Category Archives: Credit markets

Matt Stoller: Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is:
http://www.twitter.com/matthewstoller. Cross posted from New Deal 2.0

Acting OCC head John Walsh is standing in the way of information that could help desperate homeowners.

I was rereading some testimony by Mark Kaufman, the Maryland Commissioner of Financial Regulation, on mortgage servicer behavior. He testified this month before the House Oversight Committee on something quite scandalous.

Why Liberals Are Lame (Part 2)

It may seem churlish to pick on a specific, well intentioned liberal organization to illustrate a rampant pathology within what passes for the left in the US. Nevertheless, examples serve as important case studies and hopefully will help both the object of presumably unwanted attention and its broader constituency understand that many of their campaigns actually undermine the causes they purport to represent.

Let’s look at an example, an e-mail from the Progressive Change Campaign Committee to constituents of Alabama’s Spencer Bachus, the Chairman of the House Financial Services Committee and self-proclaimed Best Friend of Banks (“My view is that Washington and the regulators are there to serve the banks”):

Josh Rosner: Dodd Frank is a Farce on Too Big to Fail

Note: Josh Rosner, managing director of Graham Fisher & Co., submitted this written testimony for a March 30 panel for the House Oversight Committee that was cancelled. His testimony has been entered into the Congressional Record and will be available on the House Oversight Committee website in the near future. The text appears below..

Has Dodd-Frank Ended Too Big to Fail?

Almost three years have passed since the United States financial system shook, began to seize up, and threatened to bring the global economy crashing down. The seismic event followed a long period of neglect in bank supervision led by lobbyist-influenced legislators, “a chicken in every pot” administrations, and neutered bank examiners.

While the current cultural mythology suggests the underlying causes of the crisis were unobservable and unforeseeable, the reality is quite different. Structural changes in the mortgage finance system and the risks they posed were visible as early as 2001. Even as late as 2007 warnings of the misapplications of ratings in securitized assets such as collateralized debt obligations and the risks these errors posed to investors, to markets, and to the greater economy were either unseen or ignored by regulators who believed financial innovation meant that risk was “less concentrated in the banking system” and “made the economy less vulnerable to shocks that start in the financial system.” Borrowers, these regulators argued, had “a greater variety of credit sources and (had become) less vulnerable to the disruption of any one credit channel.”

In the wake of the crisis, and before either the Congressional Oversight Panel or the Financial Crisis Inquiry Commission delivered their final reports on the causes of the crisis, Congress passed the Dodd-Frank Act. The act claimed to end the era of “too-big-to-fail” institutions and sought to address the fundamental structural weaknesses and conflicts within the financial system. To falsely declare an end to Too Big to Fail without actually accomplishing that end is more damaging to the credibility of U.S. markets than a failure to act at all. The historic understanding that our markets were the most free to fair competition, most well regulated and transparent, has been the underlying basis of our ability to attract foreign capital. It is this view that, in turn, had supported our markets as the deepest, broadest, and most liquid.

In fact, Dodd-Frank reinforces the market perception that a small and elite group of large firms are different from the rest.

Hooray! Jamie Dimon Says New Capital Rules Will Kill Zombie Banks!

It really is a sign of how complete a victory that the banks have won over the rest of us that Jamie Dimon has the nerve to complain about banking regulations. Even worse, he is egging on a effort by Republican bank-owned Congresscritters to roll weak bank capital rules back.

His position is pure, simple, unadulterated bank propaganda: what is good for banks is good for America, when the converse is true. Simon Johnson warned in his May 2009 article “The Quiet Coup” that the financial crisis had turned American into a banana republic with a few more zeros attached, a country in the hands of oligarchs, in this instance, the financiers. And we playing out the same script he saw again and again in emerging economies:

Lender Processing Services Behind More Record-Keeping Botches and Foreclosure Forgeries

Lender Processing Services has played a singularly destructive role in the mortgage servicing industry. The firm not only offered document fabrication services through DocX, a company it acquired and was forced to shut down after the Department of Justice started sniffing about, but is being revealed to be involved in more abuses as far as borrower records and legal process are concerned. Readers may recall that it is also the target of two national class action suits on illegal legal fee sharing which if successful will produce multi-billion-dollar damages.

This abuses matter due to the role that LPS has come to play. It is the biggest player in default services, meaning it acts as the de facto selector and supervisor of foreclosure mills via its system, LPS Desktop, which manages and oversees the work of local law firms on behalf of its bank servicer clients. It also provides the servicing platform for more than half of the servicing industry. And as our two latest examples show, the company clearly places its profits over integrity of records and due process.

OMG, Greenspan Claims Financial Rent Seeking Promotes Prosperity!

I was already mundo unhappy with an Alan Greenspan op-ed in the Financial Times, which takes issue with Dodd Frank for ultimately one and only one disingenuous and boneheaded reason: interfering with the rent seeking of the financial sector is a Bad Idea. It might lead those wonderful financial firms to go overseas! US companies and investors might not be able to get their debt fix as regularly or in an many convenient colors and flavors as they’ve become accustomed to! But the Maestro managed to outdo himself in the category of tarting up the destructive behaviors of our new financial overlords.

What about those regulators? Never never can they keep up with those clever bankers. Greenspan airbrushes out the fact that he is the single person most responsible for the need for massive catch-up. Not only due was he actively hostile to supervision (and if you breed for incompetence, you are certain to get it), but he also gave banks a green light to go hog wild in derivatives land. And on top of that, he allowed banks to develop their own risk models and metrics, which also insured the regulators would not be able to oversee effectively (there would be a completely different attitude and level of understanding if the regulators had adopted the posture that they weren’t going to approve new products unless they understood them and could also model the exposures).

And the most important omission is that the we just had a global economic near-death experience thanks to the recklessness of the financial best and brightest.

Are Banks Scheming to Gut the Role of the Courts in Foreclosures?

I may be overreacting but given the sorry behavior of banks throughout the crisis and its aftermath, better to be vigilant than sorry.

The Wall Street Journal provided a very sketchy summary of the counterproposal that the banks will put on the table in the foreclosure fraud settlements this week:

The 15-page bank proposal, dubbed the Draft Alternative Uniform Servicing Standards, includes time lines for processing modifications, a third-party review of foreclosures and a single point of contact for financially troubled borrowers. It also outlines a so-called “borrower portal” that would allow customers to check the status of their loan modifications online.

But the document doesn’t include any discussion of principal reductions. Nor does it include a potential amount banks could pay for borrower relief or penalties.

This seems innocuous, right?

Think twice.

The Consumer Financial Protection Bureau’s Bogus Mortgage Settlement Math

Shahien Nasiripour of Huffington Post’s new article, “Big Banks Save Billions As Homeowners Suffer, Internal Federal Report By CFPB Finds,” includes a presentation from the Consumer Financial Protection Bureau dated February 14 prepared for Tom MIller, the Iowa Attorney who is leading the 50 state attorneys general foreclosure fraud settlement negotiations.

If I were a betting person, I’d wager this document was leaked to show that the Administration and the AGs did not just make up the $20 to $30 billion settlement figure that has been bandied about ask their ask, but have a sound, reasoned basis for their demand.

Unfortunately, the document simply proves that they did make up the $20 to $30 billion figure.Not only is the analysis effectively fabricated, it’s the wrong analysis. But I have to say, having been at McKinsey, it’s impressive the use of McKinsey firm format makes a story look much more credible than it really is.

Illustrating How Infrastructure Deals Result in High Fees and Diminished Service

It isn’t hard to understand why infrastructure deals (the sale of government owned assets to private investors) are inherently a ripoff. We’ve had such a vogue for private contracting that a lot of services that are almost certainly more cheaply run by the government (e.g., logistical support for the military as proven by Iraq profiteering by Blackwater) that it’s a pretty safe assumption that most assets now held by government bodies are the the sort of thing that it makes sense for the government to own: high cost to build, long lived, not terribly complex to maintain assets.

Infrastructure investors like to see returns in the mid to upper teens. The deals are complicated to put together, so the fees are high. The deal needs to generate enough to pay the fees and generate the required returns. Since it is pretty much impossible to run something like a parking meters “smarter”, the usual course of action is a combination of increasing charges to the users (taxpayers who in the past used it for free or much less) and cut maintenance costs.

The Sydney-based investment bank Macquarie pioneered this business. Reader Crocodile Chuck pointed us to one of its latest capers. From the Sydney Morning Herald:

The Sandbagging of Elizabeth Warren (and 49 State Attorneys General)

I don’t know who is pulling the strings, but any objective look at the so called mortgage settlement negotiations shows that a lot of people are being played for fools. Precisely because Elizabeth Warren is being attacked so forcefully by the Wall Street Journal and other banking industry loyalists, too many of her erstwhile defenders are giving a free pass to the fact that the Administration itself is undermining her, and with her, any attorneys general who sign up for the settlement, assuming it ever sees the light of day.

Recall the Team Obama modus operandi: getting something done, no matter how lame, compromised, or even counterproductive it is, is considered to progress because it presumably can be swaddled in enough propaganda to be made attractive to a presumed to be chump public. Never mind that Obama’s flagging poll ratings and the abysmal mid-term Congressional results, where the Blue Dogs, the Democrats philosophically most aligned with Obama, were mowed down, show that that strategy is becoming less and less effective. Recall in the runup to the mid-terms how many Democratic Congressional candidates were straining to distance themselves from Obama.

The Democratic state attorneys general have even less to gain by playing nice with this Administration. Some are from states that are solidly liberal and/or so hard hit by the mortgage meltdown that being seen to be soft on banks would be political suicide.

Scott Fullwiler: Paul Krugman—The Conscience of a Neo-Liberal?

By Scott Fullwiler, Associate Professor of Economics at Wartburg College

The old saying that bad press is better than no press is definitely true in this case. Without the advent of the blogosphere, our work would likely never even be noticed by the likes of Paul Krugman, so the fact that he’s writing about us (here and here) this weekend at least means we’re doing better than that, even if his assessment of us is far less than glowing. At the same time, and particularly given that Krugman is so widely read, it’s imperative to at the very least set the record straight on where MMT and Krugman differ. I should note before I start that others have done very good critiques already that overlap mine in several places (see here, here, here, and here).

Krugman makes three incorrect assumptions about what MMT policy proposals actually are while also demonstrating a lack of understanding of our modern monetary system (as is generally verified by volumes of empirical research on the monetary system by both MMT’ers and non-MMTer’s). These are the following:

Assumption A: The size of the monetary base directly (or indirectly, for that matter) affects inflation if we’re not in a “liquidity trap”

Assumption B: MMT’s preferred fiscal policy approach or strategy—Abba Lerner’s functional finance—is Non-Ricardian

Assumption C: Bond markets alone set interest rates on the national debt of a sovereign currency issuer operating under flexible exchange rates

Assumptions A and C are central to the Neo-Liberal macroeconomic model. Assumption B is a common misconception about MMT and a common perception of Neo-Liberals about the nature and macroeconomic effects of fiscal policy (i.e., Neo-Liberals often believe that activist fiscal policy is Non-Ricardian).

While MMT’ers argue that all three assumptions are false, one does not need to necessarily agree. The point is that to critique MMT on the basis of assumptions that are inconsistent with MMT is to actually not critique MMT at all. It is a straw man.

Complexity and War or How Financial Firms Wreck Economies for Fun and Profit

There’s a great post up, “Human Complexity: The Strategic Game of ? and ?,” by Richard Bookstaber, former risk manager, author of the book A Demon of Our Own Design and currently an advisor to the Financial Stability Oversight Council. As insightful as it is, Bookstaber does not draw out some obvious implications, perhaps because they might not be well received by his current clients: that the current preferred profit path for the major capital markets firms is inherently destructive.

I suggest you read the post in its entirety. Bookstaber sets out to define what sort of complexity is relevant in financial markets:

The measurement of complexity in physics, engineering, and computer science falls into one of three camps: The amount of information content, the effect of non-linearity, and the connectedness of components.

Information theory takes the concept of “entropy” as a starting point…

Sleaze Watch: Florida Attorney General Cavils About “Moral Hazard” While Letting Foreclosure Mill Off the Hook

t’s becoming increasingly clear that morality applies only to little people, especially the sort that are cannon fodder for our mortgage industrial complex.

The Florida attorney general, Pam Bondi, joined three other Republican attorneys general in arguing against the principal reductions called for in the so-called mortgage settlement on the basis of “moral hazard”. Their argument? That it would reward those who “simply choose not to pay their mortgage”.

Boy, am I naive. The term “strategic default” appeared out of nowhere and had a pre-packaged sound about it.

Slapping Team Obama: Several Democratic AGs to Withdraw from Proposed Mortgage Fraud Settlement; Federal Negotiations in Disarray

The so-called mortgage settlement looks to be coming apart at the seams. That does not mean there will not be a deal of some sort. Remember, a hallmark of the Obama administration is to do things simply to have more “achievements” to discuss. But not only, as has been rumored for some time, are a number of Republican attorneys general saying they will not join in the settlement, so are some Democrats as well.

It’s important to recognize that Democratic withdrawals are a far bigger problem for Obama than the Republicans. Given that a number of AGs signed up at the last minute, and some of the Republicans were not even on board with the concept of a mortgage settlement, defections among the GOP participants can be depicted as partisanship. By contrast, repudiation by Democrats, particularly Democrats that have garnered some attention in the national press by taking mortgage abuses seriously, is much harder for the Administration to explain away. And as David Dayen at Firedoglake reports, if enough AGs defect, the settlement becomes a dead letter: