Elizabeth Warren’s opening salvo in the Senate Banking Committee, when she asked assembled top officers from various banking regulators when they had last litigated a case against a financial firm, drew blank stares (the SEC, which regularly files civil suits, was able to muster an answer).
Thomas Curry, the Comptroller of the Currency, addressed Warren’s question in a speech on Tuesday. However, his response was partly regulatory bromides, partly artful misdirection, and on the whole, provided more proof that regulators lack the will to regulate. But his speech also unwittingly shows why the problem of insufficiently aggressive regulators is so hard to remedy. Read this paragraph closely:
As a prudential supervisor, we examine banks regularly and seek to identify issues early when they can most easily be fixed. Most often the banks take the necessary corrective action, and those are the cases no one hears about since under law the supervisory process is confidential. But there are times when problems cannot be remedied through the supervisory process, and those are the cases that result in formal enforcement actions that sometimes make headlines. In those situations, we very often end up taking actions that are aimed in the first instance at fixing the problem and which, depending upon the circumstances, may also include financial penalties or compensation for individuals who suffered harm as a result of improper practices.
This is the key to the failings of the OCC and other bank regulators: “as a prudential supervisor”. That means their overarching concern is the safety and soundness of the institution, as in whether it will go bust. Aside from the not trivial problem that US and other national bank regulators did a piss poor job of their overarching mission in the runup to the crisis, it also means that they will tend to give a pass to behaviors that make the bank money as long as they don’t pose safety and soundness risks, or violate laws too egregiously (and we’ll see shortly how egregious that has to be before a regulator stir himself to take meaningful action). So if a bank finds a clever way to gouge customers, or the matter has not rise to the level where the media treats it as a big deal, you can’t expect a banking regulator to be unduly concerned. For instance, in the 2000s up through the crisis, the Fed took no interest in enforcing weak subprime regulations (HOEPA); even the OCC did a better job of that.
Thus Curry tries to tell us that consent orders will be sufficient to remedy bad bank behavior. But that is affirmatively untrue. Various regulators have issued consent orders (also known as cease and desist orders) in servicing since the abuses by predatory subprime servicer Fairbanks came to light. The requirements of the consent orders were supposed to serve as new industry standards, yet they have never been met. So it’s actually an insult to an audience’s intelligence to say this broken process is effective. Look, the OCC can’t even get JP Morgan to provide it with e-mails. Get a load of this, courtesy Bloomberg:
The U.S. Treasury Department’s inspector general has threatened to punish JPMorgan Chase & Co. (JPM) for failing to turn over documents to regulators investigating the bank’s ties to Bernard Madoff’s Ponzi scheme.
Inspector General Eric Thorson gave the largest U.S. bank a Jan. 11 deadline to cooperate with the Office of the Comptroller of the Currency probe or risk sanctions for impeding the agency’s oversight. JPMorgan, according to the Dec. 21 letter, contends the information is protected by attorney-client privilege
The OCC is calling in the Treasury IG for help? Huh? In theory, IGs can subpoena documents but cannot depose witnesses. But the Treasury IG is widely seen as being one of the weakest in the executive branch and a letter to JP Morgan is mere noodle waving. The January 11 deadline has passed and the OCC and the Treasury IG remain silent as to whether JP Morgan caved (I’d bet a large sum not) and if not, what they are doing about it.
A second issue Curry tries to finesse is that the largest consent order his office ever entered into was never serious to begin with. As we and others recounted at some length, the consent orders issued by the OCC in April 2011 against 14 servciers were simply a ploy to derail the state/Federal mortgage seettlment talks underway. As Georgetown law professor Adam Levitin explained:
On the surface it looks like a very serious thing–C&D orders are an extraordinary regulatory response in the banking world, where a lot of regulation is done informally….But when one looks at the substance of the C&D order, one is struck by how empty it is…
So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.
Let’s contrast Levitin’s assessment with Curry’s remarks, which could just as easily have come from the Fed (as in this is an apple pie and motherhood statement):
Second, if there is a lapse significant enough to warrant a public action, then the underlying problem is almost certainly one that must be addressed immediately. This is particularly true in cases involving financial harm to individuals, where we will move as quickly as possible to ensure those customers are compensated in a timely fashion. While we have authority to impose civil money penalties, those fines often come later, after a remedial document has been put in place. There are a number of reasons for this. One reason is that our enforcement statutes require us to consider additional factors and, in the case of larger “tier 2” penalties, meet a heightened legal standard. In order to do this, it is helpful to have more time to assess why the bank or thrift dropped the ball in the first place and how well it reacted once the particular concern was identified. Finally, in cases where other agencies are involved, we will normally coordinate our penalty actions with the other agencies so that all actions can be brought together.
The problem is “we will move as quickly as possible if individuals are being harmed” is patently untrue. It’s now being used as an excuse for shutting down the botched foreclosure reviews quickly, that that was depicted as a sound move so that individuals could get checks faster. But no borrower who submitted their case to the IFR who has weighed in in NC’s comments section buys this logic. They wanted their file reviewed, and in every case, they were either denied a review for spurious-sounding reasons or they were informed that they would be included in the to-be-announced compensation scheme. No one is happy with the latter; they understand full well that it is capricious and inadequate.*
So when the OCC has something embarrassing it wants to disappear, suddenly it is concerned with speedy action and uses individual harm as a cover. But has the OCC manifested any concern in prior years when it was getting letters from citizens seeking help, along with frequent prods from Congressmen who were inundated with letters from aggrieved voters? No.
Or better yet, look at how much good cease and desist orders did when banking regulators presumably were serious. HSBC got two cease and desist orders related to money laundering. One was from the Fed in 2002, which was followed by plenty of warnings by the OCC, which the bank also ignored. The OCC then issued a cease and desist order in 2010, which the bank again dissed. So how does Curry present this sorry record?
Where appropriate, we have also imposed fines commensurate with the nature of the infraction, and those fines have sometimes been very substantial. For example, not only was the recent $500 million dollar penalty we assessed against HSBC the largest penalty the OCC has ever assessed, but it is by far the largest penalty that any federal banking agency has ever assessed, exceeding by a wide margin all of the bank’s cost savings for its deficient BSA compliance program.
Please. So all the OCC sought to cover was the cost savings for not hiring people to do compliance? How about making them disgorge all the profits, which would seem a minimum requirement, plus a fine on top of that? The logic for the fine is laughable. As Matt Taibbi pointed out, the total fines paid across the various regulators and the Department of Justice, was $1.9 billion, a mere five weeks of profit. And this for facilitating transactions with terrorists and some of the worst drug traffickers in the world. And even more basic: why were no individuals prosecuted? This was a flagrant, long-standing violation of regulatory orders and anti-terrorist laws.
This is another indicator of the OCC’s failure. It’s trivial compared to HSBC, but it again illustrates that the OCC can’t be bothered even to pretend to do things right.
Recall that in our Bank of America/OCC whistleblower series, we were flummoxed by the role a firm SolomonEdwards played in the Bank of America and PNC reviews, both supposedly conducted by the “independent” consultant Promontory Financial Group. Promontory did not list SolomonEdwards as a subcontractor for either bank review. It did list SolomonEdwards as a firm it might use in a staffing capacity for its review for Wells Fargo, but that did not serve to give it clearance for BofA or PNC, since subcontractors were to be reviewed for conflicts. Whistleblowers told us SolomonEdwards was acting as a “body shop” for PNC, where the effort was staffed to a staggering degree by contractors (one Promontory managing director to 140 to 150 contractors). That’s not great, but it might not be terrible, since of all the roles a not-properly-approved firm could play, a staffing contractor is not too substantive.
However, even though our sources said that SolomonEdwards was also acting as a body shop to Bank of America, that did not square with what a SolomonEdwards partner had told us in March 2012, when he gave us the strong impression that his firm was doing nitty gritty independent foreclosure review work, with 600 people tasked at a bank, which with the benefit of hindsight was clearly Bank of America. That led us to wonder whether SolomonEdwards was both acting as a body shop to Promontory as well as supervising and executing significant portions of the review. The latter, if true is particularly troubling. It means either that Promontory misrepresented how the reviews were being executed to the OCC (and the OCC did not review SolomonEdwards for conflicts of interest) or Promontory and Bank of America changed the engagement letter substantially from the one published on the OCC website and notified the OCC. If the latter, that means the OCC chose to hide this from the public and Congress. The reason that matters is that the OCC was forced to change the scope of work of one IFR subcontractor, Allonhill, directly as a result of the public disclosure and exposure of undisclosed conflicts by Michael Olenick on this blog. The OCC and Promontory may have decided to hide the role played by SolomonEdwards, particularly in light of the fact that it has also publicized that it engages in loan file “scrubbing” and winked and nodded in an interview that it fabricates allonges. Put it another way: if there was nothing suspect about SolomonEdward’s role, why was it kept hidden? Smoking gun below (hat tip Consultant B, via Indeed.com).
Recall that the IFR set forth two parallel tasks for reviewing 2009 and 2010 foreclosures: one the review of complaints from borrowers that had been wronged, the second, the review of a random sample of foreclosures completed during the same timeframe. Tmoking gun below relates to work on the second task (hat tip Consultant B, via Indeed.com).
* Unless you were an active duty servicemember. The authorities have bent over backwards to remedy abuses to them, so they are the only group that has a shot at getting something resembling adequate compensation.