By Dan Kervick, a PhD in Philosophy and an active independent scholar specializing in the philosophy of David Hume who also does research in decision theory and analytic metaphysics. Cross posted from New Economics Perspectives.
Where We Can Go from Here
I have asked the reader to follow me through a lengthy series of reflections and thought experiments on the nature and role of money in modern economies. Some might ask why this issue is so important. How can these ruminations on the nature of modern monetary systems help guide our thinking on the task of building a more fair and decent society of democratic equals? How can they help us create a society in which democratic solidarity trumps self-regarding and avaricious greed, and in which broad and shared prosperity replaces the concentrated economic privilege and supremacy of the few?
It is important to keep the political problem of money in proper perspective. No one needs to be reminded that money plays an incredibly significant role in modern societies. But it is also important not to overrate the role of money. The most important reason to reflect on the nature of money is that by doing so we better understand all those things that are not money, all of the sources of real and non-instrumental value in the world that are the ultimate ends we seek and the ultimate sources of our happiness. And as we improve our understanding of the purposes served by money and monetary systems, our improved understanding can help liberate us from our dependency on monetary systems controlled by the powerful.
Clearly money is just an instrument: a tool that helps us to organize our economic lives. It is used for assigning quantitative values to the real goods and services we produce. It assists in the production, distribution and exchange of those goods and services, and in the prudent storage of value and purchasing power over time. A monetary system cannot be separated from the larger economic and social order of which it is a part. A more democratic monetary system will therefore be part of a more democratic economic system and a more democratic society.
The cause of genuine democracy will, of course, require steps that go well beyond reform of the monetary system. If we seek a more democratic society, one in which decision-making power over our everyday lives and common futures is more evenly distributed among all of our people, it will be necessary for all of us to embrace the demanding responsibilities of democratic governance. This can be hard to do in the face of so many decades of governmental failure, where government itself has sometimes seemed to have become nothing but a tool of the plutocracy. Some of the tendency in recent history among dissidents and reformers has been to pull away from one another other rather than pull together. Some of us hope only to liberate ourselves from government and from one another in order to be left alone to pursue our individual happiness on our own terms.
This thoroughly individualistic approach cannot succeed. The cravings for ever more personal freedom, and for ever more liberation from the responsibilities of democratic government, will only lead to the eventual dissolution of democratic government and the triumph of authoritarianism. Either we work together as equals to govern our lives and govern our societies, or ambitious and ruthless people commanding great stores of wealth will take advantage of the vacuum to seize control and govern our societies for us. The urge for freedom is natural and praiseworthy, but the dream of a real and durable freedom that can exist outside the cooperative efforts of a democratic people practicing vigilant and industrious democratic governance is not the dream of a free people, but the twilight illusion of a defeated and alienated people who have given up on the kinds of freedom and well-being that can only be achieved through social solidarity and teamwork.
In the end, we are dependent and social creatures, built by nature for social and community life, and for relationships based on love, fellowship and friendship.
We have been living in recent decades through an anti-social era of greed, separation and inequality. Those of us who have lived this way for a long time might have become accustomed to the norms and practices of this era, and might even have convinced ourselves that these norms and practices are appropriate and healthy. But the rising generation of young people, whose natural and healthy sociality and friendliness has not yet been too damaged and disfigured by the ruthless demands of the system of greed know that something is wrong. They know that our present way of economic life is disordered and out of balance.
The anti-social era has been marked by a fatalistic passivity in the face of unregulated commerce and market behavior. But the forlorn era of low social expectations is dying; we can feel it. People are tired of being on their own. The defeatist dogma about social change characterizing this dying era is that we can’t choose our society’s future, because people are too weak and stupid and selfish and limited for collective effort to succeed on a large scale. The future can onlyemerge in an entirely unpredictable fashion from the crisscrossing patterns of individuals pursuing their own personal goals without any significant degree of social cooperation or coordination. The result of this trend in thinking has been a withering of the social imagination and the enfeeblement of the democratic practices of our people.
In the neoliberal world of the past few decades, politics has become small, unambitious and managerial. This dispirited managerial government presides over a society in which pathologies of social living are promoted as virtues: radical individualism, greed, ambitions of supremacy, cravings for isolation, hatred of community, and a debasement of healthy human relationships into commercial and exploitative transactions come to be seen as normal. But the gloomy religions of self-seeking isolation are not just debilitating; they are dispiriting. As David Graeber has written, “the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures.”
The fading era of market fundamentalism and hyper-individualism was trumpeted as the “end of history.” But history is starting up again. In the shadow of the current recession, we are beginning to recapture the optimistic sense that the future is something we can envision and choose. We can work to build a social consensus about the future we want, make large and ambitious choices about the shape of that future and then work with one another in the task of creating the future we have envisioned. We need not sit back, wait, and just see what turns up. The possibility of a mass democratic movement for profound social change begins with the recognition that the machine of despair is a lie, and that success is actually possible.
It is starting. People all over the world, frustrated by the dismal and meaningless pursuit of individual achievement and material gain alone without larger social purpose, and fatigued by the insecurity, stresses and manic busyness that afflict the neoliberal individual, are reaching out to re-forge the social contract, establish a new sense of justice based on teamwork and equality, and articulate visions of the human future that are a match for the inherent human dignity we sense in ourselves and recognize in our fellows. The world that we have passively allowed to be built around us by commercial frenzy devoid of higher purpose is an assault on that dignity.
It is notable and inspiring that as the Occupy Wall Street movement took shape around the United States and other parts of the world, the participants in the occupations organized themselves as communities of equals, in which every voice is equally prized and harmonious consensus is avidly sought. The hunger for democratic community and self-determination is palpable. This is not the laissez faire form of self-determination, in which each individual strives only to determine the course of one individual life, but a more encompassing phenomenon, in which people strive to build and sustain communities and then work together as equals in order to make well-founded, democratic decisions to determine the direction of the community. It’s hard work. But the work is inspiring and ennobling, and people are naturally drawn to it.
In both the United States and Europe, policy-making elites – whose allegiances are to the plutocrats who are responsible for funding and sustaining the political operations of these elites – are aggressively working to take advantage of the stress and confusion caused by the present global economic crisis to dismantle progressive social systems. They are targeting systems of public ownership and organized social cooperation, and are working to undermine the capacity for democratic governance. For the very wealthy, democratic governments represent nothing but competitors. These governments have sometimes acted in the past to diminish some of the formidable power the wealthy would otherwise possess over entire societies, and they sometimes even strip them of some of the wealth that they have earned from the sweat of others. Plutocrats would like nothing better than to put real democracy out of business, and to leave behind nothing but a toy facsimile of democracy – something like a high school student government that is allowed to engage in a little democratic role-playing inside an adult social institution that the students really don’t control.
So the plutocrats have put out a stark and coordinated message through the media channels they control, and through the opinion-leaders they own and influence. It is a message designed to invoke fear and panic, and to achieve democratic surrender: The message is that we are out of money, that our governments are bankrupt, that they must opt for austerity and downsizing and contraction, and that we must hand over even more decision-making to bankers, bond markets and technocrats – the functionaries of the plutocracy.
This message is preposterous. Societies build their futures and common wealth out of the real resources they possess, not out of money. Money is only a tool, and it is the simplest and most inexpensive tool we can make. Modern democracies are very rich in human, material and technological resources. We are not “out of” anything important of real and fundamental value. The plutocrats might be out of ideas; and they are running out of time. But the democratic peoples over whom the plutocrats are trying to reassert control are only out of patience with the plutocracy.
And this brings us back to the issue of monetary democracy. The time has come to consider some specifics: What role can money play in building a more democratic society? How should we organize our monetary system so that the public’s money is ruled by the public and made to serve public purposes, and is not instead perverted into an instrument that primarily serves plutocrats in their drive to rule over the public? In the final installment in this series I will propose six tasks for democratic economic reform, each of which has some dependence on the democratic reform of our monetary system.
Thursday, December 29, 2011
Did OFHEO Fix Fannie and Freddie’s Compensation Systems after discovering their Frauds?
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City.
I have been chastised by a friend and former colleague for writing:
“Here is the crazy thing – the SEC, OFHEO, and Department of Justice all failed to demand that Fannie and Freddie end their perverse executive compensation system that made the executives wealthy through fraud and put the entities and the government at risk.”
My friend notes that Fannie, under pressure from OFHEO and with its prior approval, changed its compensation system after the initial accounting fraud.
My sentence would be clearer if it was revised to read as follows:
“Here is the crazy thing – the SEC, OFHEO, and the Department of Justice all failed to prevent Fannie and Freddie from using perverse executive compensation systems that made the executives wealthy through fraud and put the entities and the government at risk.”
The new compensation systems at Fannie and Freddie remained exceptionally perverse after the changes. Their CEOs continued to cause them to engage in systematic accounting fraud by not providing remotely adequate loss reserves and allowances for loan losses despite purchasing massive amounts of fraudulent liar’s loans and fraudulent subprime liar’s loans. The same scam that made the officers rich was certain to destroy Fannie and Freddie.
I have also examined a number of statements by both of OFHEO’s leaders during the relevant period, concerning compensation and the initial Fannie accounting fraud. James Lockhart issued a hard hitting release on May 23, 2006 accompanying OFHEO’s report on its investigation of Fannie entitled: “FANNIE MAE FAÇADE: Fannie Mae Criticized for Earnings Manipulation.” The release begins with this passage that directly ties the accounting fraud to the controlling officers’ desire to trigger bonuses.
“The report details an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004. The report also prescribes corrective actions to ensure the safety and soundness of the company.”
Note that the release emphasizes that the OFHEO report “prescribes corrective actions.” The purpose of the release, of course, is to emphasize the most important aspects of the lengthy OFHEO report. The release makes it clear that executive compensation drove the fraud.
“The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.”
“By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets.”
When it comes to the steps that Lockhart considered critical, however, executive compensation was not specifically mentioned.
The report ends with recommendations from OFHEO’s staff to [Lockhart], which he has accepted. Some of the key recommendations include:
Fannie Mae must meet all of its commitments for remediation and do so with an emphasis on implementation – with dates certain – of plans already presented to OFHEO.
Fannie Mae must review OFHEO’s report to determine additional steps to take to improve its controls, accounting systems, risk management practices and systems, external relations program, data quality, and corporate culture. Emphasis must be placed on implementation of those plans.
Fannie Mae must strengthen its Board of Directors procedures to enhance Board oversight of Fannie Mae’s management.
Fannie Mae must undertake a review of individuals currently with the Enterprise that are mentioned in OFHEO’s report.
Due to Fannie Mae’s current operational and internal control deficiencies and other risks, the Enterprise’s growth should be limited.
OFHEO should continue to support legislation to provide the powers essential to meeting its mission of assuring safe and sound operations at the Enterprises.
Similarly, on June 6, 2006, Lockhart testified before the House on Fannie’s fraud. He explained how Fannie’s executive compensation system created the perverse incentives that drove the massive accounting fraud. He ended by listing how OFHEO responded to the frauds by ordering changes at Fannie. None of these changes discussed executive compensation. The failure of this excerpt to discuss executive compensation is particularly striking.
“Fannie Mae must take additional steps to improve its internal controls, accounting systems, operational and other risk management practices and systems, data quality, and journal entries. Emphasis must be placed on implementation with dates certain.”
Executive compensation, the most critical problem at Fannie and Freddie, the problem that drove their accounting control frauds, received minimal attention from OFHEO’s head. Fannie and Freddie’s CEOs proceeded to become wealthy through bonuses “earned” through business strategies that were sure to destroy Fannie and Freddie. OFHEO took no effective action to remove these perverse incentives.
Armando Falcon, Lockhart’s predecessor as head of OFHEO, achieved the remarkable – his revulsion for Fannie’s controlling officers exceeded Lockhart’s. “While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means.” Testimony of Armando Falcon, submitted to the Financial Crisis Inquiry Commission (April 9, 2010). His testimony details how Fannie’s controlling officers used accounting fraud to attain massive bonuses.
The Terrible Cost of Failing to Understand Accounting Control Fraud
The sad irony is that immediately after Falcon explained the perverse incentives arising from Fannie’s compensation system he went on to be only half right in his analysis of Fannie and Freddie’s eventual failure. The half he got wrong stemmed from his failure to understand the interplay of accounting control fraud and perverse executive compensation.
“Your letter also asked me about the impact of the affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”
In addition, OFHEO made it very clear to both enterprises that safety and soundness was always a higher priority than the affordable housing goals. They should not take on excessive risk in order to meet any one of the goals.”
Falcon almost gets this right, but his failure to understand the most destructive financial fraud mechanism leads him to miss what happened at Fannie and Freddie even with the benefit of hindsight. His analytical failures exemplify OFHEO’s central analytical failure. He is correct that only the exceptionally naïve could believe that Fannie and Freddie’s controlling officers based their business decisions on meeting the affordable housing goals. He is grotesquely incorrect in assuming that their controlling officers only engaged in an activity if “there was a profit to be made.” His error is bizarre given the fact that he had explained that Fannie’s controlling officers engaged in activity that caused large losses and then used accounting fraud to transmute real losses into fictional gains in order to maximize their bonuses.
Falcon is correct that Fannie’s controlling officers had “one primary purpose” at all times – “the speedy accumulation of personal wealth by any means.” What he fails to understand is that accounting control fraud is a “sure thing” and that the formula for maximizing fictional income (and real bonuses) maximizes real losses. Fannie and Freddie’s controlling officers “one primary purpose” was making themselves wealthy. Accounting fraud was their “weapon of choice” to produce great wealth very quickly. Purchasing large amounts of “liar’s” loans guaranteed that Fannie and Freddie would suffer massive losses. Purchasing large amounts of subprime liar’s loans guaranteed that they would suffer catastrophic losses. Liar’s (home) loans create such intense “adverse selection” that they have a sharply negative “expected value.” In plain English, the purchaser will lose money. It’s equivalent to betting against the House, except that the odds are so bad that the expected value is more negative than playing the lottery. Liar’s loans can only fail to produce obvious severe losses temporarily while the bubble is expanding. Refinancing hides the losses during the rapid expansion phase of the bubble. The saying in the trade is that “a rolling loan gathers no loss.” Bubbles, however, are only temporary and liar’s loans will begin blowing as soon as the bubble starts inflating, which can be over a year prior to the bubble bursting.
Fannie and Freddie’s CEOs chased higher nominal yields, not real “profit” for the firms. Their strategy exemplified the logic of George Akerlof and Paul Romer’s famous 1993 article, captured in their title (“Looting: the Economic Underworld of Bankruptcy for Profit”). The firm fails, but the controlling officers walk away rich because the frauds they lead produce fictional income and real bonuses. (Akerlof and Romer’s use of the word “profit” is ironic. It refers to gains to the controlling officers from fraudulent business strategies that cause fatal losses to the firm.) Akerlof and Romer aptly termed the accounting control fraud strategy a “sure thing.”
Fannie and Freddie’s risk officers alerted their CEOs to the fact that nonprime loans were likely to produce far greater losses, that the rapid rise in home prices was temporarily suppressing default rates, and that the rapid rise in home prices could not continue indefinitely. It is inconceivable that Fannie and Freddie did not know of the FBI’s September 2004 warning that there was an “epidemic” of mortgage fraud and their prediction that the fraud epidemic would cause an economic “crisis” if it were not contained. Fannie and Freddie’s purchase of liar’s loans that cause severe losses overwhelmingly occurred after the FBI’s warning. “The government” never required any entity to make or purchase liar’s loans. Most of the liar’s loans that caused Fannie and Freddie’s severe losses were purchased after MARI’s five-part warning to the mortgage industry in April 2006. “The Mortgage Asset Research Institute’s (MARI) EIGHTH PERIODIC MORTGAGE FRAUD CASE REPORT TO the MORTGAGE BANKERS ASSOCIATION.” (It is inconceivable that Fannie and Freddie’s controlling officers, or OFHEO, were unaware of these warnings. Louis Freeh, former head of the FBI, joined Fannie’s board of directors in mid-2007.)
MARI paired it first two warnings:
“Stated income and reduced documentation loans speed up the approval process, but they are open invitations to fraudsters. It appears that many members of the industry have little historical appreciation for the havoc created by low-doc/no-doc products that were the rage in the early 1990s. Those loans produced hundreds of millions of dollars in losses for their users.”
MARI’s third warning quantified the incidence of fraud in such loans. It paired these data with its fourth warning dealing with the revealing label the industry used internally for such loans.
“One of MARI’s customers recently reviewed a sample of 100 stated income loans upon which they had IRS Forms 4506. When the stated incomes were compared to the IRS figures, the resulting differences were dramatic. Ninety percent of the stated incomes were exaggerated by 5% or more. More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%. These results suggest that the stated income loan deserves the nickname used by many in the industry, the “liar’s loan.””
MARI’s fifth warning reported the views of federal banking regulators.
Federal regulators of insured financial institutions have expressed safety and soundness concerns over these loans with lower documentation requirements and other “nontraditional” loans.
To summarize, MARI warned every member of the Mortgage Bankers Association (MBA) in writing in early 2006 that so-called “stated income” loans:
1.Were “open invitations to fraudsters”
2.Had produced hundreds of millions of dollars of losses when they became common in the early 1990s
3.Had a fraud incidence of 90%
4.Deserved the industry term for such loans: “liar’s loans”
5.Were opposed by federal banking regulators because of safety and soundness concerns
It was in this context that (1) lenders moved massively to increase their origination of fraudulent liar’s loans and to sell such loans through fraudulent “reps and warranties” (2) Fannie and Freddie (and their investment banker counterparts) moved massively to purchase these endemically fraudulent loans, and (3) OFHEO did nothing meaningful to prevent Fannie and Freddie from purchasing fatal amounts of fraudulent liar’s loans.
Fannie and Freddie (and the FHFA) still get it wrong
Indeed, even after the second wave of accounting control fraud caused the failure of Fannie and Freddie, OFHEO failed to end their perverse executive compensation practices. Steve Linick, the FHFA’s Inspector General (FHFA is the successor agency to OFHEO) reported:
“Linick said the FHFA rejected his recommendation that it test and independently verify the annual pay packages, which are set by the boards of Fannie and Freddie and approved by the agency in consultation with the Treasury Department.
The FHFA “lacks key controls necessary to monitor the enterprises’ ongoing executive compensation decisions under the approved packages,” the inspector general wrote. “FHFA has neither developed written procedures to evaluate the enterprises’ recommended compensation levels each year, nor required FHFA staff to verify and test independently the means by which the Enterprises calculate their recommended compensation levels.”
Further, the agency “lacks independent testing and verification of the Enterprises’ submissions in support of executive compensation packages,” the report said.”
The federal “pay czar” heavily criticized all but one of the executive compensation plans submitted by the bailed-out firms still subject to special regulation. Executive compensation is so typically perverse that it is one of leading causes of criminogenic environments for accounting control fraud. The intellectual father of modern executive compensation, Michael Jensen, has decried the results, which he concedes includes rampant earnings manipulation. Fannie and Freddie are simply the most expensive failures to date caused by accounting control fraud.
I have been chastised by a friend and former colleague for writing:
“Here is the crazy thing – the SEC, OFHEO, and Department of Justice all failed to demand that Fannie and Freddie end their perverse executive compensation system that made the executives wealthy through fraud and put the entities and the government at risk.”
My friend notes that Fannie, under pressure from OFHEO and with its prior approval, changed its compensation system after the initial accounting fraud.
My sentence would be clearer if it was revised to read as follows:
“Here is the crazy thing – the SEC, OFHEO, and the Department of Justice all failed to prevent Fannie and Freddie from using perverse executive compensation systems that made the executives wealthy through fraud and put the entities and the government at risk.”
The new compensation systems at Fannie and Freddie remained exceptionally perverse after the changes. Their CEOs continued to cause them to engage in systematic accounting fraud by not providing remotely adequate loss reserves and allowances for loan losses despite purchasing massive amounts of fraudulent liar’s loans and fraudulent subprime liar’s loans. The same scam that made the officers rich was certain to destroy Fannie and Freddie.
I have also examined a number of statements by both of OFHEO’s leaders during the relevant period, concerning compensation and the initial Fannie accounting fraud. James Lockhart issued a hard hitting release on May 23, 2006 accompanying OFHEO’s report on its investigation of Fannie entitled: “FANNIE MAE FAÇADE: Fannie Mae Criticized for Earnings Manipulation.” The release begins with this passage that directly ties the accounting fraud to the controlling officers’ desire to trigger bonuses.
“The report details an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004. The report also prescribes corrective actions to ensure the safety and soundness of the company.”
Note that the release emphasizes that the OFHEO report “prescribes corrective actions.” The purpose of the release, of course, is to emphasize the most important aspects of the lengthy OFHEO report. The release makes it clear that executive compensation drove the fraud.
“The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.”
“By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets.”
When it comes to the steps that Lockhart considered critical, however, executive compensation was not specifically mentioned.
The report ends with recommendations from OFHEO’s staff to [Lockhart], which he has accepted. Some of the key recommendations include:
Fannie Mae must meet all of its commitments for remediation and do so with an emphasis on implementation – with dates certain – of plans already presented to OFHEO.
Fannie Mae must review OFHEO’s report to determine additional steps to take to improve its controls, accounting systems, risk management practices and systems, external relations program, data quality, and corporate culture. Emphasis must be placed on implementation of those plans.
Fannie Mae must strengthen its Board of Directors procedures to enhance Board oversight of Fannie Mae’s management.
Fannie Mae must undertake a review of individuals currently with the Enterprise that are mentioned in OFHEO’s report.
Due to Fannie Mae’s current operational and internal control deficiencies and other risks, the Enterprise’s growth should be limited.
OFHEO should continue to support legislation to provide the powers essential to meeting its mission of assuring safe and sound operations at the Enterprises.
Similarly, on June 6, 2006, Lockhart testified before the House on Fannie’s fraud. He explained how Fannie’s executive compensation system created the perverse incentives that drove the massive accounting fraud. He ended by listing how OFHEO responded to the frauds by ordering changes at Fannie. None of these changes discussed executive compensation. The failure of this excerpt to discuss executive compensation is particularly striking.
“Fannie Mae must take additional steps to improve its internal controls, accounting systems, operational and other risk management practices and systems, data quality, and journal entries. Emphasis must be placed on implementation with dates certain.”
Executive compensation, the most critical problem at Fannie and Freddie, the problem that drove their accounting control frauds, received minimal attention from OFHEO’s head. Fannie and Freddie’s CEOs proceeded to become wealthy through bonuses “earned” through business strategies that were sure to destroy Fannie and Freddie. OFHEO took no effective action to remove these perverse incentives.
Armando Falcon, Lockhart’s predecessor as head of OFHEO, achieved the remarkable – his revulsion for Fannie’s controlling officers exceeded Lockhart’s. “While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means.” Testimony of Armando Falcon, submitted to the Financial Crisis Inquiry Commission (April 9, 2010). His testimony details how Fannie’s controlling officers used accounting fraud to attain massive bonuses.
The Terrible Cost of Failing to Understand Accounting Control Fraud
The sad irony is that immediately after Falcon explained the perverse incentives arising from Fannie’s compensation system he went on to be only half right in his analysis of Fannie and Freddie’s eventual failure. The half he got wrong stemmed from his failure to understand the interplay of accounting control fraud and perverse executive compensation.
“Your letter also asked me about the impact of the affordable housing goals on the enterprises’ financial problems. In my opinion, the goals were not the cause of the enterprises demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.”
In addition, OFHEO made it very clear to both enterprises that safety and soundness was always a higher priority than the affordable housing goals. They should not take on excessive risk in order to meet any one of the goals.”
Falcon almost gets this right, but his failure to understand the most destructive financial fraud mechanism leads him to miss what happened at Fannie and Freddie even with the benefit of hindsight. His analytical failures exemplify OFHEO’s central analytical failure. He is correct that only the exceptionally naïve could believe that Fannie and Freddie’s controlling officers based their business decisions on meeting the affordable housing goals. He is grotesquely incorrect in assuming that their controlling officers only engaged in an activity if “there was a profit to be made.” His error is bizarre given the fact that he had explained that Fannie’s controlling officers engaged in activity that caused large losses and then used accounting fraud to transmute real losses into fictional gains in order to maximize their bonuses.
Falcon is correct that Fannie’s controlling officers had “one primary purpose” at all times – “the speedy accumulation of personal wealth by any means.” What he fails to understand is that accounting control fraud is a “sure thing” and that the formula for maximizing fictional income (and real bonuses) maximizes real losses. Fannie and Freddie’s controlling officers “one primary purpose” was making themselves wealthy. Accounting fraud was their “weapon of choice” to produce great wealth very quickly. Purchasing large amounts of “liar’s” loans guaranteed that Fannie and Freddie would suffer massive losses. Purchasing large amounts of subprime liar’s loans guaranteed that they would suffer catastrophic losses. Liar’s (home) loans create such intense “adverse selection” that they have a sharply negative “expected value.” In plain English, the purchaser will lose money. It’s equivalent to betting against the House, except that the odds are so bad that the expected value is more negative than playing the lottery. Liar’s loans can only fail to produce obvious severe losses temporarily while the bubble is expanding. Refinancing hides the losses during the rapid expansion phase of the bubble. The saying in the trade is that “a rolling loan gathers no loss.” Bubbles, however, are only temporary and liar’s loans will begin blowing as soon as the bubble starts inflating, which can be over a year prior to the bubble bursting.
Fannie and Freddie’s CEOs chased higher nominal yields, not real “profit” for the firms. Their strategy exemplified the logic of George Akerlof and Paul Romer’s famous 1993 article, captured in their title (“Looting: the Economic Underworld of Bankruptcy for Profit”). The firm fails, but the controlling officers walk away rich because the frauds they lead produce fictional income and real bonuses. (Akerlof and Romer’s use of the word “profit” is ironic. It refers to gains to the controlling officers from fraudulent business strategies that cause fatal losses to the firm.) Akerlof and Romer aptly termed the accounting control fraud strategy a “sure thing.”
Fannie and Freddie’s risk officers alerted their CEOs to the fact that nonprime loans were likely to produce far greater losses, that the rapid rise in home prices was temporarily suppressing default rates, and that the rapid rise in home prices could not continue indefinitely. It is inconceivable that Fannie and Freddie did not know of the FBI’s September 2004 warning that there was an “epidemic” of mortgage fraud and their prediction that the fraud epidemic would cause an economic “crisis” if it were not contained. Fannie and Freddie’s purchase of liar’s loans that cause severe losses overwhelmingly occurred after the FBI’s warning. “The government” never required any entity to make or purchase liar’s loans. Most of the liar’s loans that caused Fannie and Freddie’s severe losses were purchased after MARI’s five-part warning to the mortgage industry in April 2006. “The Mortgage Asset Research Institute’s (MARI) EIGHTH PERIODIC MORTGAGE FRAUD CASE REPORT TO the MORTGAGE BANKERS ASSOCIATION.” (It is inconceivable that Fannie and Freddie’s controlling officers, or OFHEO, were unaware of these warnings. Louis Freeh, former head of the FBI, joined Fannie’s board of directors in mid-2007.)
MARI paired it first two warnings:
“Stated income and reduced documentation loans speed up the approval process, but they are open invitations to fraudsters. It appears that many members of the industry have little historical appreciation for the havoc created by low-doc/no-doc products that were the rage in the early 1990s. Those loans produced hundreds of millions of dollars in losses for their users.”
MARI’s third warning quantified the incidence of fraud in such loans. It paired these data with its fourth warning dealing with the revealing label the industry used internally for such loans.
“One of MARI’s customers recently reviewed a sample of 100 stated income loans upon which they had IRS Forms 4506. When the stated incomes were compared to the IRS figures, the resulting differences were dramatic. Ninety percent of the stated incomes were exaggerated by 5% or more. More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%. These results suggest that the stated income loan deserves the nickname used by many in the industry, the “liar’s loan.””
MARI’s fifth warning reported the views of federal banking regulators.
Federal regulators of insured financial institutions have expressed safety and soundness concerns over these loans with lower documentation requirements and other “nontraditional” loans.
To summarize, MARI warned every member of the Mortgage Bankers Association (MBA) in writing in early 2006 that so-called “stated income” loans:
1.Were “open invitations to fraudsters”
2.Had produced hundreds of millions of dollars of losses when they became common in the early 1990s
3.Had a fraud incidence of 90%
4.Deserved the industry term for such loans: “liar’s loans”
5.Were opposed by federal banking regulators because of safety and soundness concerns
It was in this context that (1) lenders moved massively to increase their origination of fraudulent liar’s loans and to sell such loans through fraudulent “reps and warranties” (2) Fannie and Freddie (and their investment banker counterparts) moved massively to purchase these endemically fraudulent loans, and (3) OFHEO did nothing meaningful to prevent Fannie and Freddie from purchasing fatal amounts of fraudulent liar’s loans.
Fannie and Freddie (and the FHFA) still get it wrong
Indeed, even after the second wave of accounting control fraud caused the failure of Fannie and Freddie, OFHEO failed to end their perverse executive compensation practices. Steve Linick, the FHFA’s Inspector General (FHFA is the successor agency to OFHEO) reported:
“Linick said the FHFA rejected his recommendation that it test and independently verify the annual pay packages, which are set by the boards of Fannie and Freddie and approved by the agency in consultation with the Treasury Department.
The FHFA “lacks key controls necessary to monitor the enterprises’ ongoing executive compensation decisions under the approved packages,” the inspector general wrote. “FHFA has neither developed written procedures to evaluate the enterprises’ recommended compensation levels each year, nor required FHFA staff to verify and test independently the means by which the Enterprises calculate their recommended compensation levels.”
Further, the agency “lacks independent testing and verification of the Enterprises’ submissions in support of executive compensation packages,” the report said.”
The federal “pay czar” heavily criticized all but one of the executive compensation plans submitted by the bailed-out firms still subject to special regulation. Executive compensation is so typically perverse that it is one of leading causes of criminogenic environments for accounting control fraud. The intellectual father of modern executive compensation, Michael Jensen, has decried the results, which he concedes includes rampant earnings manipulation. Fannie and Freddie are simply the most expensive failures to date caused by accounting control fraud.
The Miracle of Solvency
By Golem XIV
The lies which got us to the purgatory we are in, are being told all over again, right now, in every bank in the Western World. Not by accident, but on purpose, by men with calculators and degrees, in the full knowledge of what they are doing, why and for whose benefit.
Every religion has its holy days. The days when the priests face their god and perform the rituals that renew the covenant between them. For believers it is the renewal of their faith, of their promise to believe in and serve their chosen God in return for which God will protect them. Global Finance is no different, and these days approaching New Year are their Holiest of Holies.
The Jews have Yom Kippur – The Day of Atonement, the Christians have Christmas and Easter – marking the birth and death of their saviour. Bankers have the Day of Reconciliation – when the year’s accounts must be reconciled. When all their deeds must be accounted for, all their actions weighed and a final reckoning made.
So spare a thought this New Year for the auditors of Deloitte, PcW, Ernst & Young and of course, Ireland’s favourite, KPMG as they, in solemn convocation with Chief Risk Officers, Chief Finance Officers, of the world’s largest banks, perform the Ritual of Reconciliation and reveal, by the grace of creative accountancy, number massaging and rank but ordained lying, the great Miracle of Solvency once again. Sing Hallelujah!
For it is crunch time for year end accounts.
Deep inside every bank, dealers have been sitting, staring at their phones hoping the bank’s Risk Manager wouldn’t call them to ask what a certain trade they made this year was actually worth, what value should be booked for it and what risk weighting applied to it? For as we approach the Day of Reconcilliation the dealers must call up the details of the deals they did, the assets they bought and sold or lent or borrowed and account for them. The Bank’s CRO (Chief Risk Officer) must then, by law, satisfy him or herself that the numbers presented are true and the valuations fair and honest, and sign off on them accordingly. Whereupon, the CFO (Chief Finance Officer) must look upon the assembled accounts of all the actions of all the traders on all the trading desks and compile the bank’s accounts for the year, showing capital adequacy (enough capital to cover the bank’s liabilities as laid down in international law) and then these accounts must be passed to the ‘Independent’ Auditors for them to check and scrutinize till they too are wholly satisfied that the accounts present a true and faithful picture of the health of the bank.
You might be tempted to think, given the magnificence of the glass and steel temples of global banking and their auditors, and given the number of people with powerful sounding titles and the size of the fees and bonuses they pay each other, that this process must be rigorous and testingly honest. You’d be wrong.
Once. long ago, the purpose of the ritual may have been to sort the solvent from the insolvent, the strong from the weak, but today it is about declaring that all banks are saved. None shall be forsaken. They are all to be declared solvent, none of them with a stain upon them. You might think I am being flippant but I’m not. Ask yourself how many of the auditors will find their clients insolvent? Or how many banks will appear in public in the coming weeks with accounts that show they are insolvent or even just in trouble? That is no longer what the ritual is about. The ritual is about finding how everyone is fine. Regardless of the fact, played out year after year, that within months, sometimes only weeks, of the miracle of solvency being proclaimed, banks will ‘unexpectedly find’ they need to raise more capital. These days the miracle does not last and wears off.
Not long ago I spoke to a senior risk manager of a German bank who described a particular incident from a year end reconciliation. He found a particular derivative trade that had to be accounted for, but the trader who had made the deal had left the bank some years earlier. No one knew the details of the trade and no one could value it. So the risk manager sought out the counter-party to the trade. Perhaps as the people owed the money, they would know, at the very least, what they were owed. It turned out to be a very large Swiss bank. Sadly for his New Year holiday, the Risk Manager found the trade had been booked in Singapore. He waited up and called. The Swiss Bank at first denied any knowledge of the trade. It was so long ago, they too had no recollection. However our Risk Manager couldn’t simply pretend it never happened. There was an accusingly empty box on the spread sheet. Eventually the Risk manager said, well my best guess – and it was a guess based on the imperfect paperwork of the original deal with no subsequent details of risks or changes in value – ‘My guess is we owe you X.’ To which the hugely brilliant and highly paid bankers who were owed this money said, ‘Yeah, fine. Let’s call it that’, and hung up. This isn’t hear say. It happened as described.
The figure was duly inscribed in the ledger, the Risk Officer signed off, the CFO signed off, the auditors signed off, obligingly, for the clients who were paying them handsomely for this service, and the accounts were declared complete and perfect. They did the job they were designed for – to show the bank in its best possible light and obscure any irregularities or blemishes. And bonuses were lavished right and left. As it turns out this particular bank was anything but all right - Not that you would ever have told from those accounts - and eventually needed a vast bail out from the tax payers of the nation it was parasitizing.
And lets be clear about how serious the lies we are talking about are. The accounts are what investors use in order to decide if it is safe to invest in or lend to a bank. It wasn’t safe. But that fact was nowhere in those accounts. As it will not be in the accounts of any of the major banks of the western world this year, like last year, like the year before and the year before that. The culture, the religion, of lies and liars, is too powerful. The auditors are not there to reveal anything unpleasant about the banks. They work for the banks. Are paid by them and look forward to many more payments for many more accounts.
Earlier this year (2011) Michel Barnier, the European Union’s internal market commissioner proposed reforms which would have broken the intimate and unhealthy relationship that exists between banks and their auditors and broken the cartel-like power of the Big Four auditors who between them audit almost all the large banks. He proposed that banks should have to have two auditors examine their books, one of which should be a smaller firm, not of the Big Four, and that auditors would no longer be able to audit a banks’ books year after year after decade. He proposed a limit of nine years. After which the bank would be obliged to change.
All the proposals were defeated after lobbying from banks, auditors and even many of the EC commissioners themselves. Too much personal and corporate power and proft would have been imperiled, too much ugly truth brought too close to public awareness.
The Auditors are not there as guardians of truth telling, working for you and me. They are there to keep the banks and bankers hard and thrusting for the year ahead. The Auditors do their work on their knees.
And what of the Risk Officers and Risk and Audit Committees of the banks themselves? This is after all where the ritual of Reconciliation mostly takes place. Can we look to them for honesty and integrity? Let me put it this way. Bank of Ireland (not to be confused with the Central Bank of Ireland), just appointed (on December 23rd) a certain Mr Patrick Mulvihill to its Board as a non-executive Director AND to its Audit Committee and Risk Committee. Mr Mulvihill spent much of his career at Goldman Sachs where he was on the board of GS Europe and on their Audit Committee. Make of that what you wish. One thing’s for sure, he will be perfectly suited for the job he’ll be expected to do.
He, like all those working for and around him, will decide if the sovereign bonds of Italy and Spain, for example, are to be booked as risk free AAA rated sovereign Euro bonds, or risky bonds which the market won’t touch for much less than 7%. Sovereign bonds are considered virtually risk free in the part of the bank which considers which assets count as solid capital to underpin liabilities. But are traded as risky and therefore lucrative in another. Will the banks book the profit of the risky version but asses the risk weighting from the risk free version? It’s like Quantum mechanics for liars. You get to have it be a wave or a particle depending on which suits you at a given moment.Which will it be? Are sovereign bonds risk free or lucratively risky?
And what about mark to market valuations? Will the Risk Committees and Audit Committees give a clear valuation of the banks assets? Or will they do what they did earlier this year, and move any ‘risky’ assets, that they have valued at ‘mark to model’ fantasy prices and which would surely lose a lot of ‘value’ if ever they were marked to market – move them from the ‘Available to Trade’ column where market to market is required, over to the ‘Hold to Maturity’ column where mark to model is fine? What do you think? Will they go for honesty and transparency or press a few keys and move billions from one column to another? And remember the assets hidden from view like this won’t be ‘held to maturity’ if the bank gets in trouble. At that point the bank will move them back again and sell them and the accounting fiction will become clear for what it is – a lie.
This year the banks are in no better shape than they have been since the debt bubble burst. In fact they are in worse shape because the nations they depend upon for endless bail outs are enforcing more and more savage cuts to social spending of every sort – education, health and welfare, and people are beginning to feel the pain.
This year the banker’s propaganda machine will have to move up a gear or two. Those who question the offical party line will perhaps have to be positively demonized. Certainly the barrage of ‘there is no alternaitve’ will have to become louder. And the threats of doom if we don’t do what we are told will have to become more dire.
This year the Miracle of Reconcilliation will do its job for the bonus seekers but will then wear off quickly leaving behind a smear of threats and anti-democratic thuggery.
The lies which got us to the purgatory we are in, are being told all over again, right now, in every bank in the Western World. Not by accident, but on purpose, by men with calculators and degrees, in the full knowledge of what they are doing, why and for whose benefit.
Every religion has its holy days. The days when the priests face their god and perform the rituals that renew the covenant between them. For believers it is the renewal of their faith, of their promise to believe in and serve their chosen God in return for which God will protect them. Global Finance is no different, and these days approaching New Year are their Holiest of Holies.
The Jews have Yom Kippur – The Day of Atonement, the Christians have Christmas and Easter – marking the birth and death of their saviour. Bankers have the Day of Reconciliation – when the year’s accounts must be reconciled. When all their deeds must be accounted for, all their actions weighed and a final reckoning made.
So spare a thought this New Year for the auditors of Deloitte, PcW, Ernst & Young and of course, Ireland’s favourite, KPMG as they, in solemn convocation with Chief Risk Officers, Chief Finance Officers, of the world’s largest banks, perform the Ritual of Reconciliation and reveal, by the grace of creative accountancy, number massaging and rank but ordained lying, the great Miracle of Solvency once again. Sing Hallelujah!
For it is crunch time for year end accounts.
Deep inside every bank, dealers have been sitting, staring at their phones hoping the bank’s Risk Manager wouldn’t call them to ask what a certain trade they made this year was actually worth, what value should be booked for it and what risk weighting applied to it? For as we approach the Day of Reconcilliation the dealers must call up the details of the deals they did, the assets they bought and sold or lent or borrowed and account for them. The Bank’s CRO (Chief Risk Officer) must then, by law, satisfy him or herself that the numbers presented are true and the valuations fair and honest, and sign off on them accordingly. Whereupon, the CFO (Chief Finance Officer) must look upon the assembled accounts of all the actions of all the traders on all the trading desks and compile the bank’s accounts for the year, showing capital adequacy (enough capital to cover the bank’s liabilities as laid down in international law) and then these accounts must be passed to the ‘Independent’ Auditors for them to check and scrutinize till they too are wholly satisfied that the accounts present a true and faithful picture of the health of the bank.
You might be tempted to think, given the magnificence of the glass and steel temples of global banking and their auditors, and given the number of people with powerful sounding titles and the size of the fees and bonuses they pay each other, that this process must be rigorous and testingly honest. You’d be wrong.
Once. long ago, the purpose of the ritual may have been to sort the solvent from the insolvent, the strong from the weak, but today it is about declaring that all banks are saved. None shall be forsaken. They are all to be declared solvent, none of them with a stain upon them. You might think I am being flippant but I’m not. Ask yourself how many of the auditors will find their clients insolvent? Or how many banks will appear in public in the coming weeks with accounts that show they are insolvent or even just in trouble? That is no longer what the ritual is about. The ritual is about finding how everyone is fine. Regardless of the fact, played out year after year, that within months, sometimes only weeks, of the miracle of solvency being proclaimed, banks will ‘unexpectedly find’ they need to raise more capital. These days the miracle does not last and wears off.
Not long ago I spoke to a senior risk manager of a German bank who described a particular incident from a year end reconciliation. He found a particular derivative trade that had to be accounted for, but the trader who had made the deal had left the bank some years earlier. No one knew the details of the trade and no one could value it. So the risk manager sought out the counter-party to the trade. Perhaps as the people owed the money, they would know, at the very least, what they were owed. It turned out to be a very large Swiss bank. Sadly for his New Year holiday, the Risk Manager found the trade had been booked in Singapore. He waited up and called. The Swiss Bank at first denied any knowledge of the trade. It was so long ago, they too had no recollection. However our Risk Manager couldn’t simply pretend it never happened. There was an accusingly empty box on the spread sheet. Eventually the Risk manager said, well my best guess – and it was a guess based on the imperfect paperwork of the original deal with no subsequent details of risks or changes in value – ‘My guess is we owe you X.’ To which the hugely brilliant and highly paid bankers who were owed this money said, ‘Yeah, fine. Let’s call it that’, and hung up. This isn’t hear say. It happened as described.
The figure was duly inscribed in the ledger, the Risk Officer signed off, the CFO signed off, the auditors signed off, obligingly, for the clients who were paying them handsomely for this service, and the accounts were declared complete and perfect. They did the job they were designed for – to show the bank in its best possible light and obscure any irregularities or blemishes. And bonuses were lavished right and left. As it turns out this particular bank was anything but all right - Not that you would ever have told from those accounts - and eventually needed a vast bail out from the tax payers of the nation it was parasitizing.
And lets be clear about how serious the lies we are talking about are. The accounts are what investors use in order to decide if it is safe to invest in or lend to a bank. It wasn’t safe. But that fact was nowhere in those accounts. As it will not be in the accounts of any of the major banks of the western world this year, like last year, like the year before and the year before that. The culture, the religion, of lies and liars, is too powerful. The auditors are not there to reveal anything unpleasant about the banks. They work for the banks. Are paid by them and look forward to many more payments for many more accounts.
Earlier this year (2011) Michel Barnier, the European Union’s internal market commissioner proposed reforms which would have broken the intimate and unhealthy relationship that exists between banks and their auditors and broken the cartel-like power of the Big Four auditors who between them audit almost all the large banks. He proposed that banks should have to have two auditors examine their books, one of which should be a smaller firm, not of the Big Four, and that auditors would no longer be able to audit a banks’ books year after year after decade. He proposed a limit of nine years. After which the bank would be obliged to change.
All the proposals were defeated after lobbying from banks, auditors and even many of the EC commissioners themselves. Too much personal and corporate power and proft would have been imperiled, too much ugly truth brought too close to public awareness.
The Auditors are not there as guardians of truth telling, working for you and me. They are there to keep the banks and bankers hard and thrusting for the year ahead. The Auditors do their work on their knees.
And what of the Risk Officers and Risk and Audit Committees of the banks themselves? This is after all where the ritual of Reconciliation mostly takes place. Can we look to them for honesty and integrity? Let me put it this way. Bank of Ireland (not to be confused with the Central Bank of Ireland), just appointed (on December 23rd) a certain Mr Patrick Mulvihill to its Board as a non-executive Director AND to its Audit Committee and Risk Committee. Mr Mulvihill spent much of his career at Goldman Sachs where he was on the board of GS Europe and on their Audit Committee. Make of that what you wish. One thing’s for sure, he will be perfectly suited for the job he’ll be expected to do.
He, like all those working for and around him, will decide if the sovereign bonds of Italy and Spain, for example, are to be booked as risk free AAA rated sovereign Euro bonds, or risky bonds which the market won’t touch for much less than 7%. Sovereign bonds are considered virtually risk free in the part of the bank which considers which assets count as solid capital to underpin liabilities. But are traded as risky and therefore lucrative in another. Will the banks book the profit of the risky version but asses the risk weighting from the risk free version? It’s like Quantum mechanics for liars. You get to have it be a wave or a particle depending on which suits you at a given moment.Which will it be? Are sovereign bonds risk free or lucratively risky?
And what about mark to market valuations? Will the Risk Committees and Audit Committees give a clear valuation of the banks assets? Or will they do what they did earlier this year, and move any ‘risky’ assets, that they have valued at ‘mark to model’ fantasy prices and which would surely lose a lot of ‘value’ if ever they were marked to market – move them from the ‘Available to Trade’ column where market to market is required, over to the ‘Hold to Maturity’ column where mark to model is fine? What do you think? Will they go for honesty and transparency or press a few keys and move billions from one column to another? And remember the assets hidden from view like this won’t be ‘held to maturity’ if the bank gets in trouble. At that point the bank will move them back again and sell them and the accounting fiction will become clear for what it is – a lie.
This year the banks are in no better shape than they have been since the debt bubble burst. In fact they are in worse shape because the nations they depend upon for endless bail outs are enforcing more and more savage cuts to social spending of every sort – education, health and welfare, and people are beginning to feel the pain.
This year the banker’s propaganda machine will have to move up a gear or two. Those who question the offical party line will perhaps have to be positively demonized. Certainly the barrage of ‘there is no alternaitve’ will have to become louder. And the threats of doom if we don’t do what we are told will have to become more dire.
This year the Miracle of Reconcilliation will do its job for the bonus seekers but will then wear off quickly leaving behind a smear of threats and anti-democratic thuggery.
Saturday, December 24, 2011
Merry Christmas to every reader wherever you are in this tiny world !!!!
You can ask for three wishes ....
right at midnight.... For this Christmas only
with 0% interest
Friday, December 23, 2011
The Economic Solutions Of Vampires
by Brandon Smith
alt-market.com
The vampire bat is a horrifying pig-nosed wart of a creature which feasts in a manner that, believe it or not, is a rather familiar scene to those of us who closely study alternative economics. After erratically flittering about in the sinking evening sky, it targets the warmth of a sleeping farm animal and latches onto it with its claws. Carefully, it inserts a fang into a vein dense region of the creature’s body, and laps away at the blood. Normally, the oblivious livestock are completely unaware and helpless to the attack. The tiny parasite does not inflict an immediately mortal blow to its host, but over time, disease and physical debilitation result. The vampire has destroyed the animal, and, pathetically, the animal has no idea.
Just as in nature, the economic world has its own bloodsucking vermin in the form of banking elites which are a wretched drain on the whole of the human race. Without their vicious and predatory presence, I envision a world so rapturously above and beyond what we wallow in today that it is impossible to describe. The disgust many feel when considering the virulent feeding habits of the common mosquito or the slithering leech does nothing to compare to the utter gut churning revulsion I feel when studying the financial habits of banks like the Federal Reserve and the “too big to fails”. They are without a doubt the most malignant form of social cancer imaginable.
And yet, after nearly four years of ongoing fiscal exsanguination, a sizable portion of the American populace is still looking to these pests for economic comfort and reassurance, just like farm animals consistently grazing near the entrance of a vampire bat cave, as if it is a shelter from harm. Worst of all is the willingness by which investors still, to this day, commit their savings and their livelihoods to the stock market meat grinder. Let’s be honest; the typical American daytrading investor is a complete moron. They have absolutely no sense of the fundamentals of our financial structure nor the eccentric rules by which it operates. They only have the faintest inkling of the functions of the highly manipulated stock market. They foolishly believe that what little money they make today riding the wave of an illegitimate liquidity driven rally they will actually get to keep. For them, stock investment is no different from buying a scratch-off lotto ticket at a hillbilly gas station; it is a cheap and tawdry game rife with failure but exciting to play, if only for a fleeting guilt addled thrill.
To be fair, they play because the game is indeed “rewarding”, at least, initially. The first taste is so sweet that it soils the plasma; the very skin of the cellular membrane of the financial mind becomes saturated. It swells within the weakening heart of a culture, and overrides its sense of logic. It makes us do terrible and stupid things, and we clasp our hands together and pray that it will never end. But, of course, an ending is painfully inevitable. The more we indulge, the more it takes down the road to satisfy us. We become an addict nation, riding the chemical wave of a pharmaceutical roller coaster fed by the opiates of fiat and fantasy.
The bottom line; we are being drained of our lifeblood as a country. However, the mainstream media is rife with talk of “recovery”, and one might ask how this could be possible. An overwhelming spectrum of solutions has been presented over the past 3-4 years, and each one has given the stock market a little push towards the green, so what’s the problem?
The problem is, the actions taken by our government and banking elites have built the connecting strands of a spider’s web, instead of a safety net.
Let’s examine some the most common solutions presented to the increasingly desperate American public and why these delusions have lulled us into the role of victim in the most elaborate monster movie of all time…
Centralization As a Solution To…Centralization…?
Europe’s current disintegration is a perfect example of this strange and ultimately destructive policy. The EU as an experiment is an utter disaster. Once the jewel of the open border dynamic and a bastion of the “merits” of globalization, the economic union has been exposed as a kind of waxwork museum; a tourist trap curiosity filled with illusions of life, but rather hollow upon closer inspection.
Half of the countries committed to the EU are burdened with liabilities well beyond the 60% debt to GDP ratio outlined in the ‘Growth and Stability Pact’. Some countries, including Greece, met few if any of the presented criteria for membership and were allowed to join anyway. The only reason the system was able to function at all was due to the imaginary wealth of the toxic derivative framework which now no longer exists.
The problem with globalization is that it requires assimilation; it demands that sovereign nations adopt the fiscal character of their neighbors in order to present the face of a single entity. Of course, when these countries are unable to do this because of their cultural differences, or their incongruent economies, something has to be slapped together instead. Artificially tying together societies by forcing them to financially harmonize is, in my view, a criminal act of collectivism. Now that this crime is being unveiled for all the world to see, though, the corrupt governments and banking puppeteers of Europe have suggested even MORE of the same! That’s right…their solution to the collapse of the EU is a harmonization not just of finance, but of politics and law. A single governing body which would dictate every nuance of the union.
The claim that Europe was not centralized enough, and that this is what caused the breakdown, is absolutely preposterous. Globalization makes a system inflexible and weak. If any portion of that system fails, it sends shockwaves through the rest. This is because centralization removes the protections of independently insulated structures and allows corrupt policy to spread like a plague. As the economic situation grows more dire, the end result will always be a reduction in the common citizen’s standard of living. In harmonization, It is far easier to make everyone equally poor than it is to make them equally rich. With a single, narrow minded leadership, especially one that is completely unaccountable to the people, the EU will become the most fragile makeshift empire in history, and a model for a global government that hopefully will never exist.
Print To Avoid The Pain…
I can’t tell you how truly exhausted I am with the constant rehashing of bailout bills and cheap lending windows as if they have ever or will ever change anything. Let’s make this clear; Keynesian stimulus measures are useless. They will always be useless. Governments do NOT create jobs, they destroy them. Central banks do NOT create wealth, they dilute it. Quantitative easing and zero interest lending does NOT diminish debt, it displaces it; removing it from the shoulders of private corporate banking institutions where it belongs and dumping it in the laps of taxpayers. I’ll say it again; the debts created by major banks have not been paid. They have been handed to you, and your children. Forget the December Santa Rally and the temporary holiday job boost. Nothing has changed since 2008.
The process of transferring private debt into public obligation is a tool of economic vampires. The utility in this is obvious. A program of wealth transference has the ability to prolong full collapse while at the same time giving the impression of stability. The dollar itself characterizes this conflict. The currency has been overprinted since the credit crisis began by some estimates in the ten’s of trillions. Not only has it been devalued to temporarily stave off a purging in the U.S., but now also in Europe. And yet, the dollar index, which supposedly measures the Greenback’s global value, has spiked. We are lulled into a sense of safety by such arbitrary measurements, but our buying power is being subversively annihilated. In less than a year’s time, those who dove into the dollar as a safe haven will discover their bones picked clean by predatory banks and hidden flesh eating inflation. Count on it…
Create A New Currency…
Globalists love currencies, as long as they aren’t tied down by a commodity. For central bankers, each fiat currency is a stepping stone to something more sinister. They are disposable. They are expendable. Like toothbrushes. Yes…even the dollar. And in this rests the key to economic control. A currency is a symbol of trade and labor; if you can create and destroy that symbol at will, then you can dominate trade and labor. Through a mere piece of paper, you manipulate the very breath of social life. No one should be given that kind of power without uncompromising transparency and constant public governance, but the Federal Reserve is free from both.
The suggestion that we can solve our current financial despair with the formation of a whole new currency, or a global currency, is like suggesting to a slave that he would be much more free with a shinier set of chains. Any solution that purports to undo the crisis by doing more of the same was probably devised by an economic vampire.
This includes digital currencies like the failed “Bitcoin”, which swagger about in the classy looking threads of technology and diversity while flashing us impromptu peace signs. Digital currencies are a Star Trek theme park distraction, and just like any paper fiat currency, they make promises they cannot keep. Any trade system that depends upon good faith in ones and zeros traveling across a network of machines that can be hacked or rendered useless by collapse is doomed. We have already tasted the danger of digital through the debauchery of credit cards. Why tempt fate even further?
More Regulation And Control…
Regulation is not the problem in America’s economy; the REGULATORS are the problem with America’s economy. The SEC is given thousands of potential investigations a year to pursue, but rarely do they ever follow through, and when they do, it’s to throw the angry masses a Bernie Madoff or two; an act of insincere appeasement in light of much greater fraud.
Being that true free markets have not existed for at least a century, the insinuation that free markets are the root of the collapse is a bit absurd. The guidelines for government oversight of business in the U.S. already exist; government has just refused to implement them. Adding new restrictions to an already restricted market will change nothing. Therefore, the only solution that makes any sense whatsoever as far as regulation is to wipe the slate clean entirely. Remove the Federal Reserve, replace the SEC, and replace the current establishment leadership.
I have heard it said that the philosophy of our economic system is the problem. This is an ignorant cop-out. The principals of free markets are not the issue; the men who abuse them and diminish them, on the other hand, are. Anyone who suggests that we as a country should focus our anger on the idea of the system rather than the men behind the misuse of that system is, without a doubt, an economic vampire.
Lurking in the Shadows...
The question of solutions is difficult, not because there aren’t any, but because those that will actually succeed require pain, sacrifice, and incredible hard work. Most people don’t like to think about that sort of thing. This is why global banks and their proponents have been able to maintain the recovery magic act for the past few years (just barely), and it is why the useless concepts they put forward are still given public consideration. We WANT to be sold on the proposal of an easy way out.
One rule to never forget when considering any solution is to take into account who benefits most from its implementation, and who has to labor for its success. If average people are forced to exert all the effort, and an elite few reap all the substantial benefits, this contradiction outweighs any assertion of practicality. It is not worth our time, nor our energy, to shadowbox reality. Unfortunately, this is all we have been doing as a nation since 2008.
The creeping terror that lay ahead is not the economic collapse, but the men who would use it to their favor. The stakes are high. With the NDAA and similar bills in place, fiscal distress is no longer just a matter of economics, but a matter of personal liberty. Without a doubt, a collapse will be used as a rationalization for totalitarianism. If we do not make the hard decisions now, and take it upon ourselves to construct our own localized economies separate and insulated from the mainstream, we will, indeed, find ourselves one day cowering in the dark of a long drawn night infested with fiends, and desperate enough to actually ask them for help. They will be happy to give it, at a very bloody price…
alt-market.com
The vampire bat is a horrifying pig-nosed wart of a creature which feasts in a manner that, believe it or not, is a rather familiar scene to those of us who closely study alternative economics. After erratically flittering about in the sinking evening sky, it targets the warmth of a sleeping farm animal and latches onto it with its claws. Carefully, it inserts a fang into a vein dense region of the creature’s body, and laps away at the blood. Normally, the oblivious livestock are completely unaware and helpless to the attack. The tiny parasite does not inflict an immediately mortal blow to its host, but over time, disease and physical debilitation result. The vampire has destroyed the animal, and, pathetically, the animal has no idea.
Just as in nature, the economic world has its own bloodsucking vermin in the form of banking elites which are a wretched drain on the whole of the human race. Without their vicious and predatory presence, I envision a world so rapturously above and beyond what we wallow in today that it is impossible to describe. The disgust many feel when considering the virulent feeding habits of the common mosquito or the slithering leech does nothing to compare to the utter gut churning revulsion I feel when studying the financial habits of banks like the Federal Reserve and the “too big to fails”. They are without a doubt the most malignant form of social cancer imaginable.
And yet, after nearly four years of ongoing fiscal exsanguination, a sizable portion of the American populace is still looking to these pests for economic comfort and reassurance, just like farm animals consistently grazing near the entrance of a vampire bat cave, as if it is a shelter from harm. Worst of all is the willingness by which investors still, to this day, commit their savings and their livelihoods to the stock market meat grinder. Let’s be honest; the typical American daytrading investor is a complete moron. They have absolutely no sense of the fundamentals of our financial structure nor the eccentric rules by which it operates. They only have the faintest inkling of the functions of the highly manipulated stock market. They foolishly believe that what little money they make today riding the wave of an illegitimate liquidity driven rally they will actually get to keep. For them, stock investment is no different from buying a scratch-off lotto ticket at a hillbilly gas station; it is a cheap and tawdry game rife with failure but exciting to play, if only for a fleeting guilt addled thrill.
To be fair, they play because the game is indeed “rewarding”, at least, initially. The first taste is so sweet that it soils the plasma; the very skin of the cellular membrane of the financial mind becomes saturated. It swells within the weakening heart of a culture, and overrides its sense of logic. It makes us do terrible and stupid things, and we clasp our hands together and pray that it will never end. But, of course, an ending is painfully inevitable. The more we indulge, the more it takes down the road to satisfy us. We become an addict nation, riding the chemical wave of a pharmaceutical roller coaster fed by the opiates of fiat and fantasy.
The bottom line; we are being drained of our lifeblood as a country. However, the mainstream media is rife with talk of “recovery”, and one might ask how this could be possible. An overwhelming spectrum of solutions has been presented over the past 3-4 years, and each one has given the stock market a little push towards the green, so what’s the problem?
The problem is, the actions taken by our government and banking elites have built the connecting strands of a spider’s web, instead of a safety net.
Let’s examine some the most common solutions presented to the increasingly desperate American public and why these delusions have lulled us into the role of victim in the most elaborate monster movie of all time…
Centralization As a Solution To…Centralization…?
Europe’s current disintegration is a perfect example of this strange and ultimately destructive policy. The EU as an experiment is an utter disaster. Once the jewel of the open border dynamic and a bastion of the “merits” of globalization, the economic union has been exposed as a kind of waxwork museum; a tourist trap curiosity filled with illusions of life, but rather hollow upon closer inspection.
Half of the countries committed to the EU are burdened with liabilities well beyond the 60% debt to GDP ratio outlined in the ‘Growth and Stability Pact’. Some countries, including Greece, met few if any of the presented criteria for membership and were allowed to join anyway. The only reason the system was able to function at all was due to the imaginary wealth of the toxic derivative framework which now no longer exists.
The problem with globalization is that it requires assimilation; it demands that sovereign nations adopt the fiscal character of their neighbors in order to present the face of a single entity. Of course, when these countries are unable to do this because of their cultural differences, or their incongruent economies, something has to be slapped together instead. Artificially tying together societies by forcing them to financially harmonize is, in my view, a criminal act of collectivism. Now that this crime is being unveiled for all the world to see, though, the corrupt governments and banking puppeteers of Europe have suggested even MORE of the same! That’s right…their solution to the collapse of the EU is a harmonization not just of finance, but of politics and law. A single governing body which would dictate every nuance of the union.
The claim that Europe was not centralized enough, and that this is what caused the breakdown, is absolutely preposterous. Globalization makes a system inflexible and weak. If any portion of that system fails, it sends shockwaves through the rest. This is because centralization removes the protections of independently insulated structures and allows corrupt policy to spread like a plague. As the economic situation grows more dire, the end result will always be a reduction in the common citizen’s standard of living. In harmonization, It is far easier to make everyone equally poor than it is to make them equally rich. With a single, narrow minded leadership, especially one that is completely unaccountable to the people, the EU will become the most fragile makeshift empire in history, and a model for a global government that hopefully will never exist.
Print To Avoid The Pain…
I can’t tell you how truly exhausted I am with the constant rehashing of bailout bills and cheap lending windows as if they have ever or will ever change anything. Let’s make this clear; Keynesian stimulus measures are useless. They will always be useless. Governments do NOT create jobs, they destroy them. Central banks do NOT create wealth, they dilute it. Quantitative easing and zero interest lending does NOT diminish debt, it displaces it; removing it from the shoulders of private corporate banking institutions where it belongs and dumping it in the laps of taxpayers. I’ll say it again; the debts created by major banks have not been paid. They have been handed to you, and your children. Forget the December Santa Rally and the temporary holiday job boost. Nothing has changed since 2008.
The process of transferring private debt into public obligation is a tool of economic vampires. The utility in this is obvious. A program of wealth transference has the ability to prolong full collapse while at the same time giving the impression of stability. The dollar itself characterizes this conflict. The currency has been overprinted since the credit crisis began by some estimates in the ten’s of trillions. Not only has it been devalued to temporarily stave off a purging in the U.S., but now also in Europe. And yet, the dollar index, which supposedly measures the Greenback’s global value, has spiked. We are lulled into a sense of safety by such arbitrary measurements, but our buying power is being subversively annihilated. In less than a year’s time, those who dove into the dollar as a safe haven will discover their bones picked clean by predatory banks and hidden flesh eating inflation. Count on it…
Create A New Currency…
Globalists love currencies, as long as they aren’t tied down by a commodity. For central bankers, each fiat currency is a stepping stone to something more sinister. They are disposable. They are expendable. Like toothbrushes. Yes…even the dollar. And in this rests the key to economic control. A currency is a symbol of trade and labor; if you can create and destroy that symbol at will, then you can dominate trade and labor. Through a mere piece of paper, you manipulate the very breath of social life. No one should be given that kind of power without uncompromising transparency and constant public governance, but the Federal Reserve is free from both.
The suggestion that we can solve our current financial despair with the formation of a whole new currency, or a global currency, is like suggesting to a slave that he would be much more free with a shinier set of chains. Any solution that purports to undo the crisis by doing more of the same was probably devised by an economic vampire.
This includes digital currencies like the failed “Bitcoin”, which swagger about in the classy looking threads of technology and diversity while flashing us impromptu peace signs. Digital currencies are a Star Trek theme park distraction, and just like any paper fiat currency, they make promises they cannot keep. Any trade system that depends upon good faith in ones and zeros traveling across a network of machines that can be hacked or rendered useless by collapse is doomed. We have already tasted the danger of digital through the debauchery of credit cards. Why tempt fate even further?
More Regulation And Control…
Regulation is not the problem in America’s economy; the REGULATORS are the problem with America’s economy. The SEC is given thousands of potential investigations a year to pursue, but rarely do they ever follow through, and when they do, it’s to throw the angry masses a Bernie Madoff or two; an act of insincere appeasement in light of much greater fraud.
Being that true free markets have not existed for at least a century, the insinuation that free markets are the root of the collapse is a bit absurd. The guidelines for government oversight of business in the U.S. already exist; government has just refused to implement them. Adding new restrictions to an already restricted market will change nothing. Therefore, the only solution that makes any sense whatsoever as far as regulation is to wipe the slate clean entirely. Remove the Federal Reserve, replace the SEC, and replace the current establishment leadership.
I have heard it said that the philosophy of our economic system is the problem. This is an ignorant cop-out. The principals of free markets are not the issue; the men who abuse them and diminish them, on the other hand, are. Anyone who suggests that we as a country should focus our anger on the idea of the system rather than the men behind the misuse of that system is, without a doubt, an economic vampire.
Lurking in the Shadows...
The question of solutions is difficult, not because there aren’t any, but because those that will actually succeed require pain, sacrifice, and incredible hard work. Most people don’t like to think about that sort of thing. This is why global banks and their proponents have been able to maintain the recovery magic act for the past few years (just barely), and it is why the useless concepts they put forward are still given public consideration. We WANT to be sold on the proposal of an easy way out.
One rule to never forget when considering any solution is to take into account who benefits most from its implementation, and who has to labor for its success. If average people are forced to exert all the effort, and an elite few reap all the substantial benefits, this contradiction outweighs any assertion of practicality. It is not worth our time, nor our energy, to shadowbox reality. Unfortunately, this is all we have been doing as a nation since 2008.
The creeping terror that lay ahead is not the economic collapse, but the men who would use it to their favor. The stakes are high. With the NDAA and similar bills in place, fiscal distress is no longer just a matter of economics, but a matter of personal liberty. Without a doubt, a collapse will be used as a rationalization for totalitarianism. If we do not make the hard decisions now, and take it upon ourselves to construct our own localized economies separate and insulated from the mainstream, we will, indeed, find ourselves one day cowering in the dark of a long drawn night infested with fiends, and desperate enough to actually ask them for help. They will be happy to give it, at a very bloody price…
More Illegal Conduct By Banks Excused?
by Karl Denninger
Wow man, another story of illegal conduct that is unpunished and excused.
A personal bankruptcy is supposed to cut borrowers loose from lenders and debt collectors, but Capital One Financial Corp.—one of the nation's largest credit-card issuers—sometimes doesn't want to let go.
....
It wasn't the first time the company went after its customers for debts that had been snuffed out in bankruptcy, even though the practice is illegal. A court-appointed auditor concluded earlier this year that Capital One pursued 15,500 "erroneous claims" seeking money previously erased by a bankruptcy-court judge.
So if I screw 15,000 people -- each of them through an illegal act -- do I get this?
Of course I do.
So why hasn't Capital One faced a criminal indictment, since this practice is illegal?
That's a good question, isn't it?
Capital One, for its part, disputes the number of "erroneous" attempts to collect discharged debt, but doesn't say what the correct number is. It's pretty hard to argue, though, that something you do 15,000 times is a mistake, right?
"I want some proof from the company that this was a legitimate error and not a conscious, malevolent effort to go out and collect a debt that's been discharged," Judge Houston said in an interview.
Good luck with that Judge.
In the meantime I want to see indictments and handcuffs.
Wow man, another story of illegal conduct that is unpunished and excused.
A personal bankruptcy is supposed to cut borrowers loose from lenders and debt collectors, but Capital One Financial Corp.—one of the nation's largest credit-card issuers—sometimes doesn't want to let go.
....
It wasn't the first time the company went after its customers for debts that had been snuffed out in bankruptcy, even though the practice is illegal. A court-appointed auditor concluded earlier this year that Capital One pursued 15,500 "erroneous claims" seeking money previously erased by a bankruptcy-court judge.
So if I screw 15,000 people -- each of them through an illegal act -- do I get this?
Of course I do.
So why hasn't Capital One faced a criminal indictment, since this practice is illegal?
That's a good question, isn't it?
Capital One, for its part, disputes the number of "erroneous" attempts to collect discharged debt, but doesn't say what the correct number is. It's pretty hard to argue, though, that something you do 15,000 times is a mistake, right?
"I want some proof from the company that this was a legitimate error and not a conscious, malevolent effort to go out and collect a debt that's been discharged," Judge Houston said in an interview.
Good luck with that Judge.
In the meantime I want to see indictments and handcuffs.
Four years later, banks still haven’t answered for foreclosure mess
By Scot Paltrow
Reuters
Four years after the banking system nearly collapsed from reckless mortgage lending, federal prosecutors have stayed on the sidelines, even as judges around the country are pointing fingers at possible wrongdoing.
The federal government, as has been widely noted, has pressed few criminal cases against major lenders or senior executives for the events that led to the meltdown of 2007. Finding hard evidence has proved difficult, the Justice Department has said.
The government also hasn’t brought any prosecutions for dubious foreclosure practices deployed since 2007 by big banks and other mortgage-servicing companies. But this part of the financial system, a Reuters examination shows, is filled with potential leads:
Foreclosure-related case files in just one New York federal bankruptcy court, for example, hold at least a dozen mortgage documents known as promissory notes bearing evidence of recently forged signatures and illegal alterations, according to a judge’s rulings and records reviewed by Reuters. Similarly altered notes have appeared in courts around the country.
Banks in the past two years have foreclosed on the houses of thousands of active-duty U.S. soldiers who are legally eligible to have foreclosures halted. Refusing to grant foreclosure stays is a misdemeanor under federal law. The U.S. Treasury confirmed in November that it is conducting a civil investigation of 4,500 such foreclosures. Attorneys representing service members estimate banks have foreclosed on up to 30,000 military personnel in potential violation of the law.
In Alabama, a federal bankruptcy judge ruled last month that Wells Fargo & Co. WFC.N had filed at least 630 sworn affidavits containing false “facts,” including claims that homeowners were in arrears for amounts not yet due.
Wells Fargo “took the law into its own hands” and disregarded laws banning perjury, Judge Margaret A. Mahoney declared. And in thousands of cases, documents required to transfer ownership of mortgages have been falsified. Lacking originals needed to foreclose, mortgage servicers drew up new ones, falsely signed by their own staff as employees of the original lenders – many of which no longer exist.
But the mortgage-foreclosure mess has yet to yield any federal prosecution against the big banks that are the major servicers of home loans.
UNPRECEDENTED FRAUD
Reuters has identified one pending federal criminal investigation into suspected improper foreclosure procedures. That inquiry has been under way since 2009.
The investigation focuses on a defunct subsidiary of Jacksonville, Florida-based Lender Processing Services, the nation’s largest subcontractor of mortgage servicing duties for banks. People close to the investigation said indictments may come as early as the end of this month. Nationwide press reports had showed photos of what appeared to be obviously forged signatures on foreclosure affidavits.
The Justice Department doesn’t disclose pending investigations, making it impossible to say if other criminal inquiries are underway. Officials in state attorneys’ general offices and lawyers in foreclosure cases say they have seen no signs of any other federal criminal investigation. “I think it’s difficult to find a fraud of this size on the U.S. court system in U.S. history,” said Raymond Brescia, a visiting professor at Yale Law School who has written articles analyzing the role of courts in the financial crisis. “I can’t think of one where you have literally tens of thousands of fraudulent documents filed in tens of thousands of cases.”
Spokesmen for the five largest servicers – Bank of America Corp. BAC.N, Wells Fargo & Co., JP Morgan Chase & Co JPM.N, Citigroup Inc. C.N, and Ally Financial Group – declined to comment about the possibility of widespread fraud for this article. Paul Leonard, spokesman for the Housing Policy Council, whose membership includes those banks, said any faults in foreclosure cases are being addressed under a civil settlement earlier this year with federal regulators.
FALSE STATEMENTS
Justice Department and Federal Bureau of Investigation officials say they have brought mortgage-fraud criminal cases through their “Operation Stolen Dreams.” None, however, were against big banks. All targeted small-scale operators who allegedly defrauded banks with forged mortgage applications or took advantage of homeowners by falsely promising arrangements to get them out of default and then pocketing their money.
Justice Department spokeswoman Adora Andy declined to comment on the absence of prosecutions for foreclosure practices by big banks. She said in a statement: “The Department of Justice has been and will continue to aggressively investigate financial fraud wherever it occurs, including at all levels of the mortgage industry and, when we find evidence of a crime, we will not hesitate to pursue it.”
Some judges have accused banks of falsely stating in court that they are working on loan modifications for homeowners in default.
In a Nov. 30 court hearing, not previously reported, a federal bankruptcy judge in New York accused Bank of America of falsely telling courts and the public that it was working to renegotiate loans. “Bank of America issues constant press releases about how it is responsive to their borrowers on these issues. They are not, period,” said Judge Robert Drain, in a case involving homeowner Richard Tomasulo, a pharmacist from Crompond, New York. Drain said Bank of America had been telling the court since January that it was working to modify Tomasulo’s mortgage, but hadn’t done so.
“Whoever is in charge of this program and their supervisor, who should be following it, should be fired” because “they are frankly incompetent.”
Bank of America spokeswoman Jumana Bauwens said the bank has completed “nearly one million” modifications since 2008. The U.S. Treasury this year suspended loan modification incentive payments to the bank because it was “seriously deficient” in responding to requests for modifications.
CHEATERS AND LIARS
Foreclosure fraud came to light in September 2010, with evidence that employees of Ally Financial Corp. had committed “robo-signing,” in which low-level workers signed and swore to the facts in thousands of affidavits they hadn’t read or checked. The affidavits were notarized outside the signers’ presence, in apparent violation of state and federal criminal laws. Since then, mounting evidence of possible foreclosure fraud has convinced judges and state regulators that servicers have harmed homeowners and the investors who bought mortgage-backed securities. A unit of the Justice Department that oversees bankruptcy court cases, the U.S. Trustees Program, said in its 2010 annual report that there were “pervasive and longstanding problems regarding mortgage loan servicing,” which “are not merely ’technical’ but cause real harm to homeowners in bankruptcy.”
Banks, the Trustees Program says, have falsified affidavits by claiming homeowners owe fees for services never rendered and by overstating how much owners are behind on payments.
Former federal prosecutor Daniel Richman, a professor of criminal law at Columbia University Law School, says a central question is who prosecutors would target in criminal investigations. Richman said it would be easy but not worthwhile to charge large numbers of rank-and-file workers who, directed by supervisors, falsely churned out affidavits. He said criminal investigations would be warranted, but harder to bring, “if there are particular individuals who lie at the heart of this conduct in a very significant way.”
In October 2010, members of Congress pressed the Justice Department to investigate. Attorney General Eric Holder said investigations were best left to the states, with help from the Justice Department. The Office of the Comptroller of the Currency, the top bank regulator, quickly negotiated settlements with the 14 largest servicers, requiring changes in practices and “remediation” for harmed homeowners. That settlement allows the banks to choose their own contractors to determine who was harmed and by how much. Lawmakers and homeowner advocates have criticized the arrangement, contending that it will let the banks avoid making all wronged homeowners whole, because the contractors are paid by and answer to the banks.
Since then, the department’s civil division has worked with a shaky coalition of all 50 states, which have been seeking a civil settlement with five banks that are the largest loan servicers. The negotiations center on requiring them to pay $20 billion or more in penalties, only some of which would go to compensate wronged homeowners.
STATES TAKE ACTION
Federal law enforcement has been noticeably absent, even in areas hardest hit by the crisis, such as Las Vegas.
In 2010 the FBI’s Las Vegas office shut down its mortgage fraud task force, which had focused on small-scale swindlers.
Tim Gallagher, chief of the FBI’s financial crimes section, said that the Las Vegas office had asked to transfer agents to other duties.
Impatient with the lack of federal prosecution, states including New York, Massachusetts, Delaware and California have launched their own investigations of the banks.
In November, it became the first state to file criminal charges. The state attorney general obtained a 606-count indictment against two California-based executives of Lender Processing Services. It accuses the executives of paying Nevada notaries to forge the pair’s signatures and falsely notarize them on notices of default, documents Nevada requires in foreclosure actions. State officials said more indictments are expected.
In an interview, John Kelleher, Nevada’s chief deputy attorney general, said the investigation began in response to citizen complaints. “We were concerned and then shocked at the sheer number of fraudulent documents we were finding that had been filed with the county recorder,” Kelleher said. Investigators found “tens of thousands” of false records filed on behalf of big mortgage servicers, he said. The two executives have pleaded not guilty. In a press release, the company said: “LPS acknowledges the signing procedures on some of these documents were flawed; however, the company also believes these documents were properly authorized and their recording did not result in a wrongful foreclosure.”
BACK HOME IN NEW YORK
The U.S. Attorney’s Office in Manhattan is the federal prosecutors’ office that traditionally has filed the most cases against top banks and financiers. But it hasn’t brought any foreclosure-related criminal cases involving Wall Street’s biggest financial houses or the law firms that represent them. To date the only step it has taken publicly was an October 2011 civil settlement with New York State’s largest foreclosure law firm. The Steven J. Baum P.C. law firm, based near Buffalo, New York, in recent years filed approximately 40 per cent of all foreclosures in New York State, on behalf of banks and other mortgage servicers. Court records show that the firm angered state court judges for alleged false statements and filing suspect documents.
Arthur Schack, a state court judge in Brooklyn, in a 2010 ruling said that pleadings by the Baum firm on behalf of HSBC Bank, a unit of London-based HSBC Holdings HSBA.L, in a foreclosure case were “so incredible, outrageous, ludicrous and disingenuous that they should have been authorized by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone.” Another state judge that year imposed $5,000 in sanctions and ordered the firm to pay $14,500 in attorneys’ fees, ruling that “misrepresentation of the material statements here was outrageous.”
But the U.S. Attorney’s office in Manhattan filed no criminal charges against the Baum firm. Instead, it signed a settlement with Baum ending an inquiry “relating to foreclosure practices.” The agreement made no allegations of wrongdoing, but required the firm to improve its foreclosure practices. Baum agreed to pay a $2 million civil penalty, but didn’t admit wrongdoing.
The law firm said it would shut down after New York Times columnist Joe Nocera in November published photographs of a 2010 Baum firm Halloween party in which employees dressed up as homeless people. Another showed part of Baum’s office decorated to look like a row of foreclosed houses. “The settlement between the Manhattan U.S. Attorney’s Office and the Steven J. Baum Law Firm resulted in immediate and comprehensive reforms of the firm’s business practices,” said Ellen Davis, spokeswoman for the Manhattan U.S. Attorney’s office. Earl Wells III, a spokesman for Baum, said the lawyer wouldn’t comment because “he’s laying low right now.”
An HSBC spokesman said: “We are working closely with the regulators to address any matters raised regarding” the bank’s foreclosure practices.
BROKEN PROMISES
The most serious potential foreclosure violations involve falsified mortgage promissory notes, the documents homeowners sign vowing to repay mortgage loans. Courts uniformly have ruled that unless a creditor legally owns the promissory note, it has no legal right to foreclose. For each mortgage there is only one promissory note.
Bankruptcy court records reviewed by Reuters show that at least a dozen radically different documents purporting to be the authentic promissory note have turned up in foreclosure cases involving six different properties in the federal bankruptcy court for the Southern District of New York.
In one, Wells Fargo is battling to foreclose on the Bronx home of Tindala Mims, a single mother who works as an ambulance driver. In September 2010, Wells Fargo filed a promissory note bearing a signed stamp showing that the note belonged to defunct Washington Mutual Bank, not Wells Fargo. The judge threw out the case. In a second attempt, the court was given a different version of the note. But inspection showed physical alterations. A variety of marks on the original were missing or seemed obviously altered on the second. And the second version had a stamped endorsement, missing on the first, that appeared to give Wells Fargo the right to foreclose. The judge threw out the second attempt too. Wells Fargo is trying a third time. It declined to comment on the case.
Linda Tirelli, Mims’ lawyer, in October sued Wells Fargo, alleging “fabrication of documents.” “It seems to me that Washington is deathly afraid of the banking industry,” Tirelli said. “If you’re talking about filing false documents and filing false notarizations, do you really think that the U.S. Attorney would find it too difficult to prosecute?”
The office of U.S. Attorney Preet Bharara in Manhattan has routinely brought charges involving forgery and filing false documents against smaller targets. In April, the FBI arrested seven employees of the USA Beauty School in Manhattan. Bharara’s office alleged that the seven suspects had forged documents such as high school diplomas, attendance records and applications for financial aid for students taking cosmetology classes. In August, Bharara’s office filed felony charges against a sports-memorabilia company’s CEO, accusing him of auctioning jerseys falsely advertised as “game used” by Major League Baseball players. In a press conference, a U.S. Postal Inspection Service official said prosecution was important because “victims felt that they had a piece of history only to be defrauded and left with a feeling of heartbreak.”
Given the record of Bharara’s office, and those of his fellow U.S. Attorneys around the country, to aggressively pursue violations both big and small, the absence of cases involving the foreclosure fiasco seems to stand out. “Why there hasn’t been more robust prosecution is a mystery,” said Brescia, the visiting professor at Yale.
Reuters
Four years after the banking system nearly collapsed from reckless mortgage lending, federal prosecutors have stayed on the sidelines, even as judges around the country are pointing fingers at possible wrongdoing.
The federal government, as has been widely noted, has pressed few criminal cases against major lenders or senior executives for the events that led to the meltdown of 2007. Finding hard evidence has proved difficult, the Justice Department has said.
The government also hasn’t brought any prosecutions for dubious foreclosure practices deployed since 2007 by big banks and other mortgage-servicing companies. But this part of the financial system, a Reuters examination shows, is filled with potential leads:
Foreclosure-related case files in just one New York federal bankruptcy court, for example, hold at least a dozen mortgage documents known as promissory notes bearing evidence of recently forged signatures and illegal alterations, according to a judge’s rulings and records reviewed by Reuters. Similarly altered notes have appeared in courts around the country.
Banks in the past two years have foreclosed on the houses of thousands of active-duty U.S. soldiers who are legally eligible to have foreclosures halted. Refusing to grant foreclosure stays is a misdemeanor under federal law. The U.S. Treasury confirmed in November that it is conducting a civil investigation of 4,500 such foreclosures. Attorneys representing service members estimate banks have foreclosed on up to 30,000 military personnel in potential violation of the law.
In Alabama, a federal bankruptcy judge ruled last month that Wells Fargo & Co. WFC.N had filed at least 630 sworn affidavits containing false “facts,” including claims that homeowners were in arrears for amounts not yet due.
Wells Fargo “took the law into its own hands” and disregarded laws banning perjury, Judge Margaret A. Mahoney declared. And in thousands of cases, documents required to transfer ownership of mortgages have been falsified. Lacking originals needed to foreclose, mortgage servicers drew up new ones, falsely signed by their own staff as employees of the original lenders – many of which no longer exist.
But the mortgage-foreclosure mess has yet to yield any federal prosecution against the big banks that are the major servicers of home loans.
UNPRECEDENTED FRAUD
Reuters has identified one pending federal criminal investigation into suspected improper foreclosure procedures. That inquiry has been under way since 2009.
The investigation focuses on a defunct subsidiary of Jacksonville, Florida-based Lender Processing Services, the nation’s largest subcontractor of mortgage servicing duties for banks. People close to the investigation said indictments may come as early as the end of this month. Nationwide press reports had showed photos of what appeared to be obviously forged signatures on foreclosure affidavits.
The Justice Department doesn’t disclose pending investigations, making it impossible to say if other criminal inquiries are underway. Officials in state attorneys’ general offices and lawyers in foreclosure cases say they have seen no signs of any other federal criminal investigation. “I think it’s difficult to find a fraud of this size on the U.S. court system in U.S. history,” said Raymond Brescia, a visiting professor at Yale Law School who has written articles analyzing the role of courts in the financial crisis. “I can’t think of one where you have literally tens of thousands of fraudulent documents filed in tens of thousands of cases.”
Spokesmen for the five largest servicers – Bank of America Corp. BAC.N, Wells Fargo & Co., JP Morgan Chase & Co JPM.N, Citigroup Inc. C.N, and Ally Financial Group – declined to comment about the possibility of widespread fraud for this article. Paul Leonard, spokesman for the Housing Policy Council, whose membership includes those banks, said any faults in foreclosure cases are being addressed under a civil settlement earlier this year with federal regulators.
FALSE STATEMENTS
Justice Department and Federal Bureau of Investigation officials say they have brought mortgage-fraud criminal cases through their “Operation Stolen Dreams.” None, however, were against big banks. All targeted small-scale operators who allegedly defrauded banks with forged mortgage applications or took advantage of homeowners by falsely promising arrangements to get them out of default and then pocketing their money.
Justice Department spokeswoman Adora Andy declined to comment on the absence of prosecutions for foreclosure practices by big banks. She said in a statement: “The Department of Justice has been and will continue to aggressively investigate financial fraud wherever it occurs, including at all levels of the mortgage industry and, when we find evidence of a crime, we will not hesitate to pursue it.”
Some judges have accused banks of falsely stating in court that they are working on loan modifications for homeowners in default.
In a Nov. 30 court hearing, not previously reported, a federal bankruptcy judge in New York accused Bank of America of falsely telling courts and the public that it was working to renegotiate loans. “Bank of America issues constant press releases about how it is responsive to their borrowers on these issues. They are not, period,” said Judge Robert Drain, in a case involving homeowner Richard Tomasulo, a pharmacist from Crompond, New York. Drain said Bank of America had been telling the court since January that it was working to modify Tomasulo’s mortgage, but hadn’t done so.
“Whoever is in charge of this program and their supervisor, who should be following it, should be fired” because “they are frankly incompetent.”
Bank of America spokeswoman Jumana Bauwens said the bank has completed “nearly one million” modifications since 2008. The U.S. Treasury this year suspended loan modification incentive payments to the bank because it was “seriously deficient” in responding to requests for modifications.
CHEATERS AND LIARS
Foreclosure fraud came to light in September 2010, with evidence that employees of Ally Financial Corp. had committed “robo-signing,” in which low-level workers signed and swore to the facts in thousands of affidavits they hadn’t read or checked. The affidavits were notarized outside the signers’ presence, in apparent violation of state and federal criminal laws. Since then, mounting evidence of possible foreclosure fraud has convinced judges and state regulators that servicers have harmed homeowners and the investors who bought mortgage-backed securities. A unit of the Justice Department that oversees bankruptcy court cases, the U.S. Trustees Program, said in its 2010 annual report that there were “pervasive and longstanding problems regarding mortgage loan servicing,” which “are not merely ’technical’ but cause real harm to homeowners in bankruptcy.”
Banks, the Trustees Program says, have falsified affidavits by claiming homeowners owe fees for services never rendered and by overstating how much owners are behind on payments.
Former federal prosecutor Daniel Richman, a professor of criminal law at Columbia University Law School, says a central question is who prosecutors would target in criminal investigations. Richman said it would be easy but not worthwhile to charge large numbers of rank-and-file workers who, directed by supervisors, falsely churned out affidavits. He said criminal investigations would be warranted, but harder to bring, “if there are particular individuals who lie at the heart of this conduct in a very significant way.”
In October 2010, members of Congress pressed the Justice Department to investigate. Attorney General Eric Holder said investigations were best left to the states, with help from the Justice Department. The Office of the Comptroller of the Currency, the top bank regulator, quickly negotiated settlements with the 14 largest servicers, requiring changes in practices and “remediation” for harmed homeowners. That settlement allows the banks to choose their own contractors to determine who was harmed and by how much. Lawmakers and homeowner advocates have criticized the arrangement, contending that it will let the banks avoid making all wronged homeowners whole, because the contractors are paid by and answer to the banks.
Since then, the department’s civil division has worked with a shaky coalition of all 50 states, which have been seeking a civil settlement with five banks that are the largest loan servicers. The negotiations center on requiring them to pay $20 billion or more in penalties, only some of which would go to compensate wronged homeowners.
STATES TAKE ACTION
Federal law enforcement has been noticeably absent, even in areas hardest hit by the crisis, such as Las Vegas.
In 2010 the FBI’s Las Vegas office shut down its mortgage fraud task force, which had focused on small-scale swindlers.
Tim Gallagher, chief of the FBI’s financial crimes section, said that the Las Vegas office had asked to transfer agents to other duties.
Impatient with the lack of federal prosecution, states including New York, Massachusetts, Delaware and California have launched their own investigations of the banks.
In November, it became the first state to file criminal charges. The state attorney general obtained a 606-count indictment against two California-based executives of Lender Processing Services. It accuses the executives of paying Nevada notaries to forge the pair’s signatures and falsely notarize them on notices of default, documents Nevada requires in foreclosure actions. State officials said more indictments are expected.
In an interview, John Kelleher, Nevada’s chief deputy attorney general, said the investigation began in response to citizen complaints. “We were concerned and then shocked at the sheer number of fraudulent documents we were finding that had been filed with the county recorder,” Kelleher said. Investigators found “tens of thousands” of false records filed on behalf of big mortgage servicers, he said. The two executives have pleaded not guilty. In a press release, the company said: “LPS acknowledges the signing procedures on some of these documents were flawed; however, the company also believes these documents were properly authorized and their recording did not result in a wrongful foreclosure.”
BACK HOME IN NEW YORK
The U.S. Attorney’s Office in Manhattan is the federal prosecutors’ office that traditionally has filed the most cases against top banks and financiers. But it hasn’t brought any foreclosure-related criminal cases involving Wall Street’s biggest financial houses or the law firms that represent them. To date the only step it has taken publicly was an October 2011 civil settlement with New York State’s largest foreclosure law firm. The Steven J. Baum P.C. law firm, based near Buffalo, New York, in recent years filed approximately 40 per cent of all foreclosures in New York State, on behalf of banks and other mortgage servicers. Court records show that the firm angered state court judges for alleged false statements and filing suspect documents.
Arthur Schack, a state court judge in Brooklyn, in a 2010 ruling said that pleadings by the Baum firm on behalf of HSBC Bank, a unit of London-based HSBC Holdings HSBA.L, in a foreclosure case were “so incredible, outrageous, ludicrous and disingenuous that they should have been authorized by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone.” Another state judge that year imposed $5,000 in sanctions and ordered the firm to pay $14,500 in attorneys’ fees, ruling that “misrepresentation of the material statements here was outrageous.”
But the U.S. Attorney’s office in Manhattan filed no criminal charges against the Baum firm. Instead, it signed a settlement with Baum ending an inquiry “relating to foreclosure practices.” The agreement made no allegations of wrongdoing, but required the firm to improve its foreclosure practices. Baum agreed to pay a $2 million civil penalty, but didn’t admit wrongdoing.
The law firm said it would shut down after New York Times columnist Joe Nocera in November published photographs of a 2010 Baum firm Halloween party in which employees dressed up as homeless people. Another showed part of Baum’s office decorated to look like a row of foreclosed houses. “The settlement between the Manhattan U.S. Attorney’s Office and the Steven J. Baum Law Firm resulted in immediate and comprehensive reforms of the firm’s business practices,” said Ellen Davis, spokeswoman for the Manhattan U.S. Attorney’s office. Earl Wells III, a spokesman for Baum, said the lawyer wouldn’t comment because “he’s laying low right now.”
An HSBC spokesman said: “We are working closely with the regulators to address any matters raised regarding” the bank’s foreclosure practices.
BROKEN PROMISES
The most serious potential foreclosure violations involve falsified mortgage promissory notes, the documents homeowners sign vowing to repay mortgage loans. Courts uniformly have ruled that unless a creditor legally owns the promissory note, it has no legal right to foreclose. For each mortgage there is only one promissory note.
Bankruptcy court records reviewed by Reuters show that at least a dozen radically different documents purporting to be the authentic promissory note have turned up in foreclosure cases involving six different properties in the federal bankruptcy court for the Southern District of New York.
In one, Wells Fargo is battling to foreclose on the Bronx home of Tindala Mims, a single mother who works as an ambulance driver. In September 2010, Wells Fargo filed a promissory note bearing a signed stamp showing that the note belonged to defunct Washington Mutual Bank, not Wells Fargo. The judge threw out the case. In a second attempt, the court was given a different version of the note. But inspection showed physical alterations. A variety of marks on the original were missing or seemed obviously altered on the second. And the second version had a stamped endorsement, missing on the first, that appeared to give Wells Fargo the right to foreclose. The judge threw out the second attempt too. Wells Fargo is trying a third time. It declined to comment on the case.
Linda Tirelli, Mims’ lawyer, in October sued Wells Fargo, alleging “fabrication of documents.” “It seems to me that Washington is deathly afraid of the banking industry,” Tirelli said. “If you’re talking about filing false documents and filing false notarizations, do you really think that the U.S. Attorney would find it too difficult to prosecute?”
The office of U.S. Attorney Preet Bharara in Manhattan has routinely brought charges involving forgery and filing false documents against smaller targets. In April, the FBI arrested seven employees of the USA Beauty School in Manhattan. Bharara’s office alleged that the seven suspects had forged documents such as high school diplomas, attendance records and applications for financial aid for students taking cosmetology classes. In August, Bharara’s office filed felony charges against a sports-memorabilia company’s CEO, accusing him of auctioning jerseys falsely advertised as “game used” by Major League Baseball players. In a press conference, a U.S. Postal Inspection Service official said prosecution was important because “victims felt that they had a piece of history only to be defrauded and left with a feeling of heartbreak.”
Given the record of Bharara’s office, and those of his fellow U.S. Attorneys around the country, to aggressively pursue violations both big and small, the absence of cases involving the foreclosure fiasco seems to stand out. “Why there hasn’t been more robust prosecution is a mystery,” said Brescia, the visiting professor at Yale.
Thursday, December 22, 2011
Michael Olenick: The Administration Likes Foxes in Charge of Henhouses – Proof that OCC Foreclosure Reviews Are a Sham
By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system
“There Goes the Neighborhood,” which ran on 60 Minutes last Sunday, is a must-see piece. Scott Pelley walks through a pillaged house in Cleveland, slated for demolition in a county neighborhood stabilization program. This abandoned house is owned by Structured Asset Investment Trust 2003-BC11. An investor reports lists the property as “in foreclosure” despite no court filing. Ohio is a judicial foreclosure state, so a foreclosure filing requires a lawsuit, but there isn’t one.
According to the prospectus, Trust 2003-BC11 was underwritten by Lehman Brothers. Aurora Loan Services is the Master Servicer, though the entire trust was passed to sub-servicers. Specifically Chase, Option One, Ocwen, and Wells Fargo serviced 30.46%, 29.47%, 26.84%, and 12.19% of the loans.
The Murrayhill Company is the Credit Risk Manager. According to the prospectus Murrayhill “will monitor and advise the servicers with respect to default management of the mortgage loans.” Later, the prospectus clarifies “The Murrayhill Company, a Colorado corporation .. will monitor and make recommendations to the Master Servicer and the Servicers regarding certain delinquent and defaulted Mortgage Loans…”
Murrayhill literally wrote the book on how Aurora should deal with defaults for Trust 2003-BC11, then took upon themselves to the obligation to monitor that same book.
Colorado-based Murrayhill was founded by Sue Ellis Allon and apparently did spectacularly well back in the past. In a case study published by the Tuck School of Business at Dartmouth in 2003, the same Trust 2003-BC11 closed, Allon bragged her company enjoyed “more than 100% annual growth” for the prior three years.
Murrayhill was eventually acquired and merged into Clayton Holdings. Allon served on their Board of Directors. Eventually she formed Allonhill, her newest company, also in Colorado. Various news reports portray Allon as a “reformer,” really trying to get to the core of the housing crisis.
On September 9, 2011, Allonhill signed an engagement letter — a definitive agreement — with the Office of the Comptroller of the Currency (OCC), as part of the consent order wherein servicers agreed to submit foreclosure fraud for review by “independent” third-party companies. The engagement letter notes that Allon founded Murrayhill, “which pioneered the concept of independent third-party oversight of loans and servicers.” But there is no mention that Murrayhill was tasked with promulgating and monitoring Aurora’s default policies and procedures.
That is, OCC chief John Walsh signed off on hiring Allon to audit her prior work for fraud.
Let’s repeat that; the OCC — an arm of President Obama’s Treasury Department — signed off, allowing a company founded and managed by the woman who created Aurora’s foreclosure practices to audit her own firm’s work, and did so pursuant to a consent order and under the guise of consumer protection. Allonhill, the firm that promulgated and enforced foreclosure policies, is based less than a mile away from the address listed for Murrayhill, the firm auditing for foreclosure fraud on behalf of borrowers.
Until now there has been a mountain of circumstantial evidence that the Obama administration has been comfortable with foreclosure fraud. There is the conspicuous lack of prosecutions, unwarranted and unwelcome intervention in the 50-state Attorney General review, and references that infer robosigning is a “victimless” crime. But, until this disclosure, there has been no solid evidence the federal government is actively covering up bank-perpetrated fraud.
This arrangement clarifies that the Federal Government, at the highest levels, are comfortable, or even arguably complicit, covering up foreclosure fraud.
The section regarding Conflicts of Interest in the Allonhill contract reads “Allonhill .. represent(s) that this engagement does not create a conflict of interest…” But it is impossible to think of a more substantive conflict of interest — the notion that a former executive is supposed to bust herself — than this arrangement. Even Bernie Madoff hired a storefront accountant to robosign his audits; he didn’t have the chutzpah to appoint himself to the role.
The agreement continues, “Allonhill will implement various controls to manage conflicts and ensure that the loan review services are provided with an appropriate level of independence. These controls include: (a) Restricting any individual who was previous employed by, or otherwise under contract to provide services to, Aurora Bank from…” a long list that includes essentially everything Allonhill is supposed to be doing.
I guess they overlooked that the founder and CEO of Allonhill is the same woman that created and monitored the fraud Allonhill is supposed to be monitoring while working for Aurora.
Allonhill is so massively conflicted with regards to Aurora that the decision to engage the firm taints not only the entire OCC review process into question, but also every person involved in the review, and the Treasury Department itself. It is impossible to think of any company that could be more conflicted in performing these audits. Even Aurora itself could blame Murrayhill for the problems, but Allonhill can’t, at least not without implicating its own founder and CEO.
John Walsh, the head of the OCC, should finally be fired for incompetence. His boss, Bailout King Treasury Secretary Timothy Geithner, also deserves the axe. Congress should let the subpoenas fly in every directions, including and especially towards the White House, to figure out how this could have happened.
Forget just firing Allonhill and Walsh; every reviewer has to be fired: it’s clear that the entire review process is corrupt.
Once Walsh, the Bush appointee who was reappointed by Obama (“You’re doing a heckuva’ job, John”) is gone the new director should void these contracts, start from scratch, and be sure to disqualify anybody who had anything to do with this fiasco. In the interim, there is now a persuasive argument for a nationwide freeze on foreclosures until this mess is straightened out.
As the reviews are reformulated every document, every email, every engagement letter — absolutely everything — should be released without a single redaction. Any firm that doesn’t want to work in sunlight can simply decline to bid. I’m sure they’ll have plenty of takers. I’d personally be pleased to have one of these contracts, and would staff up a firm with top-notch auditors who would find foreclosure fraud.
News reports say that President “Hope & Change” Obama, who promised Hope but gave us the ineffectual and arguably outright harmful HAMP, has apparently decided to reincarnate himself in the likeness of President Teddy Roosevelt. He might want to think about this quote from President T. Roosevelt: “No man who condones corruption in others can possibly do his duty by the community.”
Paraphrasing from a Senatorial candidate I once adored, foreclosure is not a Blue State problem, it’s not a Red State problem, it’s an American problem. And it’s long past time the White House wakes up and doesn’t something besides protect the perps who caused this mess.
Disclosure: Aurora has foreclosed against a house I purchased with an ex-girlfriend. That loan, which Lehman/Aurora purchased as they were going broke, is a full-documentation loan with a substantial down-payment and no second. I don’t live there; my ex-girlfriend does. My own home has no mortgage and is not affected. This isn’t what drew me to focus on Aurora — the house in the 60 Minutes segment is what perked up my interest — though it does explain why they told me that I had to stop paying the mortgage in order to qualify for a short-sale, a policy probably promulgated by Murrayhill .. and now audited by Allonhill.
“There Goes the Neighborhood,” which ran on 60 Minutes last Sunday, is a must-see piece. Scott Pelley walks through a pillaged house in Cleveland, slated for demolition in a county neighborhood stabilization program. This abandoned house is owned by Structured Asset Investment Trust 2003-BC11. An investor reports lists the property as “in foreclosure” despite no court filing. Ohio is a judicial foreclosure state, so a foreclosure filing requires a lawsuit, but there isn’t one.
According to the prospectus, Trust 2003-BC11 was underwritten by Lehman Brothers. Aurora Loan Services is the Master Servicer, though the entire trust was passed to sub-servicers. Specifically Chase, Option One, Ocwen, and Wells Fargo serviced 30.46%, 29.47%, 26.84%, and 12.19% of the loans.
The Murrayhill Company is the Credit Risk Manager. According to the prospectus Murrayhill “will monitor and advise the servicers with respect to default management of the mortgage loans.” Later, the prospectus clarifies “The Murrayhill Company, a Colorado corporation .. will monitor and make recommendations to the Master Servicer and the Servicers regarding certain delinquent and defaulted Mortgage Loans…”
Murrayhill literally wrote the book on how Aurora should deal with defaults for Trust 2003-BC11, then took upon themselves to the obligation to monitor that same book.
Colorado-based Murrayhill was founded by Sue Ellis Allon and apparently did spectacularly well back in the past. In a case study published by the Tuck School of Business at Dartmouth in 2003, the same Trust 2003-BC11 closed, Allon bragged her company enjoyed “more than 100% annual growth” for the prior three years.
Murrayhill was eventually acquired and merged into Clayton Holdings. Allon served on their Board of Directors. Eventually she formed Allonhill, her newest company, also in Colorado. Various news reports portray Allon as a “reformer,” really trying to get to the core of the housing crisis.
On September 9, 2011, Allonhill signed an engagement letter — a definitive agreement — with the Office of the Comptroller of the Currency (OCC), as part of the consent order wherein servicers agreed to submit foreclosure fraud for review by “independent” third-party companies. The engagement letter notes that Allon founded Murrayhill, “which pioneered the concept of independent third-party oversight of loans and servicers.” But there is no mention that Murrayhill was tasked with promulgating and monitoring Aurora’s default policies and procedures.
That is, OCC chief John Walsh signed off on hiring Allon to audit her prior work for fraud.
Let’s repeat that; the OCC — an arm of President Obama’s Treasury Department — signed off, allowing a company founded and managed by the woman who created Aurora’s foreclosure practices to audit her own firm’s work, and did so pursuant to a consent order and under the guise of consumer protection. Allonhill, the firm that promulgated and enforced foreclosure policies, is based less than a mile away from the address listed for Murrayhill, the firm auditing for foreclosure fraud on behalf of borrowers.
Until now there has been a mountain of circumstantial evidence that the Obama administration has been comfortable with foreclosure fraud. There is the conspicuous lack of prosecutions, unwarranted and unwelcome intervention in the 50-state Attorney General review, and references that infer robosigning is a “victimless” crime. But, until this disclosure, there has been no solid evidence the federal government is actively covering up bank-perpetrated fraud.
This arrangement clarifies that the Federal Government, at the highest levels, are comfortable, or even arguably complicit, covering up foreclosure fraud.
The section regarding Conflicts of Interest in the Allonhill contract reads “Allonhill .. represent(s) that this engagement does not create a conflict of interest…” But it is impossible to think of a more substantive conflict of interest — the notion that a former executive is supposed to bust herself — than this arrangement. Even Bernie Madoff hired a storefront accountant to robosign his audits; he didn’t have the chutzpah to appoint himself to the role.
The agreement continues, “Allonhill will implement various controls to manage conflicts and ensure that the loan review services are provided with an appropriate level of independence. These controls include: (a) Restricting any individual who was previous employed by, or otherwise under contract to provide services to, Aurora Bank from…” a long list that includes essentially everything Allonhill is supposed to be doing.
I guess they overlooked that the founder and CEO of Allonhill is the same woman that created and monitored the fraud Allonhill is supposed to be monitoring while working for Aurora.
Allonhill is so massively conflicted with regards to Aurora that the decision to engage the firm taints not only the entire OCC review process into question, but also every person involved in the review, and the Treasury Department itself. It is impossible to think of any company that could be more conflicted in performing these audits. Even Aurora itself could blame Murrayhill for the problems, but Allonhill can’t, at least not without implicating its own founder and CEO.
John Walsh, the head of the OCC, should finally be fired for incompetence. His boss, Bailout King Treasury Secretary Timothy Geithner, also deserves the axe. Congress should let the subpoenas fly in every directions, including and especially towards the White House, to figure out how this could have happened.
Forget just firing Allonhill and Walsh; every reviewer has to be fired: it’s clear that the entire review process is corrupt.
Once Walsh, the Bush appointee who was reappointed by Obama (“You’re doing a heckuva’ job, John”) is gone the new director should void these contracts, start from scratch, and be sure to disqualify anybody who had anything to do with this fiasco. In the interim, there is now a persuasive argument for a nationwide freeze on foreclosures until this mess is straightened out.
As the reviews are reformulated every document, every email, every engagement letter — absolutely everything — should be released without a single redaction. Any firm that doesn’t want to work in sunlight can simply decline to bid. I’m sure they’ll have plenty of takers. I’d personally be pleased to have one of these contracts, and would staff up a firm with top-notch auditors who would find foreclosure fraud.
News reports say that President “Hope & Change” Obama, who promised Hope but gave us the ineffectual and arguably outright harmful HAMP, has apparently decided to reincarnate himself in the likeness of President Teddy Roosevelt. He might want to think about this quote from President T. Roosevelt: “No man who condones corruption in others can possibly do his duty by the community.”
Paraphrasing from a Senatorial candidate I once adored, foreclosure is not a Blue State problem, it’s not a Red State problem, it’s an American problem. And it’s long past time the White House wakes up and doesn’t something besides protect the perps who caused this mess.
Disclosure: Aurora has foreclosed against a house I purchased with an ex-girlfriend. That loan, which Lehman/Aurora purchased as they were going broke, is a full-documentation loan with a substantial down-payment and no second. I don’t live there; my ex-girlfriend does. My own home has no mortgage and is not affected. This isn’t what drew me to focus on Aurora — the house in the 60 Minutes segment is what perked up my interest — though it does explain why they told me that I had to stop paying the mortgage in order to qualify for a short-sale, a policy probably promulgated by Murrayhill .. and now audited by Allonhill.
by Charles Hugh Smith from Of Two Minds
Students stuck with gargantuan loans for life are bound in a bank-dominated "improvement" of indentured servitude.
Yesterday ( Risk is Necessary for Adaptation, Innovation and Success) I discussed the inevitable failure of systems in which risk has been transferred from those who reap the gain to others. In the case of student loans, the risk has been transferred to students who enter decades of indentured servitude.
Indentured servitude has a long history in the U.S.; many immigrants accepted servitude of between two and seven years in exchange for passage to the New World. Orphans were indentured out of orphanages to the age of 21--potentially a much longer servitude. Indeed, the labor of anyone on the public dole could be auctioned off:
From Wilma A. Dunaway's Online Archive:
By the time of the Revolutionary War, indentured servitude had been a common practice in the United States for 150 years.
Following British laws established during the colonial period, post-Revolutionary public authorities indentured the labor of those who were likely to fall upon the public dole. Appalachian county governments bound out indigent adults and children whose families could no longer care for them. The age, gender, and racial trends are clearly documented in early records of Appalachian poor houses, for women and orphans represented more than two-thirds of the individuals whose labor was auctioned off by county governments.
Isaac Miller of Anderson County, Tennessee, advertised in 1819 for the return of Margaret Hutcheson who had been bound to him by the county poor house. Obviously, the seventeen-year-old girl had tried the patience of her master, for he offered only "a reward of 6 1/4 cents to the person who w[ould] deliver her to [him]," caustically adding, "but I will not thank any person for doing so."
When an orphan was bound out by the county poor house, the child was legally tied to the master until the age of eighteen or twenty-one.
Orphans were often bound to tradesmen or farmers until age 21, and indigent adults were typically bound for three to seven years. However, there is no way to document how many laborers were bound out by their own families. When parents indentured their own children, it was for "a usual term of seven years if a girl, or five if a boy."
Let us consider the modern form of indentured servitude, student loans, which now exceed a staggering $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" (Zero Hedge), or perhaps more accurately, indentured servitude, because the debt cannot be dismissed via bankruptcy.
Student loans outstanding will exceed $1 trillion this year (USA Today):
Lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.
"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of FinAid.org.
"It's going to create a generation of wage slavery," says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.
The University of Phoenix, the nation's largest, got 88% of its revenue from federal programs last year, most of it from student loans.
In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans.
This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades.
The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers.
The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.
Imagine if risk were connected to gain. Maybe lenders would be a bit more careful about which students they deemed worthy credit risks; perhaps they would begin differentiating between low-market-value liberal arts degrees from hard-science degrees.
Maybe they'd start considering the students' incomes while in university. Maybe they'd recognize differences in risk between for-profit diploma mills protected by the rapacious, captured-by-corporations Savior State and state universities.
There can be no "fix" to our decline until risk is bound once again to return and gain. If risk is transferred to others, you're left with some type of indentured servitude and financial tyranny in service of the banks and their Savior State toadies.
Students stuck with gargantuan loans for life are bound in a bank-dominated "improvement" of indentured servitude.
Yesterday ( Risk is Necessary for Adaptation, Innovation and Success) I discussed the inevitable failure of systems in which risk has been transferred from those who reap the gain to others. In the case of student loans, the risk has been transferred to students who enter decades of indentured servitude.
Indentured servitude has a long history in the U.S.; many immigrants accepted servitude of between two and seven years in exchange for passage to the New World. Orphans were indentured out of orphanages to the age of 21--potentially a much longer servitude. Indeed, the labor of anyone on the public dole could be auctioned off:
From Wilma A. Dunaway's Online Archive:
By the time of the Revolutionary War, indentured servitude had been a common practice in the United States for 150 years.
Following British laws established during the colonial period, post-Revolutionary public authorities indentured the labor of those who were likely to fall upon the public dole. Appalachian county governments bound out indigent adults and children whose families could no longer care for them. The age, gender, and racial trends are clearly documented in early records of Appalachian poor houses, for women and orphans represented more than two-thirds of the individuals whose labor was auctioned off by county governments.
Isaac Miller of Anderson County, Tennessee, advertised in 1819 for the return of Margaret Hutcheson who had been bound to him by the county poor house. Obviously, the seventeen-year-old girl had tried the patience of her master, for he offered only "a reward of 6 1/4 cents to the person who w[ould] deliver her to [him]," caustically adding, "but I will not thank any person for doing so."
When an orphan was bound out by the county poor house, the child was legally tied to the master until the age of eighteen or twenty-one.
Orphans were often bound to tradesmen or farmers until age 21, and indigent adults were typically bound for three to seven years. However, there is no way to document how many laborers were bound out by their own families. When parents indentured their own children, it was for "a usual term of seven years if a girl, or five if a boy."
Let us consider the modern form of indentured servitude, student loans, which now exceed a staggering $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" (Zero Hedge), or perhaps more accurately, indentured servitude, because the debt cannot be dismissed via bankruptcy.
Student loans outstanding will exceed $1 trillion this year (USA Today):
Lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.
"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of FinAid.org.
"It's going to create a generation of wage slavery," says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.
The University of Phoenix, the nation's largest, got 88% of its revenue from federal programs last year, most of it from student loans.
In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans.
This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades.
The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers.
The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.
Imagine if risk were connected to gain. Maybe lenders would be a bit more careful about which students they deemed worthy credit risks; perhaps they would begin differentiating between low-market-value liberal arts degrees from hard-science degrees.
Maybe they'd start considering the students' incomes while in university. Maybe they'd recognize differences in risk between for-profit diploma mills protected by the rapacious, captured-by-corporations Savior State and state universities.
There can be no "fix" to our decline until risk is bound once again to return and gain. If risk is transferred to others, you're left with some type of indentured servitude and financial tyranny in service of the banks and their Savior State toadies.
A Christmas Message From America's Rich
Taibblog Main
It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.
True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.
But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.
Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:
“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”
Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:
“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.
Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:
Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.
“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”
Finally, there is this from Blackstone CEO Steven Schwartzman:
Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.
“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”
There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.
But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.
Why? It's not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.
It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.
The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).
So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.
But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.
You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you'd better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.
And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.
The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.
An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.
But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.
Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.
Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.
And in 2008, in that moonlighting capacity, he orchestrated a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?
Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.
Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.
That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officials – literally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.
Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.
Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?
Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.
Just look at how Chase behaved in Greece, for example.
Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase “helped” Greece mask its debt problem for years by selling a similar series of swaps to the Greek government. The bank then turned around and worked with banks like Goldman, Sachs to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.
In other words, Chase knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.
Does a citizen of Greece do that deal? Forget that: does a human being do that deal?
Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chase – hell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.
But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?
Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.
People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.
What makes people furious is that they have stopped being citizens.
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It's called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.
But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:
Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”
Unbelievable. Merry Christmas, bankers. And good luck getting that message out.
It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.
True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.
But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.
Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:
“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”
Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:
“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.
Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:
Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.
“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”
Finally, there is this from Blackstone CEO Steven Schwartzman:
Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.
“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”
There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.
But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.
Why? It's not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.
It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.
The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).
So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.
But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.
You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you'd better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.
And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.
The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.
An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.
But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.
Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.
Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.
And in 2008, in that moonlighting capacity, he orchestrated a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?
Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.
Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.
That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officials – literally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.
Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.
Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?
Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.
Just look at how Chase behaved in Greece, for example.
Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase “helped” Greece mask its debt problem for years by selling a similar series of swaps to the Greek government. The bank then turned around and worked with banks like Goldman, Sachs to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.
In other words, Chase knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.
Does a citizen of Greece do that deal? Forget that: does a human being do that deal?
Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chase – hell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.
But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?
Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.
People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.
What makes people furious is that they have stopped being citizens.
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It's called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.
But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:
Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”
Unbelievable. Merry Christmas, bankers. And good luck getting that message out.
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