banking

Loan Modification Process ‘Adding Uncertainty To The Market,’ Delaying Recovery

by on December 18, 2011

Huffington Post…

WASHINGTON (Reuters) – Shirley Burnell, a community activist from Oakland, California, has been trying to get her subprime loan restructured since 2007. She never missed a payment, but the adjustable rate mortgage she got in 2004 shot up to a monthly payment she could no longer afford. First she provided documents without getting any response, then she was denied in April by her servicer, Bank of America, for not providing documents it never actually asked for. As one part of the bank appealed that decision and approved her for a trial modification, another part denied her again – twice – providing two new reasons in part based on inaccurate calculations, according to documents reviewed by Reuters. When asked about Burnell’s case, a bank spokesman said she was unable to qualify under “imminent default provisions,” a third reason that Burnell said she had never been given. At one point, Burnell even received notice the bank would accelerate foreclosure proceedings, despite her perfect payment record and the letter itself saying the bank owed her $281.01. “They gave you a funky loan in the first place, and now they’re refusing to work with people to get it worked out,” Burnell said. “It just keeps you upset all the time.” Bank of America is “committed to keeping customers in their homes whenever the homeowner has the financial wherewithal to make reasonable payments and the desire to keep the home,” a spokesman for the bank said. Three years after the foreclosure crisis began, the process to apply for a loan modification remains a bureaucratic nightmare that is complicating the housing recovery and could dull the impact of any Obama administration initiatives in the works. The administration’s biggest foreclosure-prevention effort, the Home Affordable Modification Program (HAMP), targeted to help 3 million to 4 million homeowners, has reached only about a quarter of that since its 2009 inception. The program pushed mortgage servicers to cut interest, extend terms, or defer parts of a loan in an effort to reduce monthly payments and keep borrowers in their homes. But servicers have dragged their feet on providing wide-scale modifications. They continue to lose documents, use inaccurate numbers to issue denials, or both approve and deny applications at the same time, according to housing advocates. “It delays resolution of the problem of defaulting loans and it is adding uncertainty to the market,” said Susan Wachter, a housing expert at the Wharton School of the University of Pennsylvania. Around one in every 12 mortgages in the country is delinquent, and only a fraction of them have received modifications. “Somehow the borrower is unreachable, or the servicer hasn’t found the right way to reach the borrower, but the fact is, we see (modifications) piercing maybe 10 to 25 percent of the potential population,” said Diane Westerback, a managing director of global surveillance analytics at Standard & Poor’s. Banks have stepped up efforts to deal with the foreclosure crisis since 2009. Chase, for example, set up 82 centers around the country specifically to deal with struggling homeowners. Wells Fargo hosts one-day fairs for homeowners to bring in all of their paperwork and potentially get approved for a modification on the spot. Bank of America says it has completed almost 1 million modifications since 2008, and Wells Fargo says it initiated or completed more than two modifications for every one foreclosure of owner-occupied homes in the past two years. But the majority of homeowners, advocates say, still get stuck in byzantine mazes, with no real enforcement mechanism to pursue under HAMP. “If you get a minor traffic ticket, you get a right to an impartial hearing, but if you are applying for federal home saving assistance, the bank is judge, jury, and executioner,” said Joseph Sant, a lawyer at Staten Island Legal Services who helps defend homeowners facing foreclosure. ‘GOING IN CIRCLES’ It took nearly one year for Hakan Tale to convince his servicer, Chase, that it overvalued his house by more than $100,000 in rejecting a modification. Once he was able to convince Chase of that mistake, it rejected him again, dropping his monthly income by almost $4,000 and determining he didn’t make enough money to qualify, even though his actual income had not changed. In November, more than two years after Tale first sought a modification, Chase asked him to submit an entirely new application. “Maybe they don’t want me to be an example for other people,” said Tale, who lives with his wife and three children in Staten Island, New York. “Any excuse they find, they deny it.” “We have worked with the customer and reviewed his application multiple times, and have been involved in multiple mediation meetings,” a Chase spokesman said. Another Staten Island resident, 77-year-old Hamson McPherson, was first denied a modification two years ago by his servicer, Wells Fargo, after it miscalculated his income. The bank then served him with a foreclosure summons and complaint, which in New York can lead to court-supervised settlement conference. But it stalled on moving forward for so long that McPherson triggered the proceedings himself in August 2011 to try to negotiate an alternative to foreclosure. In October, more than two years after he first applied for a modification, the bank told him there was an investor restriction on the loan, which meant it couldn’t modify it. That investor agreement was public, Wells Fargo told him. But after confronting the bank with that agreement, which did not include any such restriction, the bank told him there was a previously undisclosed secret document that included the restriction. “It’s a nightmare,” McPherson said, “when you have these things, you don’t get proper sleep at all.” In an ironic twist, the hold music played when he called Wells Fargo once was a song called, “Going in Circles.” “I listened to it for five minutes and then hung up because I was so upset,” he said. A Wells Fargo spokesman said the bank has “worked for some time to find payment assistance within the investor guidelines of the loan.” “We continue to work with him to find alternatives to foreclosure,” the spokesman said. ‘NOT DOING THEIR JOB’ Even with staff additions — Chase, for example, added some 10,000 employees to deal with defaults, and Bank of America increased its 5,000 employees to 40,000 — individual negotiators can still have hundreds, or even thousands of cases open, according to housing advocates. Employees can be so overwhelmed that applications languish for months. Banks consider financial documents “stale” within two or three months, forcing homeowners to provide updated documents all over again. While housing counselors have seen some improvements in the past few years, many borrowers are still not even able to email applications in; they have to fax them in, thus creating no real paper trail. Carlos Cespedes, an advocate with the Neighborhood of Affordable Housing in Boston, said his files include 25 faxes of the same document, provided over and over to a servicer that said it never received it or lost it. One of his clients traveled to Central America to obtain her deported husband’s signature on a document renouncing his interest in the property, but had to send that same document six times to her servicer who kept losing it. “These are institutions that have taken a huge amount of bailout money. There should be a level of responsibility to communities,” said Josh Zinner, an advocate with the Neighborhood Economic Development Advocacy Project in New York. “HAMP is far from perfect, but the biggest problem is servicers not doing their job.” (Reporting by Aruna Viswanatha; Editing by Xavier Briand) Copyright 2011 Thomson Reuters. Click for Restrictions .

See the article here:
Loan Modification Process ‘Adding Uncertainty To The Market,’ Delaying Recovery

Find our Weekly Commercial Real Estate, Private Equity and Fund Newsletters at www.WeeklyBrief.net

Loan Modification Process ‘Adding Uncertainty To The Market,’ Delaying Recovery

by on December 18, 2011

Huffington Post…

WASHINGTON (Reuters) – Shirley Burnell, a community activist from Oakland, California, has been trying to get her subprime loan restructured since 2007. She never missed a payment, but the adjustable rate mortgage she got in 2004 shot up to a monthly payment she could no longer afford. First she provided documents without getting any response, then she was denied in April by her servicer, Bank of America, for not providing documents it never actually asked for. As one part of the bank appealed that decision and approved her for a trial modification, another part denied her again – twice – providing two new reasons in part based on inaccurate calculations, according to documents reviewed by Reuters. When asked about Burnell’s case, a bank spokesman said she was unable to qualify under “imminent default provisions,” a third reason that Burnell said she had never been given. At one point, Burnell even received notice the bank would accelerate foreclosure proceedings, despite her perfect payment record and the letter itself saying the bank owed her $281.01. “They gave you a funky loan in the first place, and now they’re refusing to work with people to get it worked out,” Burnell said. “It just keeps you upset all the time.” Bank of America is “committed to keeping customers in their homes whenever the homeowner has the financial wherewithal to make reasonable payments and the desire to keep the home,” a spokesman for the bank said. Three years after the foreclosure crisis began, the process to apply for a loan modification remains a bureaucratic nightmare that is complicating the housing recovery and could dull the impact of any Obama administration initiatives in the works. The administration’s biggest foreclosure-prevention effort, the Home Affordable Modification Program (HAMP), targeted to help 3 million to 4 million homeowners, has reached only about a quarter of that since its 2009 inception. The program pushed mortgage servicers to cut interest, extend terms, or defer parts of a loan in an effort to reduce monthly payments and keep borrowers in their homes. But servicers have dragged their feet on providing wide-scale modifications. They continue to lose documents, use inaccurate numbers to issue denials, or both approve and deny applications at the same time, according to housing advocates. “It delays resolution of the problem of defaulting loans and it is adding uncertainty to the market,” said Susan Wachter, a housing expert at the Wharton School of the University of Pennsylvania. Around one in every 12 mortgages in the country is delinquent, and only a fraction of them have received modifications. “Somehow the borrower is unreachable, or the servicer hasn’t found the right way to reach the borrower, but the fact is, we see (modifications) piercing maybe 10 to 25 percent of the potential population,” said Diane Westerback, a managing director of global surveillance analytics at Standard & Poor’s. Banks have stepped up efforts to deal with the foreclosure crisis since 2009. Chase, for example, set up 82 centers around the country specifically to deal with struggling homeowners. Wells Fargo hosts one-day fairs for homeowners to bring in all of their paperwork and potentially get approved for a modification on the spot. Bank of America says it has completed almost 1 million modifications since 2008, and Wells Fargo says it initiated or completed more than two modifications for every one foreclosure of owner-occupied homes in the past two years. But the majority of homeowners, advocates say, still get stuck in byzantine mazes, with no real enforcement mechanism to pursue under HAMP. “If you get a minor traffic ticket, you get a right to an impartial hearing, but if you are applying for federal home saving assistance, the bank is judge, jury, and executioner,” said Joseph Sant, a lawyer at Staten Island Legal Services who helps defend homeowners facing foreclosure. ‘GOING IN CIRCLES’ It took nearly one year for Hakan Tale to convince his servicer, Chase, that it overvalued his house by more than $100,000 in rejecting a modification. Once he was able to convince Chase of that mistake, it rejected him again, dropping his monthly income by almost $4,000 and determining he didn’t make enough money to qualify, even though his actual income had not changed. In November, more than two years after Tale first sought a modification, Chase asked him to submit an entirely new application. “Maybe they don’t want me to be an example for other people,” said Tale, who lives with his wife and three children in Staten Island, New York. “Any excuse they find, they deny it.” “We have worked with the customer and reviewed his application multiple times, and have been involved in multiple mediation meetings,” a Chase spokesman said. Another Staten Island resident, 77-year-old Hamson McPherson, was first denied a modification two years ago by his servicer, Wells Fargo, after it miscalculated his income. The bank then served him with a foreclosure summons and complaint, which in New York can lead to court-supervised settlement conference. But it stalled on moving forward for so long that McPherson triggered the proceedings himself in August 2011 to try to negotiate an alternative to foreclosure. In October, more than two years after he first applied for a modification, the bank told him there was an investor restriction on the loan, which meant it couldn’t modify it. That investor agreement was public, Wells Fargo told him. But after confronting the bank with that agreement, which did not include any such restriction, the bank told him there was a previously undisclosed secret document that included the restriction. “It’s a nightmare,” McPherson said, “when you have these things, you don’t get proper sleep at all.” In an ironic twist, the hold music played when he called Wells Fargo once was a song called, “Going in Circles.” “I listened to it for five minutes and then hung up because I was so upset,” he said. A Wells Fargo spokesman said the bank has “worked for some time to find payment assistance within the investor guidelines of the loan.” “We continue to work with him to find alternatives to foreclosure,” the spokesman said. ‘NOT DOING THEIR JOB’ Even with staff additions — Chase, for example, added some 10,000 employees to deal with defaults, and Bank of America increased its 5,000 employees to 40,000 — individual negotiators can still have hundreds, or even thousands of cases open, according to housing advocates. Employees can be so overwhelmed that applications languish for months. Banks consider financial documents “stale” within two or three months, forcing homeowners to provide updated documents all over again. While housing counselors have seen some improvements in the past few years, many borrowers are still not even able to email applications in; they have to fax them in, thus creating no real paper trail. Carlos Cespedes, an advocate with the Neighborhood of Affordable Housing in Boston, said his files include 25 faxes of the same document, provided over and over to a servicer that said it never received it or lost it. One of his clients traveled to Central America to obtain her deported husband’s signature on a document renouncing his interest in the property, but had to send that same document six times to her servicer who kept losing it. “These are institutions that have taken a huge amount of bailout money. There should be a level of responsibility to communities,” said Josh Zinner, an advocate with the Neighborhood Economic Development Advocacy Project in New York. “HAMP is far from perfect, but the biggest problem is servicers not doing their job.” (Reporting by Aruna Viswanatha; Editing by Xavier Briand) Copyright 2011 Thomson Reuters. Click for Restrictions .

Go here to read the rest:
Loan Modification Process ‘Adding Uncertainty To The Market,’ Delaying Recovery

Find our Weekly Commercial Real Estate, Private Equity and Fund Newsletters at www.WeeklyBrief.net

Brett King: What the Occupy Movement and Mobile Means for Banking

November 18, 2011

The Occupy Movement has emphasized our changing ‘trust’ in the big banks. Mobile is changing the way we interact day-to-day. But how are these two elements going to intersect in a far more dramatic change in the way we choose and work with a bank in the future? What was our instinct in banking? The earliest instincts around banking were that it was a safe place to store your assets and, in many ways, that is still the case. However, banking in its infancy didn’t necessarily involve a bank or money at all. The earliest forms of banking involved the deposit of commodities or valuables that were traded, and often they were deposited in temples or palaces, the safest physical locations. It wasn’t until the 16th and 17th centuries that organized banking started to emerge globally, particularly as the wealthy tried to keep their assets safe during the dark ages. Even then, banking was still exclusive. It really wasn’t until the 20th century that banking became more mainstream and people started considering storing their savings in a bank. Since then, banking has been an instinctive part of the lives of most people in the developed world. It wasn’t long before it became instinctive to pull out our checkbook to pay for a large ticket item. Some would also use lay-away or lay-buy plans, but these largely disappeared over the last decade or so. Over time those instincts changed to use credit cards and, more recently, debit cards at the point of sale. In the past our instinct when we needed cash was to think about where the nearest branch was and figure out when we would need to go to withdraw cash. Over time, that instinct changed to using an ATM machine and we went from planning when we’d withdraw cash to just picking the nearest ATM when the cash in our wallet was getting low. In the past, our instinct when paying a bill was to write a check and send it in the mail, or to go down to a post office or office of the utility company and pay the bill in person. Today, that instinct has changed to where we pay online in an instant. It’s ironic that we think of banking as a slow and steady institution that doesn’t really change, but in reality the utility of our money means that our behavior in respect to banking has always been changing. The future instincts of banking So what will your instincts for banking be in the next decade? Not a place you go, something you do… Firstly, we won’t instinctively think of banking as a place you go. The concept that a branch is at the center of our banking relationship has been central to retail banking for over 800 years. This is the primary instinctual shift that will occur in the next few years. Instead of looking for a place to store your money, we’ll look for a trusted brand that is safe to store our money but, equally important, will be a brand that offers strong utility and a seamless connection to the things we do with our money. A safe and trusted banking partner will be a bank that offers me access to my money and access to financial services when and where I need them. A bank that demands or prefers a physical interaction will increasingly be avoided instinctively as too hard to work with, as irrelevant to my daily life and as slow and unwieldy. On rare occasions for the minority of us that have complex asset allocations, trust structures and so forth, we’ll look for a physical place to go where we aspire to get the high-touch service of a personal banker who recognizes our status as a special class of banking customer — but this will not be an overriding instinct day-to-day, it will be incidental to our general banking experience. The majority of the time, even for the high net-worth client, instinct will simply dictate a much more efficient engagement of the ‘bank’. Move and Pay, Safely and Efficiently When it comes to day-to-day interactions, the emphasis on the movement of our money will be speed and security. Inevitably in the short-term our instinct will be to pull out our phone at the point-of-sale to pay for goods and services. We’ll do this not only because it is much faster than using cash or a card, but because our money management will be articulated through this personal device — we’ll see our balance, what our monthly expenditure is, what upcoming expenses we have and will be able to understand the context of this payment on our financial life in an instant. The same would have taken much more effort with cash, our checkbook or our card. Your instinct for payments is changing again Security of our cash will be also a primary reason for the shift to digital money. Increasingly we’ll look to the technology of encryption, geo-location tagging, biometrics and active identity management to secure the flow of our funds. We won’t trust a piece of plastic or a piece of paper that can be easily corrupted or stolen, and the technology of ‘hacking’ our cash from a secure device will require a level of expertise and high-performance computing that make it far less frequent than the compromise of traditional physical ‘payment’ artifacts. At the point that it is simply no longer safe to do things with cash and plastic, our instincts will quickly change to keep our finances safe once again. Being able to see what has been happening with our money over time will also drive us to increasing digital management of our money. Core instincts are at the heart of the change in bank modality First and foremost our instinct for banking is keeping our money safe, secondly is the need for the utility of our money. Neither of these core instincts will lend us to continue to support the physical elements of banking and payments that we’ve been used to in the last 100 years. We will measure ‘safety’ in the trust of a brand, not in the bricks and mortar of branches. We will measure ‘utility’ in the seamless access to our cash, and the availability of the bank in our life when and where we need it. Our instincts are rapidly changing. We don’t store grain and gold in temples or palaces anymore. Already most of the world doesn’t use checks anymore. If you’re heavily invested in branches and the physical, you don’t understand the core instinct that banking is.

Read the full article →

European Official: EU Banks Need To Raise $140 Billion

October 22, 2011

BRUSSELS — EU finance ministers neared agreement Saturday on forcing banks to raise just over euro100 billion ($140 billion) to ensure they have enough cushion to weather further losses on their Greek bonds as well as market turmoil, a European official said. In order to help Athens dig out of its debts – and hopefully keep a cap on the amount of money they have to loan Greece – the 17 countries that use the euro agreed Friday to ask banks to take bigger writedowns on Greek bonds. A new report suggests the value of Greek bonds might need to be slashed as much as 60 percent. Taming Greece’s debts is an important part of the euro debt crisis puzzle, but it could make banks across the continent – not just in the eurozone – more vulnerable at a time when they’re already facing declining stock prices and finding it difficult to get regular loans for their day-to-day operations. So when the eurozone finance ministers decided to reopen negotiations on Greek debt with the banks, the EU had to force its banks to reinforce their rainy-day funds. Strengthening banks and slashing Greece’s debts are critical to solving Europe’s crisis, which is now threatening to engulf larger economies like Italy and Spain and is blamed for dampening growth across Europe and even the world. “The crisis in the eurozone is doing real damage to many of the European economies, including Britain,” George Osborne, Britain’s chancellor of the exchequer, said as he headed into Saturday’s meeting. “We have had enough of short-term measures, sticking plasters that get us through the next few weeks.” The European official said EU leaders meeting Sunday should sign off on forcing the continent’s biggest banks to raise just over euro100 billion in capital. The official spoke on condition of anonymity because the discussions between ministers were still ongoing. The figure is likely to disappoint some analysts. A report by the International Monetary Fund has called for up to euro200 billion ($280 billion) to be poured into banks. The new rules would force systemically important banks to raise their core capital ratios to 9 percent, compared with just 5 percent to 6 percent they needed to pass EU stress tests this summer. The ratio measures the amount of capital banks hold compared to their risky assets. Greece, of course, has it far worse: The country is struggling through a third year of recession and record unemployment, which reached 16.5 percent in July. Deep anger is building against the Socialist government’s repeated rounds of new austerity measures. A two-day general strike against the new cuts and taxes shut down much of the country this week and led to violent protests on the streets of Athens. Pressure to contain the Greek crisis ramped up Friday after a new report from the country’s debt inspectors – the European Commission, the European Central Bank and the IMF – showed that its economic situation had deteriorated dramatically even since the summer. If banks don’t take bigger losses, the report said, Greece’s debt would peak at a massive 186 percent of economic output in 2013 and only decline to 152 percent by the end of 2020. That would prevent Greece from raising money on the markets until 2021 and require the eurozone and the IMF to fund an extra euro252 billion ($350 billion) in new loans to Greece through 2020, according to the report, which was marked confidential but was seen by The Associated Press. Those funds would be in addition to Greece’s first bailout of euro110 billion ($152 billion), which has been keeping the country afloat since May of last year, and another euro109 billion ($150 billion) rescue agreed to in July. The report said that Greece’s debts would have to be cut by 60 percent if the eurozone wants to avoid lending it more money. It did not make policy recommendations, and the European Central Bank opposes cutting Greece’s debts further. But finance ministers are clearly paying close attention to the experts’ document. Austrian Finance Minister Maria Fekter told journalists Saturday that the eurozone’s chief negotiator, Vittorio Grilli, had been asked to restart negotiations with banks. That means the July deal, under which banks would have taken writedowns on their Greek bond holdings of about 21 percent, is definitively off the table. Despite that significant progress, agreement on arguably the most important measure has remained elusive to eurozone leaders: boosting the firepower of the currency union’s euro440 billion ($600 billion) bailout fund to keep the crisis from spreading. Increasing the effectiveness of the fund – called the European Financial Stability Facility – is meant to help prevent larger economies like Italy and Spain from being unable to afford to borrow money from markets. That’s exactly what happened to Greece, Portugal and Ireland and why those three EU countries needed bailouts. Germany and France still disagree over how to do that and failed to make much progress on that front Friday night. German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting Saturday evening in the hopes of moving toward a deal. The Greek crisis and its threat of contagion have led to calls for more robust intervention when it becomes clear that an EU country is in financial trouble. German Foreign Minister Guido Westerwelle said Saturday that the EU along with the IMF should be able to directly intervene in the budgets of member states if they are receiving financial aid but failing to meet fiscal targets. But not all EU nations share his view. The foreign ministers of Luxembourg and Finland cautioned that changing the EU treaty is too big a task to tackle now and the bloc should try instead to strengthen budget rules through existing channels. Significant changes to the EU treaty would require national referendums in some countries, and winning approval for the current treaty from 27 nations took 10 years. ___ Elena Becatoros contributed to this report from Brussels.

Read the full article →

Monika Mitchell: Is Wall Street the Enemy of the People?

October 18, 2011

Lately, there has been a fast-growing movement to declare “Wall Street” the enemy of the people. We arrived at this critical point of public rage very simply because the 20th century model of “take the money and run” went off a cliff three years ago resulting in serious unintended consequences and general public outrage and misery. In the high tech super-transparent 21st century there simply is no place to run. Even if you do run, you definitely can’t hide. The current “rage against the machine” conversation does not separate the good Wall Street from the bad. At the risk of mountains of hate (or love) mail, I must explain there is a “good” Wall Street: one that runs on integrity, honor and old-fashioned ideals like “my word is my bond.” The trouble is that in the decades since iconic “hero-villain,” celluloid Gordon Gekko and the 80s mantra of “Greed is Good” rose to fame, the “bad” Wall Street has outweighed the good. Sort of like a Star Wars movie, where good and evil duke it out. Where is Hans Solo when you need him? One thing we learned from the Oliver Stone movie is to never put an actor as hot as a young Michael Douglas in a pivotal role if you want the public to hate him. Let’s face it, the man looked good in suspenders. Basically most men wanted to be like him and most women wanted to be with him. His appearance in the film, “Wall Street” made greed glamorous, even gave it sex appeal. We are still fighting that ethos as a culture. For the purposes of this article let’s start with what’s bad about Wall Street – the issues that the general public are outraged about and that the Occupy Wall Street movement are echoing. Firstly, in the wake of nearly six million homes being foreclosed upon, 25 million children homeless, 42 million Americans on food stamps, and twenty million people unemployed since the banking collapse: there is nothing glamorous about “ripping people’s faces off “- especially since some of the victims were young children tossed out on the street with their teddy bears by errant lenders who gave out mortgage loans like lollipops at a 1970s dentist. Greed is the new “bad.” In fact, greed is about as unsexy as it gets in our 21st century world. It’s savage, primitive and brutal. It creates devastating poverty, hunger, homelessness and a society that most of us on the side of good abhor. Sure there are holdouts. They shall remain nameless; but many in the financial industry know who they are. The fact is there is “good and bad” everywhere. There are plenty of good folks in your hometown and also plenty of people that would just as soon cut you off on the road, pad your car repair bill, lock you into a toxic mortgage loan and shake you down at every chance. This is just a part of life and as ancient as human civilization. The good news is as we evolve as a culture, we become more cognizant of how our behavior affects others and the consequences of our actions. A senior manager at one of the big investment banks claimed, “It’s not my job to take care of other people. My job is to take care of my family and myself. If somebody else didn’t take care of their finances and finds themselves in an underwater mortgage or out of work… it’s on them . It’s not my problem.” Well, ok. Fair enough. Gordon would be proud. But darlin’, that is so 20th century. The fact is the growing outrage against that kind of indifference makes it your problem, whether you want it to be or not. The Times are changin’ There is something new going on in this millennium, something really exciting. A shift in the way we think from an exclusive sense of “what’s in it for me?” to an inclusive sense of “what kind of world are we co-creating?” In the mortgage market mayhem of 2002-2007, all hell broke loose in the world of financial reason. “Risk,” that fine balancing act between smart investment and outright disaster, became the decade’s hot potato. Everyone passed the risk onto the next guy, hoping that when the music stopped, they would not be holding it. Alan Greenspan, the Federal Reserve Chairman who in his tenure was viewed as a financial genius, supported the “transfer of risk” to counterparties around the globe. His misguided belief was that “dispersing risk” would minimize the damage created by bad bets. None other than Wall Street sage Warren Buffet tried to dissuade him from that view – famously calling some of the most dangerous investment vehicles like Collateralized Debt Obligations (CDOs) “Weapons of Financial Mass Destruction.” We know now there was an inherent “flaw” in Greenspan’s thinking. The calamity known as the mortgage-backed securities crisis and the subsequent outsized leverage that led to the banking collapse reveals the stark contrast between the 20th century view of mindless money and 21st century mindfulness. Over forty years ago, the renowned economist Milton Friedman made indifference stylish. He wrote famously, “The social responsibility of business is to pursue profits.” The 1970s icon described a world where money is a means to itself with no meaning or purpose other than to make more. It was a kind-of-brainwashing that catapulted self- interest to a high “moral” ideal. It is no wonder that within two decades, greed became exalted. So that brings me back to the good Wall Street. Where is it? What is it? And how do we support it? For far too long, the good Wall Street has been silenced. It has been considered “weak” to speak about social responsibility in finance or the common good co-existing with market share. In a conversation with a senior managing director at a top investment bank (detailed in my book below, Conversations with Wall Street ) , he explained the powerful backlash from colleagues, underlings, and superiors he experienced when voicing objections to buying $5billion dollar blocks of 100% Loan-to-Value (100LTV) loan pools. He remarked, “I knew they were bad loans and we shouldn’t be securitizing these. People have to have skin in the game.” His view was that borrowers with zero investment in their homes would have little incentive to pay the loans back. He was out-voted. Why? “Because everyone was doing it,” he said, “So my colleagues thought, why not us?” The classic Henrik Ibsen play, ” An Enemy of the People ” revolves around the human struggle between greed and moral rectitude. The story reveals one man’s (Dr. Stockman) struggle to do the right thing in the face of extreme opposition. The good doctor threatens his hometown’s tourist industry by discovering that waste products are contaminating the water system. He brings the issue to his brother, the town’s Mayor, who silences him. The townspeople also ignore his warnings and prefer to risk the health of tourists rather than threaten their livelihood. This powerful drama takes place in 1883 Norway, not contemporary Wall Street. It proves that the conflict between self-interest and world interest is a fundamentally human one. The investment banker who warned his firm of loan toxicity ultimately gave in to his superiors. He explained, “I look back on it and see the problem. I had hundreds of people in that division. The decision to make was to exit the business. Yet, every other firm was reporting record earnings, which turned out to be fictitious. Here is my boss telling me, figure it out or you’re fired. You do the best you can within the institutional architecture. So what do you do? The CEO is pressuring us to build the mortgage business. He was taking the firm from 12 to 1 to 35 to 1 in leverage. If he hadn’t done that, then we couldn’t have done the business. It was top down pressure. You can look back on this and say that accountability was way too diffuse. There was no one single person who answered for it. That is what has gone wrong with the securitization model in my mind. No accountability. Used to you be you had a loan officer who was accountable – now you don’t.” The lack of accountability from the top levels of the mortgage markets and government is currently fueling public outrage. Very simply, we are at this place of economic despair from a tragic failure in responsible leadership: one that can be traced to the absence of reasonable risk safeguards in the system. And one that can be traced back to the Gordon Gekko view that “greed was good.” The same can be said for the millions who took out these 100LTV loans. If everyone is doing it, why shouldn’t you? The answer is simple: following the herd can sometimes destroy the whole system. The fact is we are all accountable, because in the end each of us inevitably pays the price. Perhaps surprisingly, there were many finance professionals in the mortgage markets who objected to the lack of accountability, excessive leverage and irrational risk models: the “good” Wall Street who couldn’t stop the machine. To put the economy back on its feet, many investors and economists know we have to first fix the housing market. This means drastic and major triage to existing mortgage loans by reducing interest rates, credit terms and loan principals to current market values. The concept is morally reprehensible to lenders and investors alike. After all, borrowers took the loans on – “no one put a gun to their heads.” And that’s the problem: accountability must be across the board – not just on the side of borrowers. In the face of the extreme moral dilemma faced by many bankers and finance professionals, reason and realism gave way to risk and recklessness. Now it’s time for the good Wall Street to step up to the plate and resolve the problem that their less responsible brethren created. In the face of the growing contempt for the industry, the time to stand on the sidelines and be silent is over. The industry must create the solution for the current economic dilemma and show the world what’s good about Wall Street – that social responsibility, integrity and transparency in our 21st century financial models can generate big profits. And the simple recognition that going for the short-term kill leads to long-term disaster. Monika Mitchell is a renowned thought leader on socially responsible business and the co-author of a soon-to-be-released book, ” Conversations with Wall Street: The Inside Story of the Financial Armageddon and How to Prevent the Next One .”(ebook October, print November) editor@good-b.com

Read the full article →

WATCH: Dozens Arrested At BofA Offices

October 1, 2011

BOSTON — Police have arrested two dozen protesters for trespassing during a demonstration against Bank of America’s foreclosure practices at the banking giant’s offices in downtown Boston. “They wanted to be arrested, and we obliged,” Boston police Commissioner Edward F. Davis told the newspaper. Organizers say about 3,000 people joined the protest. Bank of America spokesman T.J. Crawford dismissed the demonstration as a publicity stunt. There was no mention of Bank of America’s planned debit card fees, which recently have generated headlines and frustrated customers nationwide.

Read the full article →

SEC Finds ‘Apparent Failures’ At 10 Credit Rating Agencies

September 30, 2011

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission staff found “apparent failures” at each of the 10 credit rating agencies it examined, including Standard & Poor’s and Moody’s, the agency said on Friday in its first annual report of credit raters. The SEC staff said concerns include failures to follow ratings methodologies, failures in making timely and accurate disclosures and failures to manage conflicts of interest. The SEC’s annual report was required by last year’s Dodd-Frank financial oversight law. The staff report did not single out by name any credit-rating agency for questionable actions. It also said the SEC has not determined that any of the report’s findings constituted a “material regulatory deficiency” but said it might do so in the future. “We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations,” said Norm Champ, deputy director of the SEC’s Office of Compliance Inspections and Examinations. The SEC’s report covers 10 credit-rating firms including Moody’s Corp, McGraw-Hill Cos Inc’s Standard & Poor’s and Fimalac SA’s Fitch Ratings. Congress first empowered the SEC to closely regulate the firms in 2006, and Dodd-Frank gave the agency even greater powers over the industry. Credit raters have been widely criticized for fueling the financial crisis by giving inflated ratings to toxic subprime mortgage securities. On Monday McGraw-Hill disclosed that the agency might charge its Standard & Poor’s unit with breaking securities laws. SEC Enforcement Director Robert Khuzami told Reuters this week that the agency faces hurdles proving wrongdoing at credit-rating agencies, pointing to the complexity of the cases and the industry’s strong legal defenses. (Reporting by Andrea Shalal-Esa, Aruna Viswanatha, Karey Wutkowski, editing by Gerald E. McCormick) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

China Blasts U.S. Over Credit Rating Downgrade, Debt ‘Addiction’

August 6, 2011

BEIJING — China, the largest foreign holder of U.S. debt, demanded Saturday that America tighten its belt and confront its “addiction to debts” in the wake of Standard & Poor’s decision to downgrade the U.S. credit rating. China currently owns $1.2 trillion of U.S. Treasury debt, the largest stake of any central bank. The commentary carried by the state-run Xinhua News Agency was Beijing’s first official response to the S&P decision. “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” Xinhua said. It said the rating cut would be followed by more “devastating credit rating cuts” and global financial turbulence if the U.S. fails to learn to “live within its means.” “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” it said. Xinhua said the U.S. must slash its “gigantic military expenditure and bloated social welfare costs” and accept international supervision over U.S. dollar issues. Last month, China’s top general, Chen Bingde, also linked America’s financial woes to its military budget and asked whether paring back on defense spending wouldn’t be the best thing for U.S. taxpayers. Such comments reflect Beijing’s desire that Washington reduce its military presence in Asia. The U.S., rattled by China’s military buildup, also routinely chides Beijing for its fast-growing defense spending. Xinhua also suggested a new global reserve currency might be necessary to replace the dollar, a position China has frequently advocated. “Mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad,” Xinhua said. “To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.” Jitters over the U.S. handling of its debt problems were also being felt elsewhere in Asia, said Kishore Mahbubani, Singapore’s former ambassador to the United Nations. The dean of Singapore’s Lee Kuan Yew School for Public Policy said the last-minute agreement by the U.S. Congress to lift the debt limit and avoid default has policymakers in Asia questioning the stability of U.S. global leadership. “It’s definitely undermined U.S. credibility,” Mahbubani said late Friday. “Everyone is wondering if you have such a dysfunctional political process, how can you provide global leadership. It’s very dangerous for the world.” ___ Associated Press writer Alex Kennedy in Singapore contributed to this report.

Read the full article →

As Layoffs Hit Wall Street, Lowest-Paid Workers Lose Jobs

July 22, 2011

NEW YORK — Layoffs have returned to Wall Street as investment banks bemoaning economic malaise and disappointing revenues are moving to pare their payrolls, by far their largest expense. Goldman Sachs and Morgan Stanley have announced plans to eliminate hundreds of employees, UBS and Credit Suisse are reportedly preparing to cut thousands of jobs and Barclays Capital has already imposed two rounds of layoffs this year. But as banks again resort to pink slips, they appear inclined to spare the most generously compensated executives — the people who enjoyed the biggest gains from the bubble in mortgage-related investments that savaged the economy — while instead dismissing less-expensive employees. “Wall Street is a cutthroat business. That’s how the capital market system works,” said Sung Won Sohn, a former Wells Fargo chief economist who is now a finance professor at California State University Channel Islands. “The more seasoned, experienced, higher-paid people have a lot more connections and contacts. That is very, very valuable. Whereas junior, younger people are more replaceable.” In June, Barclays Capital cut employees, including first-year analysts who had been hired last year out of college to work in the New York investment banking division, a person familiar with the situation told The Huffington Post. Morgan Stanley released plans earlier this year to lay off up to 300 workers in its retail brokerage, including trainees. At Goldman Sachs, employees losing their jobs will include “junior people,” the firm’s chief financial officer said during a conference call this week. But being seasoned doesn’t provide a job guarantee, either. In the end, the decision comes down to the company’s bottom line, and whether an employee is capable of fattening it. “Length of time at the firm doesn’t matter, it doesn’t help you,” said Kim Woodle, 54, who was laid off from his job as a computer programmer at Morgan Stanley in 2009, in the midst of the Great Recession. He had been working there for almost a decade, but his total pay, including bonus and benefits, was below average, reaching about $180,000 in 2008, he said. The average Morgan Stanley employee that year made over $265,000, according to a filing with the Securities and Exchange Commission. “I’d gotten good performance reviews for nine years,” Woodle said. “And people who’d been there less kept their jobs.” Woodle is still out of work, he said. Like many workers who lose their jobs in middle age, he said he feels like he’s competing with recent college graduates, who will work for less pay. He had planned to retire at 65, he said. But now, as he subsists on disability payments and his wife’s income, retirement plans have been called into doubt. A spokeswoman for Morgan Stanley declined to comment on Woodle’s case. By many accounts, thousands more Wall Street employees are about to suffer the bewildering experience of losing their jobs. Banks are complaining of a slump in trading volume, a point reinforced this week when titan Goldman Sachs announced tepid second-quarter earnings. At Goldman, revenue from trading bonds, commodities and currencies dropped by more than half in the second quarter. The numbers had prominent analysts openly wondering whether the most profitable investment bank in Wall Street history had lost its magic. David Viniar, the firm’s chief financial officer, said during a conference call Tuesday that he wouldn’t “sugar coat” the results, explaining that the company might have “made a bad decision in taking too little risk.” Goldman now plans to cut 1,000 jobs. Viniar said during the call that those cuts would include “some more senior, some more junior people.” The firm isn’t alone. The Swiss investment bank UBS is preparing to cut 5,000 jobs, according to a report by a Swiss newspaper last week. Its rival Credit Suisse plans to cut at least 1,500 jobs, the Wall Street Journal reported . Morgan Stanley is considering laying off “several thousand” people, Fox Business reported last week . (The Morgan Stanley spokeswoman said the firm is “not considering any large-scale firm-wide layoffs at this time.”) The recent layoffs at Barclays, the British investment bank that bought a smoldering piece of the wrecked Lehman Brothers in 2008, followed a round of dismissals in January, according to various reports at the time. The first-year analysts at Barclays who were laid off in June could otherwise have graduated to second-year status in July, meriting a pay bump, the person familiar with the situation said. A typical base salary for a Barclays first-year analyst is $70,000, this person said. A spokeswoman for Barclays declined to comment. Employees at several investment banks said Wall Street layoffs can appear to follow a rule that’s familiar to any police officer, firefighter or teacher who’s borne the brunt of municipal cutbacks: last hired, first fired. With top executives still hauling down salaries and bonuses that reach well into seven figures, some bank employees expressed bewilderment that the greenest — and cheapest — hires were being let go. “A decent IT project is tens of millions of dollars. If you fire every analyst out there, it doesn’t add up to one IT project,” said an executive at one of the nation’s biggest banks. “It doesn’t save that much money.” For the people actually losing the jobs, the result can be a profound crisis. “We’ll get panicked calls,” this executive continued. “Somebody’s friend or classmate will call up and say, ‘I lost my job, I don’t even know where to start, can you help me out?’ That happens all the time.” One 20-year Wall Street veteran, who works at an investment bank planning cost-cutting measures, said new employees are vulnerable to cuts precisely because they’re new, and haven’t yet developed a network of friends in the firm. “There’s always a ripple effect of people being bummed out when somebody gets laid off,” he said. “Even if a person is good, if they’ve only been at a place for a year or so, they just haven’t developed this web of internal connections that helps protect you in a situation like this.” He added that the layoff process isn’t scientific. “It’s a subjective call. It really is,” he said. “You just know there are going to be some people that are let go that shouldn’t be.” The round of job cuts has some observers drawing comparisons to the period immediately following the financial crisis, when Wall Street firms laid off sizable percentages of their workforces. The number of people employed in financial activities in New York City dropped by more than 7 percent between September 2008 and 2009, the year after the crisis struck, state data show. In the wake of a $700 billion taxpayer bailout, as Wall Street compensation came under scrutiny, firms reduced bonuses for employees — but also boosted base salaries. Those fixed costs have made banks less flexible when hard times strike, experts say. Now, with trading activity anemic, those banks are scrounging around for savings. “If you’re eliminating the lowest x percent, you have more to spend on the top x percent. That is just a natural thing,” said Wendi Lazar, a partner at the law firm Outten & Golden, where she co-runs the transactional practice group. “We saw it with Lehman and Bear — there was an enormous amount of house-cleaning,” said Lazar, who represents financial executives. “It’s an opportunity to get rid of people who are not at the top of the food chain.”

Read the full article →

WikiLeaks Reportedly To Begin Receiving Credit Card Funds

July 7, 2011

LONDON — WikiLeaks has again begun accepting credit card donations, a company affiliated with the secret-spilling site said Thursday. Andreas Fink, the chief executive of Icelandic payment processor DataCell, told The Associated Press that Visa and MasterCard were again processing payments to WikiLeaks after a seven-month hiatus. Fink claimed the move as a tacit admission of guilt from the credit card companies, but it may well have been accidental. Visa Europe spokesman Simon Kleine told AP that processing the payments was “not something that we’ve sanctioned” and that the company was investigating. An email and phone calls seeking comment from MasterCard were not immediately returned. Visa and MasterCard pulled the plug on the company, DataCell ehf, in early December, shortly after WikiLeaks began publishing about 250,000 U.S. State Department cables. But Fink said Thursday that card services had been restored – saying that lawyers had made sure of it by making test donations. “We have seen donations going through,” he said, although he added that he wouldn’t get a clear idea of how much money was flowing into WikiLeaks’ coffers for another couple of days. Visa Inc. and MasterCard Inc. were two of a host of financial and Internet services companies which severed their links with WikiLeaks following the publication of the State Department cables. PayPal Inc., Amazon.com, EveryDNS and others also cut their ties with the site amid intense government criticism of the online activist group – leading WikiLeaks founder Julian Assange to accuse them of bowing to pressure from the Pentagon. Last week, WikiLeaks and DataCell said they were preparing to take the credit card companies to court in Denmark. On its website, WikiLeaks claims that the block placed on WikiLeaks by companies such as MasterCard and Visa have cost it more than 90 percent of its donations, or $15 million. It has offered no explanation as to how those figures were derived. The company is still raising money through bitcoins, a kind of online currency, and direct bank transfers to accounts in Iceland and Germany. ___ Online: http://www.datacell.com

Read the full article →

JPMorgan Pays $228 Million To Settle Bid-Rigging Charges

July 7, 2011

(AP) WASHINGTON — A JPMorgan unit is paying $228 million to settle civil fraud charges that it rigged dozens of bidding competitions to win business from cities and counties. The Securities and Exchange Commission says J.P. Morgan Securities LLC made secret deals with companies handling the bidding process that allowed them to peek at competitors’ offers. Banks help municipalities invest the money so they can earn interest before paying for projects. JPMorgan Chase & Co. agreed to cooperate with the Justice Department’s investigation into the issue. Bank of America and UBS have agreed to similar settlements. The settlement with JPMorgan covers charges brought by the SEC, the Internal Revenue Service, bank regulators and 25 state attorneys general. JPMorgan blames the wrongdoing on former employees and a division that has closed.

Read the full article →

Goldman Sachs Took Biggest Loan During Fed’s Emergency Program

July 6, 2011

WASHINGTON – Goldman Sachs, Lehman Brothers, and European banks RBS and UBS were the biggest beneficiaries of very short-term Federal Reserve loans extended at the height of the financial crisis, according to data released on Wednesday. The details of the lending program were disclosed after a lengthy legal battle eventually won by Bloomberg News LLP. The data, available on the Fed’s website, showed Goldman took $15 billion in exchange for securities ranging from Treasuries to mortgage bonds. Swiss-based UBS AG (UBSN.VX), UK-based RBS Royal Bank of Scotland (RBS.L) and Lehman took $10 billion each. The program worked as an emergency lending facility for large primary dealer banks that deal directly with the Fed. It lengthened the window for so-called open market operations, overnight loans used by the central bank in the conduct of monetary policy, to as many as 28 days. The facility was launched in March 2008, just as Bear Stearns was about to become the first major investment bank to require a rescue in what turned into the worst financial meltdown in modern history. The full report can be found at: here . Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

U.S. Banks Finally Increasing Lending In Good Sign For Investors

July 6, 2011

Major U.S. banks appear to be finally opening the lending spigot. Second-quarter earnings reports due this month are likely to reveal a slight reversal of the long-term shrinkage in bank loan books, one of several positive signs for investors, bank analysts said. A number of other long-term clouds over the weakened banking sector may be clearing. Credit quality is on the mend, signaling that many large banks will bolster their bottom lines with money that had been reserved to cover losses on bad loans. And Bank of America’s startling $8.5 billion settlement with mortgage bond investors last week adds clarity and may spur rival banks to clear up their own legal liabilities from home loans. Another big question mark — how much banks will be hurt by a new law limiting debit card fees — was answered last week when regulators finalized rules that were not as ferocious as initially proposed. “We’re chipping away at the problems here,” said analyst Jason Goldberg of Barclays Capital. The earnings reports begin on July 14 with JPMorgan Chase & Co. Danger Signs Banks, of course, are far from being in the clear. Weak fixed-income trading and market volatility are believed to have weighed heavily on the biggest banks in the second quarter, while their net interest revenue continues to be pummeled by low interest rates. And low rates are expected to continue for the indefinite future. A growing loan book, however, could cover a multitude of woes. The Federal Reserve said last week that loans and leases in bank credit grew about 1 percent on an annual basis in both April and May, with the biggest growth — over 11 percent each month on an annual basis — coming from commercial and industrial loans. Real estate lending is still shrinking, and consumer lending, while stabilizing, is still tepid. Consumer lending grew just 0.1 percent on an annual basis in the second quarter, primarily from increases in credit cards and other revolving loans. “Banks are beginning to lend again and that’s a good sign,” said Timothy Ghriskey, co-founder of Solaris Group, which owns bank stocks. “There are a lot of issues out there that still have a potential impact on future earnings. This is going to take years.” Large banks are starting to loosen their standards for credit card applications, according to a Fed survey of senior bank loan officers in April. JPMorgan Chase, widely considered the strongest of the top three U.S. banks, is expected to report a second-quarter profit of about $1.22 per share, up from $1.09 a year earlier, according to Thomson Reuters I/B/E/S. Citigroup will be next to report, on July 15, and is expected to post a profit of 97 cents per share. A year earlier it earned 90 cents, adjusted for 1-for-10 reverse stock split in May. Bank of America’s mortgage settlement will likely bring it to a quarterly loss of $8.6 billion to $9.1 billion, or 88 cents to 93 cents per share. It reports on July 19. Regional banks such as US Bancorp and BB&T could be the biggest beneficiaries of loan growth since they won’t have large trading businesses offsetting increased lending fees. Even Regions Financial , the only one of the 19 largest U.S. banks that has not yet repaid the government bailout it received during the financial crisis, is expected to see its loss shrink to 1 cent per share. It lost $335 million, or 28 cents per share, in the comparable 2010 period. Kitchen-Sink Quarter Investors breathed sighs of relief last week over two costly developments that answered questions long weighing on the banking sector. BofA complemented the$8.5 billion settlement of mortgage repurchase claims from institutional investors with notice that it would take an additional $11.9 billion of charges for other mortgage settlements, and write down the value of its 2008 purchase of Countrywide Financial, among other items. The settlement put a ceiling on what other banks, including JPMorgan Chase and Wells Fargo & Co , could be expected to pay to resolve their own legal issues, investors said. “Everyone can assume that Countrywide was as bad as it got … that’s the worst-case scenario,” said Nuveen Investments analyst Alan Villalon. On the same day that BofA announced its settlement, the Fed unveiled final guidelines for its long-debated crackdown on fees that banks can charge merchants who accept debit cards. The rules on the “swipe” fees, mandated by the 2010 Dodd-Frank financial reform law, are expected to shave $9.4 billion from an estimated $23 billion of annual debit card processing revenues in the banking industry, according to CardHub.com. That’s far better than the $14 billion hit that many analysts had forecast. New capital surcharges from bank regulators, announced last month, also resolved some questions about global regulatory requirements banks will have to meet. On top of a base of 7 percent risk-based capital that banks must set aside, the biggest banks will have to add as much as an additional 2.5 percent, depending on size and risk. “That’s been the largest overhang on these stocks, just the unknowns that are out there,” said Jason Ware, equity analyst at Salt Lake City-based Albion Financial Group. “On the debit card fees, the banks got a gift. With the capital guidelines, we’re starting to get some numbers we can use.” Large banks are starting to loosen their standards for credit card applications, according to the April Fed survey. Undervalued? The main thing going for bank stocks today is that they have been beaten down to cheap valuations, according to some analysts. Large banks on average are trading at about 1.25 times tangible book value, according to Nuveen’s Villalon, while Citigroup and Bank of America are closer to a multiple of 0.85. JPMorgan Chase is trading at about 1.33 times tangible book, he said. As Ghriskey notes, however, uncertainty about the economy and regulatory developments still loom over bank stocks. Trust banks such as Bank of New York Mellon , State Street and Northern Trust , which avoided many of the credit issues weighing on their competitors, are grappling with the same pesky issues that have dogged them for several quarters: low interest rates and few remaining opportunities to trim expenses. State Street and BNY Mellon also have an overhang of lawsuits accusing them of overcharging pension funds on currency trading. In coming years, analysts expect trust banks will have to adjust pricing for a number of products they sell, with currency trading likely taking in less money. Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

British Policymakers Pursuing ‘Half-Measure’ In Trying To End Too Big To Fail

July 5, 2011

WASHINGTON — British proposals to force large banks to separate their riskier trading operations from their retail units go further than what U.S. policymakers ordered when revamping their financial system, yet still fall far short of truly ending the perception that megabanks are too big to fail, experts say. The Independent Commission on Banking, a panel formed at the urging of the government last year to recommend ways to increase the stability of the British banking industry, suggested in April that lenders should isolate their basic banking operations into separately capitalized subsidiaries within the larger bank. This would make it easier and cheaper for regulators to wind down failing firms while protecting retail and business deposits, the panel argued, and more expensive for banks to engage in capital markets activities like trading in derivatives. Britain spent more than 65 billion pounds in taxpayer funds rescuing Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc during the financial crisis. Policymakers, trying to avoid a repeat scenario, have latched onto the idea of a subtle separation of banks’ retail and investment units. Chancellor of the Exchequer George Osborne backed the proposal last month during his Mansion House speech. But that idea, while it has caused an uproar among British bankers for the costs it would likely impose, barely takes a stab at ending so-called “Too Big To Fail,” say experts like Simon Johnson, a former chief economist at the International Monetary Fund. “The question is what’s the size you’re left [with] and are you afraid of them failing,” said Johnson, a professor at the MIT Sloan School of Management and a member of the U.S. Federal Deposit Insurance Corporation’s systemic resolution advisory committee. “By itself, [ringfencing] is not going to do much.” Johnson reckons the banks will still be too big, and policymakers will remain too scared to let them fail. While banks would be forced to hold a bit more cash as a buffer against extreme losses — a result of having to raise more capital for the separate subsidiary — they would ultimately remain nearly as large as they are now, and would not hold nearly enough capital to protect taxpayers from having to rescue them in case of failure, experts argue. “In principal, this is a perfectly reasonable thing to do,” said Richard Portes, president of the Centre for Economic Policy Research and an economics professor at London Business School. “But it doesn’t strike at the essence of the problems that caused the crisis or try to prevent future ones.” “The banks will still be very, very big — it will be just as big as before — and with that comes not just ‘too big to fail’ but ‘too big to manage’ and ‘too big to cope with politically,’” Portes said. Johnson recommends big banks be broken up. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, an arm of the U.S. central bank, says the same thing, as do his counterparts in St. Louis and Dallas. Hoenig says that financial firms that take deposits, which enjoy taxpayer backing, should not be allowed to leverage that support to engage in riskier activities like trading for their own account. Last year, the U.S. passed a financial regulation law known as Dodd-Frank that aimed to end the perception that some firms are so big that policymakers would not allow them to fail. One of the law’s provisions mandates that banks reduce trades made for their own account, while another calls for some of banks’ derivatives activities to be organized within a separately capitalized subsidiary. Regulators are at work defining key terms that would govern such moves. The British independent commission, led by former Bank of England chief economist John Vickers, could have gone further, particularly given the size of the banking industry relative to the economy. However, the commission dismissed ideas like Johnson’s as “radical” in its interim report, released in April. Instead, the Vickers panel pursued “more moderate measures.” “You can’t get half-pregnant in this game,” said Amar Bhide, a professor of international business at the Fletcher School of Law and Diplomacy at Tufts University and a former proprietary trader at E.F. Hutton. “It’s not enough to have a ringfenced subsidiary; I think the ringfenced entity ought to be free and clear on its own accord,” Bhide said. Bhide, like Johnson and Hoenig, supports cleaving off capital markets units from retail banks. “These things are spaghetti-like creatures, where no one quite knows who owns what, what the obligations are, and to whom and by whom,” Bhide said. “People have no clue from the outside — including, I suspect, the regulators — what a mess it is, organizationally speaking, within these large entities.” British policymakers, like their counterparts in the U.S., don’t seem inclined to take the sort of steps that would make their jobs easier. Vickers’s suggestion was the next-best thing. “They feel the need to do something,” Johnson said. “This is the least they could do.” Ultimately, the ringfencing idea is “terrific,” Bhide said, “but no half-measures, please.” * * * * * r Shahien Nasiripour is a senior business reporter for The Huffington Post. You can send him an email ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 1+917-267-2335.

Read the full article →

Global Regulators Agree To Impose Extra Capital Charge On Biggest Banks

June 25, 2011

BASEL (Huw Jones) – Global banking regulators have agreed on a proposal to slap an extra capital charge on the world’s biggest banks to make them safer by 2019. The surcharge is part of a series of regulatory reforms launched in response to the financial crisis, which forced countries worldwide into costly bailouts of their banking sectors to prevent systemic collapses. The Group of Governors and Heads of Supervision (GHOS) said after a meeting in Basel on Saturday the proposal would be put out to public consultation next month. “The additional loss absorbency requirements are to be met with progressive common equity tier 1 capital requirement ranging from 1 percent to 2.5 percent, depending on a bank’s systemic importance,” the group said in a statement. An additional 1 percent surcharge would also be imposed if a bank becomes significantly bigger, pushing the total to 3.5 percent. The plans, which need approval from world leaders (G20) in November, would be phased in between January 1 2016 and end of 2018. The capital surcharge will come on top of the new 7 percent minimum core capital all banks across the world will have to hold under new Basel III rules being phased in over six years from 2013. However, many of the world’s biggest banks already hold core tier 1 capital ratios of 10 percent or more and therefore easily meet or exceed the top end of the surcharge band. The central bankers have opted for a smaller surcharge than forseen but, in return, the surcharge will have to be in the form of top quality capital — retained earnings or common equity. This marks a victory for hardline countries such as Britain and the United States but will disappoint some banks that have been hoping to use hybrid debt such as contingent capital (CoCos) to pad out the surcharge band. Dirk Jaeger, Managing Director for supervision matters at Germany’s banks association BdB said the decision was not much of a surprise: “But we regret that bank levies and CoCo bonds do not count for the additional capital buffer.” COCOS REVIEWED The proposal, which was due to be finalized by last November but faced opposition from banks and some countries, will apply initially to so-called globally systemically important banks (G-SIBs). “These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time,” the statement said. The consultation paper in July will indicate how many banks face a capital surcharge but it is not clear yet if their names will be published. The number of banks affected is likely to change over time as lenders grow or shrink and the consultation will spell out how often a snapshot of the sector will be taken. Banks will face a surcharge according to an indicator that draws on five elements — size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity, and complexity. The group of central bankers and the Basel Committee it oversees said they will continue to review the use of contingent capital. The central bankers said they would support the use of contingent capital to meet higher national requirements than the global minimum surcharge. However, even then, there would have to be a high-trigger for converting the debt into equity to help absorb losses on a going concern basis, the central bankers said. (Additional reporting by Alexander Huebner in Germany; Editing by Toby Chopra) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

Americans Have Never Been More Distrustful Of Banks: Poll

June 24, 2011

The recession might be officially over, but American views toward the institutions that brought the economic system close to collapse have never been worse. According to a new poll by Gallup , 36 percent of Americans now say they have “very little” or “no” confidence in U.S. banks, the highest percentage on record since Gallup first started tracking that data. Those saying they have a “great deal” or “quite a lot” of confidence in banks has also stagnated, stuck at 23 percent for the second straight year, after falling to a low of 22 percent in 2009. Safe to say it’s been a tough year in the banks’ public relations departments. U.S. banks have spent much of the past year aggressively lobbying against the implementation of Dodd-Frank financial reform. This week, Treasury Secretary Timothy Geithner called out banks for the “huge amount of money [spent by banks] to erode, weaken, walk back” financial reform. Indeed, the largest-lobbying institutions of last year spent 2.7 percent more in the first months of this year in an attempt to combat rules including higher capital requirements and restrictions on swipe fees. The nation’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — have also been the focus of a federal investigation into whether the banks defrauded taxpayers in their handling of foreclosures, first reported by The Huffington Post in mid-May. In addition, in April, Goldman Sachs, the nation’s first-largest bank by assets, was accused in a Senate report of systematically misleading clients by selling them assets known to be junk and then subsequently betting against that junk. So this year’s Gallup results only further emphasize the growing animosity toward banks in America. Never before 2009 had more Americans expressed more distrust than trust in banks. That has not only been the norm for three years now, but the gap is widening. Gallup, who has been tracking confidence in banks for over thirty years now, notes the steady decline of confidence in their release, pointing out that 60 percent of Americans had at least “quite a lot” of confidence in banks in 1979. That fell to 30 percent in the early 1990s, but then steadily rose to 53 percent in the mid-200s. The percentage of Americans with a good deal of trust in banks has been nearly halved since 2007: Although levels of confidence have fallen in all regions since the first years of the financial crisis in 2007, confidence is again on the rise in the Midwest and West. This year, it is the East that has the least confidence in banks, at 20 percent. The below graph charts levels of confidence since the financial crisis:

Read the full article →

Mark Bourrie: Canada’s New Bills Won’t Change Old Financial Habits

June 24, 2011

In a drawer somewhere, I have a nickel-sized coin of the Roman emperor Gallienus (ruled 253-268 AD). Gallienus is long-forgotten, but he shouldn’t be. He is one of the true fathers of inflation, and there should be a statue to him on the Acropolis in Athens and in the lobby of every government’s central bank. Gallienus was a victim of bad timing. Plagues and invasions had weakened the Roman Empire. Big chunks of it were seceding and rebelling. Gallienus rarely visited Rome. He spent most of his reign on the road, hunting down various barbarian hordes and rebel legions. And he fretted over his finances. Because of the wars and the decline of trade, (along with hoarding by nervous Romans), silver disappeared from circulation. Coins were almost impossible to come by. Gallienus’ money guys came up with a solution to this problem. They got the mint to stamp his coinage in copper. Then they put a silver wash on the coins. Gallienus paid his army with it. The resulting carnage left Gallienus and his entire family dead, his statues smashed and his monuments pulled down. Geneologists re-wrote family histories to erase Gallienus. I bring up poor Gallienus just hours after seeing Canada’s new polymer $100 bills. I was at a news conference where these bills were handed out to reporters. We had to give them back, but, while we had them, I went at mine with every intention of seeing if it really could not be torn or mutilated, as the Bank of Canada’s people said. Some of the people around me reacted in horror at the disrespect I showed to my little piece of plastic, as though “money” — even a piece of holographed chemistry that no one would accept as money right now — was somehow sacred. Money is what people think it is. A “dollar” used to be the same everywhere: one ounce of silver, give or take a small nip. A dime was 1/10 of an ounce of silver. A “penny” was, for hundreds of years, 1/240 of a Roman silver pound, which was 12 troy ounces. A British pound morphed from those 12 ounces of silver to ¼ ounce of gold, which was also about the size of a U.S. $5 gold piece. A U.S. $20 gold piece was just under one troy ounce of gold. A century ago, Canadians were very familiar with the big British copper penny, which was about the size of a loonie and had about the same purchasing power. But now money is all numbers, articles of faith. Canada’s paper money used to bear the words “The Bank of Canada will pay to the bearer on demand…” the number of dollars on the bill. The bill was a promise to pay money. By sleight of hand, the bill somehow became money. Money and governmental jiggery-pokery have always been intertwined. Henry VIII’s subjects called him “Old Copper Nose” because he watered his silver coins down with so much copper. I have a $50 trillion Zimbabwe note around the house somewhere, one of the last bills issued by Robert Mugabe’s regime before the German printers stopped the presses until their account was settled (in Euros). Somewhere else, I have a stash of billion-mark bonds issued by Germany’s Weimar Republic in 1923. That inflationary trick, which conned some of my gullible relatives and wiped out the bond-holding German middle classes, helped seal the German republic’s fate. (The company that printed the German bank notes in the worst weeks of the inflation submitted a bill to the government for 32,776,899,763,734,490,417.05 marks.) Sound currency issuers: Elizabeth I, Julius Caesar, Constantine the Great, Napoleon, George Washington, Sir John A. Macdonald, Otto von Bismarck. Unsound currency issuers: Richard Nixon, Jimmy Carter, unlamented Gallienus, the Soviet Union, Communist China, Robert Mugabe (and Abraham Lincoln, just to throw a wrench into my own argument. But war is hell on currency). We’re in for a reckoning about money, not because we’ve physically debased it, but because we don’t understand it. The yuppie who stiffs a waitress on a tip has no problem bidding up a house by $50,000 over its asking price, which already reflects a speculative “value” that has no basis in intrinsic costs. Politicians in Canada hold a five-week election campaign to argue about economics, then pass $275 billion in spending, some 800 pages of estimates, in far less time than it takes to read them. Each Canadian family has, on average, some $180,000 in mortgage and personal debt. Take out the renters, the people making minimum wage, people with bad credit, the elderly who have the sense to be debt-free at retirement, people who abhor debt or have religious scruples about usury, and the small number of people who are so rich that they rarely borrow, and you have a skilled working class and a professional middle class in deep, deep financial trouble. The CMHC, which insures most of the worst of Canadian mortgages, has more risk on its books than the amount of the federal debt. We also hide debt by spreading it among pension plans, provinces and municipalities. Our statisticians play with numbers to try to convince us that inflation is much lower than it actually is. Our allies and friends are already showing us the future. In Greece, revolution is in the air because the government is worse than broke. In the U.S., public debt levels are above the ability of most people to comprehend. It’s like trying to calculate the number of stars in the universe. Eventually, things will work out. People will need stuff. People will make stuff. People will carry stuff around and sell it. Barter is far less efficient at setting prices than a cash economy, so people will create good money out of necessity. But the road between now and then could be pretty rough. I doubt the new plastic currency will help, though I did find that if you do pull really hard, you can stretch the new bucks. You just can’t stretch them far enough.

Read the full article →

WATCH: Bankers Taped To Lamp Poles In Stunt

June 22, 2011

An Australian bank’s fees are so low that competitors have duct-taped some of its employees to lamps hovering yards above ground. Or so those responsible for the bank’s marketing might have you believe. The video stunt , part of the award-winning “Break Up” campaign for the National Australia Bank, is the latest in a series of viral marketing efforts by Melbourne-located Clemenger BBDO, a communications agency. Based on the idea that the National Australia Bank is “breaking up” with the other three big Australian banks, it recently took home top honors for Public Relations at the Cannes Lions Festival . The campaign has used a number of traditional and new media resources to gain exposure, including break-up tweets , a stunt in which waiters presented rival banks’ executives with a break-up cake. Cannes Public Relations Jury President Dave Senay said he was impressed with NAB’s dynamic campaign, which helped attract 225,000 new customers since it began in February. “It’s sort of like a conceptual jujitsu,” Senay’s quoted by Australian news site news.com.au , “where you take the power of the opposition and use it against them. It was superbly executed.”

Read the full article →

Larry Summers: More Stimulus Now

June 13, 2011

By Lawrence H. Summers CAMBRIDGE, Mass., June 12 (Reuters) – Even with the massive 2008-2009 policy effort that successfully prevented financial collapse and depression, the United States is now halfway to a lost economic decade. Over the last five years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, about like Japan during the period when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 percent to 58.4 percent, reducing the number of those with jobs by more than 10 million. The fraction of the population working remains almost exactly at its recession trough and recent reports suggest that growth is slowing. Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent that once would have been unimaginable, new college graduates are this month moving back in with their parents because they have no job or means of support. Strapped school districts across the country are cutting out advanced courses in math and science and in some cases only opening school four days a week. And reduced incomes and tax collections at present and in the future are the most important cause of unacceptable budget deficits at present and in the future. You cannot prescribe for a malady unless you diagnose it accurately and understand its causes. Recessions are times when there is too little demand for the products of businesses, and so they fail to employ all those who want to work. That the problem in a period of high unemployment like the present one is a lack of business demand for employees, not any lack of desire to work is all but self-evident. It is demonstrated by the observations that (i) the propensity of workers to quit jobs and the level of job openings are at near-record low levels; (ii) rises in nonemployment have taken place among essentially all demographic skill and education groups; and (iii) rising rates of profit and falling rates of wage growth suggest that it is employers, not workers, who have the power in almost every market. I belabor the idea that lack of demand is the fundamental cause of economies producing below their potential because the failure to recognize the centrality of demand can have catastrophic consequences. But for Hitler and the military buildup up he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent and with the recovery promise of the New Deal shattered by the premature attempt in 1937 to reassert the traditional virtues of deficit reduction and inflation control. When I entered the Clinton administration in 1993, it was generally believed that Japan had the potential to grow its economy by 4 percent a year going forward, enough to have doubled output from that time until now. Instead output has barely grown, a consequence of the post bubble stagnation that Japan suffered. A sick economy constrained by demand works very differently than a normal one. Measures that usually promote growth and job creation can have little effect or can actually backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply. In a recession, if more people seek to borrow less or save more, there is reduced demand and hence fewer jobs. Training programs or measures to increase work incentives for those with both high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Most paradoxically, measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand constrained. Traditionally, the American economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post-World War II period — those of 1974-1975 and 1980-1982 — the economy was growing in the range of 6 percent or more — rates that seem inconceivable today. Why? Inflation dynamics defined the traditional post-war American business cycle. Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. When the Fed became concerned about inflation accelerating, usually too late, it raised interest rates and crunched credit, stifling housing, business investment, and consumer durable purchases and causing the economy to go into recession. After inflation slowed, rapid recovery propelled by dramatic reductions in interest rates and a backlog of deferred investment was almost inevitable. Our current situation is very different. With more prudent monetary policies, expansions are no longer cut short by rising inflation and the Fed hitting the brakes. All three American expansions since Paul Volcker brought inflation back under control have run long. They end after a period of overconfidence drives the prices of capital assets too high and the apparent increases in wealth give rise to excessive borrowing, lending and spending. After bubbles burst, there is no pent-up desire to invest. Instead, there is a glut of capital caused by overinvestment during the period of confidence: vacant houses, malls without tenants, and factories without customers. At the same time, consumers discover that they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors. Little wonder that private spending collapses and that post-bubble economic downturns often last more than a decade and are only ended through external events like military buildups. Pressure on private spending is enhanced by structural changes. Take as a vivid example the publishing industry. As local bookstores have given way to megastores, megastores have given way to Internet retailers, and Internet retailers have given way to ebooks, two things have happened. The economy’s productive potential has increased and its ability to generate demand that fulfills the potential has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend. And the need for capital investment in distribution networks has come down. What then is to be done? This is no time for fatalism or for traditional political agendas that the two parties have pushed in more normal times. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. It follows that the central objective of national economic policy until sustained recovery is firmly established must be increasing confidence, borrowing and lending, and spending. Unless and until this is done, other policies, no matter how apparently appealing or effective in normal times, will be futile at best. We should recognize that it is a false economy to defer infrastructure maintenance and replacement, and instead take advantage of a moment when 10-year interest rates are below 3 percent and construction unemployment approaches 20 percent to expand infrastructure investment. It is far too soon for financial policy to shift toward preventing future bubbles and possible inflation and away from assuring adequate demand. The underlying rate of inflation is still trending downward, and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the hugely important challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not over-confidence is the problem of the moment and needs to be the focus of policy. Most important, the fiscal debate needs to take on board the reality that the greatest threat to the nation’s creditworthiness is a sustained period of slow growth that, as in southern Europe, causes debt-GDP ratios to soar. This means that essential discussions about medium-term measures to restrain spending and raise revenues need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated by the president and Congress last fall we might well be looking today at the possibility of a double dip. Substantial withdrawal of fiscal support for demand at the end of 2011 would be premature. Fiscal support should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well. At a near-term cost of a little over $200 billion, these measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays. It is appropriate that policy in other dimensions be informed by the shortage of demand that is a defining characteristic of our economy. For example, the Obama administration is doing important work in promoting export growth by modernizing export controls, promoting U.S. products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy, for example, to promote exports of tourism as well as education and health services. In a similar vein, recent presidential directives regarding relaxation of inappropriate regulatory burdens should be rigorously implemented to boost confidence. Perhaps the most fundamental strength of the United States is its resilience. We averted Depression by acting decisively in 2008 and 2009. Now we can avert a lost decade by recognizing current economic reality. (Lawrence H. Summers is the Charles W. Eliot University Professor at Harvard University and a former U.S. Treasury secretary. He speaks and consults widely on economic and financial issues.) (Editing by Jonathan Oatis) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

Foreclosure Fraud Price Tag Four Times Higher Than Banks’ Initial Proposal

June 7, 2011

WASHINGTON — The nation’s largest mortgage companies are operating on the assumption that they will have to pay as much as $20 billion to resolve claims of widespread foreclosure abuse, an amount four times what they had originally proposed, the top federal official overseeing the discussions told state officials Monday, according to people who participated in the conversation. Associate U.S. Attorney General Tom Perrelli told a bipartisan group of state attorneys general during a conference call that he believes the banks have accepted the realization that a wide-ranging settlement to the months-long probes will cost them much more than the $5 billion offer they floated last month, according to officials with direct knowledge of the call. Perrelli said he’s basing his belief on his recent conversations with representatives of the five targeted firms: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. Three unresolved issues remain, these people said. State and federal officials have not agreed on the scope of banks’ release from liability that would accompany such a deal; negotiators continue to hammer out how much of the money pot will be split between restructuring borrowers’ mortgages and bank fines, and officials are not yet near an agreement on how the coalition of state and federal government agencies will monitor and enforce bank behavior in the wake of a settlement agreement. The settlement talks are the result of state and federal investigations launched last autumn after widespread reports that the five largest mortgage handlers illegally seized the homes of an unknown number of homeowners and improperly accelerated foreclosure proceedings by failing to amass required paperwork, in some cases allegedly lying about it to local judges. Over the past couple months, government officials have been in discussions with the banks to resolve claims of past abuses and set new standards to govern bank dealings with distressed homeowners. The banks seek a quick resolution, according to sources who have participated in settlement talks, as falling home prices, a continuing high rate of delinquent borrowers, stagnant home sales, rising unemployment and slower economic growth batters bank stocks. Shares of Bank of America, the largest mortgage servicer, hit a two-year low Monday. Citigroup fell more than four percent. The 24-company KBW Bank Index has fallen nearly 11 percent over the past three months. Top officials in the Obama administration, like Treasury Secretary Timothy Geithner, have said they want a quick settlement, too. Bank regulator Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, told a Senate panel last month that a settlement must be reached due to “significant” damages the banks face from “flawed mortgage banking processes [that] have potentially infected millions of foreclosures.” The industry could be reeling for years, Bair warned. Many of the states, though, aren’t in such a hurry. New York’s top law enforcer, Eric Schneiderman, wants to conduct a complete investigation into all facets of mortgage banking, from fraudulent lending to defective securitization practices to faulty foreclosure documents and illegal home seizures. Delaware recently sent Mortgage Electronic Registration Systems Inc., which runs an electronic registry of mortgages, a subpoena demanding answers to 75 questions. Other states are combing through court filings and pulling out files infected by so-called “robo-signing” and potentially-fraudulent claims made by banks, while some are probing the role played by a unit of Lender Processing Services, a firm used by the biggest mortgage companies in foreclosure proceedings. Those angling for either a more thorough investigation or a more punishing set of penalties also have the results of a set of confidential federal audits in their back pocket. The reports accuse Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, The Huffington Post first reported last month . The five separate investigations, conducted by the Department of Housing and Urban Development’s inspector general, conclude that the firms violated the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The federal watchdog office referred its findings to the Department of Justice, which is deciding whether to file charges. The False Claims Act allows the government to recover damages worth three times the actual harm. Jessica Smith, a spokeswoman for the Justice Department, declined to comment. ************************* Shahien Nasiripour is a senior business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 917-267-2335.

Read the full article →

Mike Lux: Our Economy’s Best Chance

June 6, 2011

The terrible wrongness of the Ryan budget plan combined with the strangest, craziest Republican presidential candidate field ever makes it rather obvious how important it is to get President Obama re-elected. To have extreme right Republicans (that seems to be pretty much all of them these days) control every branch of government would do even more damage now, as weakened economically as we are, than the 2003-2006 run they had with Bush and Congressional Republicans running everything — and think how ugly that was for the country. The good news is that Republicans are doing a very good job right now showing how bad they are, with this weak field of presidential hopefuls in all-out pander mode to the far right of their party, and the lockstep support for the Ryan budget showing how extreme they are — not just on Medicare but on a wide range of other major issues. And I feel good about many of the Obama team’s moves so far this cycle, especially creating Democratic unity around opposition to Ryan’s budget. However, as is obvious to pretty much everyone who follows politics at all (and probably a fair share of people who don’t), the continued problems with our economic trajectory is going to remain a serious problem dragging down the president’s re-election chances. Conventional economists and D.C. politicos, who generally focus on fiscal policy to the exclusion of just about everything else, feel stymied because they feel like the economy needs another fiscal stimulus package, and they know that is the exact opposite direction that House Republicans want to go. As a result, most people in Washington have pretty much given up on improving the economy between now and the 2012 election, and are devising strategies for Obama around running without the background of an improving economy. It is a very bad thing that Republicans, for all their lip service about jobs, don’t want to do anything to actually promote, and that their budget policies will force many more people to lose their jobs as well. But the ironic thing is that President Obama does not have to depend on Republicans to provide a major boost to the economy right now. What the president can do to boost the economy is to put his energies into restructuring and rebuilding the housing market. The fact is that the single biggest thing dragging the economy down right now is the housing sector, which is in terrible shape right now and continues to get worse. Home prices, already at lower levels than at the worst point in the housing crash of 2008-9, are dropping like a stone. Almost 30 percent of mortgage holders are underwater (what they owe on the house is more than what it is worth). Foreclosures are sky high for the foreseeable future. With middle-class families’ biggest financial asset by far being their house, and home prices low, while foreclosures are high, it means middle-class assets are being decimated. And with no one buying homes, it means no one is building homes either. With the housing sector as huge a part of the economy as it is, as long as these kinds of trends prevail, we are not going to make the economy work well for the broad middle class. But look at what could happen if we address this issue head on. SEIU did a report a few months back on the economic impact of shoring up the housing market, and it showed some pretty remarkable things. Here’s what I wrote when their report came out: … this report does a great job of laying out the numbers in stark detail. Bank robber Wee Willie Sutton famously said that the reason he robbed banks was because that was where the money was, and if we are looking to get our economy moving again, we should be looking to get the money to do it where the money is. Right now, more than ever, the Big Banks are where the money is concentrated. The most important fact by far in Big Banks Bonus Bonanza is this one: Right now, 11,000,000 American homeowners owe $766 billion more on their mortgages than their homes are worth, but if the banks were to write down those mortgage principals to market value and refinance them into 30-year, fixed-rate loans, you would get $73 billion pumped directly back into the economy — every year for the next 30 years. Now unlike extending tax cuts for the rich or reducing the estate tax, which tends to be saved and invested in long term bonds, this money would go directly into stimulating the economy and creating jobs. Think about who those 11,000,000 underwater homeowners are: They are almost entirely middle- and working-class families who have spent the last couple of years sweating bullets to save their main life investment after its value plummeted by 20 percent, 30 percent, or more. They haven’t been spending money on new products, they haven’t been taking any vacation trips with their families, if they own a little mom-and-pop business they sure haven’t been taking any risks to expand it: They have just been desperately scrimping and saving and trying to hang on by the skin of their teeth. But if their mortgage is reduced to what their house is actually worth in today’s market, that means their overall financial situation is far more stabilized, and it means their monthly mortgage payment will go down as well. With a stabilized debt and lower monthly mortgage payments, with the psychological weight of probable foreclosure off their shoulders, these middle-class homeowners (at least the ones with jobs, which is most of the folks who still have homes) are exactly the kind of people who will be likely to start spending a little money in this economy. Maybe they will finally buy the car they have been holding off on now for years. Maybe they will do a little home improvement now that they know they will be able to stay in their home. Maybe they will feel able to finally make the investment in their small business they have been wanting to make, and hire a few extra folks as a result. The economic multiplier effect of this $73 billion would be as good as any money injected into the economy right now. You want to know what the second most important fact in this report is? The $73 billion it would cost to write down those mortgages would be only half what the top six banks alone are getting ready to write in bonuses and compensation for 2010. If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages, the vast majority of which go to top executives and traders, by 50 percent. Given all the cash these banks are sitting on, all the profits made and bonuses distributed in recent years, I have no doubt they can afford the hit. The ironic thing is that if they wrote down these mortgages, they would be getting monthly mortgage checks from all these homeowners, plus avoid the costs of all those foreclosure proceedings, but they don’t want to write down the property because of their own phony accounting that claims the properties are worth far more than they actually are. So here’s the other little nugget the report alludes to: If you injected $73 billion into the economy through these write downs, the multiplier effects I was referencing earlier — homeowners being able to free up cash to buy things and invest in small businesses and do home improvements — would mean 1.8 million new jobs. That is a lot of jobs, folks: enough to drop the unemployment rate from the almost 10 percent it has been sitting at for a very long time down to the mid 8s. And it would finally begin to stabilize the housing market, which would do a lot for the economy all by itself. The problem is this: you have to take on the biggest banks on Wall Street to clean up this mess. And let’s be clear: Congress would not be on the side of the administration if they did take on those banks. Even when Democrats controlled both Houses of Congress by wide margins, Sen. Dick Durbin famously commented that that banks “own the place,” and now of course it is far worse: the Republican chair of the banking committee told bankers that his mission was to serve them, and the entire party is doing everything it possibly can to slow Elizabeth Warren down in her efforts to help consumers. But with all their sound and fury on behalf of Wall Street, let’s be clear on one other thing: the Obama administration does not need the Congress to do anything on this issue. The executive branch proved conclusively during the financial crisis that when something is important enough to them, they can do what they need to do and get the bankers to play along. If the regulatory agencies, the Department of Justice, and the Treasury Department, along with state AGs like Eric Schneiderman who already are putting the heat on — these bankers would have to go along with writing down a very big number of underwater mortgages, and cleaning up their foreclosure servicing operations in general. With fiscal stimulus out of the question, nothing the Obama administration could do right now would do more to help this economy. This makes economic sense and political sense, but Tim Geithner continues to stand firmly in the way. He continues to tell members of Congress and consumer and labor advocates he privately meets with that his hands are tied, there is nothing he can do, but in fact there is plenty he could do, he just doesn’t want to. Geithner is convinced that if you harm the banks, you harm the American economy — and if you help the banks, you help it. And the banks, whose balance sheets look so much better because the Mark-To-Model accounting system they use allows them to value the housing assets they hold at some inflated rate they project in the future when they assume the housing market will suddenly be better than it was in 2006, are telling Geithner that if they are forced to write down these mortgages, their accounting will show they have lost money. God forbid their books show their assets at what they actually are worth, because then they won’t be able to pay executive bonuses at such a high level. Given the makeup of Congress, Obama has just one chance to dramatically improve the American economy before the 2012 election, and that is to move aggressively to revitalize the housing market. He’ll have to take on Wall Street to do it, and he’ll have to pick a fight with them and their Republican allies in Congress. It’s a political fight worth having, and most importantly it would put our economy on the right path by giving it the jumpstart it needs.

Read the full article →

Former GOP Senator Hired By Goldman Sachs

May 27, 2011

NEW YORK — With Goldman Sachs’ latest high-profile hire, the Wall Street giant is unlikely to shake its Government Sachs nickname or the reputation for exerting undue influence in Washington that it implies. Goldman announced Friday that it had named three-term Sen. Judd Gregg an international adviser to the bank. The New Hampshire Republican will “provide strategic advice to the firm and its clients, and assist in business development initiatives across our global franchise,” Goldman said in a statement. “Judd Gregg’s experience and insight will contribute significantly to our firm and our continuing focus on supporting economic growth,” said Lloyd Blankfein, Goldman’s chairman and CEO. “A strong financial sector is critical to our nation and one of the key engines of job creation in our country,” said Gregg, who was the ranking Republican on the Appropriations; Banking; Housing and Urban Affairs; and Health Education Labor and Pensions Committees. “I hope that I can bring to Goldman Sachs some ideas and perspectives that will help the firm continue to be a leader in supporting its clients in their pursuit of the capital, credit and advice they need to be successful.” In the wake of the financial crisis, which has been partly blamed on the excesses of Wall Street banks such as Goldman, Gregg was an outspoken critic of the Obama administration’s effort to tighten oversight of the financial industry. He was also a defender of Goldman during the heated congressional debate over the $700 billion bank bailout. Early last year, Gregg said that Democrats were overreacting to civil charges filed against Goldman for securities fraud by using the indictment to push regulatory reform. He noted at the time that the allegations had not yet been proven in court. “It’s really disingenuous for some people to pursue regulatory reform based off this one instance,” the retired senator said on MSNBC. “This is a single event, we don’t even know what the outcome will be.” During an April 2010 appearance on Fox News , Gregg corrected the host Greta Van Susteren’s assertion that Goldman received a $10 billion bailout. The bank didn’t need the money, and that it’s wrong to criticize them for handing out big bonuses, he said: VAN SUSTEREN: Goldman Sachs got bailed out, right? GREGG: They didn’t ask. I don’t think in Goldman’s case they were looking to be bailed out. VAN SUSTEREN: They took it, right? GREGG: They were told to. If you’re going to go back and do some history, what happened — I was there at the time. [Treasury Secretary] Hank Paulson called in the top 10 banks and said you are all going to take this money, because if only those of you who are in real trouble take the money it is going to be a message to the marketplace that you guys are in trouble and the others are stronger and that is going to turn the playing field against you and you are going to get in worse trouble. He said all the top 10 banks, you have to take this money there. So there were four or five who didn’t want to take it — Wells Fargo, Goldman, a number of others — but ended up having to take it. VAN SUSTEREN: So I’m wrong to think they got a bailout from taxpayers and turned around and paid big bonuses? I’m wrong in being sort of, like, hyper-critical of them? GREGG: In the Goldman case I think it is hard to say that. You can make that case with Bank of America because of the Merrill deal with Citibank, and with a couple of others that clearly got support when they were in difficult straits and then gave large bonuses.

Read the full article →

Ellen Brown: Japan Shows How to Defuse Debt Time-Bomb

May 27, 2011

[T]hreatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea. — Alan S. Blinder , Princeton professor of economics, former vice chairman of the Federal Reserve A game of Russian roulette is being played with the national debt ceiling. Fire the wrong chamber of the gun, and the result could be the second Great Depression. The first Great Depression led to totalitarian dictatorships, war to consolidate power, and concentrations of capital in the hands of a financial elite. The trigger was a default on the global reserve currency, in that case the pound sterling. The U.S. dollar is now the global reserve currency. The concern is that default could create the same sort of global panic today. Dark visions are evoked of the president declaring a national emergency, FEMA plans locking into place, camps being readied for protesters, and the secret government taking over . . . . This may all just be political theater, but do we really want to get close enough to the economic precipice to find out? The conservative ideologues toying with the debt ceiling are doing it to force cuts in the budget, a budget that was already approved by Congress. Congress is being held hostage by a radical minority pushing a risky agenda, one that is based on an economic model that is obsolete. High-stakes Gambling On May 16, the Wall Street Journal published an opinion piece titled ” The Armaggedon Lobby ,” which claimed that a “technical default” on the federal debt was just “political melodrama” and not really a big deal: [B]ond markets can figure out the difference between a genuine default when a country can’t pay its bills and a technical default of a few days if it serves the purpose of fixing America’s fiscal mess. Not so, said Saudi Prince Alwaleed bin Talal in a May 20 interview on CNBC. “That’s gambling. This is the United States. You’re leading the whole world. You cannot play games with that.” It is not just that the government could be brought to a standstill, with a third of its bills now being paid by borrowing or that interest rates would shoot up, forcing thousands of homeowners into foreclosure. Failure to pay on the national debt could trigger a default on the global reserve currency. As one commentator described what could go wrong: [T]he consequences of a US default could spark yet another global financial crisis. The US could lose its triple-A rating, which could cause a sell-off in Treasury notes by institutional and foreign investors. This sell-off could lead to higher interest rates, and banks’ balance sheets might be decimated by the decline in their bond portfolios. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. A Rerun of 1931? The sort of chaos that could ensue was seen when Great Britain reneged on its deal to redeem pound sterling banknotes in gold in 1931. The result was the worst global depression in history. When the pound went off the gold standard, markets panicked. People rushed to exchange their paper money for gold, in any currencies in which that was still possible. The gold wound up hidden under mattresses and in safety deposit boxes, unspent and the banks from which it was pulled, having no reserves to back their loans, quit lending or closed their doors. Credit froze; business ground to a halt. As other countries ran short of gold, they too were forced to take their currencies off the gold standard. The last holdouts suffered the most, including the United States, which kept its gold window open until 1933. The 19th century had been plagued by bank runs, caused by banks having too little gold to back their outstanding loans. The Federal Reserve was instituted in 1913 ostensibly to prevent those runs, but its levee did not hold back the run of the 1930s. In 1933, the country suffered a massive banking collapse, forcing President Roosevelt to declare a banking holiday and take the U.S. dollar, too, off the gold standard. Freed from the Bankers’ “Cross of Gold” The transition off the gold standard was a painful one but according to Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, the country was the better for it. In a paper read before the American Bar Association in 1946, he said that going off the gold standard had finally allowed the country to be economically sovereign: Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity. Freed from the strictures of gold, Roosevelt was able to jump-start the economy with deficit spending. As Marshall Auerback details , the next four years constituted the biggest cyclical boom in U.S. economic history. Real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. Then in 1937, Roosevelt listened to the deficit hawks of his day and slashed the deficit. The result was a surge in unemployment, and the economy slipped back into depression. What lifted the country out of the doldrums was again deficit spending, liberally engaged in to fund World War II. In wartime, few people worry about the national debt. The debt grew to 120% of GDP — twice what it is today — and wound up sustaining another very productive period in U.S. history, one that set the country up to lead the world in manufacturing for the next half century. On Inflation and Taxes Ruml said federal taxes were no longer needed to fund the budget, which could be financed by issuing bonds. The principal purpose of taxes, he said, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’” The government could spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the money supply need to be contracted with taxes. “The dollars the government spends become purchasing power in the hands of the people who have received them,” Ruml said. “The dollars the government takes by taxes cannot be spent by the people,” so the money supply can be contracted with taxes as needed. When the economy is in a recession, however — as it is now — the government needs to spend in order to get purchasing power into the hands of the people. Businesses cannot hire more workers until they have more customers demanding their products, and the customers won’t come until they have money to spend. The money (“demand”) must come first. Adding money will not drive up prices until the economy is at full employment. Before that, increasing “demand” will drive up “supply” by setting the engines of production in motion. When supply and demand rise together, prices remain stable. We now know that a government can go quite far into debt without a dangerous level of price inflation occurring — much farther than the U.S. has gone today. Besides World War II, when U.S. debt was 120% of GDP, there is the remarkable example of Japan. Japan has retained its status as the world’s third largest economy, although it has a debt to GDP ratio of 226% — and it is still fighting deflation. Critics of the deflationary theory point to commodity prices, which are soaring today. But if those prices were due to the economy being awash with “too much money chasing too few goods,” real estate prices would be soaring too. Instead, the real estate market has collapsed. What has actually happened is that the housing bubble has transmuted into the commodity bubble, as “hot money” has fled from one to the other. The overall money supply is still in decline . The deficit hawks have been predicting for years that the federal debt would sink the dollar and the economy, and it hasn’t happened yet. In fact the federal debt has not been paid off since 1835, and no disaster has resulted. The debt has not only been carried on the government’s books but has continued to grow, and the economy has grown and flourished along with it. This is not an economic anomaly. The economy has flourished because of the national debt. Nothing backs the currency today but “the full faith and credit of the United States.” Money is no longer a metal; it is an inflow and outflow, credits and debits . The liabilities of the government are the assets of the private economy. The national debt is what backs the money supply. Dealing with the Rising Cost of Debt Service There is a potential time bomb in a growing federal debt, but it is one that can be defused. The debt has risen from $10 trillion to $14 trillion just since the banking crisis of 2008, not from “entitlements” but due to the Wall Street collapse and bailout. Just the interest on this growing debt could cripple the tax base if interest rates were at normal levels, so they have had to be pushed almost to zero. The result has been to create a dollar carry trade . This has facilitated speculation in commodities, a major cause of today’s commodity bubbles. There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Beardsley Ruml recommended. The Bank of Japan now holds an amount of public debt equal to the country’s GDP! As noted by the Center for Economic and Policy Research: Interest on [Japanese] debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. . . . Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt. Like the Bank of Japan, the Federal Reserve now returns the interest it receives to the government. With a rising interest tab on the federal debt no longer a problem, private interest rates could be allowed to rise to normal levels. Today the Fed is not permitted to buy bonds directly from the Treasury but must go through middleman bond dealers. But that problem too could be fixed. In a supporting statement in 1947, Federal Reserve Chairman Marriner Eccles discussed a bill to eliminate the unnecessary cost of these middlemen. He said the Federal Reserve had been allowed to purchase securities directly from the government from its inception in 1914 until the Banking Act of 1935. Then: A provision was inserted in that act requiring all purchases of government securities by Federal Reserve banks to be made in the open market, which means purchased chiefly from dealers in Government bonds. Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing. . . . Nothing constructive would be accomplished by the proviso that the Reserve System must purchase Government securities exclusively in the open market. About all such a ban means is that in making such purchases a commission has to be paid to Government bond dealers. The interest cost and the bond dealers’ cut could both be eliminated by allowing the Treasury to borrow directly from its own central bank, interest free. Nothing to Fear But Fear Itself We have been frightened into believing that government debt is a bad thing, but nearly all money today originates as debt. As Marriner Eccles observed in the 1930s, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” The public debt is the people’s money, and today the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy. Originally posted on Asia Times .

Read the full article →

David Coates: Punishment or Pushback: Financial Regulation in the Midst of Recession

May 27, 2011

Nearly one American in two is currently “financially fragile ” — unable, that is, to come up with $2000 dollars in 30 days to deal with an unexpected emergency. That fragility presumably does not stretch out to the fortunate few employed by Goldman Sachs, collectively the recipients of the reportedly $15.4 billion set aside by the Wall Street giant for the payment of bonuses at the end of 2010. Fifteen point four billion dollars averages out at $435,000 per Goldman Sachs employee: in a year in which, far away from Wall Street, one million homes were foreclosed and 15 million Americans went without employment, let alone bonuses. While mainstream America continues to struggle with the recessionary consequences of a meltdown caused by financial excess, large financial institutions have left that struggle far behind. They are back to profitability and back to their old ways. Senior bankers are making money again while the rest of us are not. There was a time, not so very long ago, when things were otherwise: when leading Wall Street players publicly conceded (and indeed apologized for) the causal role played by their institutions in the financial meltdown of 2008. There was a time when the energies of Congress were accordingly focused on the creation of stronger regulatory structures designed to block a repetition of that meltdown. There was even a time when some of the minor players in the debacle of 2008 found themselves in court, charged with fraud. But those apologies were brief. The new regulatory structures were born flawed; and the few prosecutions failed to deliver. To a truly remarkable degree, given the scale and longevity of the damage they have caused, the guilty have escaped unpunished from the financial crisis of 2008, as Washington has turned its attention elsewhere, in the process allowing bank lobbyists to water down even the modest reforms imposed at the height of the crisis. Washington, that is, except Carl Levin and his subcommittee. Their Wall Street and the Financial Crisis report deserves to be compulsory reading for every concerned citizen, for it reaffirms what we already knew — that regulation and even punishment, certainly not pushback, remains essential if the practices which generated such economic havoc and social misery in 2008 are not eventually to do the same again on an even grander scale. A little recap would not go amiss, given the amount of money, energy and argumentation now flowing into the weakening of new regulatory constraints on the behavior of leading U.S. financial institutions. 1. Lest we forget, remember this. The credit crisis of 2008 was caused by inadequately-regulated and over-confident U.S. financial institutions, within which there were serious lapses of accountability and ethics. This is the well-established conclusion of a welter of both academic and journalistic reports on the events and processes leading up to the collapse of Lehmann Brothers in September 2008, and the subsequent financial meltdown. The credit crisis was the product of recklessness, corruption, managerial failure, greed and arrogance – in what Michael Mayo called “an industry on steroids .” That is also the conclusion reached by the subpoena-empowered Financial Crisis Inquiry Commission in its January 2011 report. Among the Commission’s findings were these: that “widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets;” that “dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis;” and that “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.” ( report , pp. xviii-xix) 2. To prevent an even deeper crisis, leading financial institutions received huge amounts of taxpayer and Federal Reserve support, without which many of them would undoubtedly have folded. We now know, because of Bernie Sanders ‘ diligence, that in addition to TARP money Goldman Sachs received nearly $600 billion in loans and other financial aid from the Federal Reserve in the wake of the crisis, “Morgan Stanley…received nearly $2 trillion, Citigroup…$1.8 trillion, Bear Stearns…$1 trillion, and Merrill Lynch…some $1.5 trillion in short term loans from the Fed.” Even hedge fund giants like John Paulson apparently took their cut of the Fed’s emergency cash. But though rapidly saved in this fashion by this staggering volume of tax-payer dollars and Fed loans, the big six financial institutions now sitting astride Wall Street — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — failed miserably to pass on their good fortune with equal speed to either struggling small banks or to a Main Street suddenly bereft of available credit. 3. The fallout from the crisis created by bad financial practices continues unabated: primarily in the form of extensive job loss, unprecedented levels of home foreclosure, and now serious cuts in state-level public services. As Simon Johnson has recently noted , “employment remains more than 5 percent below its pre-crisis peak, millions of homeowners are still underwater on their mortgages, and the negative fiscal consequences — at national, state and local level — remain profound.” Indeed we may be facing such a prolonged recession as a result of the 2008 financial collapse as to effectively lose a whole decade, even perhaps a whole generation. Certainly there are disturbing signs in the wind of new and awesome problems ahead: not least persistent and unexpected unemployment among the estimated 85 percent of the 2 million new college graduates likely to return home in 2011 for want of adequate work ! 4. Bankers did initially concede responsibility and invite some degree of regulatory reform. Bank of America chief executive and president Brian Moynihan told the opening session of the Financial Crisis Inquiry Commission that “over the crisis, we as an industry caused a lot of damage;” and JP Morgan Chase’s Jamie Dimon admitted before the same body that “we did make mistakes and there were things we could have done better .” Appearing before a parliamentary committee in London a month later, the former chairman of HBOS made similar concessions, saying that he was “profoundly and unreservedly sorry.” John Mack of Morgan Stanley even called the crisis “a profound wake up call for [his] firm;” and all four bankers appearing before the Financial Crisis Inquiry Commission declared their willingness to co-operate with tighter oversight while indicating their fear that such oversight might become excessive. It didn’t last of course. By the time of the next Davos conference, Jamie Dimon for one was already condemning ‘the incessant broad-based vilification of the banking industry” as both unfair and damaging. Fortunately for the rest of us, the French President did not agree, reminding the American banker that “the world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.” Nicholas Sarkozy had a point. 5. The appropriateness of that admission of responsibility was confirmed by later bipartisan investigatory panels, particularly Carl Levin’s. The suspicion that even major players in the industry misbehaved prior to the crisis is now evident for all to see from the evidence presented in the Levin report. As the Senator put it, the investigation of his sub-committee found a “financial snake pit rife with greed, conflicts of interest, and wrong doing.” And not just the Democratic Senator. His Republican counterpart was equally blunt. “Blame for this mess lies everywhere,” the ultra-conservative Tom Coburn said when sitting alongside Levin, “from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight….It shows without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers.” Goldman Sachs (for their marketing practices), and Standard & Poor’s (for the inadequacy of their credit rating), were both heavily censored in the Levin report. The Subcommittee found no less than 12 Goldman Sachs’ practices that raised conflict of interests concerns: criticizing the company for designing, marketing and selling “CDOs in ways that created conflicts of interest with the firm’s clients and at times led to the bank’s profiting from the same products that caused substantial losses for its clients.” (report, page 8) The logical outcome of these five unassailable truths would, in an entirely sane world, presumably be the extensive re-regulation of the entire financial sector and the punishment of the guilty among the financial elite; and there is some slow momentum building for at least a degree of punishment. Many of the main players have already slipped through the judicial net. Individuals like Angelo Mozilo, who agreed in October 2010 to pay $67.5 million to settle insider trading and other charges brought by the Securities and Exchange Commission. Institutions like Citigroup, which paid $75 million in July 2010 to settle civil fraud charges filed by the SEC; or Goldman Sachs, who settled with the SEC that same month for $550 million. (Two top Citigroup executives settled separately with the SEC that July, paying $100,000 and $80,000 respectively.) But at last the net seems to be tightening slightly. The FDIC has reportedly filed suit to recover $900 million in damages from three former executives of Washington Mutual, and is said to be conducting at least 50 criminal investigations of former senior figures in banks that have failed. Carl Levin, for his part, has referred the evidence given to his subcommittee by Goldman Sachs executives (including by its CEO) to the Justice Department for possible criminal prosecution; Attorney Generals in Nevada and Arizona have filed suit against Bank of America for dubious lending procedures in the housing market; a coalition of 50 state attorney generals is gearing up to do the same; and New York’s Attorney General has called in documents on mortgage operations during the housing bubble from major financial institutions that include Bank of America and Morgan Stanley. However, don’t hold your breath. American justice grinds mighty slow when it is the mighty who are being called to justice. The initial anger – in Washington and beyond – against bank excess has now largely dissipated, and lobby spending by financial institutions has accordingly grown of late, as the battle over regulatory details has shifted away from Congress and back into the regulatory agencies themselves. There was significant pushback against reform even before the passage of the Dodd-Frank Act – pushback that left gaps in the new regulatory structures through which old forms of financial malpractice could and do continue to slip: pushback that ensured that there would be no impenetrable wall between commercial and investment banking, no watertight limit on the size of financial institutions, and an indeterminate amount of derivative trading still exempt from the new regulations. (The formulation of those was left to the CFTC, where partisan infighting recently eroded the potency of the new regulatory codes still further). Tighter regulation in the wake of the Act is accordingly proving more difficult than was originally hoped: partly due to the difficulty of getting Congressional clearance for Obama appointees, partly because of the sheer complexity of the practices being regulated, and partly because of resistance from large institutions and their lobbyists. The new Republican majority in the House of Representatives is an additional thorn in the side of this tighter regulation: with the Tea Party-inspired legislators persistently underfunding (or attempting to defund) regulatory agencies, introducing bills to slow down or eviscerate the Dodd-Frank Act, and waging a particularly focused war on the new Consumer Financial Agency and its erstwhile head, Elizabeth Warren. Even the Obama administration is now apparently planning to exempt certain foreign exchange derivatives from regulations mandated by the Dodd-Frank Act. Meanwhile, old practices are up and running again, as though they had made no contribution to our present malaise. The board of Citigroup awarded its CEO a base salary of $1.75 million for 2011. Bank of America paid its CEO $10.2 million in 2010, as JPMorgan Chase’s Jamie Dimon earned $23.6 million. Even the credit agencies, so defective in the run up to the crisis, are full of self-confidence again. Standard and Poor’s chose to warn in April of a potential downgrade to the credit rating of the United States, a downgrade directly linked to public borrowing made necessary by the recession that inadequate credit rating had helped trigger less than 3 years before! Standard & Poor’s, the very company on which in that same month the Levin-Coburn report had laid prime responsibility for triggering the financial meltdown (through their and Moody’s July 2007 mass downgrading of mortgage-backed securities hitherto rated AAA). It takes some nerve to be simultaneously so criticized and so critical, but Standard and Poor’s clearly have those kinds of nerves! Richard Eskow complained in 2010 that “a banker can’t get arrested in this town.” Well, perhaps it’s time that they could. In Iceland, in Germany and even in the UK, delinquent bankers occasionally end up in court, sometimes in jail, even expelled from the industry because of their malpractice. But not here, not this time, not yet (unlike in the earlier S&L crisis, when more than a thousand bankers were jailed). As a whole string of commentators (including Richard Eskow, Matt Taibbi, Les Leopold and Joshua Holland ) have recently argued, it is surely time to call our bankers to account. Time because of justice; time because of the sufferings of others; time because only by calling delinquent bankers to account can we ever hope to prevent them dragging us all down again into a crisis and a recession of which we would be innocent, and which would be entirely of their making. Initially posted, with full academic sourcing, at: www.davidcoates.net

Read the full article →

Dennis Santiago: Crunching the Bank Numbers for 1st Quarter of 2011

May 27, 2011

We received the 1st Quarter of 2011 research dataset from the FDIC at Institutional Risk Analytics yesterday. The computers churned the data overnight so our customers could begin to look at the surveillance analytics for their banks of interest this morning. I’ve been staring at the summary statistics for the industry today and file the following observations for those of you entertained by how this is all playing out. Stress: Forks in the Road There’s a fork in the road for the stressed out TBTF’s. At the end of 2010, we were tracking 545 institutions representing $4,909B in assets that has an IRA Bank Stress Index grade of B. This was the interesting population of “large complex institutions” (LCI’s) dealing with the indigestion of rotting mortgages in their bellies. Come the end of 1Q2011, forty-four of these banks exit the B grade column and look to have split with one group representing maybe $3.1T in assets migrating back up to A stress grade condition and another faction worth approximately $1.6T dropping further down to join other banks in the C column. We are just beginning to look at what commonalities are shared by these two emerging clusters of larger institutions but for me it begins to add a little more clarity to the musing I referred to in the article I filed a couple of days ago, “Bank Fail” Pondering the Unthinkable . There’s another major note in this quarter’s data on the small bank side. A little over 500 of them joined the A+ grade stress silo this quarter, quite a number of them going from F to A+ as they begin to show positive operating income again. The most common strategy we see is an adoption of a mixed business operating profile cutting back on lending and favoring the use of money to put into investment assets made so attractive by quantitative easing. Clearly, the economist’s view that encouraging all banks to migrate towards post Glass-Steagall portfolio management profiles is tickling down. That’s good news for Wall Street. Read on for what it means to Main Street. Deposits: Big Winners The news in bank deposits country for Q1 is that the big banks continue to be the big winners. The over $65B size institutions hold just over $6T in deposits versus $3.6T by all the smaller banks combined. More important, the big banks have grown deposits by $1T since June 2008 while the smaller bank group has stayed flat only moving up $100B in deposits in the same time. More interestingly, this winning formula by the big banks has been happening in the low or no interest paying checking and savings accounts category. Interest paying time deposits are way down at the big banks, a much deeper decline than experienced at the smaller institutions. This means the cost of doing business for these big banks is materially advantaged versus the smaller group. I’m not saying I like it. What I am saying is despite people in America whining about “Too Big To Fail”, the deposits story says Americans still bank there. The big banks have known this all along of course. Now you do too. Lending: Still a Dearth Back in January I filed a blog on the Huffington Post titled “A Deepening Dearth of Lending” . That trajectory towards that dearth remains in effect. Total bank industry lending is now down about $800B since June 2008. Bank willingness to extend commitments to borrowers is down around $2T in the same timeframe. That’s a lot of private capital energy taken out of the economy. The bank’s reluctance to lend manifests as a steady flight to quality. We see them hammering down annualized gross default rates – a measure of operating stress – from a peak of 302 basis points (bp) this time last year to around 211 bp this quarter. That’s still elevated compared to the 127 bp it was in June 2008 so the pressure to stay stingy doesn’t look like it’s gone away just yet. The flight to quality also shows loss given default rates have come down now to 86.8% which is actually below the 90% it was in 2008. The message of these numbers is clearly that you’d better have stellar credit to ask for credit. But you already knew that. Now you have a little better picture of how much it matters to your banker. Distressed Real Estate: The Workout Continues The news is that real estate lending for the banking industry is getting safer. The annualized gross default rate for residential real estate is down from a peak of 212 bp a year ago to 159 bp roughly following the same trend as lending in general. Nationwide R.E. loans have dropped by $634B to $4,161B down from $4,795B in June 2008. Magnitude wise things could have been worse at this point and clearly this apparent stabilization has much to do with the gargantuan efforts of the United States to deliberately spend treasure to buy time. That time continues to be spent working out the excess inventory of our last mortgage boom. Looking at degraded real estate in particular that data shows that work to stem what was a tidal wave of 30-89 day delinquent loans seems to have gotten us back to the same levels of $76-78B today as it was in 2008 when the swan eggs hatched. This doesn’t mean the nest isn’t toxic. Over 90 day delinquent real estate presently stands at $105.5B. It was a mere $19B the day the music stopped. Similar large workout inventory remains in Non-Accrual loans that stand at $186B today and Other Real Estate Owned sits at $52B as of 1Q2011. To see the numbers behind this report go to the IRA Industry Fact Sheet .

Read the full article →

FST ANZ Summit 2011 To Discuss Wireless Banking, Data Management And Other IT Issues

May 26, 2011

FST ANZ Summit 2011 To Discuss Wireless Banking, Data Management And Other IT Issues

Read the full article →

ProPublica: The Heroes Are Really Zeroes in HBO’s Too Big To Fail

May 25, 2011

By Jesse Eisinger , ProPublica HBO’s Too Big To Fail — I just caught up with it last night, thanks to HBO On Demand — is extraordinarily revealing about the financial crisis. Only its revelations are almost entirely inadvertent. The movie is set up in the Hollywood conventional way: A gang of misfits, each with a special expertise, is brought together for an impossible mission. There’s Treasury Secretary Henry Paulson, steely eyed at the moment of truth. There’s New York Federal Reserve head Timothy Geithner, the athlete (he doesn’t just jog, but also plays what appears to be squash). And then there’s Federal Reserve chairman Ben Bernanke, the professor with a heart of gold and secret knowledge of the Great Depression. Ostensibly it’s a story of their success against all odds. Michael Kinsley, reviewing the movie in the New York Times , labeled Hank Paulson [1] the “hero” of the account. Except that the movie actually depicts something entirely different: failure upon failure. Too Big To Fail the movie isn’t the story of how the Three Musketeers saved the global economy. It’s a story of how the three didn’t see the financial crisis coming; hadn’t prepared for it; made mistake after mistake as it was cresting; and then, in their moment of triumph, made their most colossal blunder of all. That, it turns out (whether or not Too Big To Fail knows it), is the true story of the financial crisis. How much did Curtis Hanson and the writers mean for that to be the story? Throughout, the characters drop hints about their missteps, but the plot unfolds like a financial “Die Hard,” with our intrepid heroes battling fiendishly powerful forces toward a happy ending. (Full disclosure in this era of transparency: I write a regular column [2] for DealBook, the New York Times section edited by Andrew Ross Sorkin, the reporter upon whose book [3] the movie was based.) Early on, Paulson complains to his staff that they have been behind on everything as the crisis began to emerge. And that’s true! The crisis actually started in the late summer of 2007 [4] . Paulson’s first effort, late that year, was to get a bunch of banks to assemble a giant off-balance-sheet concoction [5] that would save each individual bank’s off-balance-sheet monstrosity. It was a complete flop. In the movie, as bankers and government officials frantically try to save Lehman, Chris Flowers, the private equity investor and banking impresario, is depicted as informing Paulson and Geithner that AIG is teetering on the edge. In their fumbled response, he immediately grasps the truth. “They’re not on top of it,” he tells a confederate. And they weren’t. In real life, AIG had been struggling since the middle of 2007. Paulson and Geithner [6] of course had some inkling of the problems [7] at the world’s largest insurer. But they didn’t prepare for it. In the movie, the chief executive of General Electric, Jeff Immelt, places a terrified call to Paulson [8] saying that GE can’t borrow. GE is standing in for every Real American manufacturing company. We are reminded it makes light bulbs and washing machines. Paulson is shocked that such a stalwart could be having trouble borrowing. The reality, of course, is that GE was more a finance company than a manufacturer and was teetering because it financed those operations with billions of short-term borrowing. It is also true that Paulson, Bernanke and Geithner had no inkling of GE’s troubles until the very last moment and therefore had no plan to deal with it. Plans are, in the movie, almost nonexistent. The team of heroes races from crisis to crisis, as Bond goes from chase scene to babe, eventually stumbling on the evil SPECTRE [9] plot to take over the world. Intentionally or not, the movie is echoing real life. Despite warning signs [10] , Paulson, Geithner and Bernanke had no evident plans throughout the last half of 2007 and the first eight months of 2008. Not for how to resolve Lehman after Bear Stearns’ collapse, not for AIG, not for recapitalizing the banking system. Indeed, they asked Congress for $700 billion to implement the Troubled Asset Relief Plan [11] to buy toxic assets from the banks, and then, without any further discussion, abandoned that idea and injected capital into the banks. Many economists [12] and financial experts had been urging them to do just that, but when they finally hit on that as a solution, it was so poorly thought out that they gave the money to the banks on overly generous terms. This moment is depicted at the end of the movie, and because it is both a triumph in the conventional narrative sense, but also a major mistake by our heroes, it is the

Read the full article →

European Institutions Scramble To Quickly Fill Top Roles

May 23, 2011

LONDON (Huw Jones) – Filling a trio of top regulatory jobs will be crucial for maintaining momentum in global reforms with the chances of emerging market candidates boosted if a European bags the IMF, regulatory sources and analysts said. “It’s not often so many things come up at the same time,” a source familiar with the situation said. The posts are opening up because Mario Draghi is expected to replace Jean-Claude Trichet as president of the European Central Bank this autumn, and Nout Wellink is stepping down as governor of the Dutch Central Bank. Draghi chairs the Financial Stability Board (FSB) which has been tasked by the Group of 20 (G20) leading economies to globally coordinate the reform of financial regulation. Few believe he can continue in this role and be ECB president. Wellink has been chairing the Basel Committee on Banking Supervision which authored the Basel III bank capital and liquidity rules that take effect from 2013. Trichet, meanwhile, chairs the Basel Committee’s oversight body, the Group of Governors and Heads of Supervision (GHOS). Both the Basel Committee and its oversight body have been headed by serving central bankers. Draghi has won plaudits for driving through a tough agenda of reforms in a short space of time while Wellink and Trichet were also key in getting a global deal on Basel III. A spokeswoman for the Bank for International Settlements, where the Basel Committee is based, said the process of replacing Wellink has begun and is being led by Trichet. CANDIDATES As in the past, all three jobs are set to be filled through backroom deals — but more is at stake this time round. Richard Reid, head of research at the International Center for Financial Regulation, said the changes were coming as grand regulatory plans are being implemented, a phase when supervisors become vulnerable to “regulatory capture” by the banks. “It’s very important that you have people who are able to understand the industry but also stand up to it,” Reid said. The FSB and Basel face the challenge of keeping up pressure over six years to implement Basel III and resolve key issues such as how much extra capital the biggest banks must hold. “It’s a critical time. There are basic tensions between on the one side wanting a universal level playing field and the other side wanting macro prudential tools to be varied over time and as between market participants,” said David Green, a former Bank of England official and regulatory expert. Names of potential candidates being whispered include Adair Turner, chairman of the UK Financial Services Authority. Another is Philipp Hildebrand, chairman of the Swiss National Bank. Germany may want a post after ceding the ECB to Draghi. The selection will also be shaped by who gets the top job at the International Monetary Fund to replace Dominique Strauss-Kahn who has stepped down to fight a sexual assault charge. French Finance Minister Christine Lagarde looks in pole position to continue the long line of European IMF bosses, strengthening the hand of developing countries when it comes to filling the three regulatory jobs opening up. “Emerging markets interested? Absolutely. I am certain people are looking after their own self interest in all circumstances,” a regulatory source added. Reid said turning the G20 into the world’s main economic forum won’t be enough to satisfy big emerging economies like India, China and Brazil. Singapore’s Finance Minister Tharman Shanmugaratnam is one non-western name doing the rounds. It could also hinge on whether the jobs are restructured, such as the FSB chair becoming full time, or the acceptance of a non-central banker to head the Basel Committee. (Reporting by Huw Jones; Editing by Ruth Pitchford) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

Video: Cassidy Says Concern Over Bank Rules Weighing on Stocks

May 13, 2011

May 13 (Bloomberg) — Gerard Cassidy, an analyst at RBC Capital Markets, talks about the performance of the banking industry and its impact on the broader stock market. Cassidy speaks with Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Read the full article →

Richard (RJ) Eskow: Forget Raj: "Too Big to Fail" is Still "Too Big to Jail"

May 13, 2011

Some of the headlines about the conviction of hedge fund manager Raj Rajaratnam are misleading or just plain wrong. The Rajaratnam guilty verdict won’t “change the way Wall Street does business” – not where it matters most. Too Big to Fail banks will continue to endanger the economy because they know they’ll be rescued again. And they’ll keep on breaking the law, knowing that even if they’re caught they’ll be protected from prosecution. And yet, instead of being grateful, bankers like JPMorgan Chase CEO Jamie Dimon will continue to publicly sulk about their own perceived mistreatment. That can be annoying, since the U.S. taxpayer saved their corporations, their careers, and their wealth from the consequences of their own mismanagement. But in the end all this public posturing is just a form of territorial primate display, like mandrills showing their brightly-colored posteriors to zoo visitors. These bankers are reminding us that this country’s economy and government are their territory and we’re just trespassing on their mating grounds. To paraphrase an old Sam and Dave song, “It’s their world, we’re just living in it.” Any aggravation felt as a result of their actions can easily be overcome through a rigorous program of spiritual and emotional self-improvement – or so I’m told. Here’s the real problem: If you combine the egocentric and self-absorbed vituperation from these CEOs with the fact that their institutions can continue to commit crimes without fear of prosecution, it means that Wall Street enjoys state of “undiplomatic immunity” that endangers the entire country. Whether it’s Dimon’s whine du jour , Bank of America CEO Brian Moynihan’s arrogant sarcasm , or Washington’s love affair with the CEO of serial corporate lawbreaker GE , the arrest of a hedge fund manager or two is insignificant as long as Wall Street’s real power brokers remain immune from investigation. The Rajaratnam conviction doesn’t change the underlying reality: Too Big to Fail is still Too Big to Jail. Something Fishy Rajaratnam sounds like a big fish. He ran a $7 billion hedge fund and was convicted of making $63 million from criminal behavior. But one bank alone, Dimon’s JPMorgan Chase, has already given up three quarters of a billion dollars to settle charges after it systematically bribed government officials in Alabama. Dimon’s Chase has set aside another $2.3 billion to settle additional lawsuits that are expected to arise from other illegal acts on its part. Jack Palance’s line to Billy Crystal in City Slickers was “I cr*p bigger than you.” Dimon’s JPMorgan Chase excretes legal settlements that are bigger than Raj Rajaratnam. How big are the biggest banks in America? Bank of America has $2.27 trillion in assets. JPMorgan Chase has $2.2 trillion. Citigroup has $1.97 trillion. Wells Fargo has $1.2 trillion. Compared to them, Rajaratnam’s hedge fund is just a rounding error. Raj Rajaratnam isn’t a big fish. He’s a guppy. Busting up the wrong gang This conviction is ” just the start, ” we’re told. Other members of Rajaratnam’s Galleon fund have been targeted, along with Silicon Valley executives and employees of other investment funds. And we’re told that the SEC’s investigation is broadening to address the idea of ” expert networks ” that link industry professionals (i.e., in technology) with hedge fund investors. To be sure, “expert networks” are dubious at best and downright illegal at worst. Business Insider did a useful round-up of firms who advertise themselves with phrases like these: “a global knowledge broker connecting professionals seeking specialist knowledge with those possessing it” …”connects the investment community and advisory firms with leading industry specialists around the globe in order to access key market information” … “the premier provider of expert consultation, market intelligence, advisory services, investment, and events for the China market.” To the untrained eye, that sounds a lot like insider trading. And to the trained eye it sounds a lot like insider trading. A very gray, very faint line divides “networking between the investment community and experts in the industry” and the illegal exchange of information between investors and experts. And it can be crossed in a heartbeat. In can be crossed in the course of a four or five-sentence answer that a “industry specialist” gives to a question from “a member of the investment community.” So it’s worth investigating. But it’s not the source of our economy’s systematic danger … or its systematic corruption. The Rajaratnam conviction may be “just the start” of something useful. But it’s not going to fix our worst problems. Big and Bad We never learned our lesson from the 2008 crisis. Instead of ending Too Big to Fail, the government has encouraged it. It’s been helping larger banks acquire small ones. There were 157 bank failures last year, and there are now roughly half as many banks in the U.S. as there were 20 years ago. And most industry experts agree that consolidation in the banking industry will continue. What’s much worse is the fact that the top banks are getting bigger, not smaller. The “Big Four” – Citigroup, JPMorgan Chase, Bank of America and Wells Fargo – had 32% of the market before the 2008 collapse. Afterwards they had 39%, and they continue to grow. And these corporations are all serial outlaws. Each of them has been deeply implicated in widespread mortgage fraud that includes the forging of court documents, a crime for which the Attorneys General for fifty states are reportedly reducing a proposed slap on the wrist to a proposed gentle kiss on the back of the hand. We’ve already described some of the crimes committed by Dimon’s JPMorgan Chase. The number of criminal indictments that resulted? Zero. Another “Big Four” bank, Wells Fargo, systematically laundered drug money from the cartels that have murdered 35,000 people in Mexico. Number of criminal indictments? Zero. Citigroup violated SEC law regarding corporate disclosures, engaged in illegal rate activity toward credit card customers, and is under investigation for aiding and abetting a Ponzi scheme. Number of criminal indictments? Zero. (A more detailed description of these banks and their rap sheets can be found here .) Get Real So forget all of those headlines that say Raj Rajaratnam’s conviction will “change everything.” The government is still targeting small fry and trying to convince the public it’s getting the people who have ruined their lives. It’s not. Justice won’t be served, and we won’t be protected from the next crisis, until executives from the major U.S. banks are seriously investigated for their roles in the criminal behavior that has already been admitted to and addressed with a wave of large financial settlements. It’s time to get real about Wall Street crime, before it brings down the economy again. And it’s time to end Too Big to Fail. If Raj Rajaratnam’s conviction fails to convince the public that the government’s cracking down on bad bankers, they’ll need another target for the public’s wrath. Who knows? Maybe they’ll arrest Martha Stewart again. Or they can get serious, and investigate the people whose crimes have done so much damage and may very well do more in the years to come. As Martha might say, that would be a good thing. ____________________________________________________________ Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

Read the full article →

U.S. stocks extend loss by midday, led by Banking and Technology shares…

May 13, 2011

U.S. stocks extend loss by midday, led by Banking and Technology shares…

Read the full article →

Antonio Borges: More, Not Less, Financial Integration Needed in Europe

May 12, 2011

Banks — and the loans they provided in the run-up to the crisis — are at the heart of Europe’s problems today. Yet it would be wrong to conclude that the crisis was caused by too much financial integration. In fact, the real problem may have been that there was too little financial integration. Policies to promote deeper integration of Europe’s banks — including through cross-border merger and acquisitions — should be part of the solution. Further progress in strengthening the institutions of the European Union (EU) is also needed. In the run-up to the global crisis, countries in the euro area periphery, and countries in emerging Europe that had fixed their currency to the euro, had very high current account deficits. These deficits turned out to be dangerous: when the capital flows suddenly slowed, the result was a deep crisis. European financial integration, and in particular the introduction of the euro in 1999, likely facilitated these high current account deficits. Interest rates in Europe converged at low levels, as foreign exchange risk was eliminated within the euro area (and reduced in those countries that were on the road to euro area membership), and as confidence in macroeconomic stability increased. The result was a big boost to investment and reduced saving in countries that previously had been living with high interest rates. Yet, as discussed in the IMF’s Regional Economic Outlook for Europe , it would be wrong to conclude that the crisis was caused by too much financial integration. The problem was not that capital flows were too large — it was that they were not used wisely. Capital flows boosted demand rather than supply, and imports rather than exports, and thereby contributed to large, and ultimately unsustainable, increases in external debt. Too many were oblivious of these risks — financial markets paid little attention until it was too late, and government policies did too little to address market failures. The real problem may have been that there was too little financial integration: Although some elements of the financial system are highly integrated, cross-border mergers and acquisitions in the euro area are still limited. As a result, banking flows to the euro area periphery during the boom years largely took the form of debt rather than equity, which exposed banks in the periphery to rollover risk. Europe has been integrated enough to foster large credit inflows, but not integrated enough to resolve crises quickly. The European Union fostered financial integration by adopting a common currency in the euro area, but it did not put in place effective instruments to handle cross-border risks or mitigate the build-up of imbalances financed by cross-border financial flows. With banking problems addressed at the national rather than EU level, banking and sovereign problems in euro area periphery countries exacerbated each other. Sovereign debt problems worsened as a result of the fiscal costs of banking problems, and concerns about the public sector increased the problems for the banking sector. How would more complete financial integration, together with pan-European institutions, have made it easier to resolve the crisis? Banking problems would have had fewer fiscal consequences. If domestic markets had been more open to foreign bank ownership, national public sector policies for supporting and recapitalizing banks would not have been the only options. Banks would have suffered less spillover from sovereign debt problems, as deposit guarantees and other implicit guarantees would not have depended on underwriting by the state. It would have been easier to consolidate the financial sector. Consolidation is now occurring slowly, if at all, and often within borders. In many cases, restructuring has led to refocusing on the domestic market and sales of foreign operations, thus reducing financial integration. If a pan-EU supervisory regime had been in place, excessive exposures or expansions of banking systems might have been spotted, and ill-considered unilateral policy moves avoided. With all that said, financial integration alone is not enough to address the current crisis — ideally, the best solution will rely on restoring growth in the crisis-affected countries. Ultimately, economic growth depends on productivity, which some countries have struggled to raise over the past decade, despite ample access to foreign capital. To boost sustainable growth, better policies are needed at the national level, while better governance at the EU level would help enforce such policies. Further European economic integration would unlock substantial efficiency gains, in particular if it dismantled many obstacles to cross-border competition that still exist, in spite of all the efforts to build the single market. To prevent future crises, we need more vigilance, both nationally and across borders, better institutions to deal with financial sector problems, and more, rather than less, financial and economic integration. From iMFdirect blog

Read the full article →

Richard (RJ) Eskow: Green Alert: Banks Use Bush Terror Team, Threat Tactics to Push Debit Card Fees

May 5, 2011

Big banks and credit card companies have made a PR misstep in the fight over debit card charges. They’re trying to use the Bush Administration’s anti-terror team to convince Americans that exorbitant debit card fees are needed for our nation’s security. The timing couldn’t be worse. Just as Bin Laden was being hunted down they decided to rely on the credibility of Michael Chertoff and Gen. Michael Hayden, two of the senior officials who failed to find him. It’s hard to imagine that somebody made a proposal for this campaign and somebody else gave it the green light. Attackers could strike the U.S. banking system, of course, either for criminal purposes or as a terrorist act. (I wrote a memo on the topic myself, in 1998.) But this campaign never suggests that any significant portion of U.S. debit card fees is being used to prevent cyber-attacks. Instead they use vague threats and insinuations to suggest that an attack could happen, and that we could be very, very sorry, if we don’t do as we’re told. Sounds familiar, doesn’t it? Just think: For a few bucks more they could’ve hired Tom Ridge to issue an “orange alert.” Their strategy centered around a meeting called the “Visa Global Security Summit – Evolutions in Payment Security.” It should be noted that Visa has more than 60% of the entire U.S. debit card market and Mastercard had the lion’s share of the rest. This duopoly crushes all competition in this marketplace, which is the main reason credit unions and other normally trustworthy groups have been arm-twisted into supporting them on this issue. After, all, if you don’t play along with Visa and MasterCard, you don’t have anywhere else to go. (Free market, anyone?) Publicity around the “summit” centered on a “Live Data Breach Simulation” moderated by Gen. Michael V. Hayden of the Chertoff Group. Here’s what you need to know about Gen. Hayden: His greatest foray into information technology came when, as director of the NSA, he initiated what may be the largest software development failure in history. As the Baltimore Sun reported in 2006, “A program that was supposed to help the National Security Agency pluck out electronic data crucial to the nation’s safety is not up and running more than six years and $1.2 billion after it was launched … After an estimated $1.2 billion in development costs, only a few isolated analytical and technical tools have been produced, said an intelligence expert.” Gen. Hayden didn’t just waste a billion dollars of taxpayer money. His project’s delays and failures also endangered our national security, leaving our defenses weakened at a critical time. One can only hope that the Summit’s “live simulation” came in on time and on budget. An executive in private industry would have been fired for a debacle like Trailblazer. Instead Hayden eventually became CIA Director, after pushing hard throughout the Bush years to dismantle civil liberties and expand the warrantless wiretapping program. These two events aren’t unrelated, of course. Compliance can be more useful than competence, when a boss wants the right political answer and a subordinate can be depended on to give it. Hayden chose a time-honored, if cynical, road to career advancement. Mr. Chertoff’s path to becoming Secretary of Homeland Security is equally instructive. As Special Counsel for the “Senate Whitewater Committee,” Chertoff worked tirelessly (if fruitlessly) to prove that Bill and Hillary Clinton did something illegal, in the now-discredited “Whitewater Scandal,” then did some fundraising for the Bush campaign in 2000. He was rewarded for his service with a judgeship on the Third Court of Appeals. When Rudy Giuliani sidekick (and now convicted felon) Bernie Kerik was forced to step aside, Chertoff was further rewarded with an appointment to Homeland Security. These two gentlemen appear to share a certain – how shall we say it? – responsiveness to the needs and wishes of their superiors. Their shared history hardly lends credibility to the claim that high debit card fees are the only thing standing between our bank accounts and the bad guys. The crux of this PR campaign came with stories like this one from the Washington Post : “The Federal Reserve has proposed capping … interchange or “swipe fees,” depending on which side you’re on — at 7 to 12 cents per transaction. That would reduce banks’ revenue from the fees by about 75 percent … On Wednesday, the card industry said a massive cybersecurity data breach could … be the result.” The Post added: “Debit card fees help pay for banks and the networks that process the transactions, namely Visa and Mastercard, to combat fraud and identity theft.” True, but excessive debit card fees don’t. The Fed didn’t just decide to cut fees by 75 percent on a whim. The recommended rate for similar fees in Western Europe is 75 percent lower, and they’re presumably as concerned about cybersecurity as we are. On the other hand, it could be true that cybersecurity four times as much here as it does in Europe – that is, if Hayden is managing it. Just it case you didn’t get the point of the Summit, a panel was held on what was called “the Durbin Effect,” named after the Durbin Amendment restricting debit card fees. The panel was described this way: “Panelists will explore long-term issues stemming from this new law, specifically the potential to impact payment security. Will a reduction in financial institution debit card revenue reduce future innovations and investments in new technology or force them to create more efficiency through tighter transaction screening?” We’re willing to place bets on which conclusion the panel reached. There was another unfortunate coincidence of timing As the Summit was being held last week, the Pew Foundation released a report which slammed the banking industry for taking advantage of debit cards to hit its customers with excessive and deceptive overcharge fees. (There have been no panels suggesting that deceptive overdraft fees are also needed to protect us from cyberattacks … at least none yet.) With this cynical move, the banking and card industries have only reinforced the impression that they have no legitimate argument for these extraordinarily high fees. Americans have reasonably good memories, and they remember when some of the same high-profile individuals who appeared at the Summit used security threates to promote everything from the invasion of Iraq to the re-election of political partisans. For more background on the debit card charge issue, the work of Zach Carter & Ryan Grim and that of Mike Konczal , is extremely helpful. (We did an overview of the debit card debate ourselves in March and concluded that it has become Wall Street’s ” invisible tax .”) More perspective can be found in this Grim/Arthur Delaney piece on how banks exert their influence over Congress. And as Carter reported today , Republicans made headway today in their efforts to prevent the government from protecting consumers from a wide range of bank ripoffs. None of this should reflect negatively on the other participants in the Visa Security Summit, by the way. There are a lot of good professionals working in this field, and presumably they provided valuable technical perspective to the discussion. That presumably includes Visa’s senior executive for risk management, who provided the first keynote address for the event. Risk management is a complex field, and most people who have leadership roles have earned them. But Chertoff’s speech and Hayden’s staged event only served to remind us of those desperate days when cynics used our greatest threats, and our greatest fears, to advance their own self interest. In trying to scare us into submission, the banks and card companies may have just lost their case. Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

Read the full article →

Big Banks Face Criticism For Their Speculative Role In Global Food Crisis

May 2, 2011

Today, rising food prices are reeking havoc in the developing world. While some blame overpopulation, and others ethanol, another culprit has emerged of late: banks and the role of speculative commodity indexes. The primary danger of the indexes, according to a new article by Frederick Kaufman in Foreign Policy , is that they fundamentally alter the food market by transforming key stapes into a financial asset that performs more or less like a stock. So while billions worldwide scramble to find money pay for food, food prices are often subject to intensified distortions of supply and demand from speculative markets. Since 1999, when the government first deregulated the commodities market, Kaufmann explains, investors have flocked to investing in food. The basis for that excitement is a Goldman Sachs-developed innovation known as the commodity index. Today, Kaufmann says, it’s a tool that has been replicated throughout the banking industry. The excitement over commodities trading has only picked up in the years since the financial crisis first brought the world economy — and the U.S. housing bubble — to its knees. That, Kaufmann says , was when this really kicked off: “The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash… In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.” Criticism of this speculation has heated up in recent weeks, with the Asian Development Bank releasing a report critical of the trend and recommending the elimination of policies “that create hurdles in transferring food from surplus to deficit regions.” Last September, the United Nations Special Rapporteur On The Right To Food wrote that “a significant portion” of rising food prices was due to the role of speculation. And then last week, Barclays Capital, the United Kingdom’s biggest commodity trader according to World Development Movement , became the target of protests by anti-poverty groups. “First, it was sub-prime mortgages, now it’s food commodities,” Deborah Doane, director of the World Development Movement, said, according to the Guardian . “The lack of transparency in these markets bears worrying resemblance to the behaviour that led to the 2008 financial crash.” Regardless of the reason, there is no denying that rising food prices have had a tangible affect around the globe. In mid-April, the World Bank reported that with food prices rising 36 percent from last year, at least 44 million people worldwide have been pushed into poverty since last June. With 1.2 billion people living on less than $1.25 per day, even small food price shocks can be devastating. Read the full Foreign Policy piece here.

Read the full article →

The U.S. Banking Industry Is Shrinking: Who Benefits?

April 28, 2011

By Knowledge@Wharton Though the U.S. banking sector was in recovery mode in 2010, it still managed to reach some highs and lows. There were 157 bank failures in the country last year, the most since 1992, according to the Federal Deposit Insurance Corporation (FDIC). And the number of new bank charters was at an historic low — 11, compared with 181 three years earlier. With so many banks leaving the sector and so few entering it, a long-anticipated consolidation process is now under way. The U.S. is expected to end up with no less than 6,529 commercial banks and 1,128 savings institutions by the end of this year. That is a 4.4% decline from the previous year, and it leaves the country with nearly half as many institutions as it had 20 years ago, according to the FDIC. What does this consolidation mean for the banking sector’s next 20 years? Should consumers be concerned about the shrinking number of banks? Many experts expect consolidation to continue, and predict that the trend will leave the banking system better off in the long run. “We don’t really need as many banks as we used to,” says Jack Guttentag , a finance emeritus professor at Wharton and former economist at the Federal Reserve Bank of New York. “Banks now have the power to [set up branches] wherever they want to, so what really matters is how many options a customer has in a certain market.” Therein lies the challenge, according to Kenneth H. Thomas, a Wharton lecturer of finance. As he sees it, not all customers will benefit from greater consolidation. A market, such as the one in the U.S., that is “over-banked,” with a supply of banking services exceeding demand, “is generally good for consumers and businesses because it results in lower prices — i.e., lower loan rates, loan/deposit fees and higher deposit rates — and higher output [in terms of] more varied and innovative products,” he notes. “Some may argue that ‘over-competition’ [or over-banking] could drive weaker banks out of business” — as happened to Washington Mutual, the savings institution that collapsed in 2008 — “but then someone else comes in and replaces them, yet may reduce the number of offices and amount of services.” History Lessons It is no accident that the U.S. has had such a large number of banks. Rather than setting up one, large national bank as other countries do, the U.S. federal government rolled out various laws in 1784 to encourage multiple banks in individual states. In 1863, a new banking act introduced a national charter that encouraged the establishment of more financial institutions even as it taxed banks with state charters. Nearly 70 years later, with the dawn of the Great Depression, the country had more than 30,000 banks. But the stock market collapse took its toll. In 1933 alone, about 4,000 commercial banks and 1,700 savings and loans institutions failed. The next wave of consolidation occurred in 1994 with the arrival of the Riegle-Neal Interstate Banking and Branching Efficiency Act. That made interstate expansion easier, whether it occurred through M&A activity or organically. The number of banks began shrinking annually by about 4.5% before another period of expansion in the late 1990s, according to the FDIC. With another swing of the pendulum last year, consolidation returned to 1994 levels. But in contrast to previous times, much of the consolidation has been due to failures rather than through M&A. Shuttered banks have ranged from American National Bank of Ohio, a small institution with assets of $70 million that had struggled for years to turn a profit and was under regulatory pressure until it was closed in March, to $25 billion Colonial BancGroup of Alabama, which closed its doors in the summer of 2009, a few days after regulators started an investigation into accounting irregularities. As the third largest failure in U.S. history, all of Colonial’s deposits were sold to BB&T, turning it into the ninth-biggest U.S. bank by assets, according to Bloomberg. As for M&A, there were 197 deals last year, a 20-year low. Loretta J. Mester, a Wharton adjunct professor of finance and director of research at the Federal Reserve Bank of Philadelphia, expects consolidation to continue over the next few years. “In the short term, I think consolidation will pick up as weaker banks go through mergers and acquisitions, and stronger banks take time to get their capital shored up” in their pursuit of greater efficiency and economies of scale, she notes. The Little Guy The institutions that will likely be hardest hit by all this activity will be the community banks. Most of these small, locally owned banks have less than $1 billion of assets, but account for 92% of all banks and savings institutions, says the FDIC. For many of them, the arrival of the recent Dodd-Frank Wall Street Reform and Consumer Protection Act was a death knell.Tougher controls involving capital, liquidity and leverage, and a surge in regulatory red tape, have left such banks struggling, particularly those with less than $500 million of assets. “Many small banks feel that they are being pushed out of existence by new regulations,” Thomas states. Their plight hasn’t been lost on the FDIC, which has launched various initiatives to give community banks some relief. A few weeks ago, for example, it released guidelines that lighten requirements for how these banks manage customers whose accounts are consistently overdrawn. The FDIC has also been encouraging entrepreneurs to buy troubled banks. According to Thomas, this trend started two years ago, when new charters were hard to come by. A case in point: BankUnited, a 70-branch Miami Lakes, Fla.-based financial institution, was taken public earlier this year after the FDIC sold it in 2009 to a bevy of private equity investors led by John Kanas — the former chief executive of a Long Island regional bank sold a few years ago to Capital One. Todd A. Gormley , a Wharton finance professor, says community banks play an important role in local economies. They typically have close relationships with individual customers, while, for example, making loan decisions based more on personalized information than the credit scores and other hard data used by large banks. “Smaller firms and local individuals trying to get loans from larger banks could be a subset of the population that is worse off because of consolidation,” Gormley suggests. There is also something to be said for the often underrated efficiency of smaller lenders that rely on personal relationships as a guarantee against loan defaults. In a study published last year, Stephanie Moulton, a professor of public affairs at Ohio State University, found that borrowers with low incomes or bad credit are significantly less likely to default on loans if they borrow from a local bank than if they receive a loan from a distant bank or mortgage company. Personal relationships, she concluded, are an important factor in the reciprocal relationship between lender and borrower, resulting in both sides offering critical information, such as repayment schedules. Easy Come, Easy Go According to Guttentag, consolidation also leaves a handful of banks controlling the majority of certain types of products. Four “mega banks” — Wells Fargo, Bank of America, JPMorgan Chase and Citigroup — now hold three-fifths of the home mortgage market, which limits consumers’ choice of products and their ability to shop around for competitive pricing. “It’s a textbook issue of a concentration of power,” Guttentag says. “A limited number of firms control the market, and they will engage in implicit collusion.” Thomas, meanwhile, is concerned about the concentration in geographic markets as a result of ongoing consolidation. While there are more than enough banks in the entire country, some cities, states and regions have just one dominant bank. “There are a few markets in danger of becoming a one-bank or two-bank town,” he says. For example, in the Pittsburgh metropolitan area, PNC Bank has 47% of the deposit share, according to the FDIC. The second-largest bank in the area is Citizens Bank of Pennsylvania, which has 8.5% of the deposit share. “We need competition because competition lowers prices,” Thomas states. While there are no limits on deposit shares in certain markets, 1994′s Riegle-Neal Act imposes a 10% cap on nationwide deposits for a single bank. That has since been interpreted as a cap on growth that occurs through mergers rather than organically. The Treasury Department is now looking into modifying the cap to include all consolidated liabilities. But Mester says consumers need not worry. “When there is consolidation, there are not necessarily fewer outlets for banking services,” she notes. While the total number of banks may be declining, the number of branches isn’t. Additionally, no matter where they are, consumers have access to a growing number of Internet banking options. In the last 10 years, the number of bank branches nationwide has increased 15%, although that expansion has primarily involved banks with $500 million or more in assets. The number of branches dropped slightly for the first time in a decade in 2010. As for the future, Guttentag predicts that the number of banks will continue to shrink, but he doubts the U.S. will ever look like, say, Canada — which has just 22 banks. Indeed, if consolidation continues as it has over the past 20 years at the average annual rate of 3.3%, it would take 60 years for the total number to fall below 1,000 banks and nearly 130 years to get below 100. “Even if the number of banks shrinks from 6,000 to 100, if those 100 are operating in all market segments and if consumers have many options, there is no reason for concern,” Guttentag says. Additional reading from Knowledge@Wharton: The Dodd-Frank Financial Regulatory Law: Long-Awaited Cure — or Cause for ‘Wild-Eyed Alarm’? ‘A Major Transformation’: The Pros and Cons of the Dodd-Frank Act The Coming Meta-Boom and Meta-Bust — One Economist’s View

Read the full article →

Wall Street Likely Profited Off Federal Reserve

April 26, 2011

A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates. The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended. The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed’s money and flipped easy profits simply by lending it back to another arm of the government. The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to “direct corporate welfare to big banks,” in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt “instead of using the Fed loans to reinvest in the economy,” Sanders added. In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used. As part of one Fed program, on 33 separate occasions, nine firms were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities for four-week intervals, paying one-time fees that amounted to the minuscule rate of 0.0078 percent. In another, financial firms pledged more than $1.3 trillion in junk-rated securities to the Fed for cheap overnight loans. The rates were as low as 0.5 percent. During one three-month period in 2009, Bank of America borrowed more than $48 billion at rates ranging from 0.25 to 0.5 percent. Meanwhile, the largest U.S. lender tripled its holdings of Treasuries and other taxpayer-backed debt to about $15 billion — securities that yielded 3.5 percent. During the third quarter of 2009, the bank borrowed $2.9 billion from the Fed through a program that charged 0.25 percent interest. In that same period, Bank of America increased its holdings of taxpayer-backed federal debt by $12 billion, according to the Congressional Research Service. Those securities yielded an average of 3.2 percent. “Bank of America provided vital support to the economy throughout the financial crisis and we continue to support businesses and individuals today through our lending and capital raising activities,” spokesman Jerry Dubrowski said in an email. In another period, JPMorgan Chase, the second-largest bank, swelled its holdings of taxpayer-backed federal debt by $20 billion, which yielded 2.1 percent, while at the same time borrowing $29 billion from the Fed at a rate of 0.3 percent. JPMorgan did not respond to a request for comment. In contrast, during the first year of the Obama administration, small businesses shuttered due to lackluster sales and a lack of credit, foreclosures surged, and credit contracted at one of the quickest rates on record. “Why wasn’t the Fed providing these same sweetheart deals to the American people?” asked Warren Gunnels, senior policy adviser to Sanders. “The Fed was practicing socialism for the rich, powerful and the connected, while the federal government was promoting rugged individualism to everyone else.” At the time, Fed officials said its bailout programs were necessary to restart the flow of credit. If money couldn’t flow to lenders, households and businesses would be next. Even more layoffs and foreclosures could have ensued, officials argued. Lending, however, decreased, according to Fed and Federal Deposit Insurance Corporation data. Mortgage rates dropped, but mortgages were harder to come by. Credit card lines were slashed. Loans were called in. New financing plunged. In 2009, outstanding credit to U.S. households declined by $234.5 billion. For non-corporate businesses, credit plunged $296.1 billion, Fed data show. Sanders said the spread between firms’ borrowing rates and their lending rates to Uncle Sam amounted to “free money.” For Bank of America during the third quarter of 2009, the spread was nearly 3 percent. Dubrowski countered by pointing out that Bank of America “extended $184 billion in credit to individuals and businesses” during that time. The author of the CRS report, Marc Labonte, cautioned that “correlation does not prove causation.” “There is no information available on how banks used specific funds borrowed from the Federal Reserve,” he wrote. The Federal Reserve declined to comment. CRS on the Federal Reserve’s Bailout

Read the full article →

Euro Falls After Moody’s Further Downgrades Ireland

April 15, 2011

DUBLIN (Padraic Halpin) – Moody’s cut Ireland’s sovereign rating by two notches to the verge of junk status on Friday and kept its outlook on negative, pushing the euro lower and adding to renewed pressure on the euro zone’s weaker countries. The move sent Ireland’s borrowing costs up and cut short a rare spell of good news after the government said on Thursday it had passed a review of its economic progress by creditors and ratings agency Fitch upgraded its outlook. A soaring of Greek borrowing costs to new highs has turned up the heat on fellow strugglers Ireland and Portugal this week after Germany said for the first time that Athens may have to restructure its huge public debt. Moody’s official Dietmar Hornung told Reuters, however, that the chances of Ireland having to restructure any of its debt were very remote and said he expected Dublin’s debt-to-GDP ratio to level off at a “sustainable” 120 percent. An advisor to Greece’s Prime Minister said last week that its debt-to-GDP will jump to over 150 percent by the end of the year, and higher still by the end of 2012. However Moody’s said Ireland’s growing debt would be high by EU standards and that weak economic growth prospects together with the expected decline of the government’s financial strength threatened its ability to manage the burden. “Should the intended fiscal consolidation goals not be met, a further rating downgrade would likely follow,” Moody’s said. “Moreover, a further deterioration in the country’s economic outlook would also exert downward pressure on the rating.” Moody’s said the downgrade to BAA3 from BAA1 — which puts its rating two notches below both Fitch and Standard and Poor’s — was also due to uncertainty around solvency tests required by the European Stabilization Mechanism (ESM) It said the country may need to take further austerity measures to meet its fiscal goals and that its financial position may suffer as a result of rises in European Central Bank interest rates. One in ten Irish mortgages were either in arrears or restructured at the end of 2010 and more customers are set to fall into difficulty after the ECB raised its base rate earlier this month. The ratings cut pushed the euro to a session low against the dollar, falling as low as $1.4451, down 0.2 percent on the day, and moving further away from its 15-month high around $1.4521 hit earlier this week. The Irish/German 5-year government bond yield spread was 20 basis points wider on the day at 724 bps. The equivalent 10-year spreads, which narrowed by around 100 basis points after an end-March fresh round of bank stress tests, were little changed on the day. ALL ABOUT GROWTH Ireland has been struggling to convince markets its spluttering economy can grow fast enough to sustain its debt burden since the International Monetary Fund and European Union arranged an 85 billion euros bailout last year. The IMF this week slashed its forecast for Gross Domestic Product (GDP) growth to 0.5 percent from 0.9 percent previously and said it did not expect Ireland to meet the target of getting its budget deficit under an EU limit of three percent by 2015. The government, which will get a full update on its progress on the IMF/EU deal later on Friday, is updating its forecasts but currently predicts 1.7 percent growth this year to give it a budget deficit of 9.4 percent. Analysts said the Irish story would now be all about growth. “I still think we will maintain investment grade, but at the same time the risks around achieving debt sustainability are to the downside,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers. “It’s absolutely all about growth now. I think we’ve parked the banking issue which is a positive and you can get that from the readings of the ratings agencies views.” On a positive note, Moody’s said that upward pressures could also develop on Ireland’s rating and that the country’s long-term potential growth prospects remain higher than those of many other advanced nations. (Editing by Patrick Graham) Copyright 2011 Thomson Reuters. Click for Restrictions .

Read the full article →

José Viñals: Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability

April 13, 2011

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath. But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive. Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies–while necessary to restart the economy–have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Many advanced economies are “living dangerously” because the legacy of high debt burdens is weighing on economic activity and balance sheets, keeping risks to financial stability elevated. At the same time, many emerging market countries risk overheating and the build-up of financial imbalances–in the context of rapid credit growth, increasing asset prices, and strong and volatile capital inflows. Here is our suggested roadmap for policymakers to address these vulnerabilities and risks, and achieve durable financial stability. Heeding the warning signs Challenges in four key areas put financial stability at risk. Confidence in the banking system has yet to be fully restored, nearly four years since the start of the global financial crisis. Progress in strengthening capital positions and reducing leverage has been uneven. There is considerable uncertainty about the quality of some bank assets, particularly exposures to higher-risk sovereigns and real estate in some countries. And a weak tail of undercapitalized banks remains. We have analyzed the sample of banks that European authorities used in last year’s stress tests. This snapshot of end-2010 data revealed that 30 per cent of these banks–representing a fifth of their total assets–have Core Tier 1 capital ratios of less than 8 percent. This makes them less able to withstand shocks and secure cost-effective funding. To solve these problems, we need comprehensive policies to increase bank transparency, raise capital buffers, and restructure and resolve weak banks. The forthcoming stress tests by the European Banking Authority are an important opportunity to assess the health of the EU banking system. But the tests need to be credible, stringent, and part of a broader crisis management strategy that includes backstops against capital shortfalls. Sovereign balance sheets remain under strain in several advanced economies. Certain countries in the euro area are especially at risk, because market concerns about the sustainability of public debt have prompted a sharp increase in funding costs and restricted credit supply, creating an adverse feedback loop with the real economy. These financial stability risks need to be addressed through strategies that combine medium-term budget deficit reduction with adequate multilateral backstops for crisis countries. Sovereign funding challenges could extend beyond the euro area. Both the United States and Japan are sensitive to higher funding burdens if interest rates increase substantially from current levels. Consequently, these countries need to take decisive action to ensure the sustainability of their public finances over the medium term. Household indebtedness in the United States remains elevated. This could negatively affect bank balance sheets, credit availability, and house prices. And, this could be a drag on the global economic recovery. More structural policies may be needed to address high household debt, including principal write-downs on mortgages. Our analysis shows that US banks are strong enough to withstand sizeable reductions in the principal of risky mortgages. Policymakers in emerging markets need to guard against overheating and a buildup of financial imbalances. A number of factors point to the incubation of financial imbalances, including: Exceptionally strong bank credit growth in some countries. Experience shows that there is a close connection between high credit growth and future increases in non-performing loans. Strong, and more volatile, capital inflows. Capital inflows are not yet excessive, but recent volatility has already tested the absorptive capacity of some emerging markets. Putting danger behind us So what can policymakers do to achieve durable financial stability? Advanced economies need to deal with the legacy of the crisis–effectively and immediately. They must reduce their reliance on policies that mainly responded to the symptoms of the crisis, and increase their focus on measures that address the underlying causes. In particular, they need to fully repair their banking systems, strengthen sovereign balance sheets, and reduce household debt burdens. By contrast, emerging economies need to act–before it’s too late–to avoid future crises. Given the risk of overheating and financial imbalances, policymakers need to make more, and better, use of macroeconomic measures, such as official rate hikes, more flexible exchange rates, and fiscal tightening. Macroprudential policies and, in some cases, capital controls can play a supportive role. Of course, internationally consistent regulation is the cornerstone on which a safer global financial system can be built. Advanced economies and emerging markets, therefore, have a shared responsibility to press ahead with regulatory reforms. No one said it was going to be easy The task ahead is not easy. There are very real risks: risks of complacency; of fatigue; or reluctance to make hard policy choices. Action is needed now to ensure that the outstanding threats to global financial stability are dealt with once and for all. And only through international cooperation can those actions prove fully effective. The global economic recovery will be on firmer ground only if we achieve durable financial stability. From iMFdirect blog

Read the full article →

Omer Rosen: How to Deceive a Client Without Really Trying

April 11, 2011

In my first article, ” Legerdemath: Tricks of the Banking Trade ,” I made brief mention of Treasury-rate locks: “Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices.” A number of readers expressed doubt that using a settlement method based on Treasury prices was appropriate. What follows is an abridged explanation of a Treasury-rate lock deception. I offer it not in the misguided hope of stamping out abuses in Treasury-rate lock transactions. Rather, I seek to give a detailed example of a certain type of behavior — hoping it carries more weight coming from an ex-insider speaking onymously. There are two basic ways to describe the value of a Treasury bond, either by price or by yield. Price answers a simple question: How much would it cost you to purchase a bond? This price will change over time, in much the same way that the price of a stock changes over time. Playing counterpart, yield expresses the return that will be earned by purchasing this bond at a certain price. It is similar to how one can describe the speed of a car either by the average number of miles per hour it is traveling at or by the time it takes it to travel one mile — if you know one you can solve for the other, and if one goes up the other comes down. To belabor the point, either “1 mph” or “a 60-minute mile” provides you access to the same knowledge about the speed of a car. And, just as traveling at 1 mph allows you to complete a mile in 60 minutes, purchasing a bond at a certain price “allows” you to earn a certain return (i.e. a certain yield) on your investment. Now back to Treasury-rate locks. When a company puts on a Treasury-rate lock, it is putting on a bet that will pay off for the company if Treasury prices go down and go against them if prices go up. I ask that you accept on faith that sometimes this bet, rather than being a gamble, reduces risk and uncertainty for a company. When the time comes to settle this bet, the change in value of the bond must be calculated. This should be a simple matter of subtracting the bond price at the time of settlement from the price agreed to when the rate lock was put on. However, when it comes to bonds, corporate clients do not think in terms of price; they think in terms of yield because yield is expressed in the language of interest rates, the same language companies are familiar with from business concepts such as rates of return and borrowing costs. And so the client is conveniently never shown how to settle based on prices. Instead they are taught a nonsensical and more complicated method called yield settlement. The sole purpose of this settlement method is to trick the client into allowing the bank extra profit. Unaware that they should even take a second look at what they assume is procedural, the client does not question. Whereas price settlement asks, “By how much did Treasury prices change?” yield settlement asks, “By how much did Treasury yields change?” But how does one convert a change in yield (i.e. a change in an interest rate) into a dollar value that can be paid out? The short answer is that one cannot. But why not? If price and yield are both valid ways of expressing the value of a bond, shouldn’t you be able to measure the change in value of a bond by looking at either the change in its price or the change in its yield? Resorting to hyperbole, teaching a client yield-based settlement is akin to selling them on skipping through time. Return to our car analogy. In this analogy, “mph” will play the role of “yield” and “travel time” will play the role of “price.” And, rather than calculating the difference between two bond values, we will calculate the difference in travel time between each of two laps by our car around a 1-mile track: If lap 1 is completed at a speed of 120 mph and lap 2 at a speed of 1 mph, how would you calculate the difference in travel time between the two laps? If you were using yield-settlement logic, you would first imagine a car that speeds up from 1 to 2 mph. The time required to travel a mile would decrease from 60 to 30 minutes — a 30-minute change. Then you would assume that for all 1-mph changes in speed, travel time per mile would also change by 30 minutes. This logic implies that lap 2 would take 3,570 minutes longer to complete than lap 1 ((120 – 1) x 30). Short of a DeLorean and some lightning, this is not possible. For makes and models without a flux capacitor, correctly calculating the decrease in travel time means converting each speed from mph to travel time per mile, then taking the difference between the two travel times. As a 120-mph lap takes 30 seconds to complete and a 1-mph lap takes 60 minutes to complete, the difference in travel time between the two laps would be 59.5 minutes. Similarly, for rate-lock settlements, yields must be converted to prices, with the correct settlement value being the difference between those prices. Yet we at Citigroup, and in my experience our peers at other banks, almost always instructed clients to use the yield-based settlement method. And so a product that is meant to return the difference between two Treasury prices, a matter of elementary subtraction, is perverted for profit. If yields change by very little, this profit does not amount to much. Fortunately, depending on one’s point of view, banks have other tricks for profiting from rate locks and do not rely solely on yield-based settlement. In fact, miseducating clients with yield-based settlement is almost an afterthought, just a bonus that pays off with large movements in yield. And, in behavior that might be considered yet more sinister, sometimes banks had to agree with one another to miseducate clients with yield settlement. This transpired if a client decided to divvy up a single rate-lock transaction, with each bank getting a piece of the deal and each bank knowing that settlement of the rate lock would have to be a coordinated affair. All this mathiness is hidden in plain sight. Some examples of yield settlement can be found online. Or you can just ask a company that put on a rate lock to dig up some trade confirmations and see what settlement methodology was used. There are hundreds, if not thousands, such documents in corporate offices around the country, each one part of an unwarranted transfer of millions of dollars from clients to banks. For a more in-depth treatment of the above song and dance, with explications of the bond math and client interactions, please click here

Read the full article →

Jeanne Gobat: Reducing the Chance of Pulling the Plug on Liquidity

April 6, 2011

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets. Many financial institutions were unable to roll over or obtain short term funding without sustaining significant losses. This threatened to sink them. Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down and less stable–that is, they underestimated their contribution to systemic liquidity risk in good times, and did not bear the cost of their actions on others in bad times. It only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. The key then is to make sure that firms have less incentive to pull the plug. This requires establishing the right incentives in the good times. We argue that more needs to be done to introduce macroprudential policies-ones that take into account the big picture of the financial system as a whole. In the latest Global Financial Stability Report , we have come up with a way to measure how much an individual financial institution contributes to system-wide liquidity risk. This can be used to develop a macroprudential tool to capture the cost an institution imposes on the rest of the system. For instance, this can be achieved by requiring all financial firms that contribute to systemic liquidity risk to buy insurance proportionate to the expected contingent liquidity support they might need from central banks in times of systemic liquidity stress. We propose three different approaches to measuring systemic liquidity risk: A systemic liquidity risk index that captures breakdowns of various financial arbitrage relationships across securities and can be used to signal a tightening of market liquidity and funding liquidity conditions. A systemic risk-adjusted liquidity model that can be used to calculate a time-varying, forward looking market-based measure of systemic liquidity risk, and an institution’s contribution to that risk; and. A macro stress-testing model which gauges the effects of an adverse macroeconomic or financial environment on the solvency of institutions and in turn the impact failures may have on liquidity shortfalls of others. Financial institutions have dealings with one another. Taking those interactions into account, we found that the probability that all institutions would have troubles meeting their cash flow needs was far higher during times of extreme market disruptions compared to if one were to simply add up each individual institution’s chances of liquidity problems. Our research underscores that the whole is greater than the sum of its parts. The connections between asset and funding markets, and the relationships among financial institutions themselves, contribute to liquidity risk in the financial system in a way that cannot–and should not–be underestimated. The next step is to test the models to see how they perform, and whether a capital surcharge or an insurance premium more cost effectively captures an institution’s contribution to systemic liquidity risk. Ideally, our framework should be expanded to include all non-bank financial institutions that contribute to systemic liquidity risk. This can include special investment vehicles, money market mutual funds, hedge funds, finance companies and others. Much of this will depend on the structure of a financial system, and will vary from country to country. Finally, we emphasize that a multipronged regulatory approach will have to be taken to address systemic liquidity risk. For instance, imposing add-on capital surcharges to control systemic solvency risk among global systemically important financial institutions, as is being currently considered under the G-20 reform agenda,may also help lower systemic liquidity risk. The two risks are closely interrelated: if a regulator or supervisor imposes a capital surcharge for systemic solvency risk on financial institutions and that lessens the need to rely on systemic liquidity risk mitigation techniques, all the better. But if the chosen measurement technique finds that there is still a residual contribution to systemic liquidity risk then an institution would then need to pay for it. Finally, measures to make funding markets work better by strengthening the infrastructure underpinning them, for instance by having collateral behind repurchase agreements registered with central counterparties, would also help lower systemic liquidity risk. A number of reforms have been put in place to address liquidity risk management at the individual firm level. The introduction of new quantitative liquidity standards under Basel III for commercial banks should help enhance the stability of the banking sector and indirectly help mitigate systemic liquidity risk. But at their core Basel III reforms are microprudential — that is they are firm specific, and do not account for the myriad connections between institutions in the financial system, or its pro-cyclical tendencies — both which contribute to a buildup of systemic liquidity risk. Crossposted from iMFdirect .

Read the full article →

Chriss Street: Why Bankers Want a Muni Bond Taxpayer Bailout

April 3, 2011

On May 5, 2009, I testified in front of Barney Frank’s Financial Services Committee that if Congress provided a guarantee of municipal bonds, the United States of America would lose its’ AAA credit rating. Over the next year-and-a-half, I was labeled the “typical Orange County ultra-conservative alarmist” when I spoke at dozens of investment conferences on growing risks of munis to investors. Even as the general market price of long term munis dropped over 20% in the fourth quarter of last year, virtually every major Wall Street investment bank continued to reassure investors that municipal bonds were a great buy. All that hoopla ended yesterday, when Jamie Dimon, the CEO of JP Morgan Chase Bank, acknowledged at a U.S. Chamber of Commerce event in Washington D.C., that hundreds of tax free municipal bonds issues will ” not make it ” and default. Mr. Dimon has intimate knowledge of the municipal bond market, because his firm is the third largest underwriter and issued $47 billion of munis last year. Mr. Dimon added : “I don’t think it’s going to shatter America, I just think it’s a part of the credit cycle.” Mr. Dimon and his bank have obviously sold their municipal bond holdings, but perhaps the timing of the release of this insider’s perspective on a coming market crash has something to do with his bank’s own needs. Currently there are 50,000 municipal bond issuers in America and they have sold over $3 trillion in bonds to mostly individuals, mutual funds and money market funds. A good portion of tax free bond sales were to fund local government worthy projects, such as roads, schools and even city halls. But another huge portion of the money raised in the municipal bond market has gone to support politically connected contractors and other crony capitalists. Mr. Dimon has real insider knowledge of this dark side of the muni market; since his firm in 2009 paid $75 million in penalties and forfeited $647 million to settle SEC charges in an alleged municipal bond kick-back and derivative scam. It seems those nice people at JP Morgan Chase somehow got $3.5 billion in underwriting business after sprinkling $8 million in cash on the friends of elected sanitation officials in Alabama. If one issuer alone could cost a bank almost three quarters of a billion dollars, how much could hundreds of defaults cause the banking industry? And, what if it turns out thousands of these muni deals were tainted by pay to play? How much more could a coming market crash cost the banking industry? Many Americans believe the current financial problems that state and local government are going through are due to high unemployment costs and lower income taxes, but the majority of state and local revenues come from property taxes. If U.S. property tax revenues had risen at the rate of inflation since the start of the real estate bubble in 1996, total property taxes collected this year would have been $296 billion. But collections last year totaled $476 billion, 60% or $180 billion more than inflation. Furthermore, instead of falling back by the 33% plummet in home values since 2006, property taxes rose another 27% or over $100 billion since 2006. The reason for the rising property taxes in this dreadful property market is that local government has been wildly efficient in raising assessed values of property, but incredibly inefficient in cutting values. This has started to create a tax revolt that is growing very rapidly as homeowners are appealing or litigating to drive their property tax bills down. Below is a chart of the State of California projected tax revenues versus budget expenditures. The fastest growing budget cost is snowballing interest and principal payments for municipal bonds. Ten years ago these bond payments were only 3% of the budget, but in two years they will reach 10% of the budget. The State revenue projections shockingly assume property taxes collections do not decline, but a 30% decline in assessed values would cost the state $20 billion. Jamie Dimon is one of the smartest bankers in the world and he fully understands his bank and the rest of the banks are facing a muni bond financial meltdown. The banking industry recently used their money and power to get Congress to stick taxpayers with the $3 trillion bailout of the banks’ busted mortgage loans. The bail-out was so successful for Mr. Dimon, that last year he pocketed a $17 million bonus. I believe Mr. Dimon’s new-found honesty about the risks of municipal bond defaults is part of a strategy to convince Congress to once again saddle taxpayers with a bailout of state and local government. From Mr. Dimon’s perspective, JP Morgan Chase Bank should be about bonuses and taxpayers should be about bailouts.

Read the full article →

Video: Wyplosz Says Portugal May Need $20-$30 Billion Bailout

March 30, 2011

March 30 (Bloomberg) — Charles Wyplosz, director of the International Centre for Monetary and Banking Studies, discusses the outlook for Portugal’s financial crisis. Wyplosz speaks with Deirdre Bolton on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Read the full article →

José Viñals: Government Bonds: No Longer a World Without Risk

March 25, 2011

The risk free nature of government bonds, one of the cornerstones of the global financial system, has come into question as the global crisis unfolds. One thing is now very clear: government bonds are no longer the risk-free assets they once were. This carries far reaching implications for policymakers, central bankers, debt managers, and how the demand and supply sides of government bond markets function. After a recent IMF conference on a new approach to government risk, I’d like to highlight three key aspects: In a world without a risk free rate, the health of the financial sector and the government are closely interconnected. We need to better understand the linkages between sovereign and financial risks, and conduct a thorough analysis of the channels of cross-border spillovers. Policies to help manage sovereign risk will have a positive impact on financial stability, and measures to stabilize the banking sector will have a favorable impact on sovereign balance sheets. Countries with large potential liabilities from their banking sectors need to identify, assess, monitor, and report related risks closely. The impact of these contingent liabilities on the government’s financial position, including its overall liquidity, needs to be assessed when making borrowing decisions. The risks involved call for stronger emphasis on stress tests. There is anecdotal evidence that some debt managers are complementing existing analytical approaches with a greater focus on stress scenarios, including extreme financing shocks. Policymakers could take the extra step and contemplate the role for a joint stress test for systemically important financial institutions and sovereigns. The outcomes of such stress tests could help inform crisis preparedness, debt strategies, as well as financial supervision and regulation. Implications for supply and demand These views are the result of some recent profound changes in the way government bond markets operate. On the demand side of the market, dealers and investors no longer treat these bonds as purely interest rate products. Far from it, government bonds have assumed characteristics typical of credit products, for which prices mainly provide measures of borrowers’ probabilities of default. Many are not as liquid as before and their investor base is not as diversified as it used to be. During phases of risk aversion, they do not benefit from flight to quality flows. On the contrary, they correlate with risky assets. Credit rating downgrades play a procyclical role and can exacerbate these adverse dynamics. Central bankers generally accept government bonds as collateral in refinancing operations, but, below certain thresholds, lower ratings could trigger sizeable haircuts, in other words, revaluing the bonds substantially below their market value. Regulators could also assign them a non-zero risk weight under the standardized approach and suddenly these bonds are not risk-free rates any longer. And even if bonds such as United States Treasuries and German Bunds have retained most of their risk-free characteristics, the once solid dividing line between interest rate and credit products has become blurred. In the long run, such changes can profoundly affect investors’ choices. One example of these changes is that more capital may flow towards emerging markets. These economies have been able to absorb the recent inflows, but the increase in corporate and financial leverage, rising asset prices, and building inflationary pressures may soon translate into growing imbalances and open the door to a new set of challenges to financial stability. On the supply side of the market, debt managers in advanced economies have started behaving a bit like their emerging market colleagues. Given the increased exposure to economic and financial risks, they have started placing stronger emphasis on risk mitigation strategies , well beyond what traditional debt management objectives would indicate. Confronted with the usual trade-off between being predictable or flexible, most of them have erred on the side of flexibility. While retaining an open dialogue with financial markets, they realize that annual programs have to offer sufficient flexibility to cope with the challenges of issuing and managing larger amounts of debt. Finally, debt managers are putting a high premium on proactive and timely communication as well as on understanding the evolving nature of the investor base. These are precisely the elements that were outlined in the ‘Stockholm Principles’ IMF facilitated with the debt managers in September 2010. The global crisis is sending many of us back to the drawing board to take a fresh look at old assumptions and long cherished principles, and the risk free nature of government bonds is no exception. From iMFdirect blog

Read the full article →

Bernanke: Dodd-Frank Should ‘Level Playing Field’ For Small Banks

March 23, 2011

SAN DIEGO – New financial regulatory reforms should help reduce the edge that large banks have over smaller ones because of their implicit support from government, Federal Reserve Chairman Ben Bernanke said on Wednesday. Bernanke argued the Dodd-Frank reform legislation will address the issue of firms perceived as too big to fail by restricting their activities, raising their capital requirements and enhancing regulators’ ability to wind them down. “A financial system dominated by too-big-to-fail firms cannot be a healthy financial system,” Bernanke told a group of community bankers in a speech that did not touch on the broader economic outlook. “One benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes,” he said. A number of other top Fed officials, including Richard Fisher, president of the Dallas Fed bank and Thomas Hoenig, president of the Kansas City Fed, have argued the legislation does not go far enough. They have called for very large banks to be broken up. WATSON NO CREDIT OFFICER Bernanke said part of the reason the new laws governing the financial sector would support community banks was that regulators are cognizant of their concerns and challenges. With that in mind, the Fed is aware that many community banks need time to recover from the financial crisis. “We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as small as possible,” he said. He said the crisis suggested fancy computer models are no substitute for on-the-ground intelligence on lending, joking the IBM computer that had recently won the U.S. game show “Jeopardy!” was not well equipped to make credit decisions. “This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms,” Bernanke said. “Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers.” Copyright 2011 Thomson Reuters. Click for Restrictions

Read the full article →

Charles Gasparino: Is Meredith Whitney Flip-Flopping or Stalling?

March 21, 2011

Meredith Whitney’s doomsday prediction back in December that there would be 50 to 100 sizable municipal bond defaults totaling hundreds of billions of dollars over the next year sparked a panic that hurt average investors who hold munis for their retirement, and municipalities trying to raise much needed cash during a time of strained budgets. And yet, even as it become clearer by the day that what Whitney said was both irresponsible and wrong (do the math; just $12 million of munis have defaulted since December and we’re already ¼ of the way through her timetable) she continues to mesmerize certain members of the press with her nonsensical meanderings about a market she obviously knows nothing about. Witness today’s USA Today snoozer titled ” Maria Bartiromo interviews Meredith Whitney .” The banking analyst turned fortune teller has been studiously avoiding much of the media after reporters like myself began questioning her prediction , and demanding that she produce the actual research backing up her claim that muni defaults not even seen during the Great Depression were supposed to happen over the next year. But if you’re expecting Bartiromo to do the same, you’re going to be disappointed. In fact, the interview reads like a press release that allows Whitney to spin another absurd tale, leaving readers questioning whether the analyst who adroitly called the banking crisis in 2007 has since been lobotomized along with the interview’s author. All of which wouldn’t be so bad if Bartiromo didn’t serve as a conduit for Whitney’s initial absurd claim. In late December, after Whitney told 60 Minutes that municipal governments in 2011 were going to be no different than the banks were in 2008, she was promptly “interviewed” by Bartiromo on CNBC without even having to produce a shred of actual research to support her claims. With that, the market for municipal bonds imploded. Because of the panic selling, small investors (the primary holders of munis because of their tax advantages) got hit the hardest, unless of course you count the nation’s taxpayers who are now forced to pay higher interest rates when the cities and states they live in need issue debt. This all seemed to fly over the head of Bartiromo, who lets Whitney off the hook once again, namely by failing to get Whitney to admit that she was wrong, and make her concede that her prediction was devoid of any real analysis (I have seen the research and it makes no mention of all those defaults). And make no mistake about it, what Whitney predicted is wrong; so wrong that now she’s even admitting to it, though her mea culpa once again seemed to go over the author’s head. In the interview, Whitney now says her 50 to 100 sizable defaults prediction isn’t going to occur over the next year. Rather, it’s “an extended, multi-year issue.” It would have been nice to know this three months ago. Even so, Whitney doesn’t say how extended the default scenario is. Will it occur over 5, 50 or 100 years? We don’t know, not just because Whitney isn’t used to providing such details, but because as far as I can tell, Bartiromo didn’t ask. Or check out this little gem. “You have been the voice for concern regarding the finances of states and municipalities,” Bartiromo intones. “How do things stand today?” I hate to break it to you Maria, but Meredith Whitney is far from “the voice of concern” regarding the dismal state of municipal budgets. Just about every mayor and governor, journalist, taxpayer and investor I know has weighed in on the issue of governments spending too much, as tax revenues fall and budgets fall out of balance. I put New Jersey governor Chris Christie above Whitney on this issue any day of the week. Nonetheless, Whitney is now admitting that public officials are doing what she said they couldn’t or wouldn’t do just three months ago by cutting their budgets, raising taxes, or a combination of both, so they don’t default on their debt. “Every day things get better because politicians are addressing the fiscal challenges more aggressively,” she now says. “Since November, you’ve had more governors take strong austerity measures…everyday the situation gets more focused and that means its closer to a fix.” Keep in mind, Whitney’s 60 Minutes and CNBC appearances occurred in late December, which renders this statement about as dopey as the others. The real story, I believe, isn’t whether this reporter is kissing up to a source (we all do it from time to time) but whether an analyst who has the stroke to tank the market, is now fully backing away from her claim and what that means for investors and taxpayers. “Time will tell,” whether her prediction will be right or wrong, she says in the interview. Okay, so here’s my prediction: In nine months, when defaults are less than half of what Whitney suggested, she will be taking credit for sounding the alarm bells, and forcing public officials to make the hard choices and avoid default. How do I know this? Well, time will tell.

Read the full article →

Ann Pettifor: If Japan Can Address Her Crises, Then the U.S. Can Address Job and Energy Insecurity

March 21, 2011

The disaster in Japan is almost beyond comprehension. Without minimizing the scale of the humanitarian tragedy, it is already possible to discern the emerging economic debate. Stock markets immediately anticipated the potential benefits to Japan’s construction industries and their suppliers. Policy makers in the U.K. and Europe, who are busy implementing austerity measures to curb budget deficits, should take note. The valuable argument coming from the ashes of this crisis is simple: Japan can afford to rebuild. The Bank of Japan is clear about this. In asserting this point, and calming markets with massive liquidity injections, the central bank is basing its Keynesian policy on a wholly different analysis from that of economists and politicians promoting austerity measures in Europe and the U.S. The economic possibilities of nations don’t depend on financial resources, but rather on human, technological and organizational power. The banking industry relies on these productive resources. The stability of banks hinges on lending for projects that will generate revenue streams for their own repayment. Power of Banking Japan is replete with all the human ingenuity and dedication that reconstruction and rebirth demands. The power of modern banking can enable Japanese society to deploy all of these resources, irrespective of the condition of Japanese public finances. The domestic banking system can circumvent the naysayers of international finance in a manner that should be understood by all financial authorities and economists. Japan can address this natural and man-made disaster without handing a begging bowl around to other nations. The same logic that enables Japan to solve its multiple crises defies European Union and American politicians who have reacted to the 2007-09 financial crisis with austerity policies. Their doctrine holds that because public finances are in disrepair we can’t address the energy or food insecurity threatening our economies, or to reduce the unemployment that jeopardizes economic, social and political stability. This diagnosis puts the cart before the horse: There is an energy and jobs crisis, not a public-finance one. Affordable Work The state of public finances is primarily a consequence of the financial crisis, the increase in insolvencies and unemployment, and the resultant decline in revenue. If there is reconstruction work that can be done by the people of Japan — and there are people to do it — it is affordable. The marvel of the domestic-banking systems that have existed since the 18th century is to permit this economic process to be stimulated. New work will generate all the public revenue necessary to repay any loans from the banking industry. The nuclear tragedy unfolding in Japan has its roots in faulty logic applied by international financiers and their “hired guns”‘ in the economics profession. Society has been convinced that nuclear power is necessary because it is the only affordable option. But all energy technologies are affordable. The real test of affordability isn’t cheapness but the most effective use of the real resources of society, taking into account threats like climate change and the risks associated with particular technology choices. Man-Made Hazard To have built nuclear power plants in the so-called Ring of Fire was to create an entirely unnecessary, man-made hazard. Decisions as to whether nuclear power is the most appropriate response to energy shortages and the threat of climate change is a question for society — not for business or finance. This is most clearly illustrated in the demonstrations and debates surrounding the forthcoming elections in Germany’s Christian-Democrat-dominated state of Baden-Wuerttemberg. It is our tragedy that policy makers permit a glimpse of these lessons only in times of war. Unemployment in peacetime, combined with risky and reckless investment, is imposed on nations by ignorance, greed and special interests. May the legacy of this appalling and destructive crisis in Japan be the abandonment of such faulty and brutal doctrines, so that the people of Japan and of the world may now turn to the possibilities of what can be achieved to restore financial stability as well as energy and job security.

Read the full article →

Goldman Sachs Buys Out Warren Buffett

March 18, 2011

OMAHA, Neb. — The Goldman Sachs Group Inc. said Friday it has received regulators’ permission to spend $5.65 billion to repurchase Berkshire Hathaway’s preferred shares in the banking giant. Goldman said the Federal Reserve has approved its plan to repay Warren Buffett’s company for the $5 billion investment it made at the height of the financial crisis in the fall of 2008. Goldman was eager to repay Berkshire because it had been paying 10 percent interest on the preferred shares, which translated into an annual expense of $500 million. “Berkshire Hathaway’s 2008 investment in Goldman Sachs was a major vote of confidence in our firm and we are very appreciative of it,” Goldman spokesman Stephen Cohen said. The repurchase will weigh down Goldman’s first-quarter earnings by $2.80 per share because it includes a one-time preferred dividend of about $1.65 billion. The Federal Reserve also approved Goldman’s overall capital spending plan for 2011, including the repurchase of common stock and a possible increase in the bank’s quarterly dividend. But Goldman did not announce any stock purchase or dividend plans on Friday. Goldman was one of a number of banks subjected to “stress tests” conducted by the Federal Reserve to see if their balance sheets were strong enough to weather another recession. On Friday, the Fed said it had completed those tests and expects that “some” banks will increase or resume dividend payments and buy back shares. The Fed did not reveal the names or number of banks that are expected to do so. Berkshire’s Goldman investment figures in a high profile insider trading trial because prosecutors say a former Goldman board member tipped off Galleon hedge fund founder Raj Rajaratnam about Berkshire’s investment before it was announced. The SEC said Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock within a minute of receiving the tip about Berkshire’s investment, enabling him to earn nearly $1 million in profit. Rajaratnam’s trial began earlier this week. He has denied wrongdoing. The former Goldman board member has also denied wrongdoing. Buffett did not immediately respond to a message Friday seeking comment, but he predicted in his annual letter to shareholders last month that Goldman would soon redeem the shares. Buffett has said that the $500 million dividend Goldman had been paying Berkshire broke down to nearly $16 a second, making every tick of the clock sound like music to his ears. But he said Goldman didn’t seem to like hearing its money tick away. Buffett told shareholders that Goldman’s decision to redeem shares – along with similar moves by Swiss Re and General Electric – will diminish Berkshire’s earning power because it will no long receive the special high dividends. Berkshire’s 50,000 preferred shares of common stock will be repurchased for $110,000 apiece on April 18 because Goldman was required to give 30 days notice. But Berkshire will continue to hold warrants to buy 43.5 million common Goldman shares at a price of $115 per share anytime before the fall of 2013. Earlier this week, Berkshire found a use for some of its cash when it announced a deal to pay $9 billion for specialty chemical company Lubrizol Corp. That deal, which includes $700 million in debt, is expected to close in the third quarter, if shareholders and regulators approve. Berkshire owns roughly 80 subsidiaries, including clothing, furniture, jewelry and corporate jet firms, but its insurance and utility businesses typically account for more than half of the company’s net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co. Berkshire has more than 260,000 employees worldwide but only 21 at its headquarters in Omaha.

Read the full article →

House Republicans Amplify Attacks On Elizabeth Warren, Consumer Protection

March 16, 2011

WASHINGTON — In a hearing marked by openly hostile questioning from House Republicans, consumer advocate Elizabeth Warren made her highly anticipated first appearance before Congress as a member of the Obama administration, emphasizing the need for stronger oversight of big banks and small mortgage firms. Warren, who is currently tasked with setting up the new Bureau of Consumer Financial Protection, was subjected to two and a half hours of inquiry before a Financial Services subcommittee regarding her role at the emerging agency and the scope of its powers. In her testimony, she focused on the need for easily-understood consumer lending terms and stronger enforcement of predatory lending regulations. “I don’t care how big you are, I don’t care who you your friends are, everybody follows the law,” Warren said, adding later, “What this agency is about is making the prices clear, making the risks clear, making it easy to compare one product to another. The point is to get an informed consumer, because I believe that American families are good at making decisions when they have good information upfront.” Congressional Republicans attempted to portray Warren as the “unaccountable” head of a bureaucracy immune from oversight from Congress or federal agencies. Republicans are waging a two-front war on the CFPB, hoping to cut its funding and weigh down its rulemaking procedures by replacing its single director with a five-member board of directors. House Financial Services Committee Chairman Spencer Bachus (R-Ala.) has introduced a bill to establish such a board, which has garnered 11 Republican cosponsors, and last week told an audience of international bankers that such a commission was the most feasible way to limit further regulation given Democratic control of the Senate. Bachus stated early in Wednesday’s hearing that the CFPB has “no oversight” and “no accountability,” a charge echoed by Reps. Scott Garrett (R-N.J.), Sean Duffy (R-Wis.) and others. “When we don’t have any oversight of what you’re doing, I view that as incredibly problematic,” said Duffy, a former star of MTV’s “The Real World” who has occupied since January the seat long held by Democrat Dave Obey. Warren was clearly anticipating the claims, which Republicans have been making to the press since President Barack Obama signed the Dodd-Frank financial reform bill into law last summer. She presented lawmakers with 34 pages of written testimony covering everything from the agency’s plans for mortgages and credit cards to its budget needs, hiring procedures and organizational chart. Several Democrats on the committee were noticeably irked by the questioning. “I do think that Dodd-Frank, in allowing the CFPB to be overruled by the safety and soundness regulators, does put a … fail-safe in there,” Rep. Stephen Lynch (D-Mass.) said, referring to the bureau’s housing within the Federal Reserve, the nation’s central bank charged with preserving the stability of the financial system. Rep. Al Green (D-Texas) ticked off a list of statutory oversight requirements the CFPB is subject to: the Government Accountability Office must perform an annual audit of the new agency’s operations; it must submit quarterly reports to the Office of Management and Budget; and the director must appear before Congress at least twice a year. Perhaps more importantly, the Financial Services Oversight Committee can overrule any new regulation issued by the CFPB if the committee deems that the rule poses a threat to bank stability. Warren’s supporters say the main objections to the agency aren’t grounded in any serious good-governing principles. Instead, they say, politicians are simply trying to preserve big banks’ bottom lines. “There’s been no meaningful oversight of the big financial institutions for more than a generation, and even though the result was financial collapse, there’s real resistance to reform,” a source close to Warren told HuffPost. “She represents unwanted accountability and balance in the system, and the industry has virtually unlimited resources and lots of allies.” In an interview with HuffPost on Thursday, Rep. Randy Neugebauer (R-Texas) acknowledged that plans to curtail the CFPB’s funding were part of an effort to limit its ability to function effectively . Other Republicans zeroed in on Warren’s role in an ongoing settlement with big banks and other mortgage servicers over widespread allegations of improper foreclosure practices. Warren noted that her agency currently has no legal authority to negotiate a settlement, but said she had been asked to advise various negotiators on the deal, since the CFPB will have regulatory responsibility for mortgage companies starting in July. Warren has been pushing back against efforts to politicize the negotiations. “Political attacks against federal and state law enforcement officials for responding to alleged legal violations are dangerous,” she said in a statement released Tuesday. “We know what can happen when laws aren’t fairly or consistently enforced because of political pressure, and it doesn’t end well for American families, for honest businesses, or for the economy.” Many GOP objections were directed at the notion of consumer protection regulation itself. “What you’re talking about today … is preventing people from being able to fulfill the American Dream!” Rep. Lynn Westmoreland (R-Ga.) said in response to a story from Rep. Bill Huizenga (R-Mich.) about a constituent in the banking industry who told him, “I’m not gonna be able to serve the people … because of the paperwork and the layering.” Warren, however, has said that the CFPB’s first task will be to simplify credit card and mortgage disclosures into a single, easy-to-understand page, rather than stacks of paper filled with complicated fine print. Because several different regulators have consumer protection jurisdiction for banking activities, the amount of paperwork required to meet similar rules can be lengthy. While some Republicans expressed skepticism about Warren’s efforts to eliminate unnecessary fine print, Neugebauer told HuffPost on Thursday that he is on board with those plans. “I get the disclosure piece,” Neugebauer told HuffPost. “When I first started buying property, there was a one-page closing statement, there was a one-page note and the deed of trust was the front and back of another piece of paper. And so you’d walk out of a transaction with five pieces of paper.” Democrats at the hearing repeatedly praised Warren, with many suggesting she would make a good director for the nascent consumer protection agency. Rep. Brad Miller (D-N.C.) likened the CFPB to federal groups that began regulating meat during the early 20th century. At the time, Miller noted, the meatpacking industry decried attacks on consumer choice and consumer freedom — a freedom most consumers did not, in fact, want. “They did not particularly value the right to buy spoiled beef,” Miller said. “That is a fair point,” Rep. Thaddeus McCotter (R-Mich.) responded later in the hearing. “No one wanted to eat it.” McCotter argued, however, that preventing rotten food from coming to market 100 years ago also led to overly burdensome food regulations today. Rep. Steve Pearce (R-N.M.) contested the CFPB’s plans to regulate payday lenders. He suggested that existing regulators had done a good job enforcing mortgage laws in recent years, and demanded to know Warren’s plans to influence monetary policy, openly mocking favorable descriptions of Warren. “I wonder if you’re gonna be the angel, be the champion for consumers with inflation,” Pearce said. “Are you gonna take on the Fed for printing money?” “I’m sorry, Congressman, but our job is not in monetary policy,” Warren replied. After two and a half hours, the hearing concluded. “I’m buoyed by the notion that anyone who could withstand this kind of badgering … is going to do a very good job,” Rep. Gary Ackerman (D-N.Y.) told Warren.

Read the full article →

Robert Kuttner: The Continuing Mortgage Mess

March 14, 2011

One of the most startling exit-poll results to emerge from the 2010 midterm elections was the finding that the 35 percent of voters who (correctly) blamed the economic collapse on Wall Street actually voted Republican by a margin of 56-42 percent. As Ruy Teixeira and John Halpin wrote in a sifting of the exit polls, “The Obama administration’s association with bailing out Wall Street bankers, who are heavily blamed for the bad economy, apparently had a negative effect on Democratic performance in this election.” To put it mildly. But since the election, Republicans keep on demonstrating that they are even better friends of the banks than the ambivalent Democrats. Tea Party populism at the grass roots coexists with close alliance with the financial industry where it counts. Under the guise of reducing the budget deficit, the Republican House and Senate budget would dramatically reduce funding for the agencies that regulate Wall Street. Richard Shelby, the ranking Republican on the Senate Banking Committee, keeps inserting himself into a law-enforcement proceeding, trying to block the proposed legal settlement of abuses in mortgage foreclosures and documentation that has been put forward by the 50 state attorneys general. Shelby last week called the plan: “Nothing less than a regulatory shakedown by the new Bureau for Consumer Financial Protection, the FDIC, the Fed, certain Attorneys General, and the Administration, led by Elizabeth Warren. This proposed settlement appears to be an attempt to advance the Administration’s political agenda, rather than an effort to help homeowners who were harmed by a servicer’s actual conduct.” It’s worth reviewing the back story. State attorneys general, led by Iowa’s Tom Miller, but with the vigorous support of Republican as well as Democrat AGs, have documented a wide range of illegal abuses by mortgage companies and banks dealing with homeowners who were victimized by corrupt lenders. So called “robo-signers” falsely signed affidavits that the bank or other mortgage service company had the right to foreclose when in fact it had no such legal right. Timely payments that were sent in to pay principal and interest were improperly applied to late fees and other penalties, causing homeowners to fall behind in their payments and then fall into technical default, leaving them vulnerable to foreclosure. While many homeowners who were working in good faith with the lender to secure refinancing or loan modifications, the loan servicer was proceeding on a separate track to foreclose and take away their house. Cases are legion of frantic homeowners not getting phone calls returned and being unable to get a straight story of how much money they owe, and to whom. Some military families lost their homes while a breadwinner was serving in Iraq, in flat violation of law. The proposed agreement with the five largest banks that control 59 percent of the mortgage market, drafted by the state AGs, would prohibit such abusive practices, define permissible procedures, and collect a one-time penalty fee from the banks in the range of $20 billion as an alternative to the criminal prosecution that the mortgage industry so thoroughly deserves. As the tireless Bill Black, a former senior financial regulator, keeps pointing out, in the savings and loan scandals of the 1980s, there were more than a thousand felony convictions. S&L executives went to jail. There was an interagency task force coordinating criminal prosecution, and this under the Reagan administration. And unlike the subprime disaster and its continuing fallout, the S&L collapse was largely contained to that industry, did not end up punishing homeowners, and caused little damage to the wider economy. Instead of using their political influence to resist the proposed global settlement of mortgage abuses, banking executives should consider themselves lucky. The proposed settlement would be a two-fer. It would prohibit illegal and deceptive practices, define proper ones, and would produce some of the money needed for the principal reductions to keep some ten million Americans from losing their homes. The Administration’s Home Affordable Modification Program (HAMP) is a widely acknowledged failure. About 600,000 loans — fewer than one at-risk mortgage in ten — have gotten relief. The program, which includes a modest incentive payment to banks, is entirely voluntary to bankers. The administration’s reluctance to push for stronger medicine is rooted in the banking industry’s reluctance to book losses on their balance sheets. By pretending that under-water mortgages are worth 100 cents on the dollar (until they are foreclosed) banks can pump up the stated value of their assets. But it would be far better for all concerned if banks reduced the principal amount of at-risk mortgages to roughly the actual market value of the home. That would compel honest accounting, and allow millions of homeowners to keep their homes. The present policy, by contrast, continues the epidemic of foreclosures and the resulting drag on housing prices. The downdraft in the real estate sector, in turn, functions as a deadweight drag on the economy. Leaks and counter-leaks suggest that the Obama administration is split on whether to strongly push for the AG’s proposed global settlement. The Treasury Department, both Secretary Tim Geithner, and the Office of Comptroller of the Currency, basically are siding with the banks. Elizabeth Warren, assistant to the president and acting director of the Consumer Financial Protection Bureau, favors the plan, as does the FDIC, and the Department of Housing and Urban Development. The banks and their Republican allies are, not surprisingly, dead set against it. But it is one thing for Republican politicians like Shelby to weigh in against policies they oppose. It is utterly shameful for them to try to block law-enforcement proceedings. Republicans like Shelby are all for states rights when it’s convenient, but not when state AGs go after their banker pals. As more and more abuses come to light, and more homeowners are fighting back against illegal foreclosures, the average foreclosure proceeding now drags on for almost two years. Just this month, the banking giant, HSBC had to suspend foreclosure actions because of questions about documentation and dubious practices. With Republicans so explicitly in bed with bankers, and after the drubbing that the Democrats took last November, you would think that it might occur to the White House that it makes good political as well as economic sense to be more clearly aligned with the interests of consumers. But that is still contested terrain. If the proposed global settlement does fail, bankers will face a continued legal morass, and some may yet face criminal proceedings for abuses. It would be tempting to wish that fate on an industry that is responsible for so much wider suffering. But it would be far better to get the mortgage mess behind us and get on with the economic recovery. Rather than political brickbats, the state AGs and Professor Warren deserve Shelby’s thanks and Obama’s strong support. Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.

Read the full article →

Congressional Republicans Set Sights On Homeowners, Elizabeth Warren As Split Emerges with State GOP Leaders

March 11, 2011

WASHINGTON — As state and federal officials near an agreement with the nation’s largest financial firms to settle allegations of abusive foreclosure practices, top Republicans in Congress are aggressively disputing their authority, decrying the possibility of expensive penalties against banks and questioning the need to help distressed homeowners. But the calls from Capitol Hill run counter to those made by Republican state attorneys general, who are involved in the 50-state investigation seeking restitution for improper foreclosures. The debate over how best to heal the nation’s troubled housing market exposes a rift between Washington legislators and local law enforcement, who are investigating potential violations of state laws. It also undercuts lawmakers’ prior demands last autumn for a full investigation into widespread allegations of wrongful foreclosures. On Wednesday, leading Republicans on the House Financial Services Committee sent a letter to Treasury Secretary Timothy Geithner expressing their concerns with any proposed settlement that would further regulate the mortgage industry or lead to large fines being levied against financial institutions. Also Wednesday, Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, blasted the negotiations between banks and government officials, likening them to a “shakedown.” At least rhetorically, such attacks undermine government efforts to seek restitution for wronged borrowers. They also bode ill for attempts to reform what’s widely acknowledged to be a broken mortgage finance system. It’s a reprise of last year’s debate to reform the broader financial system, during which many Republicans sought to kill a proposed agency dedicated to protecting consumers from abusive lenders. The temporary head of that nascent agency, Elizabeth Warren, now finds herself cross-wise with the congressional GOP. So do state attorneys general, many of them Republicans, who serve as their states’ top law enforcement officials and view improper foreclosure practices as violations of state law. “We want to remedy losses that have occurred as a result of those problems,” John Suthers, Colorado’s attorney general, said of bank errors during the foreclosure process. Suthers is a Republican and one of four attorneys general leading the states’ settlement talks with the nation’s five largest mortgage firms. “Let’s go now and negotiate with the banks,” said Mark Shurtleff, the Republican attorney general of Utah. Shurtleff added that the Republican attorneys general are waiting for a proposed final settlement agreement before deciding whether they will support it. The current spate of criticism from GOP leaders contrasts with their calls for a wide-ranging investigation into foreclosure practices last fall. The current negotiations are a direct result of state and federal inquiries into the matter. In October, Shelby demanded that federal banking regulators “immediately review the mortgage servicing and foreclosure activities” at major banks to “determine exactly what occurred at these institutions.” He asked for the findings to be presented to the banking committee “without delay.” That same month, a spokesman for House Speaker John Boehner (R-Ohio), then the lower chamber’s minority leader, told The Huffington Post that “at a time when economic uncertainty and unemployment are putting great pressure on homeowners and the housing market, it is imperative that we get all of the facts about this situation, and quickly.” A spokesman for Boehner was not immediately available for comment Friday. But Rep. Randy Neugebauer, a Texas Republican who serves on the financial services committee, said Thursday that the current settlement discussions are a “terrible” move that “verges on extortion.” Still, Neugebauer emphasized that he wants a full investigation into bank practices, and for those findings to be made public. “There should be more transparency to these processes,” he said. Neugebauer declined to support the kinds of penalties regulators are now discussing. All 50 state attorneys general joined together last fall to probe bank foreclosure practices after several companies halted home repossessions when improper paperwork practices — like the so-called “robo-signing” scandal — came to light. The law enforcement officers have said they’ve found that banks violated numerous state laws. State and federal officials are considering a large-scale settlement with the largest banks that could include penalties totaling up to $30 billion and requirements to modify distressed mortgages, people involved in the discussions said. A settlement agreement and requirements to modify troubled mortgages could help calm the roiling housing market, officials said. In January, Sheila Bair, the Republican chair of the Federal Deposit Insurance Corporation, said that “chaos in mortgage servicing and foreclosure has created a dangerous new uncertainty in this fragile market.” Bair is among the officials looking for at least a $20 billion settlement, according to people familiar with the discussions. Reforming the industry is one of the primary goals of the settlement talks, according to senior Treasury Department officials. Meeting with reporters Thursday, one top Treasury official said that bank foreclosure practices remain terrible, four years after the subprime crisis erupted. Some Republican attorneys general are also looking for broader industry reforms. Suthers said that he and other law enforcement officials are looking forward to hearing mortgage firms’ ideas on “how to structure a system that isn’t the mess the system has been the past couple years.” Meanwhile, however, congressional Republicans have scored some political points by latching onto Warren’s involvement in the discussions, part of a broader GOP effort to hamstring the emerging Consumer Financial Protection Bureau before it gets off the ground. Last month, House Republicans voted to slash the bureau’s budget for this year by about half. Now, in letters to the administration and in speeches, they’re singling out Warren in questioning the bureau’s authority to even participate in efforts to protect consumers and reform the broken process by which troubled mortgages are modified and homes are repossessed. “They’re trying to scapegoat her,” said a person involved in the settlement discussions who wasn’t authorized to speak publicly. That person added that some of the Republicans who opposed the creation of the agency during last year’s debate to reform the financial system, like Shelby and Alabama Rep. Spencer Bachus, now appear to be trying to undermine Warren’s participation in the settlement discussions as a way to disrupt the government’s enforcement effort and also isolate and marginalize the still-developing consumer unit. Bachus, the Republican chairman of the House Financial Services Committee, was one of the signatories to Wednesday’s letter to Geithner. Spokespersons for Shelby and Bachus didn’t respond to calls seeking comment. Neugebauer didn’t hold back, however. “We question whether Ms. Warren has any authority to be playing a role, because she is not the head of the bureau,” he said. “I was in the homebuilding business. There’s a difference between the homebuilder and the homeowner,” Neugebauer continued. “As I look at Ms. Warren’s task, she’s supposed to be the homebuilder, not the homeowner. That agency, they have no head. The emperor has no clothes.” The settlement discussions have only just begun, people familiar with the matter said. But unlike their Republican colleagues in Washington, state attorneys general are open to significant fines. The 50-state probe is led by an executive committee of 13 attorneys general, six of whom are Republicans. During their association’s annual spring meeting in Washington this week, many Republican attorneys general said they strongly supported the settlement talks. When asked if a $20 or $30 billion penalty was too high, Shurtleff of Utah said no, pointing to numerous settlements state officials have entered into over the years with individual subprime lenders that totaled in the hundreds of millions — in the case of Countrywide Financial, more than $8 billion. “The servicers themselves acknowledge there are very serious problems in the foreclosure process,” Suthers said. “That’s a good starting point.” ************************* Zach Carter is a staff reporter in The Huffington Post’s Washington bureau. He can be reached at zach.carter@huffingtonpost.com. Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

Read the full article →

← Previous Entries