When I first read about this letter from retiring Financial Services Committee Ranking Member Barney Frank to Eric Holder, I thought it akin to what retiring Homeland Security Chair Joe Lieberman did on the Sunday shows when he aggressively called for gun control: a PR stunt by an outgoing top Committee member, addressing a problem in all-but retirement that he didn’t address while he had the authority to do so in Congress.
Dear Mr. Attorney General:
I note several instances recently in which Administration officials have proceeded civilly against blatant violations of our important financial laws, in part because of the difficulty of proving cases beyond a reasonable doubt, especially where the law may have been somewhat uncertain, but also because of a concern that the criminal conviction—and even indictment—of a major financial institution could have a destabilizing effect. This latter consideration does not apply, similarly, to individuals. It is, of course, the case that no corporation can have engaged in wrongdoing without the active decision of individual officers of that entity. I believe it is also the case that prosecuting individuals has more of a deterrent effect than prosecuting corporations.
I am writing to you as well as to financial regulators, understanding that the decision to pursue criminal proceedings rests with the Justice Department, so I ask that there be a series of consultations involving law enforcement officials and regulators with the goal of increasing prosecution of culpable individuals as an important step in seeing that the laws that protect the stability and integrity of our financial system are better observed.
And that may well be what this is: an effort to pile on all the calls for prosecuting the banksters.
Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.
“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”
Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place. [my emphasis]
DOJ went to Treasury and the Fed and OCC and asked for permission to get HSBC to plead guilty to Bank Secrecy Act violations. According to Cohen, Treasury said they had no meaningful assessment. According to NYT, the regulators–the Fed and OCC–raised concerns about the broader economy.
And Barney Frank says he is writing financial regulators (in addition to Holder himself) about bank immunity, but this appears not to be the letter to financial regulators, because they are not CC’ed on the letter. Yet he has not released a separate letter to regulators to the press (though if my attempts to get this letter this morning are any indication, Frank’s staffers have already moved onto look for new jobs).
This suggests there’s another letter to the people who told DOJ to let HSBC skate.
It’s worth noting that one of these regulators–OCC–was broadly implicated by the Permanent Subcommittee Investigation of HSBC.
In any case, there seems to be more to what Frank is doing. It may be he’s just trying to push Holder to meet with TurboTax Timmeh and the financial regulators, as Holder’s prosecutors attempted to make happen. Or he may be doing something else here, potentially even coaxing regulators to embrace individual indictments to stave off the larger anger about the HSBC wrist-slap.
It may well be this is a show. But it appears that we’re only seeing half the show.
Bloomberg’s blockbuster story–showing that the Fed was dumping $7.77 trillion into the same banks that Treasury was claiming were solvent to qualify them for TARP–shows a number of different things. It focuses on the $13 billion in profits the banks made off of massive secret loans from the Fed.
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.
More importantly, IMO, the Bloomberg piece also shows how Ben Bernanke, TurboTax Timmeh Geithner, and Hank Paulson used secrecy to get DC’s bureaucracy–both Congress and Executive Branch officials–to push through his preferred plan to prop up the TBTF banks.
They did this in two ways: first, by keeping details of the Fed’s massive lending secret from the people implementing TARP.
The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.
The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.
This meant the Fed could hide the fact that the six biggest banks were basically insolvent, and should have been wound down rather than propped up with a strings-free TARP.
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. Continue reading
A month ago, Brad Miller and a dozen other Congressmen — including House Financial Services Committee Chair Barney Frank — wrote the Financial Stability Oversight Council to ask that they look into the systemic dangers of foreclosure fraud. The letter requested that three very specific things be included in upcoming stress tests and overall consideration of the systemic threat this represents to the economy:
Timmeh Geithner just responded to that letter. His response makes it clear he actually read Miller’s letter — because he references the first item I’ve laid out above, though rather than actually respond to that request, he describes what the FSOC is actually doing instead of examining collateral loan files. His response to the second and third requests is even more insolent; he refuses to even repeat the second one, and rather than consider either one seriously, he just says FSOC will take action “if abuses are found.”
Here is Timmeh’s response to Miller’s request that the Council examine random collateral files:
With regard to your suggestion of examinations of financial institutions by FSOC member agencies, these reviews are currently ongoing as part of a foreclosure task force formed by the Administration in early September.
The main objectives of the task force are to determine the scope of the foreclosure problems, hold banks accountable for fixing these problems, protect the homeowners, and mitigate any long-term effects this misconduct could have on the housing market.
Note that even though Timmeh admits the banksters have engaged in “misconduct,” he makes no mention of holding them legally accountable. Instead, he simply repeats the Administration line that banks will “fix these problems.”
But rather than address Miller’s specific request — that investigators look at random collateral files — Timmeh describes how the investigators will examine other things, and then boasts of the (inadequate) number of investigators on the job.
Regulators are conducting onsite investigations to assess each servicer’s foreclosure policies and procedures, organization structure and staffing, vendor management, quality control and audit, loan documentation including custodial management, and foreclosure prevention processes. The task force is also closely reviewing related issues that include loss mitigation, origination put-backs, securitization trusts, and disclosure put-backs.
These examinations are extensive and resource intensive. For example, the Office of Thrift Supervision has approximately 80 examiners on-site at their four servicers, and the Office of the Comptroller of the Currency has 100 examiners at the top eight national bank servicers.
Now granted, some of the things the FSOC is investigating might cover Miller’s request. “Loan documentation including custodial management” might get at the issues Miller specifically requested FSOC examine. But Timmeh makes absolutely no promise that these 20 examiners per non-bank servicer or 8 examiners per bank servicer (Really, Timmeh!?!?! You think 8 people can investigate Bank of America’s morass?!?!) will actually look in detail at the actual loan files, much less a randomly selected collection of loan files.
That’s enough of a non-answer.
But here’s how Timmeh summarizes Miller’s two other requests.
You also suggest that the FSOC consider the potential risk associated with the role of large financial institutions in the servicing of mortgages and to consider requiring these firms to divest of their servicing affiliates.
Note what phrase Timmeh doesn’t utter there?
That little matter of the half a trillion dollars in conflicted exposure these banks have, which goes to the heart of the reason this is systemic issue.
In fact, Timmeh doesn’t utter the phrase “second lien” anywhere in his letter. It is, apparently, the elephant in the bank vault that shall not be named, for fear Timmeh would have to acknowledge the magnitude of the problem. Timmeh apparently wants to spin the problem of second liens as nothing more than part of the size of the institutions in question, and not the very real conflict of interest that provides motivation for all the foreclosure fraud Timmeh doesn’t want to criminally prosecute.
And while Timmeh does use the word “divest,” here’s his actual response to Miller’s description of the very real and very avoidable problem of having the banksters service the loans that threaten to expose their insolvency.
As you suggest, the Dodd-Frank Act also provides the FSOC, and its member agencies, with a variety of tools to recommend heightened prudential standards and take other remedial actions when necessary for financial stability. With that in mind, the FSOC and its member agencies will remain critically focused on working with the foreclosure task force, and will use all appropriate authorities available to them if abuses are found.
So while Timmeh can manage to at least utter “divest” (unlike his apparent allergy to “second lien”), when push comes to shove, he won’t admit that FSOC has the ability to force bankster to divest of a part of their business. More importantly, he envisions using the power granted him under Dodd-Frank (and remember, Frank is one of the recipients of this letter) only “if abuses are found.”
Because it would be too much to ask for Timmeh actually take an obvious proactive move to fix one of the problems weighing down our housing market and with it our entire economy. I guess if he did, he might actually have to think about those second liens he’s refusing to acknowledge.
DDay has a really important post that–along with a great interview with Brad Miller–includes a letter from Miller and other members of Congress, urging the Financial Stability Oversight Council to take action to prevent the foreclosure fraud problem from becoming a systemic crisis. The letter reminds the FSOC that Dodd-Frank gives them the power to avoid a systemic crisis.
An important purpose of the Dodd-Frank Act is to identify risks to the financial system as early as possible, so that regulators can take corrective action or minimize the disruption to the financial system that results from the insolvency of systemically significant financial companies. It is also a purpose of the Act to make risk to our nation’s financial system transparent in order to restore the confidence of the American people in the financial system and in their government.
And lists three things the FSOC should do to prevent the foreclosure fraud problem from becoming a systemic crisis:
House Financial Services Committee Chair Barney Frank is one of the first ten people to sign this letter.
Put together with Senate Banking Committee Chair Chris Dodd’s call on Tim Geithner to consider how the FSOC can mitigate the risks of this crisis, you’ve got both Chairmen of the relevant committees urging the FSOC to do something about the potential systemic risk of this crisis. You’ve got Dodd and Frank, the two guys with their name on the financial reform bill, calling on the Administration to use the authority granted under Dodd-Frank to prevent another meltdown.
And thus far?
Crickets. From both the Administration and the media.
I had a bit of fun with Michael O’Hanlon on Tuesday. At the America’s Future Now conference, he was pitted against Juan Cole in a debate over the future of our Afghan war. I took the first question to note that we weren’t just facing a choice between escalating in Afghanistan (O’Hanlon’s position) or maintaining the status quo (Cole’s position). We also faced a choice between escalating in Afghanistan and doing something about our 10% unemployment rate.
O’Hanlon responded by explaining how much longer he thought the surge of troops needed to remain in Afghanistan.
To his credit, when I noted that by defunding schools, we’re creating a much bigger national security problem than Afghanistan, he said we shouldn’t have to choose (while admitting that politics in DC meant we would have to do so).
Finally, someone in DC–Barney Frank–is making a similar argument in concrete form.
A panel commissioned by Rep. Barney Frank (D-Mass.) is recommending nearly $1 trillion in cuts to the Pentagon’s budget during the next 10 years.
The Sustainable Defense Task Force, a commission of scholars from a broad ideological spectrum appointed by Frank, the House Financial Services Committee chairman, laid out actions the government could take that could save as much as $960 billion between 2011 and 2020.
The acceptance of the recommendations would depend on a “philosophical change” and a “redefinition of the strategy,” Frank said at press conference on Capitol Hill.
He said the creation of the deficit reduction commission offers the best opportunity for the reduction recommendations. Frank wants to convince his colleagues to write to the deficit reduction commission and warn that they would not approve any of the plans suggested by the commission unless reduction of military spending is included.
Now, Frank’s committee’s recommendations are actually not the defense equivalent of cat food. They involve cutting things like the F35 we have no use as anything but a jobs program.
But it’s something we may well have to sell as a national security issue. The effects of the recession (and a decade of Norquist-inspired bathtub shrinking) really are forcing us to cut education. That’s something the federal government could prevent. So it’s high time we invested in our base-level national competency before yet another set of military toys.
There are two articles out that provide the beginning of an explanation of why even good progressives like Dick Durbin and Barney Frank can’t fix our finance system.
Trade Organizations as a Wing of the Republican Party
First, there’s the smoking gun proof that–at a moment when big banks were preparing to negotiate with Dick Durbin on cramdown legislation–banking’s trade organization was attacking that cooperation in conjunction with Republicans. HuffPo’s Sam Stein has posted the email from Tanya Wheeless, president & CEO of Arizona Bankers Association.
Subject: Cramdown Update
Just a quick update in case you were not aware. I’m sorry to say that Chase, Wells, and B of A have been working with Durbin on a cramdown compromise since last week. So far, none of the national trades are at the table. I’ve been told that ICBA is working on a press release to admonish them for trying to cut a deal. The good news is, they aren’t there yet. Apparently, they gave Durbin a wish list awhile back and in his desperation to get something, he’s given on most everything. Reid told Durbin he had until the end of recess to get something done, but it looks like Reid may be willing to wait a little longer if they’re at the table.
I have contacted the market presidents for each of the three banks and explained that in my humble opinion it’s a big mistake to cut a deal with Durbin and alienate our (in Arizona) Senator. I also told them that I thought this would drive a wedge in our industry. Kyl has pointedly told them not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring or systemic risk regulation.I know the [sic] every state association will have to do what’s best for its members, but I have told my largest three members that if they cut this deal, AzBA will fight them on it. They may be willing to alienate Republican leadership, but I’m not quite there yet.
This is the President of a trade association, bullying her largest members, to serve the command of John Kyl. (Arizona, of course, is one of the leading states for foreclosure rates, so Kyl is basically working directly against the interest of his constituents.) And, voila, we still don’t have cramdown. Or, for that matter, regulatory reform (yet).
Hiding the Banks behind the Airplanes
Meanwhile, this Michael Hirsh article explaining how Barney Frank failed to close some loopholes in derivatives legislation describes Main Street companies fronting the lobbyist efforts of the banks–so basically Main Street appears to be fighting to keep the customized derivatives that their bankers charge them extra for.
According to insiders and industry e-mails obtained by NEWSWEEK, the banks have sought to stay in the background and put their corporate customers—a who’s who of American business, including Apple, Whirlpool, and John Deere—out in front of the campaign. Continue reading
A few days ago, this hearing might have focused on why we need to bribe the banksters to clean up their mess. Now, it will undoubtedly focus on why we’re socializing risk some more. We’ll also have William Dudley, the new head of the NY Fed.
From Geithner’s statment, he’s still pushing regulation of "too big to fail" rather than avoiding "too big to fail."
We must ensure that our country never faces this situation again. To achieve this goal, the Administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision. All institutions and markets that could post systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking. Regulators must apply standards, not just to protect the soundness of indivdiual institutions, but to protect the stability of the system as a whole.
And here’s Timmeh playing dumb on bonuses.
In November, as part of the government’s infusion of capital, Treasury imposed the strictest level of executive compensation standards required under the Emergency Stabilization Act. When we were forced to take additional action in March, we required AIG to also apply the Treasury rules that will be promulgated based on the executive compensation provisions in the American Reinvestment and Recovery Act.
See, AIG has given out bonuses to 4,500 people since we bailed them out in September. And Treasury knew about the AIGFP bonuses (to be paid in March) when they were negotiating the most recent $30 billion. But for some reason Timmeh doesn’t want you to know about it.
Barney Frank: [Reminding the context of AIG, the Lehman collapse and the no involvement of Congress] Two examples of how not to proceed. Lehman, not help for creditors. The other one, AIG, help for all of the creditors. Contrast with Wachovia, IndyMac, WaMu. Those of us who will mourn Countrywide are a small number. Regulators that contained the damage. Neither Lehman total collapse on economy or excessive intervention. Continue reading
When Barney Frank asked AIG CEO Edward Liddy to send him a list of the people who got bonuses, Liddy said he’d only do so if Frank could promise they’d remain secret. He read from a threat letter that disgustingly threatened the children of AIG employees.
I agree with Barney Frank: those threats are disgusting and inappropriate. Those who send those threats should be turned over to law enforcement.
That said, the white paper AIG submitted to explain why AIGFP employees should receive their bonuses was, itself, a massive threat: pay these bonuses or AIGFP employees will trigger a default event that will bankrupt AIG and cause American taxpayers to lose billions–if not crash the entire financial market.
No one should be physically threatening AIGFP’s derivatives traders–at least not with anything short of legal investigation and, if appropriate, indictment.
But at the same time, neither should we tolerate threats issued on behalf of traders holding a gun to our economy.
Edward Liddy, AIG’s CEO, will testify before Barney Frank’s committee tomorrow (10AM, CSPAN3, and yes, we’ll be liveblogging it).
But after reading the letter Andrew Cuomo just sent to Chairman Barney, I think the guy we need under oath is Tim Geithner. After all, over the weekend Geither allowed himself to be convinced that AIG had to pay out its retention bonuses. But today, we learn the following:
Now, presumably, Tim Geithner knew all these details from his conversations with Liddy over the weekend. Hell, he should know the details from when, as NY Fed President, he negotiated the bailout last year.
Yet he came to the American people and claimed we simply had to pay these bonuses. Why?
I want prosecutions. But seeing as how it looks increasingly likely we won’t get that, I want some accounting for the crimes of the Bush Administration. Today, Pat Leahy joined his counter-part in the House, John Conyers, as well as the Chair of the Senate Armed Services Committee, Carl Levin, in calling for a committee to examine the wrong-doing of the Bush Administration.
The President is right that we need to focus on fixing the problems that exist and improving the future for hardworking Americans. I wholeheartedly agree and expect the Judiciary Committee and the Senate to act accordingly. But that does not mean that we should abandon seeking ways to provide accountability for what has been a dangerous and disastrous diversion from American law and values. Many Americans feel we need to get to the bottom of what went wrong. We need to be able to read the page before we turn it.
We will work with the Obama administration to fix those parts of our government that went off course. The Office of Legal Counsel at the Justice Department is one of those institutions that was hijacked and must be restored. There must be review and revision of that office’s legal work of the last eight years, when so much of that work was kept secret.
We have succeeded over the last two years in revitalizing our Committee’s oversight capabilities. The periodic oversight hearings with the Attorney General, the FBI Director, the Secretary of Homeland Security, and others will continue. The past can be prologue unless we set things right.
As to the best course of action for bringing a reckoning for the actions of the past eight years, there has been heated disagreement. There are some who resist any effort to investigate the misdeeds of the recent past. Indeed, some Republican Senators tried to extract a devil’s bargain from the Attorney General nominee in exchange for their votes, a commitment that he would not prosecute for anything that happened on President Bush’s watch. That is a pledge no prosecutor should give, and Eric Holder did not, but because he did not, it accounts for many of the partisan votes against him.
There are others who say that, even if it takes all of the next eight years, divides this country, and distracts from the necessary priority Continue reading