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Remember the Stress Tests?

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The other day, I noted that Administration claims that they were helpless to affect what they now depict as loan servicers’ “sloppiness” but what really amounts to fraud ignores their decision to stop pushing for cramdown–and with it, leverage over the loan servicers.

I think (though I’m less sure of this) they’re ignoring one other source of leverage they once had over the servicers: the stress tests.

First, remember that the top servicers also happen to be the biggest banks. Here is Reuters’ list of the top loan servicers.

  • Bank of America (19.9%)
  • Wells Fargo (16.9%)
  • JPMorgan Chase (12.6%)
  • Citi (6.3%)
  • GMAC (3.2%)
  • US Bancorp (1.8%)
  • SunTrust (1.6%)
  • PHH Mortgage (1.4%)
  • OneWest (IndyMac) (1.4%)
  • PNC Financial Services (1.4%)

And here is the list the nineteen banks that had to undergo stress tests in 2009.

  • American Express
  • Bank of America
  • BB&T
  • Bank of New York Mellon
  • Capital One
  • Citigroup
  • Fifth Third
  • GMAC
  • Goldman Sachs
  • JP Morgan Chase
  • Key Corp
  • MetLife
  • Morgan Stanley
  • PNC Financial
  • Regions
  • State Street
  • SunTrust
  • U.S. Bancorp
  • Wells Fargo

So all of the top mortgage servicers–Bank of America, Wells, JP Morgan Chase, Citi, and even GMAC–had to undergo a stress test last year to prove their viability before the government would allow them to repay TARP funds and therefore operate without that government leverage–which was threatened to include limits on executive pay, lobbying, and government oversight of major actions–over their business. Significantly, all but JPMC were found to require additional capital.

Now, I’m not sure what I make of this. The stress tests were no great analytical tool in the first place. Moreover, the stress tests focused on whether the banks could withstand loan defaults given worsening economic conditions, not whether they could withstand financial obligations incurred because their servicing business amounted to sloppiness fraud.

But in letters between Liz Warren (as head of the TARP oversight board) and Tim Geithner in January and February 2009 discussed foreclosure modification, stress tests, and accountability for the use of TARP funds (Geithner made very specific promises about foreclosure modifications and refinancing which Treasury has failed to meet). And those discussions–and the stress tests–took place as COP reported on the problems with servicer incentives, servicer staffing and oversight, and the lack of regulation of servicers more generally (the COP report came out March 6, 2009; the stress test results were announced May 7, 2009). So at the same time as the Administration was officially learning of problems with servicers, it was also giving those servicers’ bank holding companies a dubious clean bill of health. And with it, beginning to let go of one of the biggest pieces of leverage the government had over those servicers.

Beyond that, I’m not sure what to think of any relationship between the stress tests and the servicer part of these banks’ business. Rortybomb has an important post examining how this foreclosure crisis may go systemic. If it does, these same banks that eighteen months ago promised the government they could withstand whatever the market would bring will be claiming no one could have foreseen that they’d be held liable for their fraudulent servicing practices. Ideally, we would have identified this as a systemic risk eighteen months ago, and based on that refused to let the big servicers out of their obligations (which would have provided the needed incentive for the servicers not only to treat homeowners well, but to modify loans). Had the stress tests included a real look at these banks’ servicing business, these banks might not have been declared healthy.

Confirmed: Official Administration Policy Is to Continue Foreclosures

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The Federal Housing Administration Commissioner, David Stevens, has joined David Axelrod in stating that the Administration sees no reason to halt all foreclosures. That’s not a surprise in itself–it was pretty clear that Axe’s statement reflected official Administration policy.

But I’m particularly interested in how Stevens justified this position in an email sent to the WaPo.

“We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market,” he said.

With approximately one in four homes sold in the second quarter in foreclosure, administration officials worry that a moratorium could have a significant impact on the economic recovery.

“While we understand the eagerness to make sure that no American is foreclosed upon in error, we must be careful not to over-reach and apply a remedy that will make the underlying problem of foreclosures worse,” he added.

First, note where Stevens places the benefit of the doubt. If the Administration has no reason to believe foreclosures to be in error, then it will assume they are not. That, in spite of the mounting evidence that the paperwork problem for homes sold during the bubble is systemic.

Foreclosures have been halted in places where there is an easy means (judicial foreclosures) to expose the fraud underlying the bubble era housing sales, or for companies (like Bank of America) that were pressured to vouch for the whole system. But there is no reason to believe the loans Wells Fargo acquired from Wachovia are any more sound than what BoA has on its books; on the contrary, they’re probably worse. But the Administration position is that we should just carry on with the foreclosures, ignoring the evidence of systemic fraud.

Which is probably, itself, just an effort to avoid admitting to the evidence of systemic fraud.

While the interim paragraph in Stevens’ response to the WaPo is not a direct quote, it seems that he is saying the Administration doesn’t want to halt all foreclosures because they don’t want the housing market to lose a quarter of its sales. That is, they seem to believe that the housing market will freeze up if it doesn’t have a ready supply of below market properties to entice buyers who otherwise would be unable or uninterested in buying.

Now, first of all, it’s not entirely clear that the housing market hasn’t effectively frozen up in any case. Things are so volatile it’s not clear that this quarter would resemble the second quarter in any case.

But given everything else, is it really a good idea to encourage reluctant buyers to buy now? (I say that with a house on the market.)

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“Creative” Wall Street and Money-Laundering

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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.

NYC DA Morgenthau Blasts Feds On Financial Investigations

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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 →

Geithner to Banks: “Ix-Nay on the Solvency-Inay”

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I suppose, if Wells Fargo boasted wildly in its earnings report that it not only made a profit, but passed its stress test with flying colors, and Bank of America and Citi remained silent about the results of their stress tests in their earnings report, then we all might conclude that Bank of America and Citi had fared rather poorly on their tests.

As opposed to all of us concluding that Bank of America and Citi failed their no-fail stress test based on the FDIC want ads and the way Geithner has been wandering around saying "Shhhhhhh!" all week.

Still. Isn’t it bad form for the Treasury Department to order financial institutions to hide data about their financial health on their earnings reports? (h/t Stephen)

The U.S. Treasury Department is asking banks not to mention the regulatory "stress tests" as part of their first-quarter earnings results, according to a source familiar with government discussions.

If I were a BoA or Citi stockholder, I’d be finalizing my suit against Geithner right now to avoid the rush.

About those [Stress] Test Results

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Peterr had a great post this morning reading some troubling tea leaves at the bottom of Citi’s and Bank of America’s tea cups.

My, the little things you notice when you peruse the job listings at the FDIC website. There are a lot of them to scroll through, but a couple of them caught my eye.

[snip]

Further down the list of positions comes a posting for two Senior Large Financial Institution Specialists, one in the New York office and the other in Charlotte, North Carolina.

Hmmm . . . large institutions, New York and Charlotte?

Can you say "Citibank" and "B of A"? Sure you can.

Speaking of New York, they are also looking for a new Chief, Examination Support and Risk Analysis Section who would be based in either New York or DC. Again, from the major duties section of the posting, the first three are these:

Serves as technical advisor on a broad range of risk management issues particularly regarding the analysis and supervision of large, complex financial institutions.

Reviews and evaluates studies, reports, and proposals prepared by staff members, financial organizations and other government agencies as these relate to large, complex financial institutions.

Directs the monitoring and supervision of large, complex financial institutions to protect the deposit insurance fund.

I’d be getting a little nervous right about now, if I had a corner office at Citibank and saw these two job postings. And if I noticed that the FDIC is also looking for two more of those Senior Large Financial Institution Specialists in their DC office, I’d be getting more than a little nervous. (As if I didn’t already have some banking nightmares to deal with.)

All in all, it looks to me like somebody thinks the FDIC needs some senior folks to deal with eating Very Big Banks — and to judge by the closing dates on these job postings and this little teaser from the Wall Street Journal, they think they need them fast.

The teaser he linked to describes the problem of what to do with the results of the stress tests investigating–among others–BoA and Citi.

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country’s 19 largest banks, people familiar with the matter said.

Only, it seems like those bank regulators have decided to punt, at least until we get past earnings season.

Read more →

Fire Ken Lewis for the $3 Billion in Merrill Lynch Bonuses

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I’ve been meaning to point to Andy Stern’s call to give Ken Lewis, CEO of Bank of America, the same treatment Obama gave Wagoner–the boot.

Both Rick Wagoner and Ken Lewis sunk large public companies — putting thousands out of work and toppling the American economy — while accepting billions in taxpayer bailouts. Yet only Wagoner got a pink slip. It’s time for Treasury Secretary Geithner to replace Ken Lewis as CEO and let real reform take hold at Bank of America.

And Change to Win’s petition calling to fire Lewis. 

But this tidbit–courtesy of Howie–will really make you want to oust Ken Lewis.

In its last days as an independent company, Merrill gave performance-based bonuses exclusively to employees earning $300,000 a year or more and holding a rank of vice president or higher, according to their financial statements. $3.62 billion was handed out to these executives – a sum equal to 36.2 percent of the $10 billion in taxpayer funds that were allocated to Merrill as part of the Troubled Asset Relief Program (TARP) before the bonuses were paid.

The company had been failing as a result of misadventures in the now infamous mortgaged-backed securities market which began crumbling with the decline of home values as the bubble burst.

The performance bonuses were determined by Merrill’s compensation committee on December 8, 2008, before Merrill revealed that it lost $15 billion in the final three months of 2008, unusual timing according to court documents filed by New York Attorney General Andrew Cuomo in an ongoing suit against Merrill’s former CEO.

In prior years, Merrill paid performance bonuses of this type after the end of the year, in January or February of the next year.

[snip]

The questionable timing and the amounts of these bonuses were not revealed to Bank of America shareholders when they voted to acquire Merrill. These facts raise questions about what government officials knew about the bonuses and when they knew it, according to Kucinich’s letter. 

$3.62 billion would keep all of GM in business for a month or two. Read more →

CEO’s Eating Their Own Toxic Products

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We’ve got competing CEOs on the all-Congress channel today, with the Peanut CEO in front of Commerce Committee and the Bank CEOs in front of Financial Services.

There will be some scuttlebutt from the Bank CEOs–as when a few of them admitted they’ve been raising credit card rates since they started sucking on the federal teat.

But the news coverage will open today with Stewart Parnell (CEO) and Sammy Lightsey (Plant Manager) of the Peanut Corporation of America.

Both of them came in, got sworn in, and repeatedly invoked the Fifth Amendment. Neither of these guys appear to be as bright as their Wall Street counterparts–I got the sense that Parnell, and especially Lightsey–were under very strict orders to say nothing beyond "On the advice of my counsel, I respectfully decline to answer your question based on the protection afforded me under the US Constitution" Lightsey, in particular, was struggling with all the legalese.

But the highlight of the hearing came when Congressman Greg Walden (R-OR) offered up a plastic bin wrapped with big yellow CAUTION ribbons–with Peanut Corporation peanut material inside. Walden asked Parnell and Lightsey if they would be willing to eat some of their own product right there, before the Sub-Committee.

"On the advice of counsel, I uh respectfully exercise my rights Fifth Amendment of the Constitution."

A simple yes or no might have sufficed.

In any case, there’s real irony with the competing CEOs show. The ones before the Financial Services Committee, after all, have done far broader damage than the Peanut Corporation–and their actions may well lead to many more deaths than the salmonella outbreak (which is not to minimize the grief of the families affected by the peanut outbreak). 

But no one is asking those CEOs–the bank CEOS–to eat their own toxic products.

Bank of America Buys a Big Chunk of the Shitpile

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There are several things that concern me about the news that Bank of America has agreed to buy a big chunk of the shitpile. First, there’s this bit, which sounds to my non-expert ears like it could become a real problem.

By purchasing Countrywide, Bank of America would combine its 5,800 branches with the mortgage lender’s coast-to-coast network, helping Mr. Lewis achieve his goal of becoming the biggest player in every major consumer finance category.

Bank of America would brush up against a federal cap that prevents a bank holding company from controlling more than 10 percent of the nation’s deposits. Because Countrywide Bank is a federally insured savings and loan, the rule does not apply.

Seeking to ease any regulatory concerns, representatives for the companies were in Washington on Thursday to brief regulators.

Given the financial situation of this country, I’m not sure it’s a good idea for anyone to hold 10% of the nation’s deposits. Now match that detail with this speculation from Herb Greenburg, via Calculated Risk.

We’ll know it soon enough, but with the leak that Bank of America is near acquiring Countrywide, several things would appear apparent (at least while we’re playing the guessing game):

1. The Fed is behind the deal.

2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.

3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses. Read more →