Working Thread on FCIC Report

/in , /by

I keep trying to immerse myself in the FCIC Report, but keep getting distracted–I guess I’ll have to read it this weekend. But it’s high time I put up a working thread for the rest of you.

The report itself is here.

Lambert Strether has made 1147 of the backup documents released by the FCIC available here.

And Masaccio sent me this observation from the report last night:

The number of suspicious activity reports—reports of possible financial crimes filed by depository banks and their affiliates—related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009.

p. 22 in the .pdf

This means that the regulators were not doing their jobs under the Bank Secrecy Act, the PATRIOT ACT and other laws. These laws are designed to enable prosecutors and regulators to spot money-laundering and other crimes.

Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm. But they did not stop.

And the report documents that major financial institutions ineffectively sampled loans they were purchasing to package and sell to investors. They knew a significant percentage of the sampled loans did not meet their own underwriting standards or those of the originators. Nonetheless, they sold those securities to investors. The Commission’s review of many prospectuses provided to investors found that this critical information was not disclosed.

That is tantamount to saying that these people committed crimes. They sold securities with documents that were knowingly false.

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  1. Rayne says:

    Jeebus. Didn’t the FCIC have any spine at all? Am wondering at what point these folks are culpable having sat on obvious fraudulent activity.

      • rosalind says:

        from dday yesterday:

        Born added that the commissioners, acting under a statutory mandate, did issue criminal referrals. She said “We were not a judicial body making decisions about the intent of the actors. We reported on a lot of behavior which may or may not have been criminal or civil violations. We’re leaving that to prosecutors and civil authorities to decide.”

        The Justice Department has not yet responded to my inquiry about the FCIC referrals, where they will go, who will handle them, and when we can expect information about them.

        • bobschacht says:

          Thanks!
          The findings of the FCIC are summarized on pp. xvff. at the beginning of the report. Near the end of their summary, they write (p.xxvii),

          While we have not been charged with making policy recommendations, the very purpose of our report has been to take stock of what happened so we can plot a new course.

          So there is no series of recommendations. The penultimate paragraph:

          This report should not be viewed as the end of the nation’s examination of this crisis. There is still much to learn, much to investigate, and much to fix.

          With Republicans in charge of the House, with subpoena power, we may get about half of the investigations that are needed.

          Bob in AZ

  2. WilliamOckham says:

    I’m reading the dissent (from KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, AND BILL THOMAS) first (I’m just a little perverse that way). The best one word summary I can come up with is drivel. Here’s their explanation of the bubble (not all of it is wrong, but it is amazing in what it leaves out):

    1. China caused a credit bubble.

    2. There was a housing bubble caused by mysterious, unknown forces.

    3. Irresponsible lenders, bad government policy encouraging home ownership and evil home buyers made things worse.

    4. Mortgage securitization (lead by Fannie Mae and Freddie Mac) and credit rating agencies made it worse.

    5. Poor risk management caused a financial panic.

    Definitely not at fault:

    1. The Fed

    2. Federal regulators (however state regulators totally dropped the ball)

    3. Repealing Glass-Steagall

    4. Lack of Regulation

    5. Non-credit derivatives

  3. WilliamOckham says:

    And Peter Wallison is even loonier. In his AEI worldview, it was all poor people’s fault. That is, the Affordable Housing Act, CRA, and the GSE’s caused the whole thing. It’s hard to tell if he believes that or is just a propagandist.

  4. bobschacht says:

    On the Senate side, the old membership of the Senate Banking, etc. committee hasn’t been updated yet. Who will replace Dodd? Will it be Schumer? By seniority, it probably should be Sen. Daniel Akaka of Hawaii– who is one of the most progressive Senators in Congress. But it may be that he is deemed too old to head the committee. Who heads the committee, and what they decide to do with the FCIC report, will be important.

    Bob in AZ

  5. profmarcus says:

    sarkozy is the first g20 leader who has really, strongly spoken out against the bankster mafia that is taking all of us to the cleaners…

    Sarkozy lashes out at the banksters at WEF in Davos

    [Sarkozy]”The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything. It caused a lot of anger. Too much is too much. The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards. We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That’s what happened… There is an ocean between flexibility and the scandal we saw. So if people present me as obsessed with regulation, it’s because there is a need for regulation. I don’t contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse? Bonuses don’t bother me, provided there are also … draw-downs when there are losses. When things don’t work, you can never find anyone responsible. Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

    you said it, nick… how long have i waited to hear this kind of righteous rant from a major world leader…

    And, yes, I DO take it personally

  6. allan says:

    These laws are designed to enable prosecutors and regulators to spot money-laundering and other crimes.

    And they worked perfectly*. Just ask Eliot Spitzer.

    * From the banksters’ point of view.

  7. janeeyresick says:

    I’m only in chapter 3 right now, but some things are clear.

    Many, many lower echelon types in multiple industries tried to blow the whistle on the coming disaster multiples of times and were either ignored, ridiculed, demoted or fired.

    The Feds made a lot of effort to make any state oversight impossible or ineffectual.

    The names Summers, Greenspan, and Rubin are coming up on the wrong side of every issue and debate every time over a span of decades. Geithner and Bernanke as well.

    Greenspan in particular is gored on almost every other page, but, his self-image is secure. “I was right 70% of the time and wrong 30% of the time”.

    I hope Obama reads this report firsthand since the brains he has surrounded himself with don’t seem too brainy in this report. Larry, Al, Bob, Ben and Timmy look like a crew of self satisfied morons. Summers calls someone waving a red flag at a conference (who turned out to be prescient) a “Luddite”.

    Interesting snippet that the Commodities Futures Modernization Act had to specifically defang state gaming and bucket shop laws! Now what does that tell you?

    It’s ironic that Brooksley Born who had tangled with and been bested by these clowns previously gets the last laugh as she sits as a commissioner looking at the fallout from their previous actions. I’m sure they had a hard time ladling out the BS about their deeds since she knew better than almost anyone else what had really gone down.

  8. 4jkb4ia says:

    It’s Friday, so I can’t finish this today, but I felt compelled to write something as someone who stuck with them to the end.

    Very well written.
    Important at the very beginning that Treasury and Fed officials responded with ad hoc programs and crisis mode from 2007 on–

    When Bear Stearns’s hedge funds, which were heavily invested
    in mortgage-related securities, imploded in June 2007, the Federal Reserve discussed
    the implications of the collapse. Despite the fact that so many other funds were exposed
    to the same risks as those hedge funds, the Bear Stearns funds were thought to
    be “relatively unique.” Days before the collapse of Bear Stearns in March 2008, SEC
    Chairman Christopher Cox expressed “comfort about the capital cushions” at the big
    investment banks. It was not until August 2008, just weeks before the government
    takeover of Fannie Mae and Freddie Mac, that the Treasury Department understood
    the full measure of the dire financial conditions of those two institutions. And just a
    month before Lehman’s collapse, the Federal Reserve Bank of New York was still
    seeking information on the exposures created by Lehman’s more than 900,000 derivatives
    contracts.

    “No skin in the game” and “OTC derivatives played a significant role”–Georgiou’s and Born’s obsessions taken out of the way early

  9. 4jkb4ia says:

    Also talks about everyone being overindebted and overleveraged–not that everyone was at fault but that only a few bad actors weren’t to blame.

  10. 4jkb4ia says:

    Damning placing of the Ameriquest lawsuit for fraud (while being sued, Ameriquest made loans until 2005) and how obvious it was there. Ameriquest was such a big player that anyone who was paying attention had to be cautious of the other subprime mortgage companies. There is also the FBI testimony on mortgage fraud in 2004 that Bill Black is fond of.

    (McLean and Nocera follow closely how this story is told)

  12. janeeyresick says:

    Conclusion of Chapter 6 –

    Regulators failed to rein in risky home mortgage lending. In particular, the
    Federal Reserve failed to meet its statutory obligation to establish and maintain prudent mortgage lending standards and to protect against predatory lending.

  13. 4jkb4ia says:

    Nice finding of the economists who warned the central bankers at conferences where they were present. Also nice job of working in the testimony of the appraisers when the commission went on the road.

  14. 4jkb4ia says:

    Bring in Herb Sandler and Lewis Ranieri, who invented MBS essentially, to show their alarm and concern. Also bring in study that was done in alarming growth in nonstandard loans for the Fed, who ignored it.

  15. 4jkb4ia says:

    Finally, after bitter ideological turf wars, Greenspan and Bernanke support OCC guidance on nontraditional loans, and the Fed does part of its job under HOEPA. But it is too late.

  16. janeeyresick says:

    page 111

    Jamie Dimon, the CEO of JP Morgan, told the Commission, “In mortgage
    underwriting, somehow we just missed, you know, that home prices don’t go up forever and that it’s not sufficient to have stated income.”

    They just missed that prices can’t go up forever thing doncha know. Another Captain of Industry revealed to have a head filled with sawdust, hay and rags.

    • PJEvans says:

      Yeah, right.
      That’s why they weren’t pushing these, hard, as investments with good returns. Also why real estate prices weren’t going sky-high. /s

  17. janeeyresick says:

    Did you know that you could take hamburger and mix it together with stew meat, leave it overnight in the fridge and have a prime rib in the morning? Me neither.

    But, believe it or not, you can take the crappy lower rated tranches out of an MBS and put them in a new CDO and miraculously get a AAA rating on the new product – Genius! Now some might see correlations with schemes like putting melamine in milk, i.e. marketing poison as wholesome, but what’s a little melamine among friends? These people went to Harvard and Yale after all.

    See page 128 – chart of low ranking tranches being converted to CDOs

  18. janeeyresick says:

    page 146

    Other observers were even harsher in their assessment. “I don’t think they have social value,” Michael Greenberger, a professor at the University of Maryland School of Law and former director of the Division of Trading and Markets at the Commodity FuturesTrading Commission, told the FCIC. He characterized the credit default swap market as a “casino.” And he testified that “the concept of lawful betting of billions of dollars on the question of whether a homeowner would default on a mortgage that
    was not owned by either party, has had a profound effect on the American public and taxpayers.”

  19. janeeyresick says:

    The smell test failure on page 192 is overpowering. Seems like a repeat of the Goldman Sachs/ Abacus/Paulson “hey can I pick my own crap to bet against?” scenario but with different players. If I were an investor of the Norma CDO I would certainly want more details.

  20. alinaustex says:

    Timmy Geithner & Maiden Lane – Timmy is not on our side.

    It is class warfare -and they are at this point winning.

    At least PappaBush put some of these wall street looters in prison back in the day . Keating went to jail. Monzillo skated away with a fine that was chump change compared to what was looted from us .

    • bobschacht says:

      The FCIC report is not all that kind to Geithner. In the general summary (pp. xxi-xxii), they say

      In making these observations, we deeply respect and appreciate the efforts made by Secretary Paulson, Chairman Bernanke, and Timothy Geithner, formerly president of the Federal Reserve Bank of New York and now treasury secretary, and so many others who labored to stabilize our financial system and our economy in the most chaotic and challenging of circumstances.

      But later, in the text, p.199:

      In May 2005, a review undertaken by peers at the other Federal Reserve banks was critical of the New York Fed—then headed by the current treasury secretary, Timothy Geithner—for its oversight of Citigroup. The
      review concluded that the Fed’s on-site Citigroup team appeared to have “insufficient resources to conduct continuous supervisory activities in a consistent manner. At Citi, much of the limited team’s energy is absorbed by topical supervisory issues that detract from the team’s continuous supervision objectives . . . the level of the staffing within the Citi team has not kept pace with the magnitude of supervisory issues that the institution has realized.”(53) That the Fed’s 2005 examination of Citigroup did not
      raise the concerns expressed that same year by the OCC may illustrate these problems. Four years later, the next peer review would again find substantial weaknesses in the New York Fed’s oversight of Citigroup.(54)

      On p.303, Geithner admits that he didn’t do enough:

      Timothy Geithner, secretary of the Treasury and former president of the Federal Reserve Bank of New York, reflected on the Fed’s oversight of Citigroup, telling the Commission, “I do not think we did enough as an institution with the authority we had to help contain the risks that ultimately emerged in that institution.”(52)

      From pp. 433-434:

      “Bernanke, Geithner, and Paulson should not have chosen to let Lehman fail”
      This is probably the most frequently discussed element of the financial crisis. To make this case one must argue:
      • Bernanke, Geithner, and Paulson had a legal and viable option available to
      them other than Lehman filing bankruptcy.
      • They knew they had this option, considered it, and rejected it.
      • They were wrong to do so.
      • They had a reason for choosing to allow Lehman to fail.
      We have yet to find someone who can make a plausible case on all four counts.

      Bob in AZ

      • bobschacht says:

        What I mean to say by focusing on Geithner is that Republicans are most likely to focus on agents associated with Obama. Of the troika of Geithner, Bernanke & Paulson who were at the center of the crisis, Geithner is the one they can most closely tie to Obama. So they will focus on him in order to blame Obama.

        But this can be useful. The Democrats have not really pushed Geithner very hard. The Republican investigators might succeed in freeing up more information, and driving a wedge between Geithner, on the one hand, vs. Bernanke & Paulson on the other hand. In doing so, we may find out more of what we need to know.

        Bob in AZ