How Hillary Turned Her Support for Welfare for Banks into an Auto Bailout Attack

For a campaign that has spent days insisting Bernie Sanders should not launch attacks against her, the Hillary Clinton campaign sure engaged in some dishonest hackery last night.

During the debate in Flint, Hillary attacked Bernie for “vot[ing] against the money that ended up saving the auto industry.” She was talking about a January 15, 2009 attempt to withhold the second $350 billion of TARP funding that failed (here’s the resolution); Bernie voted not to release those funds. But the vote was not directly about auto bailout funding. It was about bailing out the banks and funding what turned out to be completely ineffective efforts to forestall foreclosures.

It is true that Bush’s failure to fund an auto-specific bailout meant that TARP funds got used to fund the $85 billion auto rescue (Bush had already spent some money on the auto companies — basically just enough to ensure they’d go under on Obama’s watch, but not enough to do anything to save them). But that’s not what the vote was (and there might have been enough money for the auto bailout in any case).

Larry Summers’ two letters in support of the additional funding (January 12Janaury 15) in support of the additional funding certainly didn’t describe it as an auto bailout bill. He mentioned “auto” just three times between the two of them. In the January 12 letter, in support of auto loans to consumers, and in the January 15 letter, limits on what I believe is a reference to GM Finance (now Ally)’s Christmas holiday move to turn into a bank so it could access funding. Contemporary reporting on the vote also did not mention the auto bailout (though there had been discussion that it might be used the previous month).

Moreover, there had been an auto bailout vote in the Senate (on a bill already passed by the House) on December 11, which failed. Both Bernie and Hillary voted in support.

So while Hillary’s attack was technically correct — Bernie did vote against giving Jamie Dimon more free money, which had the side effect of voting against the second installment on the fund that would eventually become the auto bailout — he did not vote against the auto bailout.

But Hillary’s attack did its work, largely because national reporters appeared completely unaware that they were fighting about TARP much less aware that there had been votes in December that directly pertained to the auto bailout. Even some local reporters now appear unaware of what went down in 2008-9. John Podesta helped matters along by sowing confusion in post-debate speeches.

Here’s one of what will end up being several exceptions to the shitty reporting on this that will come too late for people to figure out what actually happened.

During the testy exchange over the auto bailout, Clinton called Sanders a “one-issue candidate” for voting against the release of $350 billion in Jan. 15, 2009, to continue funding the bailout of the nation’s banks and mortgage lenders.

Sanders joined seven Democratic senators in voting against the second wave of TARP funds. President Barack Obama ended up using some of TARP to fund the $85 billion rescue of GM, Chrysler and their auto lending arms.

“If everybody had voted the way he did, I believe the auto industry would have collapsed, taking 4 million jobs with it,” Clinton said.

[snip]

David Axelrod, a former top adviser to President Barack Obama, questioned Clinton’s attack on Sanders’ voting record in the middle of the debate.

“It wasn’t explicitly a vote about saving auto industry,” Axelrod wrote on Twitter.

U.S. Sen. Debbie Stabenow, a Clinton supporter, said after the debate that senators, including Sanders, were aware the TARP money would be used to aid the domestic auto industry.

“A lot of folks said we shouldn’t do it because somehow it was helping the banks,” said Stabenow, D-Lansing. “It was the auto bailout we were talking about. I was very clear with colleagues that we had to do this.”

Stabenow’s comment, incidentally, is proof that the money shouldn’t have been granted as it was (it wasn’t spent on auto companies until much later). While she’s right that there had been public discussion of spending some money on the auto bailout, there obviously was still so little limiting what the Executive could do with the money that there needed to be nothing explicit supporting the auto bailout to make it happen. The flimsiness of the guidelines is one of the things that enabled the Obama Administration to avoid providing real foreclosure relief, choosing instead to “foam the runway” for banks.

Don’t get me wrong. Bernie did a number of other things at the debate that hurt him last night, such as his comment about ghettos that suggested all African Americans are poor and no whites are. I think, too, the optics of his efforts to stop Hillary from interrupting him as well as his own gesticulating while she was making responses will go over poorly.

But the auto bailout attack was a pretty shameful ploy, one that otherwise would make it fair game to really hit on Hillary’s own actions in a way Bernie has not yet done. That said, it was also a probably perfectly timed attack, because it will ensure victory for Hillary on Tuesday, eliminating one of the last possibilities that Bernie might really challenge Hillary.

Update: As it turns out, Hillary should be attacking Stabenow according to her own standards, because Stabenow voted no on the first TARP vote that actually paid for the first tranche of funding to the auto companies. (Here’s the second, January 2009 one.)

Flint Crisis: Harvey Hollins Not Giving Task Force Information that Implicates Harvey Hollins

Some weeks ago, I noted that Rick Snyder had picked his Director of Urban Initiatives, Harvey Hollins, to coordinate response with his hand-picked Task Force to respond to Flint, in spite of the fact that Hollins was intimately involved in all his prior decisions involving Flint.

First, back in early December, Snyder’s hand-picked Task Force for responding to the Flint crisis met with him to tell him of their initial observations. One of their key recommendations, as made clear by a meeting summary they shared with him, was that he appoint one single person to handle the response. (See PDF 240ff)

We also believe it important that a single person or entity-potentially independent of any one particular state agency and mutually agreeable to this Task Force and you, Governor-be established to provide effective coordination of ongoing activities and reporting on thestatus of mitigation measures.

[snip]

Accordingly, in advance of our final report, we would like to ensure the independentcoordinator suggest ed above engage trusted community groups to beginrebuildincommunity trust in state actions.

Snyder responded by “appointing” Harvey Hollins, his Director of Urban Initiatives, as that person “independent” of the “involved state agencies.”

You make a solid suggestion about establishing a person who is independent of any one of the involved state agencies to serve as the point person to coordinate t he ongoing work. I am recommending that Harvey Hollins, director of the Office of Urban Initiatives,carry out this effort. Harvey Is wellversed in the issues and the challenges faced by ourcities and will be effective in this role. Senior members of our executive team willcontinue to engage with your task force and provide direction and support to Harvey to ensure you will have continued support and cooperation.

The thing is, Hollins was in no way “independent” of the decisions that poisoned Flint. He has been involved at every phase, down to coordinating Snyder’s hush-hush water filters when he was still trying to cover it up. So basically Snyder just “appointed” the guy he had “appointed” to oversee all the decisions that got Flint poisoned in the first place.

The other day, Progress Michigan revealed that MI’s Department of Environmental Quality had alerted Hollins of concerns that the Legionnaires outbreak in Flint might be tied to the water switchover last March.

In the next few days, officials at DEQ exchanged some panicked emails, pretty much blaming Flint for the non-response, noting that DEQ “became peripherally aware” of the spike in Legionnaires, but also bitching about the Genesee County supervisor suggesting that it might be tied to the switch to Flint river water.

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It appears that panicked email was printed out by then DEQ Director Dan Wyant’s assistant, Mary Beth Thelen, then initialed by Wyant, presumably indicating he had read it.

Also included on that email, though, was Harvey Hollins.

Yesterday, the Free Press reported that, in an interview, Hollins had explained that he had decided there was not yet enough information to brief the Governor on the public health crisis potentially tied to the water.

Harvey Hollins III, director of Michigan’s Office of Urban and Metropolitan Initiatives, said in an interview Friday that he received an e-mail from a Department of Environmental Quality official in March about concerns over Legionnaires’ disease in Genesee County. But Hollins said he told the e-mail’s author, former DEQ spokesman Brad Wurfel, in a follow-up call, that there was not enough information for him to take the issue to the governor.

Instead, Hollins said he told Wurfel to gather more information and have the department’s director bring it directly to the governor if it was warranted. Hollins said he heard nothing more about the issue until late December when local officials in Flint revealed the outbreak had recurred.

Hollins said he should not be held responsible for what some have called the state’s sluggish response to the Legionnaires’ outbreaks starting in 2014. The outbreaks and the city’s 2014 switch to the Flint River for its drinking water are suspected of being linked, but state officials said they have yet to make a direct connection.

“I have nothing to leave over,”  Hollins  said when asked whether he considered resigning over the issue. “When you have people who are professionals who are hired … to do their job and it takes four months to do that, for me to leave over their missteps, I’m not going to do that,”

“I don’t feel any responsibility for grown-ups who don’t do their jobs,” he added.

It’s unclear whether the Freep asked Hollins if he felt any responsibility for the 9 people who died in this Legionnaires outbreak.

Also yesterday, one of the doctors on the Task Force with which Hollins is supposed to be coordinating communication said that it is having problems getting information — notably, on the Legionnaires outbreak — from state agencies.

“Unfortunately, first on the list is the legionella issue,” said Reynolds of Mott Children’s Health Center, referencing spikes in the fatal Legionnaires’ disease after the city began using Flint River water in April 2014.

“Some agencies have been very forthcoming, other agencies it’s like pulling teeth to get information, and it can get real frustrating and doesn’t facilitate good communication,” he said.

Reynolds, who serves on the task force, raised his concern during a meeting of the Flint Interagency Coordinating Committee attended by Snyder and top aide Rich Baird, who vowed to help Reynolds push through any bureaucratic resistance.

[snip]

The Flint task force has been working to wrap up its investigation this month, but Reynolds said members may need to reinterview some officials because of recent developments.

“If we don’t ask the question, we don’t get the answer,” he said. “But there’s clearly information that’s being withheld.”

How curious that Hollins doesn’t seem to be terribly effective at getting the Task Force the information it needs about events that implicate Hollins.

Pope Francis Nails the Rhetoric of Addressing Congress

Pope Francis just finished his address to Congress. It was a masterful speech from a political standpoint, designed to hold a mirror up to America and provide a moral lesson.

He started with an appeal the most conservative in America would applaud, to the foundation of Judeo-Christian law (CSPAN panned to the Moses relief in the chamber as he spoke).

Yours is a work which makes me reflect in two ways on the figure of Moses. On the one hand, the patriarch and lawgiver of the people of Israel symbolizes the need of peoples to keep alive their sense of unity by means of just legislation. On the other, the figure of Moses leads us directly to God and thus to the transcendent dignity of the human being. Moses provides us with a good synthesis of your work: you are asked to protect, by means of the law, the image and likeness fashioned by God on every human face.

He then couched his lessons in a tribute to four Americans — two uncontroversial, Abraham Lincoln and Martin Luther King Jr — and two more radical, Dorothy Day and Thomas Merton (but probably obscure to those who would be most offended).

Several times he nodded towards controversial issues, as when he addressed making peace in terms that might relate to Cuba (controversial but still accepted by most who aren’t Cuban-American) or might relate to Iran.

I would like to recognize the efforts made in recent months to help overcome historic differences linked to painful episodes of the past. It is my duty to build bridges and to help all men and women, in any way possible, to do the same. When countries which have been at odds resume the path of dialogue – a dialogue which may have been interrupted for the most legitimate of reasons – new opportunities open up for all. This has required, and requires, courage and daring, which is not the same as irresponsibility. A good political leader is one who, with the interests of all in mind, seizes the moment in a spirit of openness and pragmatism. A good political leader always opts to initiate processes rather than possessing spaces (cf. Evangelii Gaudium, 222-223).

Similarly, he spoke of the threats to the family in such a way that might include gay marriage, but he then focused on the inability of young people to form new families.

I will end my visit to your country in Philadelphia, where I will take part in the World Meeting of Families. It is my wish that throughout my visit the family should be a recurrent theme. How essential the family has been to the building of this country! And how worthy it remains of our support and encouragement! Yet I cannot hide my concern for the family, which is threatened, perhaps as never before, from within and without. Fundamental relationships are being called into question, as is the very basis of marriage and the family. I can only reiterate the importance and, above all, the richness and the beauty of family life.

In particular, I would like to call attention to those family members who are the most vulnerable, the young. For many of them, a future filled with countless possibilities beckons, yet so many others seem disoriented and aimless, trapped in a hopeless maze of violence, abuse and despair. Their problems are our problems. We cannot avoid them. We need to face them together, to talk about them and to seek effective solutions rather than getting bogged down in discussions. At the risk of oversimplifying, we might say that we live in a culture which pressures young people not to start a family, because they lack possibilities for the future. Yet this same culture presents others with so many options that they too are dissuaded from starting a family.

By far the shrewdest rhetorical move the Pope made — standing just feet from the Catholic swing vote on the Supreme Court, Anthony Kennedy, as well as John Roberts (Catholic Justices Sam Alito, Clarence Thomas, and Antonin Scalia, all blew off the speech given by the leader of their faith), with the Catholic Vice President and Speaker sitting just behind — calling to “defend life at every stage of its development.” — This brought one of the biggest standing ovations of the speech (though Justices never applaud at these things and did not here), at which point the Pope pivoted immediately to ending the death penalty.

The Golden Rule also reminds us of our responsibility to protect and defend human life at every stage of its development.

This conviction has led me, from the beginning of my ministry, to advocate at different levels for the global abolition of the death penalty. I am convinced that this way is the best, since every life is sacred, every human person is endowed with an inalienable dignity, and society can only benefit from the rehabilitation of those convicted of crimes. Recently my brother bishops here in the United States renewed their call for the abolition of the death penalty. Not only do I support them, but I also offer encouragement to all those who are convinced that a just and necessary punishment must never exclude the dimension of hope and the goal of rehabilitation.

I hope the Pope’s general pro life call, emphasizing the death penalty rather than abortion, will get people who claim to be pro-life to consider all that that entails.

That led — past his expected appeal to stop shitting on Eden and start taking care of the poor — to what was probably the worst received line in the speech, a call to stop trafficking in arms.

Being at the service of dialogue and peace also means being truly determined to minimize and, in the long term, to end the many armed conflicts throughout our world. Here we have to ask ourselves: Why are deadly weapons being sold to those who plan to inflict untold suffering on individuals and society? Sadly, the answer, as we all know, is simply for money: money that is drenched in blood, often innocent blood. In the face of this shameful and culpable silence, it is our duty to confront the problem and to stop the arms trade.

The Pope went into a Chamber where large numbers are funded by arms merchants and told them they were relying on “money that is drenched in blood.” Very few applauded that line.

Still, the message was about the duty of legislators to serve the common good and on several issues, the Pope avoided directed confrontation, preferring an oblique message that might be interpreted differently by people of all political stripes. Amid the rancor of Congressional debates — about Planned Parenthood, about defunding government (and with it, harming the poor the most), about Iran — it was a remarkably astute message.

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Even Millionaire Workers Like Tom Brady Need Solidarity

President Obama’s at a labor breakfast in Boston today. He offered this message.

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Clearly, the President is pandering to his audience. Bostoners like Brady, unlike much of the country.

But it’s an important point, one which has been missing from a lot of the coverage of DeflateGate. Brady will play on Thursday not just because he had better lawyers than the NFL, nor because Roger Goodell is a douchebag who’s not even competent at being a tyrant, but also because he’s a member of a union that had negotiated certain rules with the bosses, one of which was that certain kinds of violations get treated a certain way (in this case, that equipment violations involve a team fine, but no suspensions).

Mind you, I keep wondering why the NFL, after having been embarrassed with the BountyGate, Ray Rice, and Adrian Peterson disciplinary procedures, would adopt an even more abusive approach with Brady, when they were dealing with an alleged crime that wasn’t even as serious or as politically unpopular as the others (setting aside how much most people hate the Pats, of course). It’s possible they did so because they got so far ahead of themselves when they launched an investigation — and leaked highly derogatory and false information — in response to rumors about overinflated balls that they were left with no choice but to double down. But partly, the serial leaks feel like part of the plan here. In which case, I think it at least possible the NFL went after Brady so hard because he has always been active in the Players Association, and was the named plaintiff in 2011 when the players sued the NFL on anti-trust grounds.

Tom Brady may look like a hero, a badass quarterback, or a cheat to fans (depending on whom you’re asking), but maybe to every owner not named Kraft, he looks like a union rabble rouser?

I don’t know the answer to that, but as the league appeals Judge Berman’s ruling, I hope some people ask whether the NFL is just acting so stupid because they are that stupid, or whether there’s something more going on.

In any case, the President may have been pandering. But his point is sound. If even millionaire workers like Tom Brady need a union — need solidarity with other workers to achieve some measure of justice — then we all probably could use more of it.

Happy Labor Day! Go Patriots!

Update: As a number of people are noting, the NFL released a graphic asking which QB will be in next year’s Super Bowl that left the reining champ off.

A Tale of Celebrity Bon Vivant Civil Servants and Access Journalism

Screen Shot 2015-07-02 at 12.27.12 PMThere is a distinct problem in this country with excessive inbreeding of politicians, lobbyists and journalists. In a country where so many are now ruled by so few in power, it is becoming, if not already become, the biggest threat to American democracy. I would add in corporations, but, heck, who do you think the politicians, lobbyists and journalists represent at this point?

Now, corporations and their money through their mouthpiece lobbyists have long had a stranglehold on politics, whether through the corps themselves or their wealthy owners. But the one saving mechanism has historically been claimed to be the “Fourth Estate” of the American press who were there on behalf of the people as a check on power. But what if the Fourth Estate becomes, in fact, part of the power? What then?

What if the crucial check on federal and state power is by journalists who are little more than stenographers clamoring for access and/or co-opted social friends and elites with the powers that be? What if the sacrosanct civil servants of this country are nothing but Kardashian like shills out for a free gilded ride before they leave office to cash in with private sector riches befitting their holiness?

Golly, if only there was an example of this incestuous degradation. Oh, wait, get a load of this just put up by Kate Bennett’s KGB File at Politico:

In a generally stay-at-home administration, one member of the Obama Cabinet is proving to be the toast of the town. Jeh Johnson, the oh-so-serious-on-the-outside secretary of Homeland Security, is fast becoming Washington’s No. 1 social butterfly, dining out at posh restaurants like CityCenter’s DBGB, as he did last week with a small group that included Amy Klobuchar, Steny Hoyer, CNN’s Jim Sciutto, the New York Times’ Ashley Parker, author Aaron Cooley, and lobbyist Jack Quinn and his wife Susanna.

For a guy who’s been running a 24/7 war against terror since 2013, Johnson seems to have a lot of time to trip the light fantastic. He can often be seen enjoying regular catch-up sessions with BFF Wolf Blitzer at Café Milano (back table, naturally); and mingling at black-tie soirées, such as the Kennedy Center Spring Gala, the Opera Ball, or a champagne-fueled VIP garden party at Mount Vernon to toast French-American relations, all of which Johnson attended—and stayed at beyond the requisite cocktail-hour schmooze.
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“There’s rarely an invitation he’ll turn down,” says an aide to Johnson, who prefers to remain anonymous, of his boss’s penchant for spending three-to-four evenings a week at social functions — and actually enjoying them.

I am not going to bother to dissect that, it speaks all too clearly for itself. And it is hard to figure which is more pukeworthy, the bon vivant civil servant or the elitism displayed by the supposed watcher last bastion journalists. It is all of the same cloth.

What’s wrong in Washington DC? Here you go. When the pathology on the boneyard of American democracy is run, this vignette will appear.

Maybe this is why Tom Vilsack could find a spare couple of hours out of one of his days to explain in a deposition why he and the Obama Administration knee jerkily demanded Shirley Sherrod’s resignation based upon a crank fraudulent video by a schlock like Andrew Breitbart.

Because “Executive Privilege” now means “Privileged Executives” who can party all night with their elitist journalistic pals and screw the rest of the government, and people it serves, during the day. Just like the Founders envisioned obviously.

Lessons From The FCIC Final Report In FHFA v. Nomura

The ruling of Judge Denise Cotes in Federal Housing Finance Administration v. Nomura Holding America, Inc., is a 361 page description of the fraud and corruption that went into just one group of real estate mortgage-backed securities. FHFA was formed after the Great Crash to oversee Fannie Mae and Freddie Mac. These two entities were the actual buyers of the RMBSs offered by Nomura Securities International, Inc., and RBS Securities, Inc., then known as Greenwich Capital Markets, Inc. The Court finds that a number of statements in the offering materials were false at the time of the offering, in violation of Section 12 of the Securities Act of 1933. It awarded a judgment in the amount of $806 million, and required FHFA to tender return of the securities.

This Reuters story is typical of the coverage of the decision, in the “we knew that” mold. Peter Eavis of the New York Times wrote a clearer explanation, pointing out that this decision undercuts any argument that Wall Street banks did not break the law in the sale of RMBSs. This is the first paragraph of the decision:

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.

In this post, I’ll look at several aspects of the case: 1) the legal framework; 2) the discussion of the due diligence tracks the findings of the Financial Crisis Inquiry Commission in its Final Report; 3) the individual liability holdings; 4) the role of the Credit Rating Agencies; and 5) loss causation.

!. The Legal Framework.

The main theory of liability in this case is the Securities Act of 1933, 15 USC § 77a et seq., specifically Section 12. The operative language says that a person who

offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission

is liable to the purchaser for any loss arising from the misrepresentations. The plaintiff has to prove that the offering materials contained an untrue statement of a material fact, and that the purchaser did not know about the falsehood. Sellers can defend by proving that they did not know and “in the exercise of reasonable care could not have known” of the falsehood. Sellers can also reduce their damages to the extent they bear the burden of proving that the losses of the buyer were not caused by the falsehood. The defendants did not claim that Fannie Mae and Freddie Mac knew that the offering materials were full of falsehoods. Thus, the main focus of the decision is the falsehoods in the offering materials.

2. The Due Diligence Defense and The Final Report of the FCIC

If the Defendants exercise reasonable care in preparing the offering materials, they are protected from liability. In fact, the risks of failing to exercise due care are so great that investors believe that financially strong sellers of securities wouldn’t take the risk of selling unless they had done good due diligence. Of course, our dominant ideology, neoliberalism, preaches that markets, whatever they might be, police themselves, and securities laws are unnecessary. Here’s a lovely example from John Spindler, now a business law professor at the University of Texas (it’s not on his CV). The Final Report also calls out this bizarre idea, beginning at P. 171 (.pdf page 198).

The Final Report looks at the due diligence across the universe of securitizers in Chapter 9, page 156 (.pdf page 184). It says that the securitizers did little or no due diligence themselves. Instead, they farmed it out to third parties. These vendors examined a sample of loans from a pool, and reported whether the loans met the guidelines that the originators claimed to follow, whether they complied with federal and state laws, and whether the valuations of collateral were reasonably accurate. They also looked for compensating features that might outweigh the defects. The sample loans were graded, and the securitizers could use these grades to kick out loans, or they could waive the defects, and in either case, they could use the information to negotiate the purchase price for the pool.

The Final Report says that vendors reported very high defect rates, and that securitizers waived in a high percentage of the defective loans. The originators then put the kicked-out loans into other pools proposed for sale. Disqualifying defects were discovered in 28% of the loans examined by one vendor, Clayton Holdings, for the 18 months ending June 30, 2007. Of those, 39% were waived in, so that 11% of defective loans were included in purchased pools. The samples were small, as low as 2 or 3%. There seems to be little effort to find the defective loans in the non-sampled portion, so it’s reasonable to assume that a similar or higher percentage of loans in the entire pool are defective.

Judge Cote follows a similar pattern. Nomura had no written procedures for evaluating loans. P. 48. After it won a bid for a pool, it conducted a review of the loans, relying on the information contained on the loan tape provided by the originator of the loans in the pool. The loan tape is actually a spread sheet containing information about the loans, including FICO scores, debt to income ratios, loan to value ratios, owner-occupancy status and other important data. P. 31. Nomura sent the loan tape to its vendors to conduct reviews for credit, compliance with originator’s stated underwriting guidelines, and valuation. The due diligence was done on a sample, in the range of 25-30%, but it was not a random sample, so the results could not be extended to the entire loan pool.

Of the loans submitted beginning in 2006 and the first quarter of 2007, one vendor graded 38% as failing to meet the originator guidelines. Nomura waived in 58% of those. It also had very high kickout rates for the pools it purchased. That means that of the examined loans, about 22% had major defects, again not counting the unexamined loans. With high kick-out rates, the number of defective loans remaining would be much higher.

The offering materials for these RMBSs all claimed that the loans met the originator guidelines with some exceptions. Judge Cote says this was a false statement, and that there was no showing that the defendants had done the kind of investigation required to avoid liability.

3. Individual Liability.

The Judge looks at the liability of the five individual defendants in part IV.b.3. P. 234. These are the officers, directors and signatories of the entities responsible for the filing of the offering materials. The ruling is harsh:

All five Individual Defendants testified at trial. The general picture was one of limited, if any, sense of accountability and responsibility. They claimed to rely on what they assumed were robust diligence processes to ensure the accuracy of the statements Nomura made, even if they did not understand, or, worse, misunderstood, the nature of those processes. Not one of them actually understood the limited role that due diligence played in Nomura’s securitization process, and some of them actually had strong reason to know of the problems with the diligence process and of the red flags that even that problematic process raised.

Each Individual Defendant made a point of highlighting the aspects of Nomura’s RMBS business for which he claimed to have no responsibility. None of them identified who was responsible for ensuring the accuracy of the contents of the Prospectus Supplements relevant to this lawsuit, and, as this group of Individual Defendants furnished the most likely candidates, the only logical conclusion is that no one held that responsibility.

A detailed explanation of this summary follows. Apparently securitizers have terrible memories.

4. Misleading The Credit Rating Agencies

FHFA did not claim the ratings were false, but that the ratings were not based on accurate information about the actual collateral for the RMBSs. The Court found that the defendants gamed the credit rating agencies models by submitting only the loan tapes prepared by the originators, even when they knew that the loan tapes were full of errors that would affect the final rating. Page 202. The Court found that the ratings depended on factors like the loan to value ratio and the debt to income ratio. The Court found that the LTV ratios were lower than represented by Nomura in 18-36% of the loans, and that many LTV ratios were above 100%, which skewed the models of the credit rating agencies and bought Nomura undeserved AAA ratings. This is a nice piece of lawyering by the legal team at Quinn Emanuel.

The FCIC is not so forgiving towards the Credit Rating Agencies:

The Commission concludes that the credit rating agencies abysmally failed in their central mission to provide quality ratings on securities for the benefit of investors. They did not heed many warning signs indicating significant problems in the housing and mortgage sector. Conclusion to Ch. 10 at .pdf 240

But there’s no point in shooting at the credit rating agencies. They have a get out of jail free card from the judiciary, which says that they are just giving opinions and are protected by the First Amendment.

5. Loss Causation.

The defendants argued that they didn’t cause the loss. They claimed that it was the housing market crash. Judge Cote cites a recent decision from the Second Circuit, Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, — F.3d —, 2015 WL 1654120 at 8 n.2

… there may be circumstances under which a marketwide economic collapse is itself caused by the conduct alleged to have caused a plaintiff’s loss, although the link between any particular defendant’s alleged misconduct and the downturn may be difficult to establish.

Judge Cote tells us that the Second Circuit cited the Final Report of the FCIC for the proposition that the housing crash was linked to the “shoddy origination practices concealed by the misrepresentations” in the Nomura offering materials. Those shoddy practices contributed to the housing bubble, and were factors in the Great Crash. Crucially, she writes at 332:

Defendants do not dispute this. They do not deny that there is a link between the securitization frenzy associated with those shoddy practices and the very macroeconomic factors that they say caused the losses to the Certificates. This lack of contest, standing alone, dooms defendants’ loss causation defense, which, again, requires them to affirmatively prove that something other than the alleged defects caused the losses.

6. Conclusions

The legal team at Quinn Emanuel did a nice job of preparation. The people who prepared the testimony of the expert Dr. William Schwert deserve a special mention: that was really smart. See page 204 and previous material.

It looks like the Quinn Emanuel team and the Judge were deeply informed by the Final Report, and used it as a road map to digging up and presenting evidence of the fraud and corruption in the securitization process. It’s a terrible shame the spineless prosecutors at the Department of Justice couldn’t grasp the point of the Final Report. That is, unless the prosecutors did understand, and the decision was made by the neoliberals at the top, Lanny Breuer and Eric Holder, and the bankster’s best friend, Barack Obama.

The Neoliberal Inhabitants of Mont Pelerin

 

 

In this post, I talked about the intersection of neoliberalism and neoclassical economics. There is a lot of talk on the left about neoliberalism, and a number of ideas about what it is. For me, neoliberalism refers to the general program of a group of economists, lawyers and othes loosely grouped around the Mont Pelerin Society. This description is used by Philip Mirowski in his book, Never Let a Serious Crisis go to Waste. Mirowski did a Book Salon at FDL, here; the introduction gives a good overview of the book, and Mirowski answers a number of interesting questions.

The writer Gaius Publius provides an historical perspective here.  Classical liberalism is based on the idea that property rights are central to the freedom of the individual, an idea espoused by John Locke, as the Theologian Elizabeth Bruenig explains here.

John Locke’s 1689 discussion of property in his Second Treatise on Civil Government establishes ownership as a fundamental relationship between the self and the outside world, with important implications for governance. In Locke’s thought, the justification for private property hinges upon one’s self-ownership, which is then applied to other objects. “Every man,” Locke writes in the Second Treatise, “has a property in his own person: this no body has any right to but himself.” Through labor, Locke continues, the individual mixes a piece of herself with the outside world. Primordial self-ownership commingles with material objects to transform them into property.

In this view, property is the central element that structures individual lives and then society as a whole. Those who have it are entitled to total control over it, just as they are over their own person. Perhaps they should even be in charge of operating the state. When you think about that era, you can see why that formulation would be popular: it solved the problem facing newly rich merchants and others under a monarchy. They were in constant danger that royalty would seize their property from them without fair compensation. Locke’s argument provides a framework to limit the power of the monarch. It also explains the relation between slaves and owners, and women and men. And, as Bruenig points out, it can be extended to justify protection of property with the same force allowed in self-protection.

The defense of property from interference by the State leads directly to the idea of small government. Government shouldn’t interfere with markets any more than it should interfere with any other use of property. The combination of these ideas leads to the principles of classical liberalism: nearly absolute personal freedom for those with property, and a tightly limited sphere of government action. This is the classical formulation of liberalism.

It lasted until the Great Depression and the New Deal. Franklin Roosevelt was faced with the rich on one side, and with angry and miserable workers on the other. These workers and unemployed people, and most of the citizenry were looking at the massive damage done by capitalists and their capitalist system, and saw that the system did not work for them. They were listening to the leftists of the day, socialists and communists; independent smart people like Francis Townsend; and powerful speakers and populists like Huey Long  and Father Coughlin. The elites were frightened of the power of these people to inform and structure the rage of the average citizen, and FDR was able to force them to capitulate to modest regulation of the rich and powerful and their corporations, including highly progressive tax rates.

FDR and the Democrats embraced the term liberalism, and the meaning of the term changed to include a more active state, to some extent guided by Keynesian economic theory. In this version of liberalism, the government becomes a tool used by a society to achieve the goals of that society. People who stuck with the old definition of small government coupled with massive force in the protection of property and rejected all Keynesian ideas were labeled conservatives.

The reformulation of the definition of liberal did not sit well with a segment of the conservatives. Friedrich Hayek and his rich supporters launched the Mont Pelerin Society in 1947. The point of the MPS is to preserve and extend classical liberalism, in an effort to prevent FDR-style liberalism from turning the US and other countries to socialism or something even worse. It is a diffuse group, not secretive, but it doesn’t seek publicity. It seems to content itself with publishing papers and having meetings at which like-minded people can talk to each other and feel good about their brilliance.

The name neoliberal comes from their desire to recapture the glory of small government capitalism. This is from a speech delivered by Edwin J. Feulner, the outgoing president of the group, in 1998:

But with the onset of Progressivism and the New Deal, many Americans became attracted to a political philosophy that was diametrically opposed to Jefferson’s. The new statist philosophy had great faith in public man, but was deeply distrustful of private man. It maintained, quite incorrectly, that the uncoordinated activities of ordinary individuals were bound to culminate in economic catastrophes like the Great Depression, and it looked to an all-good, all-wise and increasingly all-powerful central government to set things right. In the view of these statists — who brazenly hijacked the term “liberal” to describe their very illiberal philosophy — what we Americans needed was more government, not less.

The FDR socialists and communists brazenly hijacked the term “liberal” to cover their assault on the principles of small state property protection. That gives you some idea of the ressentiment of the neoliberals. They have a strong sense of entitlement, and they cling to grudges for decades. Hayek was perhaps most famous for his book The Road to Serfdom, written in the wake of World War II, a screed warning against socialism. That wasn’t going to happen, but it fit neatly with the ressentiment of the filthy rich capitalists who never forgave the Class Traitor FDR.

The Statement of Aims of the MPS is here.  It describes a limited choice: Communism or Free Market Capitalism This stark choice has

… been fostered by the growth of a view of history which denies all absolute moral standards and by the growth of theories which question the desirability of the rule of law.  It holds further that they have been fostered by a decline of belief in private property and the competitive market; for without the diffused power and initiative associated with these institutions it is difficult to imagine a society in which freedom may be effectively preserved.

This statement shows why the filthy rich love neoliberalism: it feeds there sense of self-glorification. That it lends itself to exploitation for their cash benefit is a lovely side benefit.

 

 

 

Neoliberalism and Neoclassical Economics

 

 

I’m new here as a poster, so I’ll start by describing my interests. As you may know from my work at Firedoglake under the name masaccio, I’m interested in the way the economy actually works. That’s why I like the work done by Thomas Piketty and his colleagues on wealth and income inequality: he has collected, refined and organized huge piles of data and made both that data and his analysis public. Piketty’s book, Capital in the Twenty-First Century, tells us that we can and should insist on data as a source of analysis, not the enormous array of cute stories mainstream economists like to tell us from their armchairs. Trickle-down, life-cycle consumption, pay based on marginal productivity, free markets, and most of the neoclassical economics taught in Econ 101 to pretty much the entire college population for decades, all of them are clever, easily explained in sophomore level calculus, and wrong.

The two parties cooperated to implement self-regulating financial markets, both through the gradual abolition of Glass-Steagall, and to gut regulatory agencies. They laid the groundwork for the Great Crash, and the cheats and thugs on Wall Street did the rest. Then the elites and their pet economists insisted that the solution lay in pumping money into the banking system with no thought of criminal investigation, let alone prosecution, and only the weakest forms of re-regulation, insuring that the criminals would not be deterred and would have plenty of ways to bring on the next disaster.

US voters were angry about the bailouts, but their wrath turned onto the victims of the fraudulent lending schemes and the interest rate swaps and the other financial innovations that the Alan Greenspans and Robert Rubins enthusiastically supported. Does your city or your school district have an interest rate swap? I live in Chicago, and our school district has a bunch. The Chicago Tribune estimated they will cost us $100 million that should be going to education but instead is going to the con artists on Wall Street. The cuts to education here are painful and unnecessary. The same is true all over the country

But it was bad luck homeowners who really got cheated. First, there were knowingly fraudulent loans, then knowingly fraudulent foreclosures, and now possibly knowingly fraudulent delinquency claims.

The vast majority of the public thinks this is just fine. Screw the victims, help criminal banks is a strange goal, but the worst part is that victims of this economic system frequently do blame themselves.

This outpouring of hostility towards the losers in the economic struggle should be seen as a natural consequence of neoliberalism. In that worldview, the market is an indifferent referee, doling out rewards to the successful, and pushing the losers off the playing field into the outer darkness. Everyone is required to be the entrepreneur of themselves, investing their money or their parents’ money or borrowed money in their own human capital in the hopes of beating out some other poor bastard for some bad job that pays poorly. If they win, they might get to retire. If they lose, there’s always bankruptcy, except for taxes and student loans, and they are trash. It’s a bleak world.

Neoclassical economic theory is the linchpin of neoliberalism. It provides a theoretical underpinning for the harsh world it envisions. In this world, humans are seen solely as consumers and producers. These calculating creatures are rational optimizers, constantly using the markets to achieve their own personal highest utility. It’s an evil, reductive idea, but notice how well it corresponds to the self images of the people described by Jennifer Silva in her book Coming Up Short, which I discussed here.  The encouraging thing about the people Silva talked to is that they see themselves as having agency, they see themselves as having problems, but they are convinced they can do something about those problems.

The middle class is shrinking. Social class mobility is falling. But no one seems interested in the possibility that the economic system is the problem. The Republicans love it, and the Democrats do too, only not quite as much: they offer timid solutions like Elizabeth Warren’s suggestion that we reduce the interest rate on student loans, or increase the minimum wage to $10.10 per hour. These are not the kinds of changes that will make a significant difference in anyone’s life. They will do nothing to dilute the power of the richest 16,000 US families. And yet these represent the extreme left in politics.

In the 1920s, there was widespread intellectual ferment around alternatives to capitalism, socialism and communism, and that forced questions about capitalism to the surface. As the Great Depression deepened, the rich and politicians were afraid that the working class and the unemployed would find those ideas superior to capitalism. Eventually they were forced to compromise a tiny bit, creating a more or less regulated system of markets. Even the conservative hacks on the Supreme Court (the Court is full of conservative political hacks almost all the time), bent to the will of the people, and allowed a range of FDR’s initiatives to stand. In some cases, for a while, the hacks even enforced those laws, though that ended years ago.

Partially regulated capitalism was a major force for the creation of what Piketty calls the Patrimonial Middle Class. This group, 40% of the population, roughly the 50th to 90th percentiles of wealth, at one time had enough wealth to live comfortably in retirement and leave an inheritance to their children. That group is dwindling. The bottom 50% of the population has little or no net worth. Piketty calls them the Lower Class. The top 10% he calls the Upper Class and the top 1% he calls the Dominant Class. The Upper class is taking all the money produced by the economy. These are the people who can make major donations to politicians and thus acquire influence they can turn to their cash benefit.

The Lower Class is becoming more and more angry as the recovery stomps their faint hopes into the dirt. The Middle Class is shrinking, and I hope is beginning to think that maybe it’s not their fault. Things won’t change until enough people figure out the connection between the economic myths they’ve been taught and the social and political institutions that enforce those myths, and structure their understanding of their place in the world. If Silva’s people are right, if Middle and Lower Class people do have agency, and if they learn to see through the smoke and mirrors of the neoliberals and their academic lapdogs, they can enforce demands that will actually improve their lives.

I like to think of this process as the way you’d peel an octopus off an aquarium wall: one tiny sucker at a time. Eventually it comes off, but it’s a lot of work, and the octopus resists with all its strength.
which is Piketty’s actual term

 

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