Underwater secrets

Local governments'  have often stirred controversy with their use of eminent domain. While it's supposed to be used for the public good, too often it has been used to profit developers, while the public just feels ripped off.

Still, the idea of local governments using eminent domain as a tool to stabilize home prices in some of Southern California’s hardest hit communities is an intriguing one.

It’s the kind of bold action that’s been missing in the government’s limp response to the foreclosure crisis.

But the scheme that’s unfolding in Southern California’s Inland Empire, rated as the one of the most underwater in the nation, is a step in the wrong direction.

It smacks of politically-connected high-finance types, boasting of their access to politicians as their “secret formula,” wheeling and dealing in secret.

A san Francisco venture capital firm is cooking up a scheme in San Bernardino to use the government’s eminent domain power to seize some underwater mortgages from investors who own them and have been unwilling to offer borrowers principal reduction that would allow them to stay in their homes.

The firm’s idea, apparently, is to for San Bernardino County and other local government’s form a joint powers authority that would allow those government to act together to use eminent domain to seize mortgage loans, not the property, of underwater homeowners who were not behind on their payments at “market value.”

Then, according to the scheme, the firm would find investors to issue new mortgages to the homeowners at that lower, more affordable “market value.”]

The plan was hatched by San Francisco-based Mortgage Resolution Partners. That’s the firm originally headed by Phil Angelides, former state treasurer, real estate developer and venture capitalist best known recently for leading a congressionally-appointed investigation into the financial crisis.

After issuing a report highly critical of the banks, Angelides didn’t stump the country to put pressure on authorities to follow up on his report with prosecutions.

He went into the mortgage business himself, swaddling his efforts to make profits from distressed mortgages in good intentions of finding solutions to the foreclosure crisis.

It was Angelides who boasted in a letter to potential investors that his firms’ secret formula was its connections to public officials. Reuters reported that Angelides told potential investors they could generate 20 percent profits.

After Angelides’ involvement in the firm was publicized earlier this year, he stepped aside. Replacing him was Steven Gluckstern, a hedge fund veteran who was one of President Obama’s major bundlers in the 2008 election.

According to published reports, Mortgage Partners would make its profit charging a fee on every mortgage seized. How much will it be paid and how? That hasn’t been disclosed. But according to Naked Capitalism, its sources say that the firm expects to make a 5.5 percent fee on each mortgage ­– paid for by having the government seize the mortgages at a discount and sell them back to the homeowner for a profit.

The most serious general flaw in the scheme is that has unfolded behind the cloak of confidentiality agreements between government officials and Mortgage Resolution Partners, with no public disclosure or debate on the concept or details, giving the whole deal the stink of a sweetheart deal, not a solution.

When the Riverside Press-Enterprise sought written records of communication between county officials and the mortgage firm, they were told there were none.

The use of eminent domain is highly controversial because it has often been justified as benefiting the public when it ends up benefiting real estate developers. In this case, investors who own the mortgage loans have already weighed in opposing the plan. Though the plan’s backers say eminent domain has been used to seize intangible goods, they acknowledge it hasn’t been used to seize mortgage loans before. So investors are likely to challenge the process in court.

But I wouldn’t shed too many tears for the investors, who have stood in the way of principal reductions or any other means of helping homeowners.

Another question raised by the current plan: why is only Mortgage Resolutions Partners being considered as a partner for the joint powers authority? The idea should be put out for an open bid. Maybe other firms would have even better plans and offer a better deal.

And there are plenty of other issues surrounding the plan. Walter Hackett is a former banker who is now lead attorney in the Legal Aid Riverside’s branch near San Bernardino. While he likes the idea of using eminent domain as a tool to stabilize home prices,

he questions why eminent domain would be used to seize mortgage loans – which are more difficult to set a price on – rather than property itself. Seizing the property and paying the investor for the fair market value of the property, rather than the mortgage, would extinguish the old mortgage and the new investors could then issue a new one to the borrower at the market value.

Hackett also questions why eminent domain would be used only on mortgages deemed current, so-called performing loans, rather than including properties that have already fallen into foreclosure that are still owned by investors. “Former owners, or others might be able to afford reduced payments once the properties are priced at market value, rather than at the price of the underwater mortgage,” Hackett said.

Hackett’s unusual background, having been a banker and represented homeowners in foreclosure, would be invaluable in redesigning such a proposal. It should not be left only to the venture capitalists and the county politicians.

I’m not suggesting that local governments shouldn’t find a way to use eminent domain or find other creative solutions to help struggling homeowners. But we also need to stop assuming that when the financiers and politicians go into the back room, they come out with something that’s in our interest – even if they say it is.

We learned from the bailout and the government’s subsequent coddling of the financial industry how the secrecy and lack of transparency undermine trust in both our financial system and our government.

However inconvenient to the bankers and hedge fund honchos, such proposals must be hammered out with full public participation and debate. We don’t need any more secret formulas” brewed with corporate cash and political connections in back rooms with you and me kept out.

 

 

Foreclosures / Martin Column - 07/12/2012

With Watchdogs Like These...

It would be bad enough if our leaders were letting the high-finance big shots off the hook for their misdeeds because the authorities were just too incompetent to catch them.

But what’s worse is that those in power don’t want to hold the high rollers accountable and run the other way when any opportunity presents itself to shine a light on how we got here.

The most recent examples are the shenanigans of Rep. Darrell Issa, head of the House Committee on Oversight and Reform.

Issa’s committee could play a crucial role in highlighting the abuse and fraud that led to the crisis if he chose, similar to the one played by Ferdinand Pecora’s hard-hitting investigation into the financial corruption and speculation that led to the Great Depression.

But Issa, a Republican, has other agendas in mind – like embarrassing the Democrats and protecting Republican interests in winning more donations from Wall Street. His priorities have been in lock-step with the Republican attack on government regulation of corporations, rather than figuring out how government might do a better job of responding to corporate abuse.

This week he hastily canceled an inquiry into the Financial Crisis Inquiry Commission after emails surfaced that would have severely embarrassed Republicans on that bipartisan commission that investigated the causes of the financial collapse.

In response to Issa’s investigation, the Democrats on the commission issued another report, accusing the Republicans of rigging their conclusions to support their political goals – weakening the Dodd-Frank financial reform.

The commission itself had long ago collapsed along partisan lines, with Democrats issuing a report that reached bland conclusions – it was everybody’s fault, while three of the committee’s Republicans were reluctant to blame anybody except to the extent that they agreed with the bankers – it was the fault of an unforeseeable global housing collapse.

The fourth Republican, meanwhile, fixed the blame on the right’s favorite bogeymen – poor people, Fannie Mae and Freddie Mac.

But the FCIC’s Democrats have now unearthed an email sent by that fourth Republican, Peter Wallison, fellow at the right-wing American Enterprise Institute think tank, to another FCIC Republican, Douglas Holz-Eakins, the day after Republicans took the majority in the House of Representatives last year. In the Nov. 3 email, Wallison wrote that it is "very important" that the separate GOP statements "not undermine the ability of the new House GOP to modify or repeal Dodd-Frank."

Issa has a chance to redeem himself by joining the senior Democrat on the oversight panel, Elijah Cummings in scrutinizing the shameful foreclosures of members of the nation’s military.

I wouldn’t hold my breath for that to happen.

While Issa has shown some willingness to tackle an investigation of the Obama administration’s failed foreclosure relief program, he’s shown no interest in the robo-signing scandal or aspects of the housing crisis that might embarrass the big banks.

Martin Berg

 

Around the Web / Financial Crisis Inquiry Commission / Foreclosures / Martin Column - 07/13/2011

Quotable-Finley Peter Dunne

"High finance isn't burglary or obtaining money by false pretenses, but rather a judicious selection from the best features of those fine arts."

Finley Peter Dunne, Chicago author, 1867-1936


Financial Crisis / Quotable - 04/15/2011

Elizabeth Warren's Inside Move

So President Obama did not appoint bailout critic and middle-class champion Elizabeth Warren to head the new Consumer Financial Protection Agency.

He did appoint her to an important-sounding post as a White House adviser with responsibility to set up the agency, which after all was her idea in the first place.

Is the president actually marginalizing her with the window dressing of a fancy title? Or will she have a meaningful role in setting up the agency and shaping policy?

The punditocracy has gone into overdrive analyzing the president’s handling of Warren.

The positive spin is that it’s a savvy political move on Obama’s part to get her to work right away creating the agency and avoid a Republican filibuster, and that the president will finally be hearing from an insider not under Wall Street’s spell.

The more skeptical interpretation sees it as the latest example of the president’s failure to push back against Wall Street on issues that Wall Street cares about. As he has in the past, rather than picking a principled fight with Wall Street (and Republicans) Obama found a way around it.

The third spin, from Barney Frank, is that Warren actually didn’t  want a permanent appointment now, keeping her options open to either exit the administration or accept the job later.

Writing on WheresOurMoney.org earlier, Harvey Rosenfield, eloquently described why Warren is the best person to lead the new agency.

Warren has been a long-time critic of predatory lending practices and the American way of debt. In her role as congressional monitor of the federal bank bailout she’s been a fearless straight shooter and a down-to-earth demystifier of the complexities and foibles of high finance.

But Obama’s handling of her appointment reinforces the impression that he’s weak in the face of Wall Street’s power. Why in the world, with a high-stakes election less than 2 months away, would the president want to avoid a fight with Wall Street and Republicans on behalf of the undisputed champion of the middle-class and consumers? If the president does intend to appoint Warren to head the agency later, does he seriously think it will be easier later?

Unlike most of the president’s other top economic advisers, Warren has never been cozy with Wall Street. But it’s simply not realistic to expect the president is about to get more aggressive in reining in the big banks with Warren on the inside.

The president has shown that he is capable of ignoring perfectly good advice from well-respected advisers with impressive job titles within his administration. Remember Paul Volcker? The former Fed adviser has been a lonely voice within the Obama administration warning about the continuing dangers of the too big to fail banks and too much risky business in the financial system. But the president used Volcker as little more than a populist prop, preferring the more conciliatory approach championed by his other top economic adviser, Larry Summers, Treasury Secretary Tim Geithner and Fed president Ben Bernanke. These three effectively fought off the tougher aspects of financial regulation at the same they time touted themselves as real reformers. While the president made clear Warren will work directly for him, will she be able to match Summers, Geithner and Bernanke, all seasoned bureaucratic infighters? She’s done little to endear herself to them and has publicly tangled with Geithner.

There’s no question that Warren, a Harvard bankruptcy law professor, has already played an extraordinary and important role in helping understand the financial collapse and its fallout. She’s never been anything but forthright, no-nonsense, principled, unafraid to speak truth to financial power and to demand accountability. She will need all those qualities as well as thick skin and nerves of steel for her new job. The stakes are high. I wish her well.

Consumer Financial Protection Agency / Martin Column / Paul Volcker / President Barack Obama - 09/17/2010

What Would Pecora Do?

There have been lots of positive comparisons between Phil Angelides and Ferdinand Pecora, who led an earlier investigation of Wall Street excesses that led to the Great Depression.

Pecora was a no-holds barred former prosecutor who ran his hearings with meticulous preparation and theatrical flair, and his work galvanized public support for widespread reforms.

Some have been impressed by Angelides’ reputation as a reformer from his days as California treasurer, when he tried to use the power of the state’s investments for socially worthy causes and implemented some protections for shareholders. Angelides was widely praised after public hearings earlier this year for his understanding of high finance and his scolding of the head of Goldman-Sachs, Lloyd Blankfein, comparing him to a used –car dealer.

I’ve been less impressed by Angelides, who doesn’t seem to have a grasp on the opportunity he has to marshal support for real financial reform. And he’s too cozy with a Democratic leadership that’s been soft on Wall Street in the wake of the financial meltdown.

I’m also suspicious of Angelides, the politician and former real estate developer who unsuccessfully ran for governor against Arnold Schwarzenegger, because of his close ties to the Democratic Party elite. In addition, I’m wary of the impact of Angelides' main job running a coalition promoting green technologies. That’s certainly a laudable goal, but Angelides and his Apollo Alliance aren’t going to get very far without lobbying the Obama administration and the Democrats, who would not be happy with a hard-hitting report.
Whatever drama Angelides manages to muster at any given moment, I’m concerned that his multiple roles and background will cause him to soft-pedal his investigation. Those concerns were only heightened after Angelides surfaced as part of a curious SEC report last week that cautions firms about “pay to play” in the state investment business.
According to the SEC, when Angelides was running for treasurer in 2002 he hit up a top J.P. Morgan official to co-chair a fundraising event. It wasn’t just an honorary position. The price tag for the co-chairmanship? $10,000.

According to the report, the official didn’t co-chair the event but donated $1,000 to Angelides” campaign personally ­– and helped raise $8,000 more. In asking other J.P. Morgan brass to contribute to Angelides, the official noted that that the state of California was an important client for the firm.

Just how important became clear in the next couple of years, when J.P Morgan received about $37 million in fees from the state on more than 50 bond offerings totaling $15.8 billion – overseen by Angelides as state treasurer.

In the SEC’s curious take on the matter, neither Angelides nor J.P. Morgan is accused of doing anything improper.  Angelides isn’t even mentioned by name. The agency merely uses its report to caution finance officials about not running afoul of SEC regulations.

OK, so the SEC doesn’t think Angelides did anything wrong soliciting funds from J.P. Morgan and then giving them the state's business. But the report serves as a bitter reminder that those who we’re counting on to get to the bottom of the financial meltdown are steeped in the toxic brew of cash and politics that has seeped into the core of our government.

I hope I’m proven wrong about Angelides; that his intimacy with this unseemly world has left him with a sense of sustained outrage and not empathy for it.  But it will take more than a few zingers to convince me. I mean, let’s be serious. Would Ferdinand Pecora have solicited money from J.P Morgan? Not much chance. After Pecora grilled the son of the legendary banker, J.P. Morgan, Jr. described the investigator as having “the manners of an assistant prosecuting attorney who is trying to convict a horse thief.”

Financial Crisis Inquiry Commission / Martin Column - 03/23/2010

Mr. Angelides, Which Side Are You On?

While I was watching the hearings into the financial crisis last week, a haunting old song got into my head and wouldn’t leave.

It was “Which Side Are You On?” from the 1930s out of the coalfields of Harlan County, Kentucky.

Coal miners faced brutally harsh living and working conditions, under strict control by the coal barons who had complete power over the miners and their communities. The miners and their families waged a tough struggle to win recognition for their union and concessions from the bosses.

The lyrics describe how at a certain point in the fight, the population of Harlan County had to take sides.

They simply couldn’t remain neutral any more. They either had to stand with the miners and their families or with the coal barons and the thugs who enforced their rule.

I wanted to ask Angelides: which side are you on?

Are you on the side of the people who are suffering in the worst economic calamity since the Depression? Or on the side of the bankers  and the politicians and regulators who did nothing to halt the crisis and whose response has only made it worse?

Lots of people admire Angelides. He’s a former real estate developer who built a reputation as a reformer while California Treasurer, then ran unsuccessfully for governor in 2006.

I found him an odd choice. Previous high-profile investigations have featured lawyers with not only great intellectual chops but who were skilled storytellers and fearless to boot.

Angelides is a bright guy who has some understanding of high finance, but without any of the characteristics that distinguished previous investigators. Far from being a courageous outsider, he’s a Democratic Party insider who has grubbed for political contributions.

He’s bright enough to get training and surround himself with people with those skills.

So why were the hearings so lacking in urgency to get to the bottom of the financial crisis, hold people accountable and offer material support for real reform?

Because Angelides doesn’t understand that at this point, there simply are no more neutrals. If you understand the public’s anger and the mishandling of the financial crisis, then you have an obligation to take a strong stance, and show you are on the side of really fixing the problems.

That’s what Sen. Christopher Dodd found out.

For years the Connecticut Democrat was a darling of the financial industry. Then came the crisis and the bailout. He tried to refashion himself as a reformer but he had no credibility with his constituents after having taken millions in campaign contributions from the financial sector over the years.

The voters in Connecticut weren’t buying the new image. They were threatening to throw him out, so Dodd retired. Since his announcement, he’s showed his true colors, doing his contributors’ bidding by dropping his push for a Consumer Financial Protection Agency.

Unlike Dodd, Angelides is not running for office, at least not now. But he’s wearing the mantle of public protector, and the public is in no mood for phonies.

People don’t want an arbitrator, they want a fighter.

They also don’t have a burning need for another investigation. Several very thorough investigations have already been conducted, including one by the Consumer Education Foundation that you can find here.

Mr. Angelides, we know what happened. What we want to know is, what are you going to do about it? You can still set this commission straight. But you have to bring a sense of passion for the fight that has been missing so far. And you’ve got to know which side you’re on.

Financial Crisis Inquiry Commission / Martin Column - 01/20/2010