Federal Government Sues Big Banks
http://thedianerehmshow.org/shows/2011-09-06/federal-government-sues-big-banks
Late Friday, the Federal Housing Finance Agency filed lawsuits against some of the world’s biggest banks. The seventeen suits alleged that the banks sold Fannie Mae and Freddie Mac nearly $200 billion in fraudulent mortgage investments. The U.S. government wants billions of dollars in compensation. It’s the setup for a brutal legal fight that could last years. The banks say the FHFA should have known better. The government says banks deliberately deceived it. A look at the role big banks played in the mortgage crisis and what it means for ongoing economic recovery.
Guests
William Cohan
contributing editor at Vanity Fair, opinion columnist for Bloomberg View; author of "Money and Power: How Goldman Sachs Came to Rule the World"; and former investment banker.
Phil Mattingly
economics and finance reporter, Bloomberg News.
Andrew Sandler
chairman and executive partner of Buckley Sandler law firm and CEO of Treliant Risk Advisers.
Comments
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I’ve heard that the lawsuits initiated by the US Department of Justice were filed at this particular time to (i) avoid losing claims by reason of a lapse of the statute of limitations, and (ii) provide November 2012 political cover for those government officials seen as failing to hold anyone in the financial industry accountable for obvious misconduct (ala “Inside Job” and “All the Devils are Here”). I’m interested in your guests’ comments.
You know, the BOA logo and signage used to have a white background. It seems to me, it was changed during the darkest days of the recession.
I drove by a BOA building every day on my commute to work. One day, the signs were white, the next morning they glowed red in the dark. It felt very aggressive and I wondered why they made that change.
I've been unemployed for over a year.
The banks did this to us. They disgust me. They should be held accountable.
Going after the banks will hurt the employees,shareholders, and customers. Go after the executives, and bankrupt them! Or, better yet, jail!
One of your guests commented on the "frustration" on the parts of the banks and Fanny and Freddy. This sounds like a very cavalier position given the financial melt down that was caused by the obvious risks that these banks took on in order to create their own short term profits.
I suppose that the people, around the world, who remain unemployed, have lost their homes and their retirement accounts are rather frustrated as well.
The truly sad part about the lack of investigations and prosecutions with the housing crisis, is that the American people will be just that much more jaded. The outrage that surrounded this issue has seemed to have dissipated and it will be so much harder to generate when the banks do this again.
Rgmlkwd raises a valid concern about innocent parties having a stake in the financial health of international banks. If we go back to the Constitutional issue of corporations as persons we begin to understand how the "strawman" of a corporate identity protects the individual perpetrators. Maybe this is one of the primary reasons our corrupt "pro-corporate Supreme Court majority is taking this extreme tack. Here is another contradiction of crony capitalism that will be resolved in favor or the ultra-wealthy. Their fannies are too royally tender for the whipping due; thus the whipping boy of corporate personhood. The very concept of incorporation shields the wealthy from accountability to the rest of society. Our business system is demolishing itself: So this must be creative destruction? Some of my money is evaporating this morning over this boogeyman bank hunt, here and in Europe; and I swear I did nothing to cause the Meltdown.
On the other side of this debacle--the consumer side--according to "60 Minutes," many of the banks involved in this suite hired a company to process their foreclosure papers. And this company is said to have subsequently forged the foreclosure papers, hiring people off the streets to sign as "vice presidents," etc.--acts for which you and I would be sent to jail. Will these alleged forgeries be prosecuted, or will the banks be held responsible?
The government will spend hundreds of millions prosecuting these cases, little or nothing will be accomplished. The only winners will be the lawyers, and as usual tax payers will pay for the illusion of a competent government . All aspects of society were in on this, borrowers, government and banks. Lets just grow up and move on.
I don't believe that change can come unless the investors as well as the financial sector decide to change behavior. When the money was good, people latched on like leeches or addicts. If I as investor want to profit without holding out accountability then anything goes.
Fast money is a drug. Not many are interested in detox
The primary reason the housing failure was so large was that financial institutions leverage mortgages 40-50 to 1 and the CDO's included NINJA loans which Fannie and Freddie did not hold. What was the Fannie and Freddie role in that regard?
If there is a successful lawsuit against Fannie, what happens to the 150,000 or so properties now owned by them, many of which are either on the market or in the process of being prepared to market? Isn't Fannie the 'last stop' when there is a foreclosure process, the original lender having passed on marketing the asset?
I understand the focus on lower income people however I am looking for an attorney to help me as a builder where countrywide and another lender had me at adjustable rate mortgages, based on credit score alone and my lender for construction encouraged me to purchase properties in neighborhoods one they were the investor, had me re-sign $2.25 million when the knew "for sure" that I only had one month of money left. When I couldn't pay any more they foreclosed on two of the properties and now are pursuing two more. Where is the lender liability for lending us builders without regard to the ability to repay. My credit used to be 830 now I have no idea where i am now.
The hidden army of extremely well funded and well connected lobbyists is the ignored culprit in this debacle. Capitalism rewards greed and democracy rewards transparency and information. Capitalism succeeded and democracy failed in this instance. This debacle is a sign of a much larger problem in our republic. These lobbyists, typically with roots in both the political and financial community, have been very successful and continue to be throughout the entire history of this debacle.
3 points.
As your' guests have pointed out, the ratings agencies need to be probed to properly understand the discrepancy between securities ratings and eventual performance.
When Goldman says they are merely acting as Market Makers, they aren't acknowledge their own proprietary trade positions, and/or fees collected from allowing intentionally designed to fail securities that were designed by clients. They are not neutral market makers as such.
It was the secondary market demand for CDO's that allowed for collection of large fees at many levels in the market, in turn leading to large bonuses. In my opinion, it was an inter corporate racket, with organized intent to deceive, and the applicability of RICO charges should be seriously considered.
Mike Sergeant: You are correct that the collective thirst for justice is dulled with the Koolade of show trials. But the core issue is uncorrected structural insanity. Why does our political economy have to be dominated by such a narrow monocrop of economic thinking? Why does the money value have to be polarized into so few hands when only our work produces any real value? Why is our military and our legal system used to crush any upstart alternative to the jackpot casino model? Which turkey necked billionaires will they trot out to assure us all is OK this week?
The US economy was doomed as soon as a barrel of oil stuck above $60, and the wealthy class went wild hoarding their wealth when they saw the financial ship was sinking. I'm not afraid of China who can't feed or water itself where nearly half the people go hungry. I'm afraid of the Oligarchy who thinks humanity is a flock of chickens.
TARP Toxic Asset Relief Program correc t me if I'm wrong I thougththat 700B was to rid the banks of the Mortgages and take them off the books in other words free the Mortgage Holders of the obilgation...now 3yrs later we still have people that never recieved a Relif of the Mortgages that this was supposed to wipe out????????
Am I WRONG HERE!!!!
Grady Lee Coward is back. The one who calls people racists with no evidence whatsoever. The "racist" charge - the last bastian of the flaming liberal who absolutely CANNOT argue an issue. Just call 'em a racist, right GLC - like you did with me - called me a racist and then when I challenge you to show ONE SINGLE racist statement in my dozens and dozens of posts and you CAN'T do it.
C'mon GLC. One post that indicates I am a racist. ONE. Man up, retract, or shut up.
Bawk ... bawk... bawkbawkbawk.
I agree that the Fair Housing Act is a contributing factor to the financial crisis resulting from violations to basic banking practice that were promoted by those who sold mortgage backed securities. But the Fair Housing Act is not a cause of the housing crisis. Normally, a responsible bank would not issue a mortage to anyone who does not have the income to make the payments over the duration of the mortgage. There were affordablle houses for all buyers. The cause of this crisis is that people where allowed to get mortgages for houses that they could not afford. Why did this happen? This practice was motivated by the need to generate large numbers of mortgages, to make up the securities that were packaged and rated AAA, and then sold all over the world. The consequence has been catastrophic.
garyg:
The solution to this issue is easy. Restore Glass-Steagall. Prevent banks from using investment money in the mortgage market.
Require banks to service their own loans. There are plenty of banks with plenty of investible money to service the mortgage market. Banks will not lend to those who cannot pay back - if they are on the hook for the bad loan.
Andy Sandler's obsession with not assigning blame is frightening, and it is the lack of consequence, as the caller from Dallas alluded to, that is resulting in continued misbehavior by Wall Street. The tax payer would benefit greatly from some heads rolling because, as the caller stated, it will put all the Wall Street players on notice that there are consequences.
Moreover, if we do not engage in the "blame game" exercise that Mr. Sandler wishes to avoid, we cannot get to the causes of the financial crisis. Causation necessarily assigns blame, and we can only get to the bottom through a full disclosure of the kind that can only occur in a criminal proceedings.
Until the dealings of these banks are laid bare to the public, the economy and the faith of people in our economic system will not recover.
Congress leaned on the banks to stop minority red-lining practices and lend to minorities who were otherwise reasonable credit risks. The difference between the pre-housing bubble baseline default rate excluding the red-lined neighborhoods and in those formerly red-lined neighborhoods is the increased risk Fannie and Freddie were absorbing on behalf of the American taxpayers for Democratic Party social engineering. That had nothing to do with the decision of the CEOs of Fannie and Freddie to get into the collateralized debt obligation market, and to conflate the two is to perpetuate the myth that Barney Frank and his policies single-handedly caused the housing bubble that led to the economic implosion. The reality is that, in the face of increasing demand for these instruments from Chinese buyers, after all of the low and moderate risk mortgages had been written, the financial houses put out the word to shake the bushes for buyers whose mortgages they could bundle, and so the risk of default on bundles including these uncreditworthy mortgages increased disproportionately. By the time the bubble burst, they were writing mortgages for people without jobs. The changes in or absence of law allowing the selling of mortgages, bundling of mortgages, lending oneself money at many time their market value, over- and under-insuring those transactions, and debt swaps were all a product of Republican Party reengineering of the banking system to remove the checks and bulkheads put in place after the last Great Depression to prevent this outcome, albeit with Democratic Party complicity. Let the bankruptcy courts deconvolve the influences of Democratic Party social engineering and Republican Party banking system reengineering from the increasingly unreasonable risks taken by the financial houses with other people’s money in pursuit of heinous profits. Unless they pay for their crimes, it will happen again, because greed corrupts, and unlimited greed corrupts absolutely.
Amen.
This was such an important episode, I can’t wait to download the transcript. But here’s a few thoughts:
1) Clearly, there’s plenty of blame to go around. The private sector, the public sector, Wall Street, Fannie and Freddie, government regulators, the rating agencies, Democrats and Republicans, all deserve a portion of the blame.
2) Much of the “bailout” was premised on the notion that some companies were “too big to fail”. I’ve always thought that anything too big to fail was too big to exist! Any company “bailed out” should have been broken up (via an anti-trust approach) as part of the “deal”, with its management fired (without “golden parachutes”, bonuses, stock options, or other “perks”). Furthermore, to prevent this from happening again, there needs to be stronger enforcement of the existing Anti-Trust Laws. Bigger is not better!
3) The root problem is not partisan, but philosophical: the mindless belief in the Laissez-Faire form of Capitalism (there are other versions, you know) which holds that any interference with the “pure, perfect, holy, and sacred” free market is wrong, that thrives on bumper sticker slogans without fact or reason (like “government is the problem, not the solution”). This is what, more than anything else, produced our current economic crisis. The banks weren’t properly doing their job. The rating agencies weren’t properly doing their job. Wall Street wasn’t properly doing its job. Fannie and Freddie weren’t properly doing their job. Even the appraisers weren’t properly doing their job. And where were the regulators - the “cop on the beat”? Busy eating donuts!
Yet, this is the same philosophy we are being told will solve the problem this philosophy helped to create! Anyone remember the definition of insanity?
ecgberht on September 6, 2011 @ 11:17 am wrote: “The solution to this issue is easy. Restore Glass-Steagall”
GASP! I completely agree.
(Although, just to help you get over the shock, let me add that I think it’s only part of the solution, but a big part.)
Why aren't any of these experts or hosts mentioning the individual mortgage holders guilt in the mortgage problems. They are always portrayed as innocent victims. Who were the liars in liar loans. Many people who signed for mortgages they couldn't afford were just as greedy as anyone. There are really very few innocent victims. Robo signing victims weren't paying their mortgage and maybe were being rushed out but they shouldn't be given a free house.
People who bought the house that they could afford and made and continue to make their promised payments are going to be the only innocent victims. Banks, mbs holders, government regulators and greedy home buyers are all crying for help. Please hand out moral hazard warning to all parties of the problem.
So many good points brought up in this discussion. The fact that they are so negative and condemning of our entire financial and governmental system—in a bipartisan way—actually gives me hope. I never thought I’d find myself in agreement with anyone from Texas (with the exception of Jim Hightower, of course), but I must second Sam’s suggestion (comments file) that until we accurately identify the causes, we will make the same mistakes. The FHFA’s suit against Wall Street banks does sound like more of a political move and the pot calling the kettle black than anything, particularly when Fannie and Freddie had been under investigation for accounting “irregularities” since before the crisis. Congress shares blame for continually deregulating the financial industries over the years and allowing fraud to not only go unpunished, but be rewarded. This all might have been contained back in the eighties after the Savings and Loan bailout, or even before, if Congress had not continued to be receptive to the relentless lobbying for deregulation by the financial industries. In the Greatest-Ever Bank Robbery (1990), the government’s response was criticized for handing Fannie Mae right back over to the same crooks who engaged in fraudulent commercial real-estate lending. And what has happened since? Ideologically, they’ve teamed up with ex-staff from Michael Milken’s Drexel Burnham Lambert, who created the CDO in the late eighties (later evolving into the synthetic variety), and then took the whole stinking mess global, calculating from the precedent set that a taxpayer bailout would back all reckless speculation and serve to vilify the beast in the bargain!
What bothers me is not how politicians and political pundits are still trying to sell people on the idea that deregulation, privatization, and laissez-faire is the way to fly (the way they succeeded in doing in the wake of the Savings and Loan fiasco)—that’s predictable—but, rather, the fact that so many people are still buying it. The degree to which loan fraud and predatory lending contributed to the financial collapse cannot be overstated, I don’t think, and the comments here, documenting personal experiences and involvement, is a testament to that. I would like to add one point about the effort to stop red-lining and include minorities in the mortgage market. Surely Congress and then President Bush were more receptive to traders’ push to pump up the bubble than with struggling lower middle-class homeowners’ desire for inclusion (regardless of stated intentions), and Fannie Mae facilitated the process when it increased the cap on the home loan value it would securitize. Also, Barry Ritholtz (Bailout Nation) has pointed out that much of the sub-prime lending included individuals who qualified for a better lending standard, but were given a sub-prime lending rate because there was more money to be made in the securitization process (having to do with the way they were rated and tranched; a synthetic CDO can default when as little as 4% of the mortgages go bad—and short traders were counting on it). So, contrary to the belief that the whole market was dragged down by reckless and irresponsible borrowers, many of those borrowers, in reality, were actually people with good credit standing.
It’s very simple to resolve actually; reinstate the Glass Steagall act of 1933 that Clinton repealed in 1999. We live economically the laws that were enacted 12 years prior. That means that we have yet to hit the bottom. Even the Chinese adopted these laws and have recently asked our government to reinstate this law.
The next item is everyone that is affiliated with MERS should be in jail. This is an unregulated corporate entity with a board consisting of both bankers and Fannie Mae and Freddy Mac. How much more do you need to define conflict of interest? (BTW - this was a little setup by EDS and is not a system of record.) Additionally, when you hear about not being able to find the information on loans, the stripping is done at MERS. When I was at Fannie Mae they were holding classes on stripping. Don’t tell me that they didn’t know what they were doing was wrong or illegal.
What I have learned is capitalism is about money. Money draws all kinds of illegal activity. The largest consolidated concentration of wealth by individuals was the North American Mortgage pool. Someone figured out how to enact a rather old shell game called it MERS and then packaged it up to sell as Mortgage Backed Securities (MBS) to other country’s banks. So if the other countries bought the bad MBS pools who holds the good MBS pools?
It’s such a complicated game that you the American Tax payer can’t resolve this situation as the bankers and the government are playing under the table. Dig around the truth is out there.