By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
Every day brings multiple new scandals. At least they used to be scandals. Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil. The Wall Street Journal, our principal U.S. financial journal ran two such stories today.
The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline: “U.S. Banks to Help Authorities With Tax Evasion Probe.” Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.”
Oh, and the feckless DOJ (again) did not require any officer who committed the felony of aiding and abetting tax fraud to resign or to repay the bonuses he “earned” through his crimes. But not to worry, the banks – not the bankers – may have to pay fines as the cost of doing their felonious business. The feckless regulators did not even require Goldman Sachs and Morgan Stanley to disclose to shareholders their participation in the program.
Best of all, the “cooperation” the banks will offer will be of vastly reduced value because under Swiss law they will not report the names or any identifying information of the wealthy U.S. taxpayers that they helped commit felonies. But not to worry says DOJ:
“Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding,” said Dena Iverson, a Justice Department spokeswoman.
And did I mention that there was an U.S. amnesty program for wealthy U.S. tax cheats who used Swiss banks to commit their felonies?
Note that this aspect of Switzerland’s deliberate national policy of aiding tax evasion by the world’s wealthiest tax cheats fits into the article I wrote earlier this week about Dr. Hans Geiger’s rage that FATF is seeking to require banks to make criminal referrals against tax cheats. Geiger is a leader in a Swiss movement to block that requirement. He has also written that requirements that the banks file criminal referrals when they discover evidence indicating that they may have aided money laundering, the funding of terrorists, or international sanctions busting should be eliminated.
The Ethics-Free WSJ Story on the Regulator’s Latest Betrayal of Homeowners
The context of this WSJ story is the broader series of betrayals of homeowners by the regulators and prosecutors led initially by Treasury Secretary Timothy Geithner and his infamous “foam the runways” comment in which he admitted and urged that programs “sold” as benefitting distressed homeowners be used instead to aid the banks (more precisely, the bank CEOs) whose frauds caused the crisis. The WSJ article deals with one of the several settlements with the banks that “service” home mortgages and foreclose on them. Private attorneys first obtained the evidence that the servicers were engaged in massive foreclosure fraud involving knowingly filing hundreds of thousands of false affidavits under (non) penalty of perjury. As a senior former AUSA said publicly at the INET conference a few weeks ago about these cases – they were slam dunk prosecutions. But you know what happened; no senior banker or bank was prosecuted. No banker was sued civilly by the government. No banker had to pay back his bonus that he “earned” through fraud.
Naturally, the WSJ provides none of that context, but what the article does discuss remains a travesty. It is entitled “GAO: U.S. Foreclosure Review Could Have Generated Higher Payments: Review Could Have Delivered $1.5 Billion More to Consumers if Not Halted, Federal Watchdog Finds.”
I’ve added emphasis to the dishonest euphemisms the WSJ employs (and quotes) for the “f” word (fraud).
• The Government Accountability Office, in a report being released Tuesday, evaluated federal bank regulators’ decision last year to cancel a prolonged review of foreclosure-processing and loan-assistance mistakes.
• The GAO report shows that the settlement “was reached without adequate investigation into the harms committed by the servicers,” Rep. Maxine Waters (D., Calif.) said in a prepared statement.
• “Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts” [the WSJ quoting Water’s prepared statement].
• But finishing this process would have been a long and complicated affair. Doing so, the GAO said, would have taken up to two more years for consulting firms to scour thousands of foreclosure files for errors, at a cost to banks of about $4.6 billion.
• The foreclosure review was ordered three years ago by the Office of the Comptroller of the Currency and the Federal Reserve, which told banks to hire independent consultants to evaluate allegations the firms used shoddy practices when handling a huge volume of foreclosures during the housing bust.
Sadly, I tend to read the underlying documents and the truly bad news is that the GAO report uses the “f” word only once and is otherwise a mass of euphemisms. This sentence will give you an accurate flavor of the Report.
In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized [GAO 2014: 7, emphasis added].
In addition to the euphemisms and the fact that the sentence reads like it was written by the banks’ criminal defense counsel, it is a sentence crafted to mislead. By that time there were sworn statements by a series of servicer personnel admitting that their offices engaged in systematic foreclosure fraud through filing affidavits that were known to be false. They admitted to tens of thousands of criminal acts by their organizations.
The one time the GAO uses the word fraud is to report that the foreclosure payout program carefully protects itself from fraud by the victims – by providing that the checks expire after 90 days [GAO 2014: 34 n. 51]. In a very dark Irish humor kind of way I find this hysterically funny. By contrast, when the GAO discusses real frauds the passage again reads as if it were drafted by the bank’s criminal defense lawyers.
Failure to review documents filed in support of a judicial foreclosure may violate consumer protection and foreclosure laws, which vary by state and which establish certain procedures that mortgage servicers must follow when conducting foreclosures [GAO 2014: 7 n.13].
Everyone involved in the faux foreclosure review – the “consultants” hired who to do the review, the mortgage servicers, the (non) regulators, and the GAO performed abysmally. The “review” was an expensive farce. The regulators did not conduct the review. The servicers did not conduct the review. The consultants were chosen by the servicers, which the regulators should never have allowed. The consultants were allowed to have additional conflicts of interest such as having worked on the loan foreclosures they were reviewing. The “design” of the (non) study was an embarrassment. The (non) study collapsed almost immediately because it turned out that many of the servicers’ files were so pathetic that the study “design” could not be followed. Rather than stop and reconsider the implications of those file defects for the likelihood that the servicers engaged in fraud in order to foreclose the regulators decided to continue. The more severe the file defects the greater the incentive of servicers to engage in foreclosure fraud.
The consultants were soon hopelessly behind schedule and budget because of the severity of the loan file defects. Eventually, the (non) regulators gave up and brought the (non) study to an end, not with a bang but with a whimper.
Real regulators would have had great negotiating leverage. The servicers had agreed to conduct the study and failed. It would cost the servicers more to complete the review than simply boost the payout by several billion dollars. The two obvious answers were to continue the study and order interim payouts or to stop the study and in return for a significantly larger payout to homeowners.
Naturally, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve found a third, far worse choice. They left the cash on the table that could have gone to the homeowners.
The GAO was no stronger. They do agree that the OCC and the Fed left billions on the table but they also give them a pass, saying that the settlement is in the “range” that would emerge from the regulators assumed rate of bad foreclosures. The problem, as the facts disclosed in the GAO’s report make clear, but GAO’s analysis ignores, is that the regulators’ assumed rate of bad foreclosures had no reliable basis and was proven to be far too low an estimate by the fact that the loan files were so incomplete that the consultants could not complete the study. So, there is no reliable basis for GAO’s claim that there is any “range” of reasonableness for the payments to homeowners.
This passage from the GAO report conveys the GAO and the regulators’ unique approach to (non) quantification.
• Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership [GAO 2014: 55]
“Generally,” “instances,” and “some consultants found cases” – billions of dollars were spent to produce nothing but these useless, vague phrases. The “study” “results” were so worthless that the GAO reports that the consultants did not even bother to create reports on their work. Instead, and this is hilarious, the OCC and the Fed held “exit interviews” with the consultants. Only a PR “expert” planning to put lipstick on a wild boar would spend even more money on such a useless exercise. The GAO tells us that many of the regulators’ exam teams given the exit interview materials concluded that they were useless.
Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, has been trying to get the regulators to do the right thing and has urged the chairman of the committee to investigate the servicers’ and regulators’ actions. Waters has been, rightly, extremely critical of the servicers and the regulators. Here is the link to an interview of her that is well worth reading in its entirety.
Postscript: The WSJ Op Ed’s Ode to Insider Trading
Henry Manne is back. The WSJ published his op ed on same day these other two stories ran. Manne ran the effort for decades to indoctrinate judges and law professors in theoclassical economics. Manne’s metaphor is that insider trading is like prohibition.
Manne’s op ed asserts that insider trading cases target “low level functionaries.” Manne’s so-called “low level functionaries” consist of millionaires and multi-millionaires that include the head of a major hedge funds and a senior official at Goldman Sachs.
We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this ‘corruption’ surely goes far beyond what prosecutors have been able to demonstrate.
Manne’s point is that if business officials have an incentive to cheat they will.
There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world’s stock exchanges waiting for an “edge.”
To use Manne’s metaphor, Wall Street is manned by alcoholics who are so addicted to greed and so devoid of ethics that Manne says it is impossible to deter them from committing these felonies even if you put hundreds of them in prison.
The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions.
So, the financial industry is run by alcoholics who are so addicted to greed that they think they have the right to profit personally from confidential corporate information – and Manne’s answer is to roll out the keg and shout “drinks for everyone.” Manne provides another proof of one of our family rules: it is impossible to compete with unintentional self-parody.
Is anyone on Wall Street horrified by Manne’s “defense” (indictment) of them? Now would be a good time for you to take a public stand and lead a long-term public campaign to clean up the Street.