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

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

"Apology Accepted, Captain Needa"

It’s not about “sorry” anymore.

Even before the Wall Street titans were sworn in last week, it appeared as if the goal of the Financial Crisis Inquiry Commission’s chair, Californian Phil Angelides, was to wring an apology from the men whose companies led the nation into an economic abyss. Whereas most Americans, let me venture, would like to wring their necks.

About twenty-five years ago, I wrote about “inseki jishoku,” the Japanese tradition of accepting responsibility for one’s actions and resigning one’s position as penitence. “These social balancing mechanisms are powerfully ingrained within the Japanese culture. In business activity, they create by necessity a ‘state of intimacy’ among management and employees,” William Ouchi, a management expert, told me at the time. I suggested that there would be less corporate crime in this country if American CEOs embraced a similar approach. 

That never happened.

So what would be the point of a symbolic apology from the titans of the Money Industry – assuming they would be willing to offer one (they tried hard not to, in the event)?

No amount of apology is going to salve the grievous wound in the American psyche as the banks’ profits and bonuses break records.

Like most Americans, I am having a hard time getting my head around how these companies can claim to be earning a “profit” and their executives billions of dollars in extra compensation after American taxpayers were forced to pitch in trillions of dollars to keep the companies afloat.

The truth is that they were able to get away with it because no one in Washington ever imposed any kind of quid pro quo for the bailout.

No cap on the exorbitant interest rates we now pay to borrow our own money from the credit card companies, for example.

No relief for people trying to keep up with their mortgages and pay the rest of the bills.

If symbolism is what this is all about, I say we’ve moved beyond the “apology” stage. How about sending some of these people to jail for twenty years? Or is it "legal" to destroy an economy and cost Americans their life savings and jobs? I had hoped the Angelides investigation would be the beginning of an intensive investigation that, like the Watergate hearings, would lead to holding people criminally accountable for their actions. Not so far, at least.

As I watched the politicians and the leaders of Goldman Sachs, Chase and Bank of America sashay around an apology at the witness table, it reminded me of a scene from the Empire Strikes Back. Han Solo and the Millenium Falcon have just managed to elude Darth Vader’s entire fleet of starships. Informed that Vader wants an update on the search, Captain Needa replies, “I shall assume full responsibility for losing them, and apologize to Lord Vader.”  Vader, using the Force, strangles him. “Apology accepted, Captain Needa.”

Executive Pay / Financial Crisis Inquiry Commission / Harvey Column - 01/18/2010

Angelides Commission: All Puff, No Punch

Here are some early reactions to the the first hearing, now underway, of the Financial Crisis Inquiry Commission in Washington, D..C and televised on CSPAN 2.

Three hours into the FCICs much-hyped first public hearing, what’s being said is less important than what is not being said.

The bankers, beleaguered as they may like to appear, have little to fear if the questioning continues as it began.

So far, this is no Pecora Commission, the Depression-era investigation into the cause of the financial crash that led to landmark reforms including the Glass-Steagall Act and creation of the Securities and Exchange Commission.

Financial Crisis Inquiry Commission / Martin Column - 01/13/2010

Rating Wall Street's New Sheriff

By Martin Berg

In the 1930s, the Senate Banking committee appointed a no-nonsense assistant district attorney named Ferdinand Pecora to lead an investigation into the causes of the stock crash of 1929.

Pecora held hearings that were equal parts public spectacle and tough scrutiny of the financial industry’s abuses. His investigation, closely followed by an angry American public, led to a raft of reforms of the banking system, most notably the Glass- Steagal Act, which kept the federally guaranteed business of making loans and taking deposits separate from other, riskier aspects of banking and investing.

Now Congress has appointed a financial inquiry commission to explore our recent financial meltdown.

The panel will not be headed by a hard-nosed prosecutor but by a real estate developer who became Democratic California treasurer from 1999 to 2007 and then an unsuccessful gubernatorial candidate, Phil Angelides.

Uncategorized - 11/18/2009