“A Public Service,” My Fannie

I wanted to juxtapose two stories about Fannie Mae. The first, from this WaPo story reporting that the Administration has decided to keep some kind of federal entity guaranteeing mortgages. The story itself is interesting–as are Dean Baker’s post criticizing the underlying decision.

What I found particularly interesting, though, were the comments from the usual suspects about the role they perceive Fannie and Freddie as playing.

Two top Obama advisers, HUD Secretary Shaun Donovan and Treasury Secretary Timothy F. Geithner, think the government should maintain an outsize role in the housing market, administration officials said.

Donovan thinks federal support for housing fulfills a public service, while Geithner has been focused on the need for the government to have a way to keep the mortgage market operating during a financial crisis.

Other advisers, however, opposed a continued government role over the long run. Austan Goolsbee, who this month left his job as chairman of Obama’s Council of Economic Advisers, argued that the federal role in housing distorts the free market. By subsidizing mortgage investments, he argued, the government drives capital away from other types of investments — for example, those in companies developing environmentally friendly technology. He also warned that the government is putting enormous sums of taxpayer money on the line while conveying little actual benefit to home buyers.

In a meeting with the president, Goolsbee said that the government had finally brought Fannie and Freddie’s excesses to heel by taking over the companies and that it would be a mistake to let them loose in the market again, said a person familiar with the meeting. Goolsbee likened the companies to a villain held in a special prison who shouldn’t be freed just because he promises to help the poor, the source recounted.

Lawrence H. Summers, who was director of the National Economic Council until early this year, argued that, over the long term, it didn’t make sense to have a government-backed agency providing guarantees to the mortgage market but that Fannie and Freddie still play a crucial role.

“My position was that we needed to maximize activity in the short run to support the housing market,” Summers said in an interview. “Discussions of scaling down Fannie and Freddie were vastly premature under the circumstances of a collapsing housing market.” [my emphasis]

Compare those comments–particularly those favoring the GSEs from Donovan and TurboTaxTimmeh–with the description of the way Fannie Mae is fleecing the taxpayers and ruining communities by pushing servicers to foreclose even though homeowners are seeking a modification, an approach that violates Fannie’s own stated policy.

The documents show Fannie Mae has told banks to foreclose on some delinquent homeowners — those more than a year behind — even as the banks were trying to help borrowers save their houses, a violation of Fannie’s own policy.

Fannie Mae has publicly maintained that homeowners would not lose their houses while negotiating changes to mortgages under the federal Home Affordable Modification Program, or HAMP.

The Free Press also obtained internal records revealing that the taxpayer-supported mortgage giant has told banks that it expected them to sell off a fixed percentage of foreclosed homes. In one letter sent to banks around the country last year, a Fannie vice president made clear that Fannie expected 10%-12% of homes in foreclosure to proceed to sale.

[snip]

“Fannie just wants to clean up its balance sheet and get these loans off the books while taxpayers are eating these losses,” [Valpariso University Law Professor Alan] White said, referring to the multibillion-dollar federal bailout of Fannie Mae in 2008 and the rising cost to taxpayers.

“And Treasury and the FHFA are letting them get away with it. It’s a huge waste. Wealth is being destroyed, people are losing houses needlessly, and taxpayers are losing money.”

[snip]

According to White, the Valparaiso professor, foreclosing on a home typically costs Fannie Mae far more than a successful loan modification. But, he and others say, Fannie is willing to absorb higher losses because it knows taxpayers — not Fannie Mae — will eventually reimburse the loss.

In other words, even as Donovan and Timmeh appear to have won the argument on sustaining Fannie and Freddie (or something like them), what was implicitly clear (I’ve been hearing this accusation since 2009) has been proven: that the GSEs have been using their government backing to stiff taxpayers and ruin communities. (Kudos to Goolsbee who got it mostly right on this one: the taxpayer backing is providing little of value to taxpayers.)

It’s as if none of these folks overseeing Fannie know how badly it is screwing American communities. Or perhaps they don’t care?

Even as the Costs Become Apparent, Big Business Pushes to Legalize Bribery

Last night, Jefferson County, AL delayed their decision for a month whether to declare bankruptcy or accept a settlement with their creditors and the state. At issue is $3.2 billion in debt, much of it for a sewer upgrade, that got dragged into the financial crash. The current deal would have creditors forgo a third of the debt in exchange for rate increases and the creation of an independent authotiry to run the sewer. County commissioners balked, though, arguing the deal relied on too many contingencies from the state–none of which are guaranteed–and took away any control at the county level. In short, it’s a mess, one that is costing the people of Jefferson County in increased rates and diminished services as the county struggled to find funding mechanisms to pay for the debt.

Yesterday, Reuters did a report summarizing all the bribery that went into the original sewer deal–and noting that JP Morgan hasn’t paid any reputational damage or loss of business for it, largely because it has blamed the deal on corrupt local officials.

JPMorgan Chase & Co. (JPM)’s Charles LeCroy said the key to landing bond deals in Jefferson County, Alabama, was finding out whom to pay off. In one example, that meant a $2.6 million payment to Bill Blount, a local banker and longtime friend of County Commissioner Larry Langford.

“It’s a lot of money, but in the end it’s worth it on a billion-dollar deal,” LeCroy told a colleague in 2003, according to a complaint filed by the Securities and Exchange Commission.

[snip]

Just 21 months ago, JPMorgan agreed to a $722 million SEC settlement to end a case over secret payments to friends of Jefferson County commissioners. The financings arranged by JPMorgan, a package of floating-rate debt and derivatives, exposed taxpayers to the 2008 credit crisis and dealt a blow that may lead the county to approve the biggest U.S. municipal bankruptcy as soon as today.

Read more

Goldman’s Latest Scam: Turning Empty Space into Riches

Who knew that Detroit was so commodity-rich it was ruining entire segments of industry?

Only, I presume Detroit gets little to none of the fortune Goldman is making by hoarding aluminum in warehouses in the city, thereby driving the price up and making millions on warehouse rent. This Reuters article describes the scam, but it works sort of like this.

The London Metal Exchange has rules to smooth out market prices for the commodities sold on its market (the rules thus serve the same goal as derivatives). As part of this, the exchange regulates over 640 metals warehouses around the world. The idea is, the metals can be stored there during recession, then used after the economy improves. The LME requires that a certain amount of metal must be delivered each day, to keep it flowing. But it sets those limits by city, not by warehouse. So in a city like Detroit, owning a concentration of warehouses allows a firm to create an artificial bottleneck in supply of the metal. And it’s costing the people who actually want to use aluminum to do something productive with it.

“It’s driving up costs for the consumers in North America and it’s not being driven up because there is a true shortage in the market. It’s because of an issue of accessing metal … in Detroit warehouses,” said Nick Madden, chief procurement officer for Atlanta-based Novelis, which is owned by India’s Hindalco Industries Ltd and is the world’s biggest maker of rolled aluminum products. Novelis buys aluminum directly from producers but is still hit by the higher prices.

[snip]

Premiums for physical aluminum — the amount paid above the LME’s cash contract currently trading at $2,620 a tonne — in the U.S. Midwest hit a record high of $210 a tonne in May, up about 50 percent from late last year. In Europe, the premium is at records above $200 a tonne, double the levels seen in January 2010.

The ripple effect into Asia has seen the premium paid in Japan increase 6 percent to $120 a tonne in the third quarter from the previous quarter, the first rise in nearly six quarters.

One of the keys to this scam is that the traders that own the warehouses also own the exchange.

The lack of real change has some in the industry questioning the very structure of the LME, which, unlike its publicly owned U.S.-based rival commodities exchanges, is owned by many of the financial institutions that trade there.

[snip]

That concern is growing. Critics of the exchange point to a potential problem with zinc supply though New Orleans, where inventories now account for 61 percent of total LME-registered stocks.

Most of the warehouses in New Orleans are owned by Goldman and Glencore.

And those same traders are buying up warehouse companies around the world.

Now, given that the two cities mentioned in this article–Detroit and New Orleans–are seriously hurting, it seems one solution would be for the cities to impose a tax designed to move product (presumably, such a tax would also create more work for those working in the warehouses). If concentrated empty space is their competitive advantage, why shouldn’t they stick it to Goldman?

The Blinds Spots of the Administration’s New Transnational Organized Crime Program

John Brennan, Eric Holder, Janet Napolitano, and some other Administration bigwigs just rolled out the Administration’s new Strategy to Combat Transnational Organized Crime (TOC). Here’s how they define TOC:

Transnational organized crime refers to those self-perpetuating associations of individuals who operate transnationally for the purpose of obtaining power, influence, monetary and/or commercial gains, wholly or in part by illegal means, while protecting their activities through a pattern of corruption and/or violence, or while protecting their illegal activities through a transnational organizational structure and the exploitation of transnational commerce or communication mechanisms. There is no single structure under which transnational organized criminals operate; they vary from hierarchies to clans, networks, and cells, and may evolve to other structures. The crimes they commit also vary. Transnational organized criminals act conspiratorially in their criminal activities and possess certain characteristics which may include, but are not limited to:

It all sounds like they could be talking about Goldman Sachs or News Corp. But the specific crimes they mentioned are:

  • Drug trafficking
  • Human trafficking
  • Russian, Italian, Japanese mafia (in addition to Mexican drug cartels)
  • Counterfeiting

In other words, this initiative will look at very serious TOCs. But they won’t look at the TOCs that have done the most damage to the US in the last several years: the banksters that, through fraud, intimidation, and political influence managed to loot and then crash the economy. The same banksters that are now–frankly with DOJ enabling them–using their corporate structures to avoid any accountability for having crashed the economy.

That’s a problem. Because imagine what we could do to the banksters if we used any of the several following tools against them:

A new Executive Order will establish a sanctions program to block the property of and prohibit transactions
with significant transnational criminal networks that threaten national security, foreign policy, or economic interests.
A proposed legislative package will enhance the authorities available to investigate, interdict, and prosecute the activities of top transnational criminal networks.
A new Presidential Proclamation under the Immigration and Nationality Act (INA) will deny entry to transnational criminal aliens and others who have been targeted for financial sanctions.
A new rewards program will replicate the success of narcotics rewards programs in obtaining information
that leads to the arrest and conviction of the leaders of transnational criminal organizations that pose the greatest threats to national security.
An interagency Threat Mitigation Working Group will identify those TOC networks that present a sufficiently
high national security risk and will ensure the coordination of all elements of national power to combat them.

We could freeze Goldman and its executives from using their ill-gotten goods. We could recruit new whistleblowers, rather than jailing them. We could throw “all elements of national power” to combat Goldman.

Instead, we’ve been funneling trillions to them.

Now I don’t mean to be glib with this observation. The Administration is about to roll out a law enforcement regime that applies terrorist-like authorities to combat the TOCs it believes are illegitimate. While I haven’t seen the bill the Administration is proposing, it seems that the taint of illegality in one part of the TOC will qualify that TOC for such terrorist-like treatment across the network.

Except if you’re a bankster. Because if you’re a bankster, the government will use all its resources to ignore or settle the crimes that lay at the heart of your TOC, just so it doesn’t have to face the illegitimacy of the TOC as a whole.

But I guess that’s what the Administration expects to drive our economy.

Why Push Elizabeth Warren to Join America’s Most Ineffective Body?

The news reports in the lead-up to this weekend’s announcement that Obama was ending the career of yet another prescient female bank regulator, this time even before it started, prepped the progressive community to champion an Elizabeth Warren run for Ted Kennedy’s MA Senate seat.

And so the usual suspects are out in force arguing that Warren would be better off running for Senate than she would be shaming Republicans for trying to kill off the CFPB.

Whoever is nominated to lead the CFPB is going to spend the next year of his life being filibustered by Republicans. The very best he can hope for is a recess appointment, in which case his tenure in the position would be relatively swift. So the question isn’t who you want leading the CFPB for the foreseeable future. It’s who you want spending his or her time being stopped from leading the CFPB for the foreseeable future. And it’s not clear that the answer to that question is “Elizabeth Warren.”

Warren, after all, has another option that she appears to be taking seriously: challenging Scott Brown in the 2012 election. For reasons I’ve outlined here and Bob Kuttner elaborates on here, there’s reason to think she would be a very effective candidate. But if she wants to do that, she can’t spend the next year being blocked from leading the Consumer Financial Protection Bureau. She has to spend at least part of it preparing for her candidacy.

Now, I don’t think there’s any doubt that Warren would prefer to lead the agency she’s built than launch a Senate campaign that may or may not succeed. But launching a Senate campaign that may or may not succeed seems like a clearly more effective way to protect her agency and further her ideas than being blocked from leading the agency she’s built.

Not only does this view not even consider whether Warren–or a relatively unknown midwestern politician–would be more effective making the public case for the bureau.

But it also seems to confuse the value of running for Senate with actually serving in the Senate.

What the people hailing a possible Warren run are arguing, effectively, is that the consolation prize for the banks having beat her on CFPB should be junior membership in a body that–as Dick Durbin has told us–the banks own.

Even putting aside the power of the banking lobby in the Senate, under what model would Senator Warren be effective championing progressive values, or even just “protect[ing] the agency she’s built”? Even assuming the Democrats kept the same number of seats they currently have on the Senate Banking Committee, even assuming Democratic leadership has already promised her the seat that Herb Kohl’s retirement will open up, that will still make her one of just three progressives (the other two being Jeff Merkley and Sherrod Brown) on a committee that has long been actively working against her CFPB candidacy. Even assuming Democrats keep the Senate, how amenable is Chairman Tim Johnson–a bank-owned hack–going to be to Warren’s ideas? If Richard Shelby were Chair, it’d be even worse.

And what about Warren’s effectiveness in the Senate as a whole–that body, under Democratic leadership, where good ideas go to die? Name a progressive Senator who has been able to do much to champion progressive ideas there? Sanders? Franken? Whitehouse? Sherrod Brown? I love all those guys, and like Sanders and especially Franken, Warren would presumably be able to leverage her public support to push some ideas through. But are any of them more effective at championing progressive values than Warren was before her White House gig, when she regularly appeared on the media and excoriated the banks in terms that made sense to real people? Just as an example, Byron Dorgan used to be effective before his progressive, deficit-cutting ideas were killed by the leader of his party. Similarly, Ted Kaufman turned out to be a surprisingly effective check on the banks, but that was partly because he came in knowing he’d never run for election (and he also knew, coming in, the tricks a lifetime of service as a Senate aide teaches).

Don’t get me wrong. I understand why the Democratic Party would like to have Warren in the Senate. I even understand how Warren might consider a Senate seat to be similar to her earlier public position, with the added benefit of having one vote to push progressive issues. I don’t dismiss the likelihood that Elizabeth Warren might be able to prevent a sixth corporatist judge from getting a lifetime seat on the Supreme Court.

I don’t think a Senator Elizabeth Warren would be a bad thing–I just think folks are far overselling what good it would bring.

It really seems the push for a Warren Senate candidacy ignores what a Booby Prize membership in the Senate has become of late.

Darrell Issa Steps in It, Inadvertantly Reveals Improper Use of Congressional Funds to Serve AEI

United States House of Representatives Seal

United States House of Representatives Seal by DonkeyHotey

Republicans are big fans of projection. When they’re neck-deep in conflicts of interest, they like to hide it by accusing Democrats of such conflicts. When they leak stuff, they accuse Democrats. When they mismanage stuff, they accuse Democrats.

And yesterday, Darrell Issa got caught doing just that.

A year ago, on July 27, 2010, Issa accused the Financial Crisis Inquiry Commission of partisanship, largely because Democrats passed the Dodd-Frank financial reform bill before the FCIC reported its conclusions. Of particular note, Issa claimed Democrats on the FCIC were letting partisan ties direct their work.

Yet, as a report released by Elijah Cummings yesterday makes clear, the Republicans were the ones being directed by outside influences–both by their own partisan considerations, as well as two possible lobbyists. The report found that:

  • Immediately after Republicans took the House last November, some Republicans on the Committee started tailoring their contributions to make sure they would serve the goal of setting up a repeal of Dodd-Frank. Of particular note, Commissioner Peter Wallison started sending emails warning, “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”
  • Wallison (who is a fellow of AEI) also tailored his contributions–including his separate statement–largely to parrot the discredited theories of AEI fellow (and former Fannie Mae official) Edward Pinto. Pinto argued that the entire crash was caused by HUD’s affordable housing policy. Wallison’s mindless insistence on advancing Pinto’s theory got so bad that the special assistant to Republican FCIC Vice Chairman, Bill Thomas, suggested, “I can’t tell re: who is the leader and who is the follower. If Peter is really a parrot for Pinto, he’s putting a lot of faith in the guy.” Not only did Wallison serve Parrot’s propaganda, though: he also shared confidential documents made available to the FCIC, violating its ethics standards.
  • Thomas himself consulted with–and shared confidential information with–someone outside the Commission: the CEO of a political consulting firm, Alex Brill (he’s also a fellow at AEI). At one level, Brill seems to have been offering Thomas political advice. But it also appears Brill may have been trying to cushion the damage done by the FCIC to Citibank’s reputation.

Now, Cummings released this report partly because Issa refused to call Thomas and Wallison as witnesses in his inquiry into problems with the FCIC. And the release of the report seems to have convinced Issa to indefinitely postpone the investigation into the FCIC.

Good–this is precisely the kind of thing I was thinking of when I suggested we needed someone like Cummings to babysit Issa.

But it also seems like a good time to turn this into a much bigger attack.

As Cummings’ FCIC report makes clear, what Wallison and Thomas appear to have done is unethically misuse funds appropriated by Congress. While it’s not entirely clear who the ultimate beneficiaries of their ethical lapses are–aside from, vaguely, the banksters, both men were collaborating improperly with AEI fellows. More clearly, both men appear to have violated their ethical obligations–a set of rules–to try to make sure banksters didn’t have to follow any rules passed under Dodd-Frank.

Issa is teeing off today, again, against Elizabeth Warren. I do hope Cummings finds ample opportunity to remind Issa that it’s clear he’s doing the bidding not of transparency or oversight or the American people, but rather a number of corrupt banksters trying to avoid playing by the rules.

Is “National Security” a Good Excuse to Pursue Policies that Undermine the Nation-State?

Here I was steeling myself for a big rebuttal from Benjamin Wittes to my “Drone War on Westphalia” post on the implications of our use of drones. But all I got was a difference in emphasis.

In his response, Wittes generally agrees that our use of drones has implications for sovereignty. But he goes further–arguing it has implications for governance–and focuses particularly on the way technology–rather than the increasing importance of transnational entities I focused on–can undermine the nation-state by empowering non-state actors.

I agree emphatically with Wheeler’s focus on sovereignty here–although for reasons somewhat different from the ones she offers. Indeed, I think Wheeler doesn’t go quite far enough. For it isn’t just sovereignty at issue in the long run, it is governance itself. Robotics are one of several technological platforms that we can expect to  greatly enhance the power of individuals and small groups relative to states. The more advanced of these technological areas are networked computers and biotechnology, but robotics is not all that far behind–a point Ken Anderson alludes to at a post over at the Volokh Conspiracy. Right now, the United States is using robotics, as Wheeler points out, in situations that raises issues for other countries’ sovereignty and governance and has a dominant technological advantage in the field. But that’s not going to continue. Eventually, other countries–and other groups, and other individuals–will use robotics in a fashion that has implications for American sovereignty, and, more generally, for the ability of governments in general to protect security. [my emphasis]

Given DOD’s complete inability to protect our computer toys from intrusion, I’ll wager that time will come sooner rather than later. Iraqi insurgents already figured out how to compromise our drones once using off-the-shelf software.

Militants in Iraq have used $26 off-the-shelf software to intercept live video feeds from U.S. Predator drones, potentially providing them with information they need to evade or monitor U.S. military operations.Senior defense and intelligence officials said Iranian-backed insurgents intercepted the video feeds by taking advantage of an unprotected communications link in some of the remotely flown planes’ systems. Shiite fighters in Iraq used software programs such as SkyGrabber — available for as little as $25.95 on the Internet — to regularly capture drone video feeds, according to a person familiar with reports on the matter.

It may not take long, then, for a country like Iran or an entity like a Mexican drug cartel to develop and disseminate a way to hack drones. And given the way other arms proliferate, it won’t be long before drones are available on the private market. (Incidentally, remember how some of the crap intelligence used to trump up a war against Saddam involved a balsa-wood drone? Great times those were!)

So Wittes and I are in pretty close agreement here; he even agrees that the larger issue “ought to be the subject of wider and more serious public debate.”

But shouldn’t it be, then, part of the question whether facilitating this process serves national security or not?

In the interest of fostering some disagreement here–er, um, in an interest in furthering this discussion–I wanted to unpack the thought process in this passage from Wittes’ response to Spencer with what appears to be Wittes’ and my agreement in mind:

The point with merit is the idea that drones enable the waging of war without many of the attendant public costs–including the sort of public accounting that necessarily happens when you deploy large numbers of troops. I have no argument with him on this score, save that he seems to be looking at only one side of a coin that, in fact, has two sides. Ackerman sees that drones make it easy to get involved in wars. But he ignores the fact that for exactly the same reason, they make it easier to limit involvement in wars. How one feels about drones is partly conditioned by what one believes the null hypothesis to be. If one imagines that absent drones, our involvement in certain countries where we now use them would look more like law enforcement operations, one will tend to feel differently, I suspect, that if one thinks our involvement would look more like what happened in Iraq. Drones enable an ongoing, serious, military and intelligence involvement in countries without significant troop commitments.

As I read it, the logic of the passage goes like this:

  1. Drones minimize the costs of involvement in wars
  2. We will either be involved in these countries in a war or a law enforcement fashion
  3. Therefore, we’re better off using drones than large scale military operations

Now, before I get to the implications of this logic, let me point out a few things.

First, note how Wittes uses “what happened in Iraq” as the alternative kind of military deployment? Read more

David Plouffe’s “Same Old War Horses”

Scarecrow, Digby, and Jon Walker rightly took David Plouffe’s promises that a 9% unemployment rate won’t hurt Obama’s reelection chances to task.

But I’m at least as appalled by this part of Plouffe’s statement:

The White House’s top political adviser, downplaying the significance of the unemployment rate in the 2012 election, said the Republican candidates are offering the same policies that caused the economic crisis and targeted one potential opponent — Mitt Romney.

“So all of them are basically just bringing out the same old war horses,” senior adviser David Plouffe said yesterday at a Bloomberg Breakfast in Washington. “Let Wall Street kind of run amok, cut taxes for the wealthy, starve investment in things like education, research and development.”

Let Wall Street run amok. Check.

Cut taxes for the wealthy. Check.

And while Obama hasn’t as obviously starved investment in education and R&D (indeed, the stimulus he doesn’t like to talk about increased investments in both), by insisting on deficit reduction at the same time as states have had (or pretended they had to) cut education and R&D to balance their budgets, he has allowed such cuts to happen on his watch.

It troubles me a bit that David Plouffe doesn’t even see the irony of his statement.  Sure, the Republicans will be running on all those things. But so will, to a large extent, Obama.

Betting for the Little People: Timmeh Geithner Departure Watch

Apparently, Timmeh Geithner has told Obama that he may leave after a budget deal, citing family considerations.

I’d be singing “ding dong the wicked witch” if I didn’t know that his replacement will almost certainly be even worse.

But while we wait on his departure, I thought I’d offer the following two betting pools:

1) What bank do you think Timmeh will revolving door into?

2) Which will have a new head first, Treasury, or the Consumer Financial Protection Board?

FWIW, my guesses are:

1) JPMorgan Chase–and I sort of worry that Obama is planning a 1-to-1 swap like he pulled off with David Petraeus and Leon Panetta. After all, like CIA and DOD, JPMC and Treasury have effectively merged of late.

2) Of course, Treasury will have a new head first. In fact, I’d be shocked if Obama didn’t use a Timmeh departure as an excuse to put the CFPB on ice.

Of course, the only solution to all this is to appoint Liz Warren as Treasury Secretary. And also, to teach pigs to fly.

 

Bank of America Offers to Pay $8.5 Billion to Stay in Business

DDay and Masaccio and Yves Smith have already covered Bank of America’s offer to pay 2 to 3 cents on the dollar to make good on its securitization misrepresentations. But I wanted to point out one issue of timing.

In her coverage of it, Yves notes the following:

So with all these considerations arguing for fighting a few more rounds, and BofA in the past taking a very aggressive posture on disputing these cases, why would it settle?

The other side has no ability to judge what it might get since it has not gotten access to the loan files (the Clayton reports that everyone makes noise about which found pretty significant violations of representations, did not look at which were significant from a risk of loss perspective. So they may make for great headline, but they aren’t very helpful in this context.

Put it simply: BofA can judge what its risks are VASTLY better than the investors. There are a lot of reasons why it would make sense for BofA not to settle now. Yet it was all over this like a cheap suit. That says it must regard this settlement as a real bargain.

While DDay alluded to this in his post, I wanted to make an explicit reminder. BoA has agreed to this settlement just weeks after Abigail Field did the work the Attorneys General and other regulators should have been doing. And she found that for a sample of NY foreclosures, Countrywide had endorsed none of the notes of Countrywide-generated mortgages.

Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor’s mortgage. Instead, her testimony was key to the judge’s ruling that Bank of America (BAC) couldn’t foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.

[snip]

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them.

Shortly after Field’s report, NY Attorney General Eric Schneiderman started an investigation of the problem. And, as Field notes in her article,

And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out.

In other words, the proof–which we all knew existed–is finally surfacing that Bank of America could and probably should be wiped out by its liability for Countrywide. The dog and pony show calling this a huge settlement no doubt is designed to convince everyone BoA has found a way to put this problem behind it. And remain in business.

So, yeah, $8.5 billion to remain in business is a bargain.

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