September 2, 2011

Feds Set To Seek Billions From Big Banks

"The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks [including Bank of America, JPMorgan Chase, and Goldman Sachs], accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation."

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages [New York Times]

First Published: September 2, 2011 7:30 AM

Comments from "Plugged In" Readers

Fannie Mae and Freddie Mac engaged in massive misstatements of earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the books.......let’s look harder at the Freddie and Fannie example.

These giant institutions were created by Congress, which retained control over them, dictating what they could and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated companies of which I am aware, as measured by manpower assigned to the task. On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes and Oxley.

The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.” In truth, both enterprises had engaged in massive accounting shenanigans for some time.

Warren Buffet (letter to shareholders)

Posted by: Bill at September 2, 2011 9:02 AM

Fannie Freddie yadda yadda...offtopic. Reliable axe-grinding from the Norquist gang.

Posted by: EH at September 2, 2011 9:19 AM

1. Bail out the big banks.
2. Sue the big banks.
3. Continue to bail out the big banks indirectly in various ways.

Posted by: shza at September 2, 2011 9:51 AM

What did the accounting irregularities involve? They involved the buying and selling of PRIVATE label securities, no? The private label fraudulent securities that most similar institutions, both private and public, had on their books. The same fraudulent crap that is still on the books of zombie banks, right? Do the Masters of the Universe in these banks use a different accounting method than the GSE? Methinks they might even be more shay accounting in the fascist banks than in the GSEs.

Also, as sfrenegade's two links in the other related post demonstrate that the main damage came from the GSEs not owning the private label crap in their portfolios but by backing the private label crap: http://www.businessinsider.com/fannie-freddie-karl-smith-2010-9
The GOP and their corporate masters WANTED this because it created a huge subsidy to the banks. This is part of the scam whereby the gains are privatized and the losses are socialized. The reactionary right-wingers will scream "communism" once they have unloaded their fraudulent paper on the public.

EH is right. The scapegoating of the GSEs is nothing but right-wing disinformation to cover up the crimes of the fascist bankers that run the GOP (but guess what, they also run the Democrats and our entire Congress).

Posted by: SFHawkguy at September 2, 2011 9:51 AM

That should be "shady" accounting.

Posted by: SFHawkguy at September 2, 2011 9:53 AM

I'm with shza in not understanding this give and take strategy. I realize that the Fed isn't the same as the USG, but shouldn't they at least be coordinating their playbook?

Posted by: The Milkshake of Despair at September 2, 2011 10:01 AM

So Milkshake and Shza think that the government should look the other way regarding bank fraud because the government bailed out these banks? They own the government therefore they should not be subject to the laws like the rest of us?

First, agencies are supposed to be independent. Theoretically, the government should not order agencies to protect favored corporations from criminal and civil wrongdoing simply because the receive government subsidies.

It really is amazing to me that we have the corporate class openly arguing that they should be above the law. These banks have sucked the lifeblood out of the people through their criminal and fraudulent actions and even despite their crimes the people gave them $16 Trillion in gifts! But that's not enough. Not only are they the only ones that get bailed out they don't have to follow the laws like the rest of us.

The agenda of these people is further revealed by the way they want to treat normal people. If a normal person, say a average worker (let's say a black public sector worker), were to be accused of lying on her Medicare application or disability claim, these fascists would be demanding to put these "welfare queens" in prison. When it is their class that commits far worse crimes, they cry for forgiveness and ask to look forward, not backward.

Posted by: SFHawkguy at September 2, 2011 10:21 AM

"Fannie Freddie yadda yadda...offtopic. Reliable axe-grinding from the Norquist gang."

The former CEO of Fannie and other executives were personally sued, and settled, by the OFHEO the precursor the the FHFA which is now suing the banks. Fannie as a corporate entity paid a $400M civil fine.

http://www.nytimes.com/2008/04/19/business/19fannie.html

"I'm with shza in not understanding this give and take strategy. I realize that the Fed isn't the same as the USG, but shouldn't they at least be coordinating their playbook?"

The suit is being brought by the FHFA, the Fannie/Freddie overseer that OFHEO turned into, not the Fed.

Another scandal here is the legal fees.
For the Fannie case taxpayers spent $160M on the defense (paid by taxpayers), not sure how much OFHEO spent on prosecution.

http://www.nytimes.com/2011/01/24/business/24fees.html

For this bank case who knows what the legal fees will be, but if the result is a just a shift in bailout money from Fannie to the banks the result will actually be a net loss due to the legal fees.

Posted by: tc_sf at September 2, 2011 10:35 AM

"So Milkshake and Shza think that the government should look the other way regarding bank fraud because the government bailed out these banks?"

No, I just don't understand the give and take strategy. Another way to resolve this would have been to withhold the "give" part until the lawsuit was resolved.

Posted by: The Milkshake of Despair at September 2, 2011 10:48 AM

"So Milkshake and Shza think that the government should look the other way regarding bank fraud because the government bailed out these banks?"

Any real fraud should definatly get settled or sued upon. If you fudged the appraisal or borrower's income/assets then the you should be eating that loss.

I'm skeptical of any backdated naiveté argument. i.e. We might have seemed like financial professionals at the time, but boy we just plumb didn't understand that complicated housing stuff.

From the article:

"Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.

In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.

“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.

In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured."
"

This was hardly a case of selling complex derivatives to widows and orphans.

But regardless of the merits, I think the point Milkshake and Shza were making, which I agree with, is that the economics of the result will probably be unsatisfying. Since the loss on these loans will probably go the the taxpayer either way with legal fees lumped on for good measure.

Posted by: tc_sf at September 2, 2011 11:01 AM

But isn't there value in having a system of laws, rather than deciding who to pursue based on economics?

We shouldn't enforce crimes because it will too expensive? I don't agree on principle, but it also appears like the argument may not even be valid.

In fact, many like Bill Black argue that we will not be able to recover economically until we treat these crimes as crimes:

"Financial regulators, white-collar criminologists, and economists all agree that perverse incentive structures cause crises and they agree that the finance industry's incentive structures have long been perverse.

The Obama administration asserts that the financial reform bill the President will sign into law this week will prevent future crises. In fact, it will fail to do so because it does not effectively address those perverse incentives. Indeed, it increases the likelihood of the accounting scams that are the very reason why perverse incentives pay.
Over time, crises have gotten more severe because many reform policies have the unintended consequence of encouraging these types of incentive structures. Executive and professional compensation create the motives, while deregulation, desupervison, and regulatory "black holes" create the opportunity.

Accounting is the CEO's "weapon of choice" that transforms the perverse incentive into what economists, regulators, and criminologists agree is a "sure thing" in crises (means). That's the classic recipe for disaster: motive, means, and opportunity."

http://money.cnn.com/2010/07/18/news/economy/finreg_law_incentives_bill-black.fortune/index.htm

Posted by: SFHawkguy at September 2, 2011 11:15 AM

Re: "…we have the corporate class openly arguing that they should be above the law."

Seems to me that what's going on is that the elite finance industry types think that regular people can't distinguish a legal argument from an economic one. Here's the relevant 'graph from the article:

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.
What Rood is saying here is that while "these guys" may have done something wrong and illegal, the benefit of prosecuting them is going to result in a higher expense once we are obligate to provide yet another bailout. This is a wholly economic argument.

Notice that he assumes that another bank bailout is not only possible but likely even though the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law.

I'm with SFHawkguy, this is just so astonishing it's breathtaking. Of course, what this argument leaves out, even if you accept the economic terms of discussion (which I do not, but let's go with it), is the benefit of prosecution by forcing "these guys" out of the marketplace or at a minimum providing some negative reinforcement and/or punishment in response to the undesired behavior so that the problem does not reoccur or at least is reduced in scope. I'm thinking along the lines of Arthur Andersen, LLP after Enron in 2002.

Removing banks and/or non-bank financial firms that cannot competently complete loan underwriting from the mortgage marketplace is an unalloyed good. Since the American marketplace has failed to perform this necessary function, the responsibility must fall to the courts.

Guys like Rood are implicitly claiming, a la Neoclassical Economics, that this is just how the marketplace works and there's nothing we can do about it, we just have to accept it. Nonsense.

Posted by: Brahma (incensed renter) at September 2, 2011 11:23 AM

i just finished reading "The Big Short" by Michael Lewis. It is hard not to want LONG jail terms for the crooks who knew exactly what they were doing.

financial engineering is killing this country - i read somewhere that 1,000 of Goldman Sachs 35,000 employees are relatively recent hires who are all PHD's in mathematics and engineering, and were hired with the express purpose of gaming the system should there be another flash crash.

In other words, biotech, health sciences, tech, and other industries that create real jobs, growth and innovation just lost another 1,000 bright minds to the financial industry which destroys productivy.

is it any wonder our growth has stalled and our economy is in the toilet?

Posted by: hangemhi at September 2, 2011 11:46 AM

"financial engineering is killing this country - i read somewhere that 1,000 of Goldman Sachs 35,000 employees are relatively recent hires who are all PHD's in mathematics and engineering, and were hired with the express purpose of gaming the system should there be another flash crash."

I think the lack of financial sophistication is more harmful then it's surplus. We recently over built and over consumed housing. Looking on this blog as well as personal experience it does not seem that people relied at all on Phd's or Goldman Sachs to decide how much or at what price to consume housing. Much of the rational thrown around for this (Buy the most house you can afford, buy now or be priced out forever, incorrect use of median price, wildly incorrect income stats, ignoring inflation and transaction costs, ignoring monthly losses,...) is and was indicative of a low level of financial sophistication not a high one.

The people you mentioned are probably working on some type of HFT (High Frequency Trading) platform not just to game the system in case of a flash crash. There has been much ink spilled about HFT, but in reality it increases liquidity and reduces transaction costs (bid/ask spread). If you're trying to day trade the HFT platforms will probably wipe you out, but how does this harm long term investors? Liquidity might seem like a buzzword, but try selling some stock when you need money vs selling your house? Stock transaction costs have been on a steady decline, what about RE? Would it be good if you took a 5% hit for commissions every time you traded stock?

Posted by: tc_sf at September 2, 2011 12:20 PM

Copy of the filings
http://www.fhfa.gov/Default.aspx?Page=110

Again, I'm fully in favor of the banks eating any losses due to actual fraud.

Posted by: tc_sf at September 2, 2011 1:44 PM

Damn. Thanks for the link tc_sf.

Just reading the complaint against Bank of America and it looks like they are suing on around $10 Billion of sales (based on a very rough review of the numbers and without counting it up). They are asking for the sale price back and/or actual damages and for attorney fees. So they could be facing a scenario of at least over $10 Billion in damages.

But I see the stock price is holding steady which is interesting to me . . . maybe I'm missing something here.

Posted by: SFHawkguy at September 2, 2011 2:31 PM

"They are asking for the sale price back and/or actual damages and for attorney fees. So they could be facing a scenario of at least over $10 Billion in damages."

Not 100% on this, but I'd guess that if they get the sale price, the bank gets the securities back. So in either case the exposure is roughly actual damages plus fees.

Posted by: tc_sf at September 2, 2011 2:39 PM

Yeah, you're probably right. Although the interest on the sale price alone would be huge. And would it be 10% interest? If it were an average of 5 years, say, then we're talking over $6 Billion in interest. Plus attorney fees and maybe other damages associated with it (time employees spent on it, etc.??).

There are probably a lot of other issues that we're missing right now as well. I imagine insurance will be illusory for many of defendants.

Potentially huge numbers. I hope they take it to trial and the jury socks it to em, to reveal my prejudices (if they're truly liable). These things need to be tried rather than settled.

Posted by: SFHawkguy at September 2, 2011 2:52 PM

Define "lack of financial sophistication." From a culturally-dominant point of view, the financially sophisticated people were the ones who perpetrated and benefited from the credit bubble.

The people with the highest level of "financial sophistication" are the people like Lloyd Blankfein and his merry band of banksters on one side, and John Paulson, Steve Eisman and Mike Burry on the other (and I agree hangemhi, The Big Short is an excellent book) down to the S.F. flippers who were taking advantage of no-money down, low interest mortgages to lever up on house and condo purchases, adding the minimal Pergraniteel and then reselling for 30% or more gains each time.

And then they'd come post on socketsite and crow about their large, tax-free capital gains and how anybody who was working for W-2 wages was a sucker! And how if you weren't in on it, you were somehow less than "sophisticated".

Were the Lembis "sophisticated"? Was Maher Muhawieh "sophisticated"?

Regular people who in normal times could afford to buy a home with a reasonable mortgage were in fact being priced out of the market despite their best personal financial decisions, that's one reason that the "buy now or be priced out forever" sales tactic worked. The S&P 500 was negative or flat for over ten years, so even if you were diligently saving and investing for a down payment, you were losing ground relative to the housing market and rapidly.

If prospective buyers were "sophisticated" they might have been able to identify that a bubble was forming, but still have no way of forecasting when it might all end. Meanwhile, your landlord was getting richer with every rent check you sent in. That was equity you were not attaining. And life has a way of passing right by. Markets can remain irrational longer than you can remain patient.

How was the regular working person who just wanted a place to lay their child's head down at night supposed to somehow avoid all of that hurly burly by being "financial sophisticated"? And I mean at the time, not now.

The single best answer I can come up with (and admittedly not very satisfying) is that he or she should have declined to participate in the whole ridiculousness and buy a BMR unit and go on and live their life. But oh, no, can't have government distortions of the oh-so-perfect marketplace. As the socketsite editor never tires of pointing out, now that the bubble is deflating, you can buy certain market-rate homes, mostly short sales and foreclosures, that are comparable in price to BMR selling prices three to five years ago, so that wouldn't have been a very "sophisticated" move.

What you're calling for is just a widespread return to traditional notions of individual thrift and personal financial propriety, not an increased level of financial sophistication. But only for the little guy, of course.

Posted by: Brahma (incensed renter) at September 2, 2011 2:53 PM

We recently over built and over consumed housing.

If it weren't for the financial engineering that created credit default swaps and mortgage backed securities there would never have been the money to loan that created the bubble.

My point is that when PHD's in math go to Wall St instead of biotech or tech we lose more than we gain as a country. If fact, it has led to financial ruin. And your only positive point is that there is more market liquidity. That is hardly an acceptable trade off.

Posted by: hangemhi at September 2, 2011 2:59 PM

Hey Brahma,

Good points. And not only did normal people not stand a chance against the financially sophisticated "savvy businessmen" and corrupt government officials, they still don't stand a chance when it comes to refinancing their homes. Here's a sad story about Ralph trying to refinance:

"Is an organizations that asks for extensive paperwork then loses it as many as eight times simply incompetent or are they evil? My money is on evil.

In the bank’s communication with Ralph they make the point over and over that “assistance isn’t guaranteed.” Looking at the numbers above it might be more accurate to say “assistance is unlikely.” It is very hard to see this as negotiating in good faith.

Maybe the bank is just pretending — faking it in hopes that Ralph will eventually get the implied message and go away. They don’t know Ralph. . . .

This is all you need to know to understand the stalled U.S. housing market: it is stalled because a class of investors has found a way for their investments to not only live on after the housing bubble popped, they are actually making more — in some cases a lot more — than they were on that money when the loans were originated. They are doing so well, in fact, that they can’t imagine a circumstance under which they would ever allow the ghost mortgages to go away, no matter the cost to the economy or the nation."

http://www.cringely.com/2011/08/mortgage-reality-distortion-field/

Posted by: SFHawkguy at September 2, 2011 3:46 PM

The real problem with suing the big banks (and I'm not opposed to it) is that many or most of the true culprits involved in these transactions are no longer with the banks. As has been pointed out, if the banks lose, then by extension the taxpayers lose since we seem to have the notion that no large bank can ever fail again.

If we really want to prevent these sorts of things from happening in the future, we need to remove the government/fed backstops on the banking industry and put in place severe/lengthy clawback provisions related to employee compensation for failed companies. If shareholders are unable to properly govern the companies they own, then regulators and the courts will need to provide the incentive to management to engage in behavior that is not a detriment to their clients or society at large.

Posted by: Guest666 at September 2, 2011 3:51 PM

"What you're calling for is just a widespread return to traditional notions of individual thrift and personal financial propriety, not an increased level of financial sophistication. But only for the little guy, of course."

There's some diminishing returns here, a lot of the bad rationals I mention above are just plain wrong. Wrong in a bull market, wrong in a bear market, wrong for stocks, wrong for houses, ... I do think that people would be a lot better off were the level of financial sophistication to rise above these unforced types of errors.

As far as only the little guy, Warren Buffet who "Bill" cited above far from being a Norquistian, has publicly stated that exec's who wreck their companies should walk away with very little. Something that I agree with. It's an unfortunate fact of life that it's a lot easier to end up with $1M if you started off with $5M, then if you started off with nothing. (Which explains away a lot of the paradox of "If this guy is so rich why isn't he very smart!") This is unfair, but at some point the only choice is going upwards vs going downwards. In general, more productive societies are richer and you don't get more productive by making a large number of un-productive decisions.

"If it weren't for the financial engineering that created credit default swaps and mortgage backed securities there would never have been the money to loan that created the bubble."

There was a Tulip Bubble without Colateralized Tulip Obligations and Tulip Backed Securities.

Not all financial activity is productive, but some of it is. A lot of tech companies fail and a tremendous amount is lost developing failed drugs.

Tech bubble not-withstanding, we're better off with the Internet.

Securitizing doesn't help much for a national housing bubble (which we've had one of). But it does and will help reduce risk of future localized housing booms and busts.

Just as you can get a better risk/reward by buying 20 stocks rather then just one (Although in neither case will be protected from a general market decline), it really makes more sense to package up groups of diverse mortgages rather then have local banks holding a tightly correlated set of local loans.

It also makes sense to slice these pools up by risk groups since it allows for specilization on the part of buyers . Higher tranches will be more about macro factors such as interest rates since they should be rarely touched by the normal divorce, job loss, medical that normally causes most defaults. Lower tranches the opposite.

Can I singlehandedly detail exactly how the above splits should work as far as what risks are best specialized and which diversified? No. Can I list out the molecular formula for a drug to cure cancer? No. In both cases, theres a long road littered with PhD's and giant failures. Both in both cases real progress requires real work.

Posted by: tc_sf at September 2, 2011 3:54 PM

I see that an earlier article states that Bank of America and Countrywide sold Fannie and Freddie $189 Billion since 2003. http://www.neontommy.com/news/2011/09/us-sue-big-banks-billions

So maybe some people figure that only suing on ~ $10 Billion or so (a very approximate number) is not so bad. I also wonder if some potential claims lapsed because of the statue of limitations (I see they had a tolling agreement for part of the time)--but I wonder about the Countrywide stuff from around 2003 or so.

Posted by: SFHawkguy at September 2, 2011 3:54 PM

The real problem with suing the big banks (and I'm not opposed to it) is that many or most of the true culprits involved in these transactions are no longer with the banks. As has been pointed out, if the banks lose, then by extension the taxpayers lose since we seem to have the notion that no large bank can ever fail again.

If we really want to prevent these sorts of things from happening in the future, we need to remove the government/fed backstops on the banking industry and put in place severe/lengthy clawback provisions related to employee compensation for failed companies. If shareholders are unable to properly govern the companies they own, then regulators and the courts will need to provide the incentive to management to engage in behavior that is not a detriment to their clients or society at large.

Posted by: Guest666 at September 2, 2011 3:55 PM

Just thinking about tc_sf's argument further:

We recently over built and over consumed housing…Much of the rational thrown around for this (Buy the most house you can afford, buy now or be priced out forever, incorrect use of median price, wildly incorrect income stats, ignoring inflation and transaction costs, ignoring monthly losses,…) is and was indicative of a low level of financial sophistication not a high one.
What I think he's really getting at is a microeconomics argument that goes something like this (please correct me if I am paraphrasing unfairly, I'm not trying to build a straw man):
During the recent period ending in 2007, lots of people engaged in a large amount of imprudent borrowing to finance real estate purchases. If people simply knew more about personal finance, they wouldn't have been convinced by the flimsy or misleading data that was swirling around to justify the borrowing ("buy the most house you can afford", incorrect usage of median pricing, wildly incorrect income stats, ignoring inflation and transaction costs, ignoring monthly losses, etc.), and they wouldn't have made the real estate purchases and hence we would have never had a bubbble.
In other words, he's placing the problem on the demand side. If people made better economic decisions, driven by better understanding of the relevant data and had a level of financial knowledge to interpret said data, the price level never would have gotten elevated, which precipitated the bubble and we would have never had a bubble.

I don't think I agree with this.

One of the things about capitalism that they never mention explicitly in econ classes is that capitalism, at least as it is currently implemented in the U.S., requires a steady supply of suckers to take the other side of a trade.

Thing is, no one, either now or in the 1630s, needs tulip bulbs to live. You do need housing. The "financial sophisticates" of the type that I mentioned earlier seized on this fact to create an opportunity to exploit people who wanted a place to live ("new suckers") and the scheme they created to do that was gaming the housing and mortgage markets. Turning it into a casino.

The whole surrounding morass of structured finance, credit default swaps and mortgage backed securities that hangemhi refers to above at 2:59 PM was just to support that. You can read Michael Lewis' first book, Liar's Poker, although it's not strictly speaking about securitization it does talk about how MBS got its start.

Anyway, my personal working hypothesis is that, just as hangemhi says, once the MBS market was created (and we can all agree that this is a fairly new invention), that created an increased ability to pay for housing via the mechanism of increased mortgage credit availability. In economic terms, once you had the substantially higher level of credit availability, the AD curve shifts right and yes, people were and can be priced out of the market because the price level departs significantly ahead of the fundamentals.

It's at that point that people start making decisions along the lines of "well, I know I can't afford this mortgage, but everyone I know is just refinancing in two years to take care of the balloon payment, rate reset or end of the teaser payment. I just have to do what I have to do." This was the exact phrase, verbatim, one of my neighbors used in describing to me why she still took out a toxic mortgage loan in 2006 even after I crunched the numbers for her and explained that there was no way she could afford it in the long term. If she'd waited another year, she would have been priced out.

Then it starts to matter less and less what an individual or a small number of individuals decide to not do (borrow) based on their level of personal financial discipline. At that point, the price level is rising and then more and more other people who are sophisticated make their decisions based on that fact and start engaging in behavior like the flippers I mentioned earlier. Or the Lembis. Or Maher Muhawieh (not that they were flippers).

The higher the level of "financial sophistication", the worse the problem is because more people respond to the rising price level with bubble-contributing behavior like flipping. Like using a home equity loan on an existing home to make the down payment on another one purchased purely for speculation. And so on.

From a behavioral perspective, if lots of people conflate "financial sophistication" with the behavior exemplified by flippers, then that makes the bubble problem worse not better. But this depends on what the majority of people think financially sophisticated behavior is.

Posted by: Brahma (incensed renter) at September 2, 2011 5:54 PM

Dog eat dog world. Both FNE/FRD and big banks are dogs. If they committed crimes, they should be jailed.

As someone pointed out earlier, tax layers are on the hook for these defense charges. I hope we recuperate it from the executives who committee this crime.

Posted by: Sfwatcher at September 2, 2011 7:05 PM

Can anyone explain to me how the banksters at Wells Fargo were not included in this lawsuit? Defies belief when all the other crooks are named.

Posted by: Britt at September 2, 2011 11:23 PM

Wells Fargo? Maybe they held on to their garbage loans rather than passing them on the GSEs? Not sure which is worse . . .

Posted by: A.T. at September 3, 2011 10:22 AM

Taking a step back, at a certain point we have to question how important home ownership is as part of the American dream. Prior to this crisis, the notion of increasing home ownership percentages has always been viewed as a good thing no matter what. We can go further back than the 90's, but even just going back to the 90's, there were significant changes in tax laws to encourage home ownership as well as tremdendous pressure for the GSE's to relax credit standards further. There was even pressure on Countrywide to relax standards during the post dot com crash in order to increase minority home ownership. The housing bubble and crisis did not start in the 2000's.

Very few people thought that the housing boom would ever end. With 1% Funds, Greenspan started the move lower in rates which helped to transfer the stock market bubble to real estate after the dot-com crash. When rates bottomed in June'ish 2003 and started to go higher many people thought that would be the end of it. But that was the start of the crazy proliferation of alternative mortgages. It "made sense" to go to ARM's, then IO's, pay option etc, to lower your payments as much as possible because real estate only goes higher. It really was the new dot com ethic all over again. I had a lot of friends and acquaintances speculating in Phoenix, LV, and also buying way more condo than they could afford in the Bay Area. In retrospect it seems crazy but the mentality of the time was different; I know a few people who were "guaranteed" that they could double their money in three to six years so financing didn't matter. Borrow more than you can and you will make the most profit.

There's plenty to prosecute with the banks and lenders- both fraud and incompetence. Unfortunately what seems to be common sense is sometimes legally tough to define as "fraud." But you can extend this to the GSE's easily as well as politicians. It's funny how you can go back and find vehement quotes from a lot of the same Congressmen decrying bank lending standards etc who were pushing the opposite way in the early 2000's. And what of the NAR, the real estate brokers and mortgage brokers who advised friends to leverage up as much as possible and then some because they were guaranteed to profit.

My point is 1) up until the last few years, everyone was involved in the same mentality that the boom would go on forever. Yes, it's definitely the banks. But it's not just the banks. and 2) when does personal responsibility start? If your broker guarantees you that you will double your money-- it is still your decision. 3) Some people should rent, not buy. Seems like a silly and simple thing to say but it used to be the mentality that everyone should pursue the american dream of home ownership.

So- keep going after the low hanging fruit that it was only the evil fascist banks. But the problem was and is systemic.

Posted by: koolaid at September 4, 2011 12:17 PM

Koolaid, you are absolutely right. But, unfortunately we live in a democratic country. So, majority is always right. If they want housing to go up. They will support any measure(good or bad) that makes housing prices go up. Politicians know that too. If something bad happens, you always blame others) in this case banks/mortgage brokers/investment banks).

On the other side, any corporation(banks/investment banks)only look to increase shareholder value. They will give enough drugs(loans) to drug addicts as long as they make more profits.

Now the problem is Govt bailing out drug addicts (home owners) and drug suppliers ( banks ) and eventually destroying the country. How to solve this? I am not financial expert, being an optimist, I hope something good will happen eventually.

Posted by: Sfwatcher at September 5, 2011 12:20 AM

A.T., I don't think Wells-Fargo held onto more of their garbage loans than any other bank; that's why they fairly recently disclosed in their regular SEC filing that Freddie Mac and Fannie Mae are demanding that WFC buy back lots of loans that went bad (a.k.a. "putbacks").

But the amount involved was < $2 billion and that doesn't sound to me like it covered everything so perhaps we'll see more on their loans in the future.

Another thing to consider is that Wells-Fargo and/or Wachovia may have sold a larger proportion of loans to buyers other than Fannie Mae and Freddie Mac.

Posted by: Brahma (incensed renter) at September 5, 2011 8:56 AM

Personal responsibility? Please. What a loaded concept. If you're going to go there, you best demonstrate that the concept of 'personal responsibility' applies to all members of our society and not simply minorities.

As soon as we start applying the rules of capitalism to all people then we can talk about personal responsibility. If we had personal responsibility the major banks would be bankrupt. If we had personal responsibility bankers would be facing criminal charges instead of a civil suit 7 years after the fact and after a tolling agreement (while the criminal charges get less and less likely). We wouldn't be bailing out the banks if we had personal responsibility. We wouldn't let them play these games about refinancing and keeping inventory off the market.

And when I hear someone mention the Community Reinvestment Act what I hear is: "them damn niggers want to have houses too and they caused all the problems. Some people are simply meant to rent from slumlords in the Ghetto and all our problems come from telling the minorities they get their share of the American dream too." As sfrenegade pointed out last week, it was the Alt A and interest only loans, and not subprime, that caused the most damage--and you can thank the cracker suburbanites for immorally (ha) taking out more loan then they could repay. If you really care about 'personal responsibity' that is, and aren't simply an apologist for fascist crony capitalism. Just because the Republicans have repeated this false talking point repeatedly (and the media regurgitates it) does not mean it is true. Evidence please if you insist on making the racial argument.

Look, the systemic problem we face is not a dearth of "personal responsibility", it is neo-fascism. When our economic system is nothing but a poker game where the richest have accumulated almost all the chips and get to set the rules of the game how dare you talk about personal responsibility for those without the chips.

And spare me the fantasy that our government is simply carrying out the wishes of the majority. What a load of hogwash. They are carrying out the wishes of their owners--the bankers and corporatists. They don't give a rip about the bottom 90%. That's why you will see the government slowly deflate the bubble against the wishes of the homeowners that want more government support for housing.

Regarding the idea that it's hard to prove fraud, I have a question: why did the industry call its products "liar loans" if they were innocent? Why were banks betting against the products they were selling? Why did banks that originated loans only have to hold on to the loans for a couple of months? Why did the bankers walk away with all the money and leave the taxpayer with the bill? The entire system became fraudulent. And the engineers of that system are to blame and should be the ones that go to jail. The normal people that sought shelter (a basic human need) and took part in the system are not to blame. Yes, some little people were smarter than others and were able to navigate the fraudulent system (like those that rented during the last 10 years or so). Average people (including minorities) did not deregulate the banks and invent securitization and liar loans.

It is very revealing to me that when bankers face very mild consequences for their vast crimes some (mostly on the right) start screaming 'personal responsibility'. Well, if you support personal responsibility then you should demand that bankers face a jury of their peers for what looks like vast crimes. Until you can take that very small step you are simply an apologist for fascism that likes the fact that there are a huge number of people that "should not own" and that most of those people are minorities.

Plus, average people have lost their homes and have indeed faced criminal charges for fraud (as well as some mortgage brokers and attorneys). The one group that hasn't faced any criminal consequences are the bankers. They face civil slaps on the wrists but I'm sure their huge bonuses and compensation will help soften the blow.

Posted by: SFHawkguy at September 6, 2011 9:24 AM

Look at this press release from Mozilla and Countrywide:

"As I look back on the history of affordable lending for both the mortgage industry and Countrywide, I am honored and delighted that we have reached our last remarkable goal three years early," Mozilo said. "Now, we are committing to an even greater goal, and I wholeheartedly look forward to the day when I can announce that we have funded $600 billion to help lower income and minority home buyers achieve the dream of homeownership. . .
In 1994, Countrywide was the first lender to voluntarily sign an ambitious document entitled "A Declaration of Fair Lending Principles and Practices" with the U.S. Department of Housing and Urban Development. Six years later,
Countrywide was also the first lender to renew the HUD Declaration. In 2001, Countrywide recommitted financially with its biggest number ever --$100 billion.

http://www.prnewswire.com/news-releases/countrywide-chairman-mozilo-announces-600-billion-commitment-to-low-income-and-minority-home-buyers-74177182.html

And ask yourself, is this a company that is being forced or coerced into lending to minorities or is this a company that is finding it extremely profitable to originate these loans? Most companies I know have one main goal of pursuing profit and it doesn't voluntarily do things to be nice--especially in minority neighborhoods.

The fact some in Congress and even people like George Bush pushed an "ownership society" doesn't mean they were sincere and that that was their goal. That was the cover story.

In fact, these loans were predatory. The idea they were helping people is a scam.

But I do agree with the idea that it does not help people to put them in a mortgage they can't repay and to create a housing bubble. Housing should be a right and the government should help provide it without creating a bubble. It should provide direct housing for some and a BMR type system for the rest of us (which would actually work like price controls). Maybe let the top 10% or so play their poker games if they want--as long as they are 'personally responsible' for the consequences.

Posted by: SFHawkguy at September 6, 2011 9:49 AM

In lawsuits between large banks and the Federal government, the Feds are seriously outgunned. Unless the Feds are willing to shell out at least 8 figures for outside lawyers (which they rarely are), the case will settle for a fraction of the amount they are seeking. The settlement will require confidentiality, and almost all the documents produced by the banks will be kept secret under a protective order.

In short, this make may great headlines, but there's nothing to see here.

If the NY AG had taken this case, though, things might be different.

Yes, I am a lawyer. And we lawyers are the only ones who win here (aside from the grandstanding politicians).

Posted by: Q at September 6, 2011 4:02 PM

Well said SFHawkGuy. The government should provide housing. Capitalism does not work. The US should be socialist.

Posted by: ... at September 6, 2011 4:41 PM

Yes, if the gummint built, or oversaw the building and selling of, tens of millions of BMR housing units, I don't see how anything could result other than high-quality, long-lasting, desirable homes at a good price to the owners and taxpayers and with smooth transactions to transfer ownership.

Posted by: A.T. at September 6, 2011 4:57 PM

Hey, A.T. and ellipsis, I'm curious as to how the market fundamentalist mind works.

What advice would you give to someone who was hardworking and carefully practiced self-denial, lived on a written budget every month for years on end and never went out to restaurants, took public transit everywhere so they could direct the money that they'd usually have to pay for auto insurance or an auto loan to savings towards their eventual down payment, and in all other respects lived frugally and saved up an amount that would normally constitute a solid 20% down payment, but happened to be attempting to make their purchase during a bubble and was priced out of the market at the bubble housing price levels?

A bubble that we being inflated and sustained by the majority of people around this responsible individual buying with no-money down, "pick a pay" and "teaser rate" ARMs and interest-only loans, and then out and out lying on their mortgage application with regard to their household income level because the mortgage broker told them that the bank wouldn't try to verify their income?

What say you, market fundamentalists?

How's that concept of "personal responsibility" fit in to this scenario, kool aid? What's that person supposed to do? Anybody? Bueller?

Posted by: Brahma (incensed renter) at September 6, 2011 6:22 PM

Brahma, my advice to such a person would be (and, in fact, was) "do not buy a home that is more expensive than a comparable rental, factoring in all costs; instead rent a nice, less expensive place and enjoy your savings." If your hypothetical person had followed this advice during the bubble (which is still not yet deflated), he/she would not have made a very stupid, costly purchase.

"The market" does not guarantee smart investments or nice returns. While it is far from perfect, it is better than any alternative I've ever heard of.

Posted by: A.T. at September 7, 2011 8:16 AM

"In other words, he's placing the problem on the demand side. If people made better economic decisions, driven by better understanding of the relevant data and had a level of financial knowledge to interpret said data, the price level never would have gotten elevated, which precipitated the bubble and we would have never had a bubble."

I don't think it's 100% demand side, but certainly the demand side played a large part. Note also from a consistency point of view that liberal economic thinking is typically more focused on the demand side (i.e. restart the economy by giving more money to consumers/middle class). If you find poor decisions by the demand side acceptable it somewhat taints the effectiveness of either stimulus or redistribution to make a real economic contribution. (i.e. why cut someone a check so they can buy a bigger jet ski)

"One of the things about capitalism that they never mention explicitly in econ classes is that capitalism, at least as it is currently implemented in the U.S., requires a steady supply of suckers to take the other side of a trade."

Since you have the freedom to choose, how can both sides of the trade be the sucker side?? More generally, you can even pick how much and what to trade in? (i.e. buy/rent, how much housing to consume, substituting via commuting, go long stock, go short, bonds, human capital/education, ...)

" saved up an amount that would normally constitute a solid 20% down payment, but happened to be attempting to make their purchase during a bubble and was priced out of the market at the bubble housing price levels?"

So this person ends up with a pile of cash and no housing debt during the biggest recession in recent memory. Where's the complaint here?

Posted by: tc_sf at September 7, 2011 8:42 AM

"Yes, if the gummint built, or oversaw the building and selling of, tens of millions of BMR housing units, I don't see how anything could result other than high-quality, long-lasting, desirable homes at a good price to the owners and taxpayers and with smooth transactions to transfer ownership."

Care to unpack that conventional wisdom? What is so complicated about imposing a price control system? We currently go through a byzantine process to qualify for a mortgage. Same thing would happen under a price control system. Say the price level is tied to one's income so that one can only buy a home that is 3x income (or some similar scheme). You are told you can buy a house for a maximum price of X. How is that any more complicated than what currently happens when one applies for a mortgage. And actually, if there is one standard then it will be even more efficient than the current system with many different private and public standards.

Furthermore, the price of the house won't change the quality. We have similar quality of housing as we did a decade or two ago but now pay way more for it. In fact, if we didn't have to pay so much for our house we would have more left over to put into the house.

Posted by: SFHawkguy at September 7, 2011 11:39 AM

Thanks for the agreement ellipses. Succinctly said. Although I don't think the government should provide housing for all--just certain segments of society, the poor, the elderly, etc. For the rest of society simple regulation will suffice.

Posted by: SFHawkguy at September 7, 2011 11:53 AM

Well, good luck designing that "simple" regulation. One obvious problem with the proposed "3x income" rule is that housing prices would immediately collapse, bringing the entire economy with it.

Heck, let's just say "everyone gets to have whatever house they want for free." Simple, no? I know, that's not what you're proposing. But you're not proposing anything concrete or that could work because there is no such simple thing.

Posted by: A.T. at September 7, 2011 12:06 PM

Also, my socialism* would be better than your crony-capitalsism if we re-regulate the banks. If any bank wants to get free money from the fed or federal guarantee of deposits they have to:

1. Issue mortgages under the price control scheme and hold the mortgages on their books, and
2. Provide a X% certificate of deposit or interest on savings accounts.
3. Provide a payment system that is free of charge.

*these proposals are socialistic in character but I am still envisioning a mixed economy, like most advanced economies. I personally would go a step further though and regulate firms over a certain size--say 50 people--much more strictly. I would make the owners of the big firms (including corporations) personally liable and force them to put labor and community "stakeholders" (I hate that term) on their boards. Firms under 50 people (or so) would still exist as is but can't be corporations--they have to form as partnerships or something whereby they have 'personal responsibility' for the firm. If I were able to decide I would also socialize the sectors of the economy where capitalism doesn't work, like health care, utilities (including modern utilities like cell phones, internet, and cable), railroads and airlines. Anyway, whether we adopt the stronger forms of socialism or not, our form of capitalism is doomed unless there is some socialistic measures passed. I'm almost rooting for the fascists to continue controlling things because the sooner we hit bottom the sooner we can start rebuilding society. American capitalism is killing our planet.

Posted by: SFHawkguy at September 7, 2011 12:10 PM

So A.T., you admit you are using a straw man argument against me but nevertheless you're going with the straw man argument anyway. Weak.

Any sort of change in our system is going to involve temporary problems. The elite are currently trying to deflate the bubble slowly while keeping a broken system in tact.

The only way to pop the housing bubble is to pop the banks. We need them to go through bankruptcy and to wipe out the unsustainable debt instead of creating zombies. All mortgages should be immediately written down. Whatever the administrative problems of doing this are, it is much better than the current method of kicking the can down the road a decade or so so that we all pay more for housing over the decade. We are slowly bleeding out to the bankers this way and I would rather rip the bandaid off now.

No one gets a "free" house under this system (although people should if we follow the rules of capitalism). We simply reset housing to a sustainable level and wipe out the banks.

Posted by: SFHawkguy at September 7, 2011 12:20 PM

Right - see how I don't hide the ball? And SFHawkguy, you forgot to address the non-strawman part of my argument. Let's hear you propose something concrete rather than just saying "arrgh, there oughtta be a law."

I will address one concrete idea you assert - "All mortgages should be immediately written down." That would also result in immediate financial collapse because (1) the marked-to-market debts would be trillions more than the banks could handle, and (2) it would immediately cause the majority of underwater owners who are willingly paying their loans to demand the same markdown, causing further collapse.

Now if you're going to open up the field to suggestions that will result in immediate and massive financial catastrophe (disproportionately harming the less well-off, by the way), then I agree that are limitless options out there. War, revolution, public executions of politicians and bankers, unconstitutional seizures of private property, etc.

Posted by: A.T. at September 7, 2011 1:36 PM

A.T., I've already laid out the rough parameters of my fairly simple plan (simple administratively, but difficult politically).

To answer your points:

1) Good. I hope those jerks lose everything, including their liberty. The firms should go into bankruptcy or receivership and the management fired, imprisoned, and sued and thier ill-gotten gains disgorged. Bring. It. On.

Accounting based on reality instead of fantasy is a step towards cleaning up our criminal capitalistic banking system. That's good, not bad, as you assert. If the firms go bankrupt-- Good. All the quicker we can rebuild a banking system along the lines of a public utility. Instead of using our money bailing out corrupt criminals we could have created something new for much less. There are plenty of smaller banks that are willing to provide traditional banking services without making a usurious profit and engage in reckless speculation that endangers our entire system. We don't need the too big to fail banks.

2) Fine. People that are not underwater should also have their mortgages marked down a fair amount--so everyone that paid too much during the bubble gets a little relief. It should be a society-wide resetting. Plus, it is hardly a radical notion that a secured loan is marked down to the value of the collateral (or a portion thereof, in the case of those not underwater). This is a more common feature in just societies and bankruptcy courts are more than experienced at doing this sort of thing.

Indeed, my suggestions are not radical, as you fear mongers assert. In the long run my proposals are more conservative and stable. Who benefits from inflated housing and reckless speculative banking? Not the people. The bankers do. Our society would be much better off if we called their bluff and ripped these parasites off the body politic and faced the consequences and tried to fix things going forward without these criminals. These people are terrorists. Saying that we have to give them tens of trillions of dollars or else the economy gets it. No, I'm not going to be intimidated.

Again, it would be a pretty easy process (administratively). We have bankruptcy courts that could write down the mortgages. Simply nationalizing the too big to fail banks in one fell swoop, plus taking over the Fed's mortgage holdings, plus Fannie and Freddie would give the government the ability to write down most mortgages immediately. I don't know why you think creating laws is silly, or not serious, but laws need to be changed in a democratic society. Our problem the last few years is a lack of upholding the laws. Like I said, nationalizing or pushing these banks into receivership is easy to do and the executive branch may even be able to do it alone (although I'm not sure). Surely they could pass a law (although the fascists are increasingly taking over the courts and returning to 19th century property rights jurisprudence that may make it difficult to pass these laws).

Furthermore, with a little bit of money, I'm sure there can even be temporary bankruptcy judges appointed. Appraisers and other experts would be hired. All in all an aggressive government receivership could write down all mortgages in a few years and the money we would save would be well worth the expense.

Hillary Clinton even proposed a similar scheme following the HOLC precedent from the Great Depression (funny how all the New Deal policies are so "radical" tody).

Plus, as I said before, we could pass a law that requires all banks that originate mortgages to follow certain regulations (like 20% down, no more than 2.5X income, they have to hold the mortgages, no discriminating based on race, etc.). The interest rates will probably go up a little bit but the price of housing for all of us will probably go down.

Posted by: SFHawkguy at September 7, 2011 2:33 PM

tc_sf wrote: "So this person ends up with a pile of cash and no housing debt during the biggest recession in recent memory. Where's the complaint here?"

It's not really hard to understand. The complaint is that the person doesn't have the SFH they were diligently saving for over a period of several years; there's opportunity cost; and they were thwarted from executing their planned purchase by the actions of hordes of other people who were making the exact opposite decisions that you and A.T. say they should have made.

Do you really not see the problem here, given that you want to blame the problem on people's lack of personal financial savvvy?

Posted by: Brahma (incensed renter) at September 7, 2011 3:31 PM

huh, I (...) was just kidding. I guess sarcasm doesn't come through in writing but didn't think anyone could think I was serious about supporting the hawk's socialist utopia. kind of funny. a bit funny-ha-ha but more funny-ludicrous. . . and now back to the local housing market . . .

Posted by: ... at September 7, 2011 8:10 PM

That was pretty witty sarcasm ellipses (clue: I'm being sarcastic). No wonder you want to get back to the local housing market . . . you're not doing team capitalism much good here.

Posted by: SFHawkguy at September 8, 2011 12:12 AM

"The complaint is that the person doesn't have the SFH they were diligently saving for over a period of several years; there's opportunity cost;"

First off opportunity cost is what you incur if you lock up money and thus forgo the opportunity to use it elsewhere. This person actually has the money and thus the opportunity.

Secondly, the individual's choice is not "will there be a bubble or not" but merely buy or rent. In retrospect, the saving and renting in your example was the better financial choice.

Thirdly, if this person has non-economic reasons for buying. i.e. they'd rather buy even if it loses money. Then they could have bought at any time during the bubble and just lost money. In fact even now you could probably buy nearly any house in SF for 2007 price and it is not too hard to find someone to take a pile of cash off your hands. Since the converse ( Selling your SF house for 2007 prices and having someone give you a pile of cash) is not nearly as likely it would seem that even with non-economic reasons for buying the person in your hypothetical is better off.

Posted by: tc_sf at September 8, 2011 11:22 AM

"The complaint is that the person doesn't have the SFH they were diligently saving for over a period of several years; there's opportunity cost; and they were thwarted from executing their planned purchase by the actions of hordes of other people"

I guess I still don't see the basis for any complaint. This person should be jumping for joy! He/she had somewhere to live during the interim and can now buy that SFR for about 1/3 off.

Assume I REALLY wanted to buy Cisco stock in 1999 because it's a great company, but I was either unwilling or unable to pay the high share price because bubble-idiots had bid up the price. Well, a few years later I could then buy that exact same share at an 80% discount. How am I harmed by that? Because I had to wait a couple years to possess that stock? I'm not harmed - I'm way better off and elated.

Posted by: A.T. at September 8, 2011 11:46 AM

And just like the proverbial tulip bulbs, one doesn't need shares in Cisco Systems to live. One does need housing, however.

Posted by: Brahma (incensed renter) at September 8, 2011 8:54 PM

The Milkshake of Despair wrote:

I'm with shza in not understanding this give and take strategy. I realize that the Fed isn't the same as the USG, but shouldn't they at least be coordinating their playbook?
True that The Fed is independent of the rest of the government. In his bloomberg column yesterday Jonathan Weil had a great 'graph on how we should probably take this;Suing Banks Is Next Best to Letting Them Fail:
It’s a ridiculous situation, for sure. Then again the FHFA is doing what it’s supposed to do: preserve and conserve the assets of Fannie and Freddie. It’s not the agency’s fault that Congress passed the Troubled Asset Relief Program and gave the Treasury Department new powers to keep Ally and its ilk alive.

Congress could have let those companies die, as they deserved to. It didn’t, though. So now the inevitable claims are working their way through the courts.
That read, I have to still agree, ruefully, with "Q" on the practical aspects of this:
In lawsuits between large banks and the Federal government, the Feds are seriously outgunned. Unless the Feds are willing to shell out at least 8 figures for outside lawyers…the case will settle for a fraction of the amount they are seeking.
And then, of course, the banks can just take a charge against earnings for the amount that they have to pay out, which then prompts yet another situation calling for a bailout. Dodd-Frank might prevent one this time, but I'm not at all hopeful.

Posted by: Brahma (incensed renter) at September 9, 2011 12:32 AM

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