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Obama Goes all out for dirty Banker Deal

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August 25, 2011 – Comments (12)

 From Matt Taibbi and Rolling Stone. http://www.rollingstone.com/politics/blogs/taibblog/obama-goes-all-out-for-dirty-banker-deal-20110824

On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008.

On the other side is the Obama administration, the banks, and all the other state attorneys general.

This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes...

...But Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR...

 

...Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:

It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.

This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!...

...What is most amazing about Wylde’s quote is the clear implication that even a law enforcement official like Schneiderman should view it as his job to “do everything we can to support” Wall Street. That would be astonishing interpretation of what a prosecutor's duties are, were it not for the fact that 49 other Attorneys General apparently agree with her.

 

I guess that is one more manifestation of electing a corporate friendly government

Best wishes,

Steven

12 Comments – Post Your Own

#1) On August 25, 2011 at 10:18 AM, PeteysTired (< 20) wrote:

from a generation of fraud that led to millions of people losing their homes..

What was the fraud?

How did the fraud lead to millions losing their homes?

Thanks

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#2) On August 25, 2011 at 10:25 AM, Jbay76 (< 20) wrote:

Pete,

You're kidding right?

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#3) On August 25, 2011 at 10:43 AM, PeteysTired (< 20) wrote:

The victims were millions of investors worldwide (like the pensioners who saw their funds drop in value) and hundreds of thousands of individual homeowners, who were often sold trick loans and hustled into foreclosure when unexpected rate hikes kicked in.

I am just asking since the millions of investors who saw their funds drop in value wasn't that the risk of buying the security in the first place?  I am not trying to be a jerk, but weren't the securities rated by the rating agencies?  Did the rating agencies commit fraud by not rating them correctly or did the issuer withhold FICO scores, DTI's.....when they created the asset?

As for the people that were sold trick loans or hustled....is this a case of not understanding what they were signing up for?  I admit buying a house and signing pages and pages of documents can be overwhelming, but is that fraud?  When I got an arm loan I had to learn about margin, LIBOR, index rate.... were these people not told?

Once again, I am trying to understand what the fraud was perpatrated.

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#4) On August 25, 2011 at 11:50 AM, MikeMark (29.57) wrote:

Hi PeteysTired,

The art of hustling is to make the sale before the potential fraud is exposed. At least that's the way I look at it.

So let's look at the banking system leading up to the crash. First you have the institution that "everyone just trusts". Second you have a misunderstanding of what a loan officer really is: a salesman for loans. Third you have a set of owners and operators in the banking system who are looking for increasing rates of return.

So when the oportunity to sell people ARM loans comes, the people trust the loan officer, the loan officer is paid by the sale of the loan (the closing cost) and the bank owners receive an increasing benefit.

Now behind the scenes, the Fed system is essentially backstopping losses, without saying that it will, but if it doesn't then there really is no reason for its existence.

Now, not everyone who borrows money really understands a simple loan. Throw in the idea of an ARM with low barriers to entry & a real estate market that doesn't help people find what they can afford, but instead captures what they are allowed to borrow. There is no one in the process that sits down with these people and helps them to understand the implications of a changing market value combined with a rate increase. Nor are they helped to understand the total cost of owning through borrowing.

Add to that the fact that Greenspan was giving an OK to the housing boom all the way through and Fannie & Fredie provide a secondary market in mortgages that banks sell (dump) into, whether they are proven viable or not, and you have banks that simply become hustlers, trying to sell the most before the game is up.

Where is the fraud?

The beauty of a good fraud from the point of view of the hustler is when you (or the lawkeepers) can't find it.

Looks like it worked.

Really, in this whole picture, we haven't taken a good look at the enabler. The major enabler here is two-fold: the Federal Reserve System and Fractional Reserve Banking. Fractional reserve banking is what allowed the banks to loan 10 times and as much as 70 times more than they had assets to back. The Fed provides the bail-out engine when the banks begin to fail due to lack of assets to cover losses. Because when you are leveraged by 10x, you are wiped completely out by a 10% decline in value, if you are at 70x, a measly decline of 1.5% will destroy you. It was guaranteed to happen.

So again where is the real fraud? The real fraud is in the idea that a system like that can ever work over an extended period of time. Amazingly it seemingly worked for about 70 years. Interestingly, it only worked for about 20 years the first time (up to the market crash where we mark the beginning of the Great Depression).

Here is where you can find more reasons why the Fed and fractional reserve banking need to go away.

-MikeMark

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#5) On August 25, 2011 at 11:56 AM, leohaas (31.24) wrote:

"Did the rating agencies commit fraud by not rating them correctly..."

Bingo!  There is just one problem here: the ratings agencies will say they provided an "opinion". And as long as we have a First Amendment on the books, it will be very hard to sue anyone for having an opinion, no matter how bought these "opinions" were.

There can be no doubt about those "opinions" being bought by the creators of the CDOs: when they sent out a CDO for rating to the agencies, they pencilled in the expected ratings for the various tranches of the CDO. And since the CDO issuer paid the ratings agency, and threatened to go to the competition if the rater would not oblige, the rater did indeed oblige.

I have no doubt that is fraud, 100%. But legally, the agencies can hide behind the First Amendment defense. For us as investors it just means we should never again believe anything the ratings agencies say!

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#6) On August 25, 2011 at 1:29 PM, chk999 (99.97) wrote:

We could elect a business unfriendly government. This would cause healthful weight loss as food became hard to get and we walked everywhere because gas was hard to get. Think of how the world would be improved!

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#7) On August 25, 2011 at 1:34 PM, FleaBagger (28.21) wrote:

Or we could elect a government that slashes its spending on corporate welfare and other odious, harmful things. But no, we don't want small government. We want "public-private partnerships" to make sure the big corporations and the unions get over - I mean, get by.

Am I right in thinking, Steve, that both you and Mr. Taibbi are planning to vote for Obama again?

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#8) On August 25, 2011 at 1:35 PM, turdburglar (38.71) wrote:

I agree that the minimal bank fines for gigantic frauds are unacceptable. 

Put it this way, if I stuck up a bank and got $100 million, I'd gladly pay a fine of $50,000 and walk free.

 

 

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#9) On August 25, 2011 at 2:47 PM, PeteysTired (< 20) wrote:

MikeMark

Thanks for your comments.  Some of them we will have to agree to disagree. 

When I think of fraud I think of Madoff.  That was clearly fraud. 

The reason I posed the questions is because this is a very emotional issue and I think people say "fraud, can't you just see it? or it is so obvious!"  I am pretty sure there were borrowers that committed fraud, appraisers (oh boy were there crappy appraiser) that committed fraud, lenders that committed fraud and issuers committing fraud..am I leaving anyone out?  The bottom line is the people with deep pockets are accused of fraud rightly or wrongly.

I worked in the middle of that mess in the securitization rhelm.  We worked with banks/brokers/lenders where we got loans from and investors who purchased our securities.  Looking back it was absolutley fasciniting.  I think people really have no idea how influential Fannie and Freddie were in the entire thing.  If lenders pre-qualifed loans through Fannie and Freddie's underwriting system it was golden it could be sold to anyone.  The weird thing was that Fannie and Freddie really didn't publish their standards.  They had a black box where data came in and a qualifying decision came out.  Gradually we could tell that Fannie/Freddie'sr standard started moving beyond A paper (think of no income no asset loans).

I think what I learned from this mess goes back to what my father said and further enforced from my business law class in college.  Know what you are signing!  Ignorance is not a defense....unless you have a really good lawyer :)

leohaas

For us as investors it just means we should never again believe anything the ratings agencies say!

Amen!

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#10) On August 25, 2011 at 4:15 PM, MikeMark (29.57) wrote:

PeteysTired

Know what you are signing!

Yep, I agree with you. Said another way: caveat emptor.

Really that's what this is all about. Who is to be responsible for the actions and happenings? Does everything get socialized, or are individuals responsible for what they do?

The idea that partial socialization is a viable stopping point or that it works will fail in due course, simply due to the fact of limitless human desire. "Well if we can do that, why can't we do this also?"

However, that's a whole different related subject.

As far as the emotional fraud issue, in the same way that many people don't take the time to educate themselves before deciding to buy a home through a particular vehicle, they don't take the time to cut through the emotionally charged media circus to find out the true facts of actions that occurred and laws that exist. It takes quite a bit of effort and really gets in the way of Monday night Football. ;-)

 

-MikeMark

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#11) On August 25, 2011 at 5:47 PM, whereaminow (< 20) wrote:

A great post with a great discussion.

Fraud is a form of theft in which the property rights of one party are taken through deceit.  In that sense, a person that does not pay their mortgage but stays in the home commits fraud.  In some states this is encouraged through lengthy foreclosure procedures that make it economically more viable to hire an attorney and wait it out than to pay the mortgage. 

On the contrary, someone who "walks away" and hands the keys back to the lender does not commit fraud, since they are giving back the property. 

Banks act fraudulently when they knowingly lend money in such a way that (1) their only possible continued existence is in the form of an implied bailout from the Fed/gov, (2) they politically engineer the system through bribery to ensure that bailout, and then (3) use the power of the law to compel homeowners to pay them back when they themselves don't have to pay anyone else.

That is the essence of Too Big to Fail. It is merely an elaborate extension of the time honored Suspension of Payment privilege that banks have received from governments for centuries.  The bank losses and obligations are temporarily forgiven or suspended, while those obliged to the bank are given no such reprieve.

This is clearly fraud. 

Though I strongly disagree with Matt/Steve on the solutions to this centuries old dilemna, I am glad to see that there is some agreement on the part of both market socialists and anarcho capitalists that you can't have free rides for the politically connected and expect everyone else to foot the bill.

David in Qatar

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#12) On August 25, 2011 at 8:39 PM, devoish (96.00) wrote:

MikeMark.

Thank you for the explanation/comments to Peteystired

Fleabagger.

Are you going to run anyone who denies global warming is caused by people? Cause thats a bigger problem than investment bank fraud.

David,

That was one of the most rational and nicest things you have ever typed to me. After all these years it is nice that you realise it is your solutions that I disagree with. In this case, however, I do not agree that your 4th and 5th paragraphs accurately describes the mortgage fraud. I would describe the investment banks has having misrepresented to their investors that their mortgage backed securitys were federally guaaranteed when that hasn't been true since the late 70's, and as having misrepresented the lending standards those loans were made with by bribing private ratings agencys to help them.

But we should probably stop.

Best wishes,

Steven

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