Around The Web: Nothing Natural About Financial Disaster

Maybe this is the one that will finally cause people to take to the streets.

The crack investigative journalists at Pro Publica and NPR’s Planet Money have uncovered the latest evidence of how the big bankers schemed to keep their bonuses and fees coming by creating a phony market for their mortgage-backed securities, which were tumbling in value as the housing market tanked in 2006.

The Pro Publica/NPR investigation shows how the bankers from Merrill-Lynch, Citigroup and other “too big to fail” financial institutions undermined a system of independent managers who were supposed to be evaluating the value of the securities. The banks simply browbeat the managers into buying their products rather than face losing the banks’ business.

Meanwhile, the bankers continued to make money off every deal, even though the rest of us paid a high price for their continued trafficking in complicated financial trash.

Then when the entire business unraveled in the financial collapsed, these bankers got a federal rescue and a return to profitability.

Pro Publica acknowledges it’s complex material, so they’ve accompanied their investigation with a cartoon and graphs to make it easier to understand.

My WheresOurMoney colleague Harvey Rosenfield wrote recently about the falseness of the claim that either Hurricane Katrina or the financial collapse were primarily natural disasters. The NPR/ProPublica investigation is yet more evidence that the bankers’ irresponsible self-dealing turned a downturn in the housing market into full-blown catastrophes.

Writing on his blog Rortybomb, Mike Konczai hones in on the stark contrast in the fate of the bankers and many of the rest of us:  “Remember that by keeping the demand artificially high for the housing market in the post-2005, these banks created its own supply of crap mortgages. These mortgages inflated and then crashed local housing prices. Meanwhile the biggest banks got tossed a lifeline and homeowners can’t even short sale their home much less have a bankruptcy judge that can set their mortgage to the market price with a large penalty. And everyone lines up to tell those people what ‘losers’ they are, how `irresponsible’ they’ve been for being pulled into becoming the artificial supply for artificially created demand of housing debt. What sad times we are living in.”

Meanwhile the SEC is supposedly investigating the self-dealing. We’re still waiting for the tougher new SEC that the Obama administration promised. In the latest indication that we may have to wait a while longer, a federal judge has rejected the agency’s proposed $75 million settlement with Citibank over charges that the bank misled its own shareholders about the shrinking value of its mortgage-backed securities. The SEC said the bank misled investors in conference calls by saying its subprime exposure was $13 billion, when it was actually more than $50 billion. Among the pointed questions the judge asked: Why should the shareholders have to pay for the misdeeds of the bank executives, and why didn’t the SEC go after more of the executives?

The judge’s questions about accountability mirror the uneasy questions a lot of us have about this administration’s reluctance to take on the bankers whose behavior led to ruin for the country while they profited.

Around the Web / Derivatives / Executive Pay / Martin Column / Outrage / Securities and Exchange Commission (SEC) / Too Big To Fail / Uncategorized - 08/31/2010

Hurricane Katrina & Wall Street

Hurricane Katrina, once considered the disaster of the decade, is the subject of a new exhibition at the Newseum, a high tech museum devoted to journalism in Washington, D.C., timed to coincide with the fifth anniversary of our national failure in New Orleans.

NewseumFirst you walk down a hall lined with the front pages of newspapers that chronicle the progress of Katrina from a natural disaster when it hit New Orleans with unprecedented force on Monday, August 29, 2005, to a few days later, when, as the world watched, Katrina became a man-made catastrophe, with the levees collapsed, the city underwater and the vaunted United States government unable to come to the aid of its citizens. The September 3 headlines range from “Unbelievable” to “Is This America?” 1800 Americans died, and the entire city evacuated – more than a million U.S. citizens rendered homeless.

The rest of the exhibit focuses on how journalists covered the story, without electricity and often at great risk. Suffice it to say that the blogosphere will never substitute for professional reporters when it comes to these kinds of events.

It is an infuriating and emotional visit. Boxes of Kleenex are strategically placed through the exhibit, and you’ll need them.

Katrina invites comparison to 9/11, when the failure of U.S. intelligence, military planners and airline security personnel combined to render our nation powerless against a throng of determined fanatics. Congressional investigators said, “If 9/11 was a failure of imagination then Katrina was a failure of initiative.”

A court later held the federal Army Corps of Engineers responsible for the collapse of the levees and thus the destruction of New Orleans once Katrina hit. You can read the congressional report chronicling the government’s failure to prepare for and then manage the disaster here.

Conservatives seized on Katrina as more proof that big government is bad, although it’s hard to fathom how “market forces” could fill the shoes of a national government.

After a viciously hot summer throughout the nation, you wonder whether Katrina was the result of yet another failure of political imagination, at the US and global level: the failure to acknowledge and reverse global warming while there was still time.

Meanwhile, Katrina has been superseded by an even more devastating man-made disaster: the economic collapse in 2008. Like Katrina or 9/11, the initial catastrophe was not government’s doing, it was Wall Street greed and speculation. But, like 9/11 and Katrina, government bears responsibility for allowing it to happen. As I noted in the introduction to our report on the crash, Wall Street paid off Congress to let “market forces” run amok, and when the bubble inevitably burst, Washington quickly rescued the financiers.

But like the residents of New Orleans, many Americans are struggling to stay afloat and some have gone under. In terms of lives ruined, families sundered, pensions lost, people made homeless or left without health care, who knows whether the toll from this disaster will exceed that of Katrina or, for that matter, 9/11.

Harvey Column - 08/29/2010

The Credit Wolves Stalk South-Central

Before they fell into a costly cycle of subprime refinancing, Harold and Patricia King could afford to live in their modest two-bedroom home in south-central Los Angeles. They had paid $17,500 for it in 1968 with the help of a low-interest G.I loan.They raised two children and two grandchildren there. Harold retired in 1994 after 30 years on General Motors’ assembly line. His wife retired a few years later from her clerical job with the school district. They had a monthly fixed income of $2,900 and a fixed monthly mortgage payment of less than $1,000. They could handle it.

Unlike some who were able to take advantage of the cash they squeezed from the value of their homes, the Kings have little more than financial devastation to show for it. They refinanced 10 times — eight times between 2000 and 2006 — through various financial institutions. They wound up with more than a half million dollars in debt and payments more than their monthly income. Earlier this year they joined the more than 1 million other homeowners across the country that face foreclosure.

While we’ve seen and heard lots of stories of families suffering through losing homes they could never actually afford, the King’s saga puts into sharp focus one of the overlooked aspects of the on-going foreclosure crisis –many homeowners who had traditional– and affordable – mortgage loans were sold into subprime hell via refinancing deals.

In its 2006 study, “Losing Ground,” the Center for Responsible Lending found that between 1998 and 2006, “the majority of subprime loans have been refinances rather than purchase mortgages to buy homes,” and that homeowners who repeatedly refinance face a higher likelihood of facing foreclosure.

In February, the Kings packed their belongings in boxes, preparing for the loss of their long-time home. But they decided to fight for the home they’ve lived in for more than 40 years.  With the help of their lawyer, they’ve been able to stave off foreclosure, at least through the rest of the year. They’ve gone on the offense, suing their most recent lenders earlier this year for fraud and elder abuse.

Tracking the complex cast of characters and institutions with key roles on the business side of the Kings’ plight also offers a stark reminder that the explosive growth in subprime created vast wealth that never trickled down to hard-hit communities like south-central Los Angeles, a once-vibrant largely African-American and Latino neighborhood increasingly blighted by the lasting marks of the severe recession – high unemployment and high rates of foreclosure.

Take for example Deutsch Bank, which bought the MortgageIT firm that provided one of their Kings’ refinancings. In 2009, the banking giant increased its compensation to its executive board nine-fold over the previous year, led by the bank’s president, who was paid $13 million. Deutsch Bank’s path through the rocky financial crisis was helped along by its share of more than $50 billion it got in funds from the taxpayer bailout–funds the federal government paid to insurance giant AIG, which were then passed on to AIG’s clients – what has been labeled the “back-door bailout.”

The Kings also crossed paths with a lesser-known firm called Green Tree, which at one time was hired to act as the servicer on their loan – collecting the Kings’ mortgage payments every month. Founded by Lawrence Coss, a former car salesman, the firm had made a fortune in the 1990s by loaning money to people to buy mobile homes. Around the time Harold King was retiring from GM, Coss was drawing attention as the country’s highest-paid executive, winning a $69 million bonus ­– the largest bonus of all time when it was awarded in 1996. The following year he did even better, with a $102 million bonus. However, the fat profits that got Coss the bonus later turned out to be a mirage, built from bundles of risky loans and shaky accounting. Coss had to give some of his bonus back but managed to hang onto his ranches and philanthropic foundation. If anybody had been paying attention back in 2001, the unraveling of Green Tree’s business could have provided an early warning signal of the problems to come.

But in places like south-central Los Angeles, the country’s financial institutions were on a lending spree.  The Kings originally borrowed some money against their equity to supplement their retirement income. But then a series of lenders decided that the retired couple on a fixed income were good candidates for much larger refinancing.  What they offered the Kings were adjustable-interest rate loans with low teaser rates and exorbitant closing costs, fees and prepayment penalties. The Kings readily acknowledge now that they are financially unsophisticated and didn’t understand what they were getting themselves into. The deeper they went into debt the worse they felt.

“I felt guilty; I didn’t want to discuss it,” Patricia King says now. “I knew that something was deeply wrong. You hope for the best. But nothing good ever happened.”

Eventually lenders told the Kings that they needed to find somebody with better credit if they wanted to refinance their home. They brought in their 35-year-old grandson Antonio, who at the time worked at the Coca-Cola bottling plant.

According to the Kings’ lawsuit, Antonio King informed lenders that his monthly income was $3,700 a month, but when the broker or lender prepared the application, it showed his monthly income as $10,200 a month. The application, submitted on Antonio King’s behalf, also exaggerated the value of the home, from $154,000 to $540,000.  The Kings’ lawyer, Philip Koebel said of their grandson: “He threw himself to the credit wolves.”

Koebel said Antionio King found an ad for what sounded like an attractive new loan with a monthly payment of about $1,000 a month.

The Kings didn’t understand that they were getting into a negative amortization loan. The Kings were told that they would save $1,000.00 per month in comparison to a conventional mortgage if they made the minimum payment. They were not told that the minimum payment didn't even cover the interest. They were not told that the difference would be added to the principal of their mortgage and that they would be charged additional interest on the ever increasing balance of their mortgage.

With the money they got, the Kings paid off the previous loan. But they couldn’t keep up with the new payments. Antonio tried to work out a loan modification but Green Tree, which was servicing the loan,  “was not interested in making the loan affordable to the Kings,” according to their lawsuit.  Eventually Antonio filed bankruptcy in an effort to save his grandparents’ house. His 80-year old grandfather mows lawns in the neighborhood to bring in a couple of hundred dollars a month.

The lenders have fought to have the Kings lawsuit thrown out, so far unsuccessfully. In court papers their defense lawyers characterize the lawsuit as nothing more than “vague allegations and broad generalizations.” The Kings, they say, were “reaping the rewards of the strong housing market at the time and taking cash-out payment after cash-out payment each time they refinanced the loans.”

The Kings “were clearly very familiar with the loan refinancing process,” the lenders’ lawyers contend.

Like many others, the Kings didn’t see that the world had fundamentally changed, Koebel said. “Once a mortgage loan had been a relatively simple matter; a talk with a banker and a fixed payment for life. They’re not supposed to put your home at risk.”

Foreclosures / Martin Column - 08/09/2010

The Lawyer With the Dragon Tattoo

This year’s most fearsome movie heroine is Lisbeth Sander, the hacker vigilante who outwits corporate and political evildoers with her superior investigatory skills, not to mention some kickboxing and the deft use of a taser. “The Girl With the Dragon Tattoo” smashes and hacks her way through the government officials, business executives and journalists that comprise Sweden’s lazy and corrupt Establishment. They do everything they can to stop her, but – I’m about to give away the ending – Sander ultimately triumphs, exposing decades-long corporate and government conspiracies.

Elizabeth Warren shares none of Sanders’ characteristics – except an exceptional intellect – ­but when it comes to inspiring fear and loathing among the denizens of Washington and Wall Street, she is every inch as frightening, as has been pointed out over the last few days in profiles and posts across the mediascape.

Warren, a bankruptcy professor at Harvard Law, long criticized the practices of America’s banks and credit card companies in law reviews and academic pieces. In 2005, when the financial industry was lobbying Congress to make it harder for the average American to declare bankruptcy, Warren penned a landmark analysis that concluded that most Americans sought bankruptcy protection not because they were freeloaders but because they could no longer afford to pay their medical bills. Long before the current crash, Warren proposed the establishment of a federal agency to protect consumers against credit card tricks and other financial abuses.

In November 2008, in a rare example of a perfect congressional appointment, Senate President Harry Reid put her in charge of the congressional task force monitoring how the $700 billion in taxpayers' bailout money was spent. She has demanded answers to the same question we ask here: “where did the money go?”  The results of her investigations, which can be found here, pull no punches.

Back in 2008, no one could have expected that Congress would create a financial consumer watchdog agency of the kind Warren advocated for years.  But her powerful and outspoken performance as chair of the bailout oversight panel has made her the obvious and only credible candidate to head the new Consumer Financial Protection Bureau created by the otherwise innocuous financial “reform” legislation Congress passed a few weeks ago.

Which, of course, has got Wall Street fired up, members of Congress tied in knots and the White House cornered. Unlike the Byzantine complexities of the financial swindles and the ostensible legislative “solutions,” none of which garnered public attention much less support, the question of whether the President will appoint a skilled lawyer/consumer advocate to protect consumers, or whether he will instead choose a Wall Street insider as he did when he appointed Treasury Secretary Geithner and White House economic advisor Larry Summers, is one the public and press can easily grasp.

The appointment raises the kind of simple and straightforward “whose side is he really on?” question that Obama has so far been able to soft peddle, though he unceremoniously surrendered on the public option in the health care bill and on “too big to fail” banks in the financial reform bill, to name just a few instances of his unilateral disarmament.

Make no mistake: Warren is a highly sophisticated lawyer that knows all the tricks of the financial industry and how to use the powers of government to stop them. This expertise will be essential. I wrote a ballot proposition, approved by California voters in 1988, that regulates the insurance industry. Having spent the last twenty-two years defending it against incessant lawsuits by industry lawyers and not infrequent efforts of elected state officials to hobble it, I can tell you that few decision-makers in the federal government have the technical skills and expertise to go head to head against the battalions of lawyering orcs deployed by big financial firms. Warren does.

Which brings us back to the fascinating spectacle of the hypocritical Washington establishment trying to grapple with her candidacy. She is, literally, made for the job, and a spontaneous grassroots campaign for her appointment is mounting around the country. But the politicians, obeying their paymasters on Wall Street, are trying to figure out a strategy to sabotage her nomination. It’s almost comic to behold. Republicans should be hailing Warren as a savior of beleaguered taxpayers, but one of their Senate leaders said that her tenure as chair of the bailout watchdog was “marked with ‘controversy”” and implied that Warren doesn’t have the necessary qualifications.

It’s the same for some Dems: Senate Finance Committee Chair Chris Dodd, who had never met a financial “innovation” (or industry lobbyist) he didn’t embrace until the whole rotten system collapsed two years ago, damned Warren with faint praise, then suggested she couldn’t be confirmed. He floated the name of FDIC Chair Sheila Bair, but she said no thanks.

Nor has the Obama administrationt been particularly supportive. Two weeks ago, Treasury Secretary Geithner was forced to dispel rumors that he is opposed to Warren by mouthing some platitudes about how “capable” and “effective” she would be in the post. A White House spokesperson told reporters, “We’ve got many good candidates. I know that the president will look at this job and the several other jobs that are created as part of this legislation and make an announcement.”

Warren’s appointment could be one of the few meaningful victories for consumers in the aftermath of the Wall Street deregulation disaster. She is not your typical accommodating political appointee. She does not appear likely to “play ball” with Team Obama or anyone else inside the Beltway when it comes to protecting consumers against the pillaging financial industry. The White House is well aware that once appointed, she would be very hard to fire, especially for doing her job with the zeal it requires. Having never served in such a position, Warren has not yet been tested, so my assessment of her political spine is partly speculation. But if I’m right, she's at least as threatening as Lisbeth Sander.

Harvey Column / President Barack Obama - 08/07/2010