U.S. Set to Sue a Dozen Big Banks Over Mortgages
nytimes.com
nytimes.com
It was a win win for the bank. Cause when the bottom fell out of the housing market Freddie and Frannie were left holding the bag - in other words, the taxpayers. Add that on top of that, TARP, and the banks walked away making trillions.
It was the biggest heist in history. And perfectly legal, in the US.
The case will probably be settled. Banks will pay like 20 billion (or so) and we're all forget it in a week.
BofA is facing 4 major lawsuits which could cost it billons (total I think is 80 billion). That alone might bring down the bank. But the more likely senario is that our government will once again step in to bail BofA out.
Now that would cause a HUGE fight in Washington. But you know, the biggest statement you can make is to pull your money out of bofA (and the others). Find a credit union or a local bank. You are insured up to $250,000 per account in any US bank. So you don't have to do business with the big players. They don't care about you anyway. They just want your deposits.
In order for job creation to take place, the USA needs less volatility rather than more : If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...
So not much point the government suing something they (i.e. we the taxpayer) own!
The cause of the underlying collapse in the securitised mortgage market was borrowers being over-rated on credit worthiness and the securities derived from these mortgages then also subsequently being overrated. Market starts tightening, the underlying value of the overvalued securities starts becoming apparent and you've got a burst bubble and a general market liquidity problem, hence TARP and QE. All of which was sadly predictable - when the nominal lending institution is given a financial incentive to write loans without the balancing disincentive of default to ensure they only write repayable loans, or the equally strong financial incentive to overvalue their securities, why wouldn't they?
The US approach to this (all set up by Bush, lest we forget) is what's leading to this round of very reasonable lawsuits about financial fraud. The UK approach you've highlighted was rather different though. Northern Rock was completely sunk through illiquidity and is now wholly owned by the state. RBS was little better (thanks largely to a poor purchase of ABN AMRO) and is heavy majority state owned, Lloyds tried to buy the similarly sunken HBOS at a fire-sale price without doing proper due diligence, got into trouble and is now state owned to a lesser degree.
Let's not forget; the names are nothing more than proxies for their collective owners who reaped their profits. There is merit to sueing those who profited from the Fannie Mae / Freddie Mac debacle because the entities still meaningfully exist with continuity of ownership. This isn't true with any of the UK institutions; they made their poor decisions, their companies started foundering and to protect both depositors and the wider economy, the government stepped in, heavily diluted (wiped out with Northern Rock) the share capital of the owners who could no longer support the businesses and put new management in place. They aren't being sued in the way you propose because the responsible parties have already been penalised.
The responsible parties being the shareholders rather than the executives? I know that is correct, and I know some people who lost a lot of money in RBS, but it does seem wrong to me that the executives that led these companies to epic disasters simply walk away keeping the bonuses they accumulated along the way.
However, I'm not naive enough to think that any of this will change any time soon.
Given the British economy is so reliant on financial services this should perhaps be revised; we regulated factories in the past in spite of protestations of its expense and difficulty because we recognised it was in the best interests of society, and we should now be doing the same to finance. Too big to fail is privatising the profits while socialising the losses; it is too big to be private without enormous and mandated operator's liability insurance, funded by the owners.
[Edit: I just noticed that the former auditor of RBS is now the Chairman of Deloittes!]
Too big to fail? The boundary cases will always be the challenge but I suspect we could get started by mandating a limit to percentages of GDP under management, overall, sectorally and regionally.
Fundamentally though, the issue is one of liability and should be insured no matter what the size of the business against the cleanup costs. I suspect that would regulate out of existence whole sectors as simply too expensive to insure, but is that really worse than a systemic liability to the taxpayer of several multiples of GDP, as at present?
The problem is capital being concentrated; we need a more horizontal society otherwise we're all waiting for the trickle-down effect and that simply doesn't happen. Companies are firing more than they are hiring and it's been like that for the last few years.
If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...
No, the prudent thing is to invest and to profit as much as possible by firing employees, forcing the remaining employees to be more productive, and screwing them over on wages and benefits. Then get the hell out before it falls apart.
Research the Federal Open Market Committee or GSE's.
The banks made it coming and going. And still are. I also wanna point out banking isn't the only sector enjoying these golden times. The drug war, terror war, general war, oil, food - all enjoy generous subsides/funding from our government.
And while FICO scores may have been relevant data for historical default analyses, as soon as evening courses in 'Fix your credit score' appeared, the historical data became a completely worthless foundation upon which to base any analysis.
So from a legal standpoint, the banks probably have a decent case to claim that they did what they were contractually obliged to do. From a realistic standpoint, though, they see that it's in the hands of politicians now, and they'll settle rather than become/remain a political football in 2012.
15 yeas ago you needed at least 610 score with a 15 to 25% deposit to buy a house. In 2006 you need a FICO score of 520 ad no deposit. You didn't even need job.
The banks didn't do their job. They were making fortunes on fees and reselling the loans.
BUT the government didn't do it's job either. The banks didn't exactly hide the fact they were doing this. I mean, every real estate agent knew it. I'm sure the various government agencies did too. But no one cared cause everyone was making money.
Until the house came down. :)
Break the banks up so that the failure of one is insignificant. Put limits on bank size so that they must split if they grow beyond a certain size. Accounts at institutions that deal in derivatives should be denied federal insurance; those that deal in loans should be federally insured.
Anyone who made more than $5M working for the banks or financial institutions during the last 15 years should be denied employment at any financial institution for the next 20 years and investigated for evidence of criminal wrongdoing.
I sorta agree with #1. "Too big to fail" is too big. Doubly awesome, "too big to fail" is also counter to standard issue investing advice: diversify your portfolio. "Too big to fail" really means "poorly diversified portfolio".
But #2 risks throwing out the baby with the bath water. No doubt that some people prospered solely at the expense of the taxpayer, but it's also likely that some of the people who prospered were competent folks who were just at the right place at the right time. Removing them, even if they did prosper,might remove the best folks to right the banks.
There are potentially at least 3 problems with employees involved: negligence, crookedness, and competence. I want to expand on the last of these, "competence", since, unlike the other 2 problems, I do not believe that it can be corrected.
The financial industry has failed to absorb the lessons of the last 100 years concerning financial instruments. Taleb's "Black Swan" addresses this failure as does Fox's "The Myth of the Rational Market". Those executives/economists/technocrats unfamiliar with the ideas in those works should be removed forever from the industry. That means most of them. Why? Because they are ineducable - their entire training is based on defunct financial models. The finance industry must be rebuilt from the bottom up with more robust models.
But I don't expect such real reform (of either sort: the burnings or the education). Instead I expect the same damn thing, another financial meltdown, to happen yet again within the next decade. Perhaps then some crazed financial Savanarola will be able to arouse the crowds to a passionate frenzy over the trillions lost. Maybe then heads will fall and true change will take place.
But denying someone employment and investigating them for criminal wrongdoing because they made more than $5m working for financial institutions?! You must not know any venture capitalists... and in any case, whatever happened to innocent until proven guilty?
* If someone committed a crime, then they will usually be in jail (a pretty effective way to be denied employment!) * If they've also violated an SEC statute (or settled with the SEC), they will often be barred from the securities industry for life by the SEC. Examples include Michael Milken and Henry Blodget. Or they can be barred for life from serving as an officer or director of any public company (examples include Angelo Mozilo of Countrywide Financial).
We don't need new ways to blackball people. We have a powerful system of civil and criminal statutes that do a great job of doing that. The problem is that nobody is being prosecuted for any crimes by state or federal prosecutors, or by federal agencies like the SEC. That's the real problem to solve.
You could even go one step back: if the government and its central bank didn't subsidize risk through low interest rates, incentives to lend to people who were massive credit risks, and so on, we may not have had the housing bubble - at least at that scale - to begin with.
Let's go back even further to the easy money .com bubble and the resulting collapse which "excused" the artificially low interest rates mentioned above...
Instead of focusing on more intervention, how about we argue for fixing the real problem: let the market work, end these artificial interest rates, and stop debasing the currency.
As expected, government intervention has created obvious winners (the financial industry, people who buy too much home) and losers (almost everyone else) once again. I would prefer your solution.
But structuring the financial industry to prevent it from re-creating known problems is also necessary.
My own personal scheme is that some public body would monitor companies and try to identify those that belong to the "too big to fail" category. If any organisation falls into this category then the executives of the organisation would be notified individually that if the organisation fails and has to be rescued using taxpayers money that they personally would be on the hook for all of their assets. It would then be up to the executives to reduce the size of the company, e.g. by splitting into smaller organisations that would be under the threshold, or accepting the risk if they believe their organisation is perfectly well run.
Of course, there are a lot of problems with this scheme - notably that banks would simply incorporate somewhere else, but something like this has to be put in place or the same thing is bound to happen again.
[Edit: In one of Vernor Vinge's short stories he has Earth being conquered by an alien race whose only form of central government are officials who have the power to order any organisation to be split up if it becomes too powerful.]
Even if they do split, what's stopping them from forming a free organization of banks that colludes to further mess things up? Note that I said free organization rather than corporation.
No, what's needed is a completely different system that makes having a lot of money no different than having just a bit of money. Then there wouldn't be an incentive to make millions of dollars.
The answer to your question is simple: Wall Street runs this country. The people in charge of making US bank policy have all come from the banks themselves.
http://themoderatevoice.com/93909/wall-streets-control-of-ec...
Credit markets and the shadow banking system http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Cre...
I haven't seen any credible arguments against bailing out the bank which would have ensured that the financial system didn't completely collapse. Some argue that we should have let the crisis take its own course, let the banks fail and deal with the consequences. But this would have guaranteed a second great depression and the vast majority of the world would have been negatively affected in a very bad way.
Now without congress actually doing anything against the banks there aren't too many options left, but hopefully the banks being sued can keep this issue in the spotlight longer to encourage public rage, so that Congress is actually forced to do something of significance.
But we are in a recession as deep as the Great Depression! And there are obvious undeserving winners (Wall Street) and losers (everyone who worked hard, paid their bills on time, invested conservatively, and saved money).
This is about image; if they don't sue, they'll look bad. If they sue, then they can at least say "hey, we tried!"
"...failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified."
The contention is that the banks did not due their due diligence in rooting out this fraud. So why are the regulators "[p]ressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure?"
Shouldn't the regulators be prosecuting the people who took out fraudulent mortgages, rather than pressuring banks to reward them?
These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk.
Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft.
All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'.
Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.
When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income).
The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool.
At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks.
Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.
In fact, banks typically sold off the AAA tranches and kept the toxic waste for themselves. If housing continued to go up this would not have caused any problems.
Regardless, even if banks and homeowners were conspirators, why should regulators punish one while rewarding the other? Shouldn't both parties be punished?
There was no "AAA" tranche, all the tranches were garbage. Magnetar Capital used the fallacy of the "A Tranche" to their advantage by selling off most of the CDO to suckers, then buying insurance against the whole thing.
Housing would have only continued to go up so long as people bought houses & people could only buy houses because they were being given loans they could not repay.
This is the first time I've heard that "foreclosure" is rewarding someone. I would agree that if the borrower knowingly falsified their income without influence or misguidance by the bank then they should be held responsible, but often that was not the case. The banks created a culture that lowered it's standards to the lowest levels, then either helped guide people into lying about their financial information, didn't ask about it or never verified it. They also helped promote things like ARMs which were big at the time because the low initial rate made it much easier to fit people into these loans. The banks didn't really check how feasible it would be for the person to pay back the loan once their rate adjusted though.
I suggest you go educate yourself. The banks constructed securities which were rated by various agencies as AAA.
Regardless of whether the AAA rating was deserved, the which the banks sold had a lower risk than the non-AAA rated tranches which the banks kept on their books. Why would they do this if they knew the securities were unlikely to pay off?
This is the first time I've heard that "foreclosure" is rewarding someone.
According to the article, regulators are pressing banks to pay $20B, "with much of the money earmarked to reduce mortgages of homeowners facing foreclosure." That's a reward for people unable to meet their obligations, many of whom are likely to have lied on their application.
...the bank falsified the application themselves.
[citation needed]
Tranches are parts of a CDO. The problem with subprime CDOs is that none of the tranches were of any quality. They all sucked. There was no "A tranche", it was all a bunch of garbage tranches. As for the "AAA" rating, that's a rating assigned to the whole CDO by a rating agency such as Moody's or Standard & Poor's.
Toxic assets weren't always considered toxic. Some thought the bubble would last forever, some knew it would end but didn't know when & didn't want to miss out. Firms would get commissions for making or selling securities. Buyers of these securities made calculations that woefully underestimated mortage default rates & to make matters worse, borrowed money to buy these crap investments. Firms weren't required to keep the bad tranche of the CDOs either, they could rebundle all portions of CDOs into other CDOs(http://www.propublica.org/article/banks-self-dealing-super-c...). It's kind of like a factory where you're producing a large volume of inventory which you think is good(or know is crap but hope no one finds out), until word finally comes out that all your merchandise has a fatal defect. You're still stuck with your crappy merchandise & have to payback your debts. It's more complicated than that though when you get down to leveraging & the default swap daisy chains, essentially they all built a house of cards. You really have to wonder how they thought it would all pan out in the end.
As for who is to blame, the banks & Wall Street hold the vast majority of the blame. These are the people paid millions to do their job & they failed miserably. There are many reasons home owners can't pay. I am sure there are some who gave fraudulent information, but I am also sure you'll find many who weren't over their heads when they got into the loan but have been affected by the downturn in the economy. Additionally you will find stories of people who know they can no longer pay & are trying to do the right thing by working with the bank to adjust their payment plan or arrange a short sale, but often banks have been very hard to work with or it's even difficult to find out who owns your mortgage due to the mess (mortgage inside an MBS inside of a CDO is parts of which are inside another CDO, that is owned by a firm that was bought out by a firm within another firm).
As for banks falsifying documents, here you go:
http://www.huffingtonpost.com/2011/07/20/wells-fargo-subprim...
http://www.dailyfinance.com/2010/10/02/robo-signing-scandal-...
This is simply incorrect. Each tranch gets a separate rating since senior tranches have a different risk profile than junior or equity tranches.
Please go learn the mechanics of CDO's, it's far more useful than just discussing them with vague metaphors ("it's like a sausage factory, full of stinky socks, run by villains...").
As for banks falsifying documents...
I didn't ask about any instance of banks falsifying documents, I asked about banks falsifying loan applications. This has nothing whatsoever to do with robo signing.
Incidentally, you did a nice job editing the text I quoted out of your original post.
But wasn't that based on the assumption that there was a low correlation between the mortgages that made up CDOs - which turned out to be completely wrong (and for fairly straightforward reasons)?
Please spend some time learning what a CDO is, and the reason why will be fairly clear.
http://en.wikipedia.org/wiki/Collateralized_debt_obligation#...
The junior and senior tranches can only be equally risky if the probability distribution is perfectly binary (i.e., the only possibilities are either all borrowers pay 100% back, or all borrowers pay 0% back). This is simply a mathematical identity.
So what did go wrong with the way CDOs were supposed to work and they did work in reality?
Edit:
Actually - genuine question here. When someone says "This is simply a mathematical identity." - how is all of this stuff grounded in reality - do people actually do controlled experiments to work out if any of this stuff is scientific?
Are any of these theories falsifiable?
Counterparty risk.
Home loan CDO's were supposed to allow people to take a long position on housing. Assuming counterparties didn't go belly up, they would have done exactly that - the owners of various securities would have made money when housing went up and lost when housing went down.
When someone says "This is simply a mathematical identity." - how is all of this stuff grounded in reality - do people actually do controlled experiments to work out if any of this stuff is scientific?
It's just basic arithmetic. The borrowers are going to pay out a certain amount of money. The senior tranch gets paid first. If any money is left, the junior tranch gets paid. Short of politicians overriding the rule of law (e.g. the GM bankruptcy), there is no scenario where the junior tranch gets a payout and the senior tranch does not.
Presumably you mean the people taking out the mortgages?
The possibility of borrowers defaulting is already incorporated into the CDO.
Or if you're in bed with ratings agencies who will rate whatever, however you want & you have an entire industry that will take their word for it.
You should take some of your own medicine & read my first link to Huffington Post:
"Perhaps more than 10,000 Wells Fargo borrowers were inappropriately steered into more expensive subprime mortgages or had their loan documents falsified by bank personnel, the Federal Reserve said Wednesday."
I added the robo-signing scandal as more evidence that they are willing to play underhanded. Additionally the reason for robo-signing & rushing through the foreclosures may have been a tactic to hide deals that had less than valid documentation & sweep them under the carpet.
As for editing, I did rearrange or restate some things differently, but I didn't remove the two lines you quoted.
What about the bank that encouraged the home buyer to inflate or falsify their incomes? So far at least, they've largely escaped consequences for their pattern of encouraging fraud and shirking on their due diligence.
JP Morgan picked up Bear in a fire sale, for a billion. Bear's Office building in NYC was worth more.
Lehman went bankrupt.. but our government (us taxpayers) had to eat the mortgages in order for other banks to buy Lehman's assets. The banks just moved the money from A to B.
BofA picked up Merrill for peanuts.
Wachovia was picked up by Well Fargo. Another fire sale.
And who lost out? Us taxpayers, and the employees. Mostly the back office staff. Most of the traders kept their jobs (and bonuses). And the executies made billions in buyouts, parachutes and stock transactions.
he was fined by the SEC for $65 million and barred from ever being a CEO of a public company.
He is not in jail. Also Countrywide is on the hook for 15 of that 65 million fine. That was part of his agreement with the company. And he didn't have to admit "wrong doing".
The criminal case against him has been dropped. Again, he's not in jail.
And no, no one is in jail AFAIK.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
http://www.rollingstone.com/politics/news/why-isnt-wall-stre...
Not anything outright fraudulent, but I suspect there was a lot of intentional looking the other way and "spinning" going on by the banks, while at the same time telling the loan-seekers that it was "just how it works".
Back in the "good old days", a banker wouldn't want to inflate your credit-worthiness on a mortgage loan application because his or her bank would be relying on you to repay the loan. But once a bank could securitize your loan and there were limited to no consequences to their funding liar loans, you started to see more and more of them flooding the market.
The story of my mortgage is a good illustration of how ridiculous the banks were in approving mortgages:
I bought my first house in 2007, after almost 30 years of apartment living. I analyzed the crap out of my budget, and concluded that I could take up to a $300k loan tops. Any more would put in territory where my mortgage payments would be at a very risky level, and I'd have to be careful on spending to keep from falling behind.
I went to Countrywide to get pre-approved so I could go house hunting. My credit rating had normally hovered around 790 at the big three, but when they pulled my credit report it happened to have zoomed up to around 830 (I do not know why). They asked for two months worth of bank statements covering my regular bank account and my investments, and pay stubs for the last month.
Result? They would pre-approve up to $750k, and instead of an appraisal on any house I decided to buy they would just do some kind of online check of tax or insurance records.
WTF?
They are supposed to be professionals in this area. Yet they were willing to let me have a loan WAY beyond my means, and to trust my judgement as to the value of a house--based on the fact I've got a job, have managed to save a decent down payment, and my credit score is high (which doesn't show any financial sophistication--it just shows I have been able to pay my bill on time).
I laughed at the ridiculous amount they were willing to pre-approve, and told them $300k was a big enough pre-approval for me, and continued looking for houses in the range I determined I could afford. (I ended up borrowing $224k).
They are professionals; they know how to shape the system to work in their favour, not in your favour.
I never understand this reflexive need of some people like yourself to defend the big powerful institutions in this type of discussion.
Did you read the article? The article claims this is exactly what happened.