to get rid of their speculative proprietary trading activities (i.e., a relatively strong version of the Volcker Rule.)
The amendment had picked up a great deal of support in recent weeks, partly because of unflagging support from Paul Volcker and partly because of the broader debate around the Brown-Kaufman amendment (which would have forced the biggest 6 banks to become smaller). Brown-Kaufman failed, 33-61, but it demonstrated that a growing number of senators were willing to confront the power of our biggest and worst banks.
Yet, at the end of the day, the Merkley-Levin amendment did not even get a vote. Why?
Three frustrated homeowners in New York City are suing JPMorgan Chase over the bank’s failure to permanently modify their mortgages under the Obama administration’s plan to help homeowners avoid foreclosure.
The complaint, filed in federal court in New York, says the plaintiffs, who are represented by attorneys with the nonprofit Urban Justice Center, relied on promises by Chase that they could have their loans modified if they made reduced payments per the Home Affordable Modification Program (HAMP). Despite making payments on time, they’ve received foreclosure threats but no modifications.
One of the plaintiffs, Alex Lam, a 35-year-old restaurant manager, alleges Chase told him to actually stop making payments in order to be eligible for help. In early 2009, Lam contacted Washington Mutual (since absorbed by Chase) about a modification after his adjustable-rate mortgage blew up in his face. He was told he didn’t qualify for help because he was current on his payments.
“Mr. Lam was specifically told that if he stopped making payments for several months, he could be considered for a modification,” the says the complaint.
The next big surprise came in December, when, after making trial payments of $1,568 for the previous six months, Lam was told he owed the bank $12,000. When he protested, Chase relented and told Lam to apply once again for a mod, this time under HAMP. He made his payments until March, when Chase told him he’d failed HAMP’s opaque “Net Present Value” test, meaning the bank determined the investors who owned the loan would make more money via foreclosure than modification. Lam alleges Chase used bogus inputs for the NPV test and that Chase refuses to show its work.
Lam called the situation “very upsetting” in an interview with HuffPost. “I trusted them because they’re a big bank. I did whatever they asked me to.”
HuffPost asked Lam what he wanted from suing Chase.
“Just to get a modification, that’s all I’m asking for,” he said. “Since day one, that’s all I’m asking for.”
HAMP lawsuits have been flying. Last week a 91-year-old veteran of three wars named Peter Ruplenas sued Bank of America over mortgage mod malfeasance in West Virginia.
In April, Faiz and Khadija Jahani of California sued Chase for reasons similar to Lam’s — the bank told them to stop making payments to qualify for help, then foreclosed. A similar case is brewing in Seattle.
Homeowners are supposed to be eligible for HAMP mods if they’re having trouble making monthly payments, owe less than $729,750, took out the loan before January 2009, and if their payment on their first mortgage is more than 31 percent of their income. In theory, if homeowners make reduced payments (typically $500 cheaper) for three months, they are put in “permanent” modifications that last for five years.
But the banks voluntarily participating in HAMP have given permanent mods to just 230,000 homeowners in the program’s first year, a far cry from the three to four million officials said HAMP would help. Meanwhile, frustrated homeowners’ stories of lost paperwork, dishonesty, and incompetence by banks are piling up.
A Chase spokesman declined to comment on the lawsuit.
The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges.
Thats in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.
One explanation for the difference may be that key bank regulators — who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors — have this time left reporting fraud up to the banks themselves.
Spokesmen for two chief regulators, the Comptroller of the Currency and the Office of Thrift Supervision, say that they have not sent prosecutors a single case for criminal prosecution.
An OTS spokesman said the agency, much like the banks themselves, does not see much evidence of criminal fraud inside the financial institutions. The spokesman, Bill Ruberry, citing the agency’s enforcement director, said, “There may be some isolated cases, but certainly there’s no widespread patterns.”
That surprises William K. Black, a former OTS official who helped coordinate criminal investigations during the S&L crisis.
“Dear God,” Black said when told bank regulators haven’t made any criminal referrals. “Not a single one?”
Black sees many signs the the government is less aggressive than during the S&L era — and could result in more bad behavior.
“This crisis was not bad luck,” he said. “It was done to us. When you bring those convictions, you hope that at least for a while to deter.”
Banks have reported massive amounts of fraud to the Treasury Department but have not held themselves — or their top executives — responsible, instead pinning blame on borrowers, independent mortgage brokers, and others.
That may account for the dearth of prosections against big fry. For instance, in California, among states where the mortgage meltdown hit hardest, the Huffington Post Investigative Fund identified 170 mortgage fraud prosecutions in federal courts. Only two are against employees of a regulated lender.
An Investigative Fund analysis shows that two-thirds of the 170 prosecutions are against mortgage brokers, real-estate professionals or borrowers — the same groups blamed by the banks when they report suspicious activities to regulators.
Besides the absence of criminal referrals, other plausible factors for the lack of major prosecutions may include a skittishness among prosecutors about filing cases they could have trouble winning, and a severe decline in investigative resources. The FBI dramatically shifted resources away from white-collar crime after the 2001 terrorist attacks.
To be sure, there are also notable differences between the S&L and current financial crisis, in the behavior of lenders during both periods, and between civil allegations of fraud and proving that someone committed a crime — all of which could account for the lack of big prosecutions.
But interviews with several law enforcement authorities suggest another explanation: A lack of active assistance to prosecutors by bank regulators who played key roles during the S&L crackdown. Those regulators sent detailed reports to prosecutors of known and suspicious criminal activity.
“Only the regulators can make a lot of these cases,” Black said. “The FBI can make a few, but the regulators are the ones that understand the industry.”
Under intense political pressure in the late 1980s, the Justice Department and thrift regulators developed a strategy to thoroughly investigate failed S&Ls for evidence of fraud and to focus their resources on the highest ranking executives.
In the early years, between 1987 and 1989, there were more than 300 prosecutions. Some bank executives were already behind bars. In 1989, Woody Lemons, chairman of Vernon Savings and Loan in Texas, was sentenced to 30 years.
In June 1990, then-OTS director Timothy Ryan told Congress that his agency had established criminal-referral units in each of 12 district offices. In addition, more than 30 OTS employees were assigned as full-time agents of grand juries or assistant US attorneys to help prosecutions. And the agency prioritized prosecutions to a Top 100 list, targeting senior S&L executives and directors.
While data on criminal referrals during the S&L crisis is spotty, the Government Accountability Office reported that in the first ten months of 1992 alone — a random snapshot — financial regulators sent the Justice Department more than 1,000 cases for criminal prosecution.
One study showed that 35 percent of criminal referrals in Texas — ground zero for the S&L problems — were against officers and directors.
This time, prosecutors are relying more heavily on banks to report suspicious activity to the Treasury Department. Banks are required to report known or suspected criminal violations, including fraud, on Suspicious Activity Reports designed for the purpose. In effect, the reports, which can be many pages in length, provide substantive leads for criminal investigations.
Black scoffs at the strategy of leaving it to banks to ferret out all the fraud. “Institutions will not make criminal referrals against the people who control the institutions,” said Black.
A white-collar criminologist and law professor at the University of Missouri-Kansas City, he argues that there’s ample evidence of fraud. Insiders working for lenders openly referred to loans they made without proof of income as “liar loans.” Many banks actively sought inflated appraisals in their rush to make as many loans as possible. As previously reported by the Investigative Fund, such lending practices contributed to the demise of Washington Mutual.
Not everyone agrees that such a case can be successful. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors.
“It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.
So far, only sporadic news reports suggest that the Justice Department has ongoing criminal investigations against major banks such as Washington Mutual and Countrywide, as well as investment bank Goldman Sachs.
Fewer Cops on the Beat
The Justice Department, in response to written questions from the Investigative Fund, acknowledged the absence of criminal referrals from financial regulators. Months into the financial crisis, a new Financial Fraud Enforcement Task Force, formed by President Obama last fall, was trying to work out communication problems between Justice and the regulatory agencies, according to the head of the task force, Robb Adkins. Adkins has said that criminal referrals from regulators have been “too often the exception to the rule.”
At a Congressional hearing in December, Assistant Attorney General Lanny Breuer was asked why there have been no criminal cases brought yet against CEOs. “Don’t for a moment think [these cases] aren’t being investigated,” Breuer replied. “They are complicated cases. It took a long time in hatching them and developing them. But they will be brought.”
The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them.
Yet in their reports, banks overwhelmingly have blamed others for fraud. Whenever a borrower’s income was wrong on a loan application, the banks fingered borrowers 87 percent of the time and independent mortgage brokers 64 percent of the time, according to a 2006 Treasury analysis of the SARs. But the bank’s own employees were almost never blamed — only about four times in every 1,000 reports.
That might explain why so few prosecutions have targeted bank insiders.
Another reason for fewer prosecutions against bank employees is that the Federal Bureau of Investigation has far fewer agents working on the current crisis. Deputy Director John Pistole testified before Congress last year that the bureau had 1,000 people working on the S&L crisis at its height. That compares to about 240 agents working on mortgage fraud cases last year.
The FBI dramatically shifted its resources away from white-collar crime and to terrorism after the Sept. 11 attacks.
“We just didn’t have the cops on the beat” during the recent crisis, said Sen. Ted Kaufman, the Delaware Democrat who conducted a hearing on the lack of criminal prosecutions. “I was around during the savings and loan crisis [as a Congressional aide] and we had a lot more folks working it when it went down.”
Even with additional funding from Congress, which Kaufman helped push through, the FBI is budgeted to have 377 people working mortgage fraud cases this year, about a third as many as during the S&L investigations.
Charges Harder to Prove?
Charges in the recent banking crisis may be harder to prove, said Robert H. Tillman, who teaches at St. John’s University and who analyzed data about S&L prosecutions. Savings and loan executives who were convicted often personally approved large commercial loans for projects doomed to fail. Some would use federally insured deposits to pay themselves excessive salaries or to lend money to their own real estate projects. A few even took kickbacks.
This time, lending executives may have encouraged the making of bad loans, but they generally did not personally approve the loans, Tillman said. They didn’t send emails telling the troops to make fraudulent loans but paid big commissions to loan offers who made risky loans. Then the executives were able to reap huge bonuses for making the company look so profitable.
So far, the biggest cases have been civil lawsuits brought by the Securities and Exchange Commission, including most recently a highly publicized securities fraud case against Goldman Sachs and one of its vice presidents, Fabrice P. Tourre. News reports suggest that a referral from the SEC’s enforcement division to the Justice Department has led to a criminal inquiry.
Typically, federal authorities deal with massive financial scandals by picking a few cases they are confident they can win, said Henry Pontell, an expert on fraud at the University of California — Irvine.
This time, the administration may have been more focused on saving failing banks — and an entire financial system — than in prosecuting bank executives, Pontell said. Giving billions in bailout dollars to executives who encouraged fraudulent practices not only could complicate a case, it could prove embarrasing, he added.
As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, For once, Grayson and Fed Chairman Ben Bernanke are in agreement, to a point. A New York Fed spokesman directed HuffPost to congressional testimony Bernanke delivered last month. “While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation,” Bernanke said. “Accordingly, we would welcome a review by the GAO of the Federal Reserve’s management of all facilities created under emergency authorities.”
Just how far that review would go is the subject of debate in the Senate.
The Valukas report found clear evidence that the New York Fed knew that Lehman was sending it garbage that it had no intention to market. In other words, the baskets of assets were created for the specific purpose of selling to the Fed for far more than they were worth.
Lehman knew it too: “No intention to market” was scrawled on one of the internal presentations about the assets. A separate bank, Citigroup, later characterized the assets as “bottom of the barrel” and “junk” when Lehman tried to push them their way, according to the report.
If Lehman hadn’t gone bankrupt anyway, the public would have no knowledge of this backdoor bailout. “It’s just fortuitous that we found out about this through a bankruptcy proceeding and a trustee that was willing to allow and pay for some digging,” said Grayson. “Do we really just have to hope for the best, that whenever the Fed does something wrong, we might someday find out about it?”
Geithner himself was aware that there was a gap between what Lehman claimed the assets were worth and what they were really worth. “The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in ‘collateral damage’ by demonstrating weakness and exposing air’ in the marks,” Geithner said, according to the report.
The assets, called “Freedom CLOs”, were sold to the Fed’s “Primary Dealer Credit Facility,” according to the report.
Lehman immediately recognized the value of what the Fed had set up. A day after the PDCF was announced, an internal Lehman analysis suggested that “the new ‘Primary Dealer Credit Facility’ is a LOT bigger deal than it is being played to be.” The facility could be a used as “as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures.”
It was a get-out-of-debt scheme and could “serve as a ‘warehouse’ for short term securities [b]acked by corporate loans [and] “MAY BE THE ‘EXIT STRATEGY’ FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET,” according to the Lehman analysis.
But not one that Lehman felt like discussing with the public. “Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below,” CEO Dick Fuld wrote in an April 4, 2008 email uncovered by the report. “Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.”
Fuld has declared himself vindicated by the report.
The Fed won’t say how much more toxic “garbage” is in the Fed’s “warehouse” and that also concerns Grayson.
“The Fed’s balance sheet is a cartoon version of what’s actually inside,” said Grayson.
“We only get to basically do autopsies on the carcasses of the Fed’s failures, but what we don’t find out is when they show favoritism to companies that do not end up in bankruptcy.”
The Treasury didn’t immediately respond to a request for comment. Below is the relevant section of the report:
(c) In Addition to a Liquidity Backstop, Lehman Viewed the PDCF as an Outlet for Its Illiquid Positions
The PDCF not only provided Lehman with a ready response to those who speculated it would go the way of Bear Stearns, but also a potential vehicle to finance its illiquid corporate and real estate loans. A day after the PDCF became operational, Lehman personnel commented: “I think the new ‘Primary Dealer Credit Facility’ is a LOT bigger deal than it is being played to be . . . .” They mused that if Lehman could use the PDCF “as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures . . . .” Additionally, by viewing the PDCF as “available to serve as a ‘warehouse’ for short term securities [b]acked by corporate loans,” the facility “MAY BE THE ‘EXIT STRATEGY’ FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET.”
Lehman did indeed create securitizations for the PDCF with a view toward treating the new facility as a “warehouse” for its illiquid leveraged loans. In March 2008, Lehman packaged 66 corporate loans to create the “Freedom CLO.” The transaction consisted of two tranches: a $2.26 billion senior note, priced at par, rated single A, and designed to be PDCF eligible, and an unrated $570 million equity tranche. The loans that Freedom “repackaged” included high?yield leveraged loans, which Lehman had difficulty moving off its books, and included unsecured loans to Countrywide Financial Corp.
Lehman did not intend to market its Freedom CLO, or other similar securitizations, to investors. Rather, Lehman created the CLOs exclusively to pledge to the PDCF. An internal presentation documenting the securitization process for Freedom and similar CLOs named “Spruce” and “Thalia,” noted that the “[r]epackage[d] portfolio of HY [high yield leveraged loans]” constituting the securitizations, “are not meant to be marketed.”
Handwriting from an unknown source underlines this sentence and notes at the margin: “No intention to market.”
Lehman may have also managed its disclosures to ensure that the public did not become aware that the CLOs were not created to be sold on the open market, but rather were intended solely to be pledged to the PDCF. An April 4, 2008 email containing edits to talking points concerning the Freedom CLO to be delivered by Fuld stated:
“Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below. Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.”
It is unclear, based solely on the e?mail, why a reference linking the FRBNY’s liquidity facility to the Freedom CLO was deleted. One explanation could be that Lehman did not want the public to learn that it had securitized illiquid loans exclusively to be pledged to the PDCF. Another reason may have been to hide the fact that Lehman needed to access the PDCF in the first place, given that accessing the securities dealers’ lender of last resort could have negative signaling implications.
The FRBNY was aware that Lehman viewed the PDCF not only as a liquidity backstop for financing quality assets, but also as a means to finance its illiquid assets. Describing a March 20, 2008 meeting between the FRBNY and Lehman’s senior management, FRBNY examiner Jan Voigts wrote that Lehman “intended to use the PDCF as both a backstop, and business opportunity.” With respect to the Freedom securitization in particular, Voigts wrote that Lehman saw the PDCF
as an opportunity to move illiquid assets into a securitization that would be PDCF eligible. They [Lehman] also noted they intended to create 2 or 3 additional PDCF eligible securitizations. We avoided comment on the securitization but noted the firm’s intention to use the PDCF as an opportunity to finance assets they could not finance elsewhere.
Thus, the FRBNY was aware that Lehman viewed the PDCF as an opportunity to finance its repackaged illiquid corporate loans. The Examiner’s investigation has not determined whether the FRBNY also understood that these Freedom-style securitizations were never intended for sale on the broader market.
In response to a question from FRBNY analyst Patricia Mosser on whether Voigts knew “if they [Lehman] intend to pledge to triparty or PDCF,”5359 Voigts replied that the Freedom CLO was “created with the PDCF in mind.”
According to internal Lehman documents, Lehman did in fact pledge the Freedom CLO to the PDCF. On three dates, March 24, 25 and 26, 2008, Lehman pledged the Freedom CLO to the FRBNY on an overnight basis, and received $2.13 billion for each transfer.5361 FRBNY discussions concerning the CLO’s underlying assets, however, took place on or around April 9, 20085362 — more than a week after the FRBNY began accepting the CLO.
Get HuffPost Business On Twitter, Facebook, and Google Buzz! Know something we don’t? E-mail us at huffpostbiz@gmail.comsopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.
SHOCK & AWE …I’m betting! Thanks to Bloomberg for the lawsuit to DISCLOSE! Notice how both Bloomberg & Huffington are always the ones who go after the banksters…Because they probably don’t use the banksters to fund them!
By David Glovin and Bob Van Voris
March 19 (Bloomberg) — The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.
The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.
The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.
The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”
The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court.
Right to Know
If today’s ruling is upheld or not appealed by the Fed, it will have to disclose the requested records. That may lead to “catastrophic” results, including demands for the instant disclosure of banks seeking help from the Fed, resulting in a “death sentence” for such financial institutions, said Chris Kotowski, a bank analyst at Oppenheimer & Co. in New York.
“Whenever the Fed extends funds to a bank, it should be disclosed in private to the Congressional oversight committees, but to release it to the public I think would be a horrific mistake,” Kotowski said in an interview. “It would stigmatize the banks, it would lead to all kinds of second-guessing of the Fed, and I don’t see what public purpose is served by it.”
Senator Bernie Sanders, an Independent from Vermont, said the decision was a “major victory” for U.S. taxpayers.
“This money does not belong to the Federal Reserve,” Sanders said in a statement. “It belongs to the American people, and the American people have a right to know where more than $2 trillion of their money has gone.”
Fed Review
The Fed is reviewing the decision and considering its options for reconsideration or appeal, Fed spokesman David Skidmore said.
“We’re obviously pleased with the court’s decision, which is an important affirmation of the public’s right to know what its government is up to,” said Thomas Golden, a partner at New York-based Willkie Farr & Gallagher LLP and Bloomberg’s outside counsel.
The court was asked to decide whether loan records are covered by FOIA. Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets.
The Fed had argued that it could withhold the information under an exemption that allows federal agencies to refuse disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”
Payment Processors
The Clearing House Association, which processes payments among banks, joined the case and sided with the Fed. The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co., US Bancorp and Wells Fargo & Co.
Paul Saltzman, general counsel for the Clearing House, said the decision did not address the “fundamental issue” of whether disclosure would “competitively harm” borrower banks.
“The Second Circuit declined to follow the decisions of other circuit courts recognizing that disclosure of certain confidential information can impair the effectiveness of government programs, such as lending programs,” Saltzman said in a statement.
The Clearing House is considering whether to ask for a rehearing by the full Second Circuit and, ultimately, review by the U.S. Supreme Court, he said.
Deep Crisis
Oscar Suris, a spokesman for Wells Fargo, JPMorgan spokeswoman Jennifer Zuccarelli, Bank of New York Mellon spokesman Kevin Heine, HSBC spokeswoman Juanita Gutierrez and RBS spokeswoman Linda Harper all declined to comment. Deutsche Bank spokesman Ronald Weichert couldn’t immediately comment. Bank of America declined to comment, Scott Silvestri said. Citigroup spokeswoman Shannon Bell declined to comment. U.S. Bancorp spokesman Steve Dale didn’t return phone and e-mail messages seeking comment.
Bloomberg, majority-owned by New York Mayor Michael Bloomberg, sued after the Fed refused to name the firms it lent to or disclose loan amounts or assets used as collateral under its lending programs. Most of the loans were made in response to the deepest financial crisis since the Great Depression.
Lawyers for Bloomberg argued in court that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money.
“Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Golden wrote in court filings.
Potential Harm
Banks and the Fed warned that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell- off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued.
Much of the debate at the appeals court argument on Jan. 11 centered on the potential harm to banks if it was revealed that they borrowed from the Fed’s so-called discount window. Matthew Collette, a lawyer for the government, said banks don’t do that unless they have liquidity problems.
FOIA requires federal agencies to make government documents available to the press and public. An exception to the statute protects trade secrets and privileged or confidential financial data. In her Aug. 24 ruling, U.S. District Judge Loretta Preska in New York said the exception didn’t apply because there’s no proof banks would suffer.
Tripartite Test
In its opinion today, the appeals court said that the exception applies only if the agency can satisfy a three-part test. The information must be a trade secret or commercial or financial in character; must be obtained from a person; and must be privileged or confidential, according to the opinion.
The court said that the information sought by Bloomberg was not “obtained from” the borrowing banks. It rejected an alternative argument the individual Federal Reserve Banks are “persons,” for purposes of the law because they would not suffer the kind of harm required under the “privileged and confidential” requirement of the exemption.
In a related case, U.S. District Judge Alvin Hellerstein in New York previously sided with the Fed and refused to order the agency to release Fed documents that Fox News Network sought. The appeals court today returned that case to Hellerstein and told him to order the Fed to conduct further searches for documents and determine whether the documents should be disclosed.
“We are pleased that this information is finally, and rightfully, going to be made available to the American public,” said Kevin Magee, Executive Vice President of Fox Business Network, in a statement.
Balance Sheet Debt
The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.
More than a dozen other groups or companies filed friend- of-the-court briefs. Those arguing for disclosure of the records included the American Society of News Editors and individual news organizations.
“It’s gratifying that the court recognizes the considerable interest in knowing what is being done with our tax dollars,” said Lucy Dalglish, executive director of the Reporters Committee for Freedom of the Press in Arlington, Virginia.
“We’ve learned some powerful lessons in the last 18 months that citizens need to pay more attention to what’s going on in the financial world. This decision will make it easier to do that.”
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).
To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; Bob Van Voris in New York at vanvoris@bloomberg.net.
Umm could we now say, we told you so?…Now on with Goldman and the rest of the dealers!
Huffington Post | Ryan McCarthy First Posted: 03-12-10 10:52 AM
** UPDATE: Scroll down to see Dylan Ratigan’s segment **
The arcane “accounting gimmick” employed by Lehman Brothers as the firm failed in 2007 and 2008, was like “a drug” propelling the bank to conceal the true nature of its financial health, according to bankruptcy documents released yesterday.
As news organizations pore through the 2,200 pages of documents released by Anton Valukas, the examiner in charge of sifting through the most expensive bankruptcy in history, new details have surfaced about possible criminal actions by Lehman executives.
An executive referred to by Lehman execs as the firm’s “balance sheet” czar — who later went on to become the firm’s COO — likely had knowledge of the firm’s highly creative accounting maneuvers, notes The New York Times. Here’s the NYT:
“I am very aware … it is another drug we [are] on,” Herbert McDade wrote in an April 2008 e-mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions.
At the center of the controversy is a technique called “Repo 105,” under which Lehman was able to move $50 billion off of its balance sheet in the second quarter of 2008 alone, MarketWatch reports. Here’s more from Market Watch:
[Repo 105 is] essentially a type of secured loan and is booked that way in the accounts — leading to an increase in both assets and liabilities.
Lehman’s trick was to use a clause in the accounting rules to classify the deal as a sale, even though it was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities…. [Repo 105] was crucial for maintaining the group’s credit rating as rating agencies and investors began to focus more on leverage and demanded lower risk.
In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: “It’s basically window-dressing.” Another responds: “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?” The first executive replies: “Yes, No and yes. :)”
But these accounting techniques did not sit well with every Lehman executive. The Wall Street Journal passes along this nugget from the examiner’s report, which suggest that Ernst & Young, Lehman’s auditors, were not concerned about the firm’s use of Repo 105. Here’s the WSJ:
In May 2008, a Lehman Senior Vice President, Matthew Lee, wrote a letter to management alleging accounting improprieties;82 in the course of investigating the allegations, Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet and quarter end.
The next day on June 13, 2008 Ernst & Young met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee. Ernst & Young took virtually no action to investigate the Repo 105 allegations. Ernst & Young took no steps to question or challenge the non disclosure by Lehman of its use of $50 billion of temporary, off balance sheet transactions. Colorable claims exist that Ernst & Young did not meet professional standards, both in investigating Lee’s allegations and in connection with its audit and review of Lehman’s financial statements.”
The question will be how far anybody can prove the responsibility extended. The report says “colorable claims” could be made against some Lehman execs and against Ernst & Young, the accountants. And by colorable claims, it means evidence that’s strong enough to potentially get a jury to award damages.
UPDATE: On Friday’s Dylan Ratigan Show, the MSNBC host delved into the Lehman saga with former New York Governor Eliot Spitzer, breaking down the firm’s fraudulent meltdown in easily-understandable terms.
Continue reading…..
Thats in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.
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