Remember Cramdown?

Remember cramdown? It was a proposed change to bankruptcy law that would have allowed judges to modify the mortgages on primary homes for people entering bankruptcy. Supporters of the change argued that cramdown would provide an important stick to force lenders into modifying loans–and in so doing help millions of people stay in their homes. Here’s how DDay described the thinking behind the House cramdown legislation that passed in March 2009.

Under the proposal, the banks would be allowed to work out their terms with borrowers first, before resorting to a bankruptcy judge. This is how it worked in the House version of cramdown, which passed in March 2009; the homeowner had to negotiate a voluntary loan mod with the lender before going to the bankruptcy judge. And this may have worked, but only because, for the servicers, cramdown would have loomed in the background as a big stick, forcing a negotiation with a level playing field for the borrower.

In other words, cramdown was meant to give homeowners and the government leverage over servicers and lenders to voluntarily modify mortgages.

I ask whether you remember cramdown, because it doesn’t show up in this WaPo story at all. The WaPo allows some anonymous administration officials to claim they couldn’t do anything about the abuses now being exposed in the foreclosure process because they wanted servicers’ voluntary help on modification programs (basically, the famously unsuccessful HAMP).

In an interview this week, a senior administration official confirmed that the White House and Treasury Department had received warnings that the mortgage industry employed inexperienced staffers to oversee foreclosures, had problems handling documents and communicating with borrowers, and often failed to comply with regulations.

But the government had struggled to address shortcomings in the industry, the official said, because the administration was also seeking the servicers’ help with modifying the home loans of millions of borrowers to help them avoid foreclosure.

In addition, a Treasury official said the federal government’s power to tackle problems in the servicer industry is limited because foreclosure law is largely the domain of states.

Both officials, who were not authorized to speak on the record but were providing the administration’s views on the matter, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

The massive foreclosure fraud that is about to seize up the economy again wasn’t the Administration’s fault, these anonymous sources want you to know, because they couldn’t do anything about it when they first got warning of it. Oh, and the servicers aren’t engaged in fraud, these anonymous sources want you to know, they’re just overwhelmed (never mind that if they’re overwhelmed, it’s partly because they refuse to hire enough people to do foreclosures right, presumably because that would hurt profitability).

Key to this story of the Administration’s helplessness is the claim that the only tool they had to get servicers to modify loans was the servicers’ good will. Basically, they’re saying that they had to let the servicers (who are also some of the biggest banks) engage in what amounts to fraud, because it was the only way they had to get servicers to participate in HAMP.

Setting aside the fact that a relative handful of people have actually gotten modifications under HAMP (which suggests the Administration was willing to overlook the problems they knew existed in the foreclosure process in exchange for helping just a few people), the claim that allowing those problems to remain was the only way to get banks to participate in HAMP is simply not true.

Or it didn’t have to be.

Back in July 2009, when the Administration was sitting on its hands as cramdown failed in the Senate and as Dick Durbin was observing that the banks own the Senate, the Treasury Department’s Assistant Secretary for Financial Stability, Herb Allison, testified to Congress that the Administration had all the tools it needed to slow the flood of foreclosures.

As housing foreclosures top the 1.5-million mark this year, the Obama administration has openly abandoned cramdown as a strategy for tackling the crisis.

That approach — which would empower homeowners to avoid foreclosure through bankruptcy — was once a central element of the administration’s plans to stabilize the volatile housing market. Some financial analysts say the strategy would prevent 20 percent of all foreclosures. But, appearing before a Senate panel Thursday, two White House officials said that current policies are enough to address the problem.

“We have enough tools,” Herbert Allison, the Treasury Department’s assistant secretary for financial stability, told members of the Senate Banking Committee. “The challenge is to roll them out.” The tools Allison invoked are several federal programs that offer financial incentives to mortgage lenders and servicers — the companies that buy the rights to manage loans — to modify the terms of mortgages in efforts to help homeowners escape foreclosure.

Fifteen months ago, according to the Assistant Treasury Secretary, the Administration had all the tools it needed. Now, as the problem of foreclosure fraud is about to explode, a Treasury official and a senior Administration official claim they didn’t have the right tools, they were helpless.

Now, you can argue whether the Administration would have ever been able to get Bad Nelson and Mary Landrieu to vote for cramdown (me, I sort of think comments like Allison’s and Obama’s silence gave the Senators cover to screw homeowners).

But you can’t argue one point: after fifteen months of trusting banksters to do the right thing for homeowners hasn’t worked out so well, the Administration is changing its story about whether it needed more tools to motivate those banksters.

The (Liz) Warren Commission and Financial Reform

A lot of hope was placed on the back of Elizabeth Warren and the financial reform act passed by Congress at the behest of the Administration formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Concurrent with belittling the liberal Democratic activist base as ungrateful whiners, the Administration and Democratic leadership has touted Liz Warren and Dodd-Frank as prime examples of accomplishments that should thrill and satisfy the base. But are those “accomplishments” really all that and should they mollify Democrats, at least on financial reform issues? The initial returns indicate no.

First, the ability of Dodd-Frank to do the job intended as to rapacious financial institutions is highly debatable at best, and that is being generous. It is already established the bill did not clamp down sufficiently on the reckless casino style trading in derivatives and synthetic financial products, and may even have opened a new portal for abuse by the Wall Street Masters of the Universe high frequency traders.

Gretchen Morgenson in today’s New York Times lays out beautifully the bigger picture on the lack of reform in the “reform”:

THE government is pulling a sheet over TARP, the Troubled Asset Relief Program created during the panic of 2008 to bail out the nation’s financial institutions. With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success.

Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.

Consider the claims made last summer that the Dodd-Frank financial reform act reduces the threats that large, interconnected banks pose to taxpayers and the economy when the banks are deemed too big to fail. Indeed, as regulators hammer out the rules governing derivatives transactions, it’s evident that the law has created a new set of institutions that will almost certainly be deemed too important to fail if they ever get into trouble. And that means there won’t really be an effective way to keep those firms from taking big, profitable, short-term risks that are dumped on the taxpayers when the bets fail.

Our roster of bailout candidates includes the clearinghouses, created under Dodd-Frank, that are meant to increase the oversight of derivatives trading. Because most derivatives transactions are expected to go through these clearinghouses, they will be “systemically important” under the law. As such, Dodd-Frank specifically provides that “in unusual or exigent circumstances,” the Federal Reserve may provide such entities with a financial backstop, including borrowing privileges.

Remember this: Financial backstop is just another term for a taxpayer bailout. And the major banks and brokerage firms are the members of the clearinghouses, so a backstop would essentially be for them.

According to the Bank for International Settlements, the entire derivatives market had a gross credit exposure of $3.5 trillion at the end of 2009. Obviously, even a small fraction of that amount could represent a sizable call on the taxpayers if a clearinghouse hit the skids.

So much for eradicating too-big-to-fail.

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SEC to Ratings Agencies: Really, We Mean Business

Yesterday, the SEC told ratings agencies they mean business. They will prosecute agencies for fraud.

In the future.

It did so in a report of investigation into explicit fraud on the part of Moody’s in which the SEC declined to prosecute for jurisdictional reasons.

At issue is a programming error that caused Moody’s to give credit ratings up to four notches higher to some complex debt products than the products deserved. Moody’s discovered the coding error in January 2007. But then ratings committee members in Europe decided not to downgrade the credit ratings for those products because doing so–admitting the coding error–might make Moody’s look bad.

In this particular case we seem to face an important reputation risk issue. To be fully honest this latter issue is so important that I would feel inclined at this stage to minimize ratings impact and accept unstressed parameters that are within possible ranges rather than even allow for the possibility of a hint that the model has a bug.

The Financial Times learned of and reported Moody’s decision in May 2008 after which, in July 2008, Moody’s ‘fessed up to the problem.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

But in the interim period, as part of a registration application to be a recognized ratings agency, Moody’s made the following representations to the SEC:

Accordingly, Exhibit 2 to the MIS application provided the procedures and methodologies used by MIS to determine credit ratings and, among other things, stated therein that the “Relevant Credit Rating Process Policies” included the MIS “Core Principles for the Conduct of Rating Committees.” The actions of the rating committee that evaluated the affected credit ratings for the CPDO notes did not comply with these Core Principles. Most notably, the Core Principles stated that “Moody’s will not forbear or refrain from taking a rating action based on the potential effect (economic, political or otherwise) of the action on Moody’s, an issuer, an investor, or any other market participant.” The Core Principles also stated that “[i]n arriving at a Credit Rating, the [rating committee] will only consider analytical factors relevant to the rating opinion.” Because the committee allowed concerns regarding the potential reputational impact on Moody’s to influence decisions not to downgrade the affected CPDOs, the process did not comply with the procedures listed in the MIS application. [my emphasis]

In other words, Moody’s promised to the SEC that it did not do what it had done in 2007, choose not to downgrade the credit rating of an entity because doing so would hurt Moody’s.

Financial Times first reported of SEC’s investigation into Moody’s in May 2010–almost two years after Moody’s admitted they had been gaming their ratings. But yesterday, SEC basically said they weren’t going to prosecute Moody’s for making false representations to the SEC because–given that the financial products being rated and the decisions not to downgrade their ratings all took place in Europe–it wasn’t sure it had jurisdiction to prosecute.

Mind you, the Financial Reform bill has made it explicitly clear that the SEC can prosecute ratings agencies for stuff they do overseas.

The Commission notes that, in recently enacted legislation, Congress has provided expressly that federal district courts have jurisdiction over Commission enforcement actions alleging violations of the antifraud provisions of the Securities Act of 1933 or the Exchange Act involving “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors” or “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”

So the punchline of this report–showing that Moody’s clearly was cooking the books but concluding that because the books were cooked in Europe, SEC isn’t sure it can do anything–is a stern warning to ratings agencies going forward:

This report serves to caution NRSROs that, where appropriate, the Commission will utilize recent legislative provisions granting jurisdiction for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States. The Commission also cautions NRSROs that they should implement sufficient and requisite internal controls over policies, procedures, and methodologies used to determine credit ratings.

How a Previously Qualified Elizabeth Warren became Unqualified, According to a Previously Progressive Chris Dodd

July 27: Chris Dodd says of Elizabeth Warren, “She’s qualified, no question about that”

August 9: Katrina vanden Heuvel tweets that several sources have told her Elizabeth Warren would be nominated “next week”

August 12: Warren meets with Financial Services Roundtable President Steve Bartlett and then meets with David Axelrod at the White House to discuss the CFPB position

August 13: Robert Gibbs acknowledges that Warren had been meeting about the CFPB position, but says no announcement would be made in the next week

August 17: Chris Dodd raises questions about whether Warren can manage anything to suggest she may not be confirmable even while he admits she has “a great campaign”

“My simple question about Elizabeth is: Is she confirmable?” Dodd said during a visit Tuesday with The Courant’s Editorial Board. “It isn’t just a question of being a consumer advocate. I want to see that she can manage something, too.”

But when pressed about where he stands, Dodd said: “If the president wants to name her and it goes through the hearing process, then fine, he’ll have my support. But she has to tell me more than just she’s a good consumer advocate or that’s she’s got a great campaign.”

I guess the only question this chronology leaves is whether or not Dodd is acting at the behest of his future employers, the banks, the White House, or both.

“Creative” Wall Street and Money-Laundering

I have long maintained that we will eventually learn that Citibank took over where BCCI and then Riggs Bank left off: serving as a money laundering vehicle used by drug cartels and other organized crime, terrorists, and spooks. But this article (h/t scribe) on the role of big banks in laundering Mexican drug money reports that–while Citibank has been implicated in money laundering (but took the appropriate regulatory steps in response)–there are a number of other banks deeply implicated:

  • Wachovia (now owned by Wells Fargo)
  • Bank of America
  • American Express
  • HSBC
  • Banco Santander

Most of these banks were implicated in Mexican legal filings. But in March, Wachovia entered into a Deferred Prosecution Agreement with the government that reveals some of the details behind its money laundering.

The DPA lays out the means by which Wachovia enabled money laundering as follows:

  • Allowing Mexican Casas de Cambio (exchange houses) to wire through Wachovia. From May 2004 through May 2007, Wachovia had processed at least $373 billion in CDC wire activity.
  • Offering a “bulk cash” service, in which Wachovia would arrange physical transport of large amounts of US dollars collected by the CDCs into the US. From May 2004 through May 2007, Wachovia processed over $4 billion in bulk cash for the CDCs.
  • Providing a “pouch deposit” service, in which CDCs would accept checks and travelers checks drawn on US banks, aggregate them into a pouch, and then forward them to Wachovia for processing. By May 2005, Wachovia had set up a digital scan system for this service. From May 2004 through May 2007, Wachovia processed $47 billion in digital pouch deposits for all its correspondent banking customers, including what it did for the CDCs.

The DPA also describes how Wachovia helped telemarketers steal directly from victims’ accounts–the subject of an unrelated lawsuit going back some years.

So here are two key details of this.

First, it appears that Wachovia deliberately got deeper into money-laundering for CDCs in 2005 even as the government issued more alerts about the way drug cartels were using CDCs.

As early as 2004, Wachovia understood the risk that was associated with doing business with the Mexican CDCs. Wachovia was aware of the general industry warnings. As early as July 2005, Wachovia was aware that other large U.S. banks were exiting the CDC business based on [anti-money laundering] concerns.

Despite these warnings, Wachovia remained in the business. And in September 2005, Wachovia purchased the right to solicit the international correspondent banking customers of Union Bank of California (“UBOC”). Wachovia knew that UBOC was exiting the CDC market due to AML problems. Wachovia hired at least one person from UBOC who had a significant role in the CDC business at UBOC. After UBOC exited the CDC business, Wachovia’s business volume increased notably.

September 2005 was definitely before most people realized the giant shitpile–of which Wachovia held more than its fair share–was going to explode. But Wachovia was already deep into it.

So $373 billion in wire services (some of which were surely legal), $4 billion in bulk cash services, and some portion of $47 billion in digital pouch services (again, some of which is surely legal and may pertain to remittances). Compare those numbers to the $40 to $60 billion or so in Wachovia subprime losses Wells Fargo ate when it took over Wachovia. Was Wachovia laundering money for drug cartels because it was so badly exposed in mortgage-backed securities, or was it so heavily involved in products that could be used for money laundering just for fun?

Now, for all of this, DOJ made Wells Fargo pay $160 million: $50 million that is an outright fine, and $110 million for what DOJ said it had identified as clear drug proceeds laundered through Wachovia. Now, granted, DOJ is fining Wells Fargo (beneficiary of huge amounts of free money from the Fed in recent years and the recipient of huge tax deductions for taking over Wachovia), not Wachovia. And granted, this was the largest fine ever for money laundering. But as the Bloomberg story notes, that’s less than 2% of Wells Fargo’s profits last year. And isn’t even as much as Wachovia got in deposits–$418 million–from the fraudulent telemarketing scheme.

Then there’s the bigger question. Who else was using these vehicles? Banks that enable this kind of money laundering tend to be indiscriminate about their client base. And as I noted when I started this post, money laundering for drug cartels tends to go hand in hand with money laundering for other organized crime, terrorists, and spooks. Given the scale of what Wachovia was doing, where are the other busts?

And while we’re looking for those other busts, note that the investigation of Wachovia started in May 2007, 17 months before the government brokered the Wells Fargo takeover. Is there any chance that Treasury, which would have been involved in this, was unaware of the massive amounts of money laundering Wachovia had been engaged in when they brokered that deal? Recall, too, the weirdness over the competition between Citi and Wells Fargo for the privilege of taking on the Wachovia shitpile. The Federal government was at one point prepared to take on a portion of Wachovia’s shitpile to allow Citi to take over the bank for a dollar a share. And when Citi CEO Vikram Pandit lost out on the deal, Andrew Ross Sorkin reported in Too Big to Fail, he told Sheila Bair, that “This isn’t just about Citi … There are other issues we need to consider. I need to speak to you privately. … This is not right. It’s not right for the country. It’s just not right!”

I don’t want to get too tinfoil about this. But it strikes me that the efforts to keep Wall Street and all its celebrated creativity intact serves to make it easier for banks like Wachovia to engage in widespread money-laundering. That is, it’s not just shadow banking as it is politely understood, but banking for entire shadow networks, both our own and our enemies.

Update: Aaron v. Andrew fixed–thanks SaltinWound.

Update: Here’s the full Bloomberg story.

Claire McCaskill: Synthetic CDOs Are Not Like Corn

One of the highlights of today’s hearing on Goldman Sachs (aside from my Senator saying “shitty deal” over and over, was Claire McCaskill’s insistence on referring to Goldman Sachs’s Synthetic CDOs as gambling. (She did this earlier with another of the Goldman execs, after which John Ensign defended his state’s biggest industry, pointing out that everyone knows the odds are gamed to make sure casinos win, whereas with finance, the House keeps changing the odds after bets have been placed.)

But don’t worry. Lloyd Blankfein tells us none of this is immoral.

New Pecora: Financial Crisis Inquiry Commission Discussion Thread

Alright, this is a hot button issue and folks seem to want a place to chat on the proceedings in the Financial Crisis Inquiry Commission with the Masters Of The Universe.

It is live on CSPAN and here is a web link to streaming CSPAN coverage.

Discuss away!!

Obama Appoints Fox To Evaluate Terror Watchlist Henhouse

fox-and-chicken-richardson-300x288Barack Obama, doing his best to make Dick Cheney’s questions about leadership look rational, has assigned John Brennan to conduct the Administration’s ballyhooed investigation into the claimed failure of the terrorist watchlist program in the Christmas Fruit Of The Loom Bomber incident.

What’s wrong with this picture? Throw a dart in any direction and you will find something.Politico gives the unsettling details:

President Barack Obama promised a “thorough review” of the government’s terrorist watch-list system after a Nigerian man reported to US government officials by his father to have radicalized and gone missing last month was allowed to board a Northwest Airlines flight to Detroit that he later tried to blow up without any additional security screening.

Yet the individual Obama has chosen to lead the review, White House counter-terrorism adviser John Brennan, served for 25 years in the CIA, helped design the current watch-list system and served as interim director of the National Counterterrorism Center, whose role is under review.

In the three years before joining the Obama administration, Brennan was president and CEO of The Analysis Corporation, an intelligence contracting firm that worked closely with the National Counterterrorism Center and other US government intelligence, law enforcement and homeland security agencies on developing terrorism watch-lists.

“Each and every day, TAC makes important contributions in the counterterrorism (CT) and national security realm by supporting national watchlisting activities as well as other CT requirements,” the company’s Web site states.

According to financial disclosures forms released by the White House, Brennan served as president and CEO of TAC from November 2005 until January 2009, when Obama named him to the White House terrorism and homeland security job. The disclosures show that Brennan reported earning a $783,000 annual salary from the Analysis Corporation in 2008. ….

One former senior intelligence official told POLITICO it is “unsavory to see Obama put Brennan in charge of a review of this matter since it is possible that NCTC or TAC could have failed in their responsibilities.”

Oy. “Unsavory”? Ya think? This is akin to a law school final exam where you try to identify all the conflicts of interest in the given situation. But there is not enough time to hit them all. Do not fret, the crack White House ethics team has looked at Brennan and determined Read more

NYC DA Morgenthau Blasts Feds On Financial Investigations

imagesThe Wall Street Journal has a fascinating and free ranging interview of New York City District Attorney Robert Morgenthau in today’s edition. Morgenthau, as you may know, is the real live template for the original DA on NBC’s Law & Order, Adam Schiff. Still young at age 90, Morgenthau will retire next Thursday after over 35 years as the chief District Attorney for New York.

The entire piece is well worth the read, but of particular interest, in light of the financial meltdown we have just lived through, and may yet again the way the Wall Street Banksters are cranking their same old casino back up, is the broadside Morgenthau lands on the Federal oversight and investigation of financial fraud.

These big criminal forfeitures support his $80 million budget, but they are also the product of Mr. Morgenthau’s unique legacy among district attorneys: his national and global reach. Such resources have allowed him to prosecute complex international business cases. Combined with his jurisdiction in the world’s financial capital, he has become in a sense the world’s district attorney.

Thomas Jefferson would have liked this bastion of local power as part of a federal system, but it is not always celebrated by federal officials. “I’m sure it [annoys] the hell out of them,” Mr. Morgenthau observes.

The feeling is mutual. The D.A. says that while he’s had to deal with the federal bureaucracy for decades, “it has just gotten worse” and “they ought to burn it down and start all over again. It’s extremely worrisome.”

For example, he says, “We had a lot of trouble with the Treasury Department” in his recent case against Credit Suisse, in which the bank coughed up $536 million and admitted to aiding Iran and other rogue nations in violating economic sanctions. The feds, as they did in a similar settlement with the British bank Lloyds, wanted only civil penalties.

Mr. Morgenthau would have none of it. He says Credit Suisse had been “stonewalling us” and only struck a deal after he threatened to bring criminal charges to a grand jury. “We would have gotten an indictment,” he says. (emphasis added)

It is a great snapshot of a one of a kind force of legal nature, Robert Morgenthau, and there are several other interesting topics; I recommend reading the entire article.

As to the portion of Morgenthau I quoted though, “Feds only wanted civil penalties and not interested in using criminal charges” to crack open the case and bring accountability for the Wall Street Banksters; sound familiar? It should, it is the exact same conclusion that blew the mind of SDNY Judge Jed Rakoff Read more

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