Category Archives: Regulations and regulators

Affordable Housing Groups Once Again Acting As Human Shields For Banksters

I’m not going to quote George Santayana tonight, as much as his famous saying verging on cliche fits. But will some people never learn?

Another useful cliche is that politics makes for odd bedfellows. But that notion is misapplied in a New York Times article tonight, which tries to convince readers that affordable housing advocates and mortgage financiers playing on the same team is a new development. Huh? Per the Times:

The weight of the mortgage crisis fell heavily on lower-income and minority communities…..That left consumer advocates and civil rights groups frequently at odds with bankers, mortgage lenders and their lobbyists during the debate over the financial regulation act last year, which aims to rein in the subprime mortgage excesses that inflated the housing bubble.

Now, as banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans…

Bill Black: Bad Cop; Crazed Cop – the IMF and the ECB

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from http://neweconomicperspectives.blogspot.com/2011/05/in-praise-of-sorkins-praise-of.html“>New Economic Perspectives

Greetings again from Ireland. One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies. Prior to the crisis, even the IMF had begun to confess that its austerity programs made poor nations’ financial crises worse. In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.

Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB).

Jean Pisani-Ferry on Europe’s Tiger and German Nightmares

This INET interview with Jean Pisani-Ferry gives a useful overview of how Greece and Ireland came to have sovereign debt woes and the viability of the remedies proposed for each. Pisani-Ferry argues, as many other economists do, that austerity measures will not succeed in Greece because they will prove to be politically unsustainable.

Are Fissures in Europe Worse Than Media Reports Suggest?

Thanks to an alert NC reader, we featured in Links more than a month ago the fact that Denmark, contrary to the spirit of the Eurozone, was implementing border controls. Today, a hand-wringing comment by Peter Spiegel, the Financial Times’ bureau chief in Brussels, describes how sentiment against Eurozone integration has risen among the locals. The near-victory of the nationalist True Finns, regime change in Ireland and Portugal, and demonstrations in Spain, Greece, and Portugal suggest that the citizenry is increasingly unhappy. Spiegel describes the Netherlands as “the California of Europe” and describes in some detail how it opposed the recent €440 billion rescue fund, opposed recent efforts to ntegrate the western Balkans into the EU to i, and demanded reform of immigration policies.

Perhaps I am projecting US tendencies onto the EU, but I see the same signs of elite isolation ther as we have here (in the US, it’s a New York-Washington bubble that includes finance, government officials, and major media).

A Better Way to Make Bankers Pay for Crises?

McKinsey once got a study from a major shipping company whose bottom line was suffering because the managers in its ports were keeping too many containers on hand. No one wanted to be short of containers and delay a shipment, so they all made sure to have enough and then some. Containers are a big cost item and management was keen to figure out how to get by with fewer.

Now the team could easily have had great fun building a big model of shipping flows and likely variability and done lots of analysis to figure out what the minimum needed level of containers was and how to have the right decision rules. Instead, the team changed the pay for port managers, so that on the one hand, they’d still be penalized if shipments were delayed, but they would be rewarded for minimizing the number of containers they had. Almost immediately, port managers were sending containers away and complaining if an influx of shipments left them holding a lot. The shipper was quickly able to reduce its stock of containers.

Since the crisis, there has been lots of debate on what to do about incentives in the financial services industry with little in the way of action.

Warren Groundswell Pressures Administration to Make Recess CFPB Appointment (Updated: Panicked Republicans Keep Senate Open for Business)

Progressive groups launched an online petition calling for the Administration to make a recess appointment of Elizabeth Warren to head the CFPB. Not surprisingly, it gained traction quickly, and now has 158,000 signatures (the initial goal, as reported by Housing Wire, was 175,000; it was apparently increased based on the sign up rate).

This weekend is theoretically a window for a recess appointment (note that the lengthy Senate confirmation process makes it impossible for anyone to be in place by the Dodd Frank start date of July 21, so a recess appointment looks to be inevitable). But there’s no reason to use this opportunity given a Senate July 4-10 break.

I urge readers to sign the petition while maintaining my view that Warren will not get the nod.

Tough Swiss Regs Induce UBS to Consider Glass Steagall Lite Partition, So Risky Ops May Become US Problem

Switzerland has taken the sensible move of recognizing that it cannot credibly backstop banks whose assets are more than eight times the country’s GDP. It is in the process of imposing much tougher capital requirements, expected to be nearly 20% of risk-weighted assets, well above the Basel III level of 7%.

UBS apparently plans to partition the bank in a Glass-Steagall lite split, leaving the traditional banking operations in Switzerland and putting the investment bank in a separate legal entity outside Switzerland. This resembles the approach advocated in the preliminary draft of the UK’s Independent Banking Commission report, of having retail banking and commercial banking separately capitalized.

The problem is that the devil lies in the details.

Fed Investigating Goldman Over Possible HAMP Mortgage Mod Violations

The Financial Times discusses a curious development, namely, that the New York Fed is making an inquiry into allegations that Goldman’s mortgage servicing unit, Litton Loan Services, failed to comply with HAMP guidelines. Readers may recall that HAMP Is the half-baked Do Something About the Mortgage Crisis program designed to give homeowners “permanent” year payment reduction mods, which is a kick the can down the road strategy.

In HAMP, servicers routinely asked borrowers to send the same documentation multiple times and assured borrowers they were likely to get a mod, only to refuse them. The worst is that many homeowners wound up worse off since they were not told that when the reduced payment trial mod ended, they would be asked to fork over the foregone portion of the payments plus late fees, pronto. Servicers often encouraged borrowers to use the savings to pay down other debt, thus assuring the homeowner would be unable to catch up and would lose their home.

The reason the Fed inquiry is curious is not that there were abuses; they were rampan

Former Treasury Restructuring Official Supports View That Dodd Frank Resolution is Failure Prone

As readers may know, we’ve been engaged in a long-running argument with a persistent Administration defender on the subject of Dodd Frank resolution, which is the one of the big arguments used for not doing much to make the TBTF banks less TBTF (see here for the latest in the series). The argument goes that since they will be allowed to fail, and they can be resolved non-catastrophically, the problem is solved. We’ve gone through the FDIC’s example of how they say they could have used the new powers under Article II of Dodd Frank and pointed out numerous (ahem) unrealistic assumptions, as as well as made more general arguments against its viability with anything other than a purely domestic institution. It’s also worth noting that a number of domestic banking and bankruptcy experts, as well as the BIS Cross-border Bank Resolution Group and the Institute for International Finance have also expressed serious doubts about the viability of Article II resolutions.

The latest critique comes from former Treasury official Jim Millstein who was the chief restructuring officer and headed the AIG rescue

Bill Black: In Praise of Sorkin’s Praise of Lowenstein’s Praise of Financial CEOs

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives

Roger Lowenstein has just taken the brave step of praising the failure to prosecute elite financial managers for fraud as a demonstration of the greatness of America. Lowenstein declares (1) that Blankfein was right – Goldman really was doing “God’s work,” (2) virtually no financial elites committed crimes, (3) any crimes they may have committed were trivial and played no material role in causing the crisis, (4) those that wish to hold fraudulent elites accountable for their crimes are (a) financially illiterate, (b) paranoid conspiracy theorists equivalent to those claiming the U.S. attacked the twin towers on 9/11, (c) a threat to our democracy and constitutional rights, and (d) engaged in “punishing profit,” (5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights, (6) the FBI is conducting a “serious” investigation of the elite financial frauds (despite points one through four above), and (7) the crisis was caused by “society” – because we’re all guilty no one should be held accountable – except those paranoids who want to destroy America’s greatness by prosecuting financial CEOs on fraud charges.

Wall Street: Not Guilty (May 12, 2011)

Lowenstein’s former colleague at the New York Times, Andrew Ross Sorkin, twittered that Lowenstein was “courageous” and “probably right.”

I join Lowenstein and Sorkin in denouncing the demagogues that denounce America’s financial CEOs for fraud and corruption and those that denounce our economic system for cronyism. My research has detected the ravings of two of the worst examples of this form of parasite. Two of the nation’s leading financial commentators have filled their books and columns with demagogic attacks on the productive class. Here are some of one’s vicious assaults on America’s CEOs and capitalist system.

Battle Over IMF Chief: Proxy War Over Power of Banks?

There’s a fight afoot over who will be the next head of the IMF. Yours truly is not making odds on this one, save that Christine Lagarde is getting far and away the most attention in the media and more generally, a big push is on to have a European take the reins. The logic is that with the eurozone mess far and away the biggest priority, the new IMF chief needs to have credibility with the major actors, and that argues for a European choice.

The contrary camp is the “the countries formerly known as emerging” who point out that it is their turn to have an IMF head from one of their countries. The IMF has been led by a European since its inception. Even though votes have been rejiggered to give younger economies more weight, the mature ones still are in control of the outcome.

But what is intriguing are the arguments that follow, which reveal what the real stakes are.

Quelle Surprise! SEC Worked Hard to Ignore Warnings of Subprime Fraud

Saying that regulators ignored danger signs in the run up to the financial crisis now verges on being a “dog bites man” account. But the New York Times excerpt from the new book Reckless Endangerment by Gretchen Morgenson and Josh Rosner show that the SEC was not merely asleep at the switch, but apparently peopled with higher ups who were looking hard for reasons not to pursue suspicious conduct.

The extract is about a particularly rancid case, that of subprime originator NovaStar, which was one of the twenty biggest. Not only did it issue the drecky mortgages in impressive volumes, but it engaged in obvious financial misreporting. While the frauds it foisted on borrowers fell largely between regulatory cracks, since NovaStar as a non-bank mortgage broker was regulated only at the state level, and those offices are chronically understaffed, misstatements in public reports reside squarely in the SEC’s beat.

Former LPS Employees Allege 30% to 78% Error Rate in Borrower Mortgage Records, Contradicting Banker/Regulator Cover-Up

One investor said that every time he looked at corporate misconduct, “No matter how bad you think it is, it’s always worse”. Lender Processing Services is proving to be a classic illustration.

The City of St. Clair Shores Employees’ Retirement System is the lead plaintiff in a class action lawsuit against Lender LPS that was amended and expanded yesterday. The suit is against the company and its three top officers, charing them with violations of Federal securities laws with the intent of inflating the company’s revenues and stock price.