“Systemically Dangerous Institutions”
Now we’re talkin…
Sorry for the long excerpt but it had to be done…
After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:
A government review of botched foreclosure paperwork so far has found that the problems do not pose a “systemic” threat to the financial system, a top Obama administration official said Wednesday.
Yes, that’s right. HUD reviewed the “paperwork” problem to see whether it threatened the banks — not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.
The Justice Department is leading an investigation of possible crimes involving mortgage fraud.
That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its “partnership” with the Mortgage Bankers Association (MBA). The MBA is the trade association of the “perps.” It created a facially ridiculous definition of “mortgage fraud.” Under that definition the lenders — who led the mortgage frauds — are the victims. The FBI still parrots this long discredited “definition.” That is one of the primary reasons why — in complete contrast to prior financial crises — the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds.
Note that the Justice Department is not investigating foreclosure fraud. HUD Secretary Donovan’s statement shows why:
“We will not tolerate business as usual in the mortgage market,” he said. “Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible.”
Note the language: “mistakes”, “errors”, “processes” (following the initial use of “paperwork”). No mention of “fraud”, “felony”, “criminal investigations”, or “prosecutions” for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to “fix” “processes” — not repair the harm their frauds caused to their victims.
The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers’ trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.
The inflated asset values allow the Fed and the administration to ignore the Fed’s massive loss exposure and allow Treasury to spread propaganda claiming that TARP resolved all the problems — at virtually no cost. Donovan claims that we have held the elite frauds accountable — but we have done the opposite. We have made the CEOs of the largest financial firms — typically already among the 500 wealthiest Americans — even wealthier. We have rewarded fraud, incompetence, and venality by our most powerful elites.
If the government does not hold the fraudulent CEOs responsible, who is supposed to stop the epidemic of elite financial fraud? The Obama administration’s answer is the fraudulent CEOs themselves, at a time of their choosing. You can’t make this stuff up.
But ultimately resolving the problems is not the government’s responsibility, said Michael Barr, assistant Treasury secretary for financial institutions.
“Fundamentally, this is up to the banks and the servicers to fix,” he said. “They can fix it as fast as they feel like.”
So who is Michael Barr and why is saying things on behalf of the Obama administration that make it appear to be a wholly-owned subsidiary of the fraudulent lenders and servicers? He’s a Robert Rubin protégé and he’s the senior Treasury official for banking policy.
We have a different policy view. We believe that only the government can stop fraud from growing to catastrophic levels and that among the government’s highest responsibilities is to provide the regulatory “cops on the beat” with the competence, resources, courage, and integrity to take on our most elite frauds. We believe that anything less is a travesty that causes tens of millions of Americans to be defrauded and poses a grave threat to our economy and democracy.
Prompt Corrective Action
First, it is time to stop the foreclosures until the banks and servicers adopt corrective steps, certified as adequate by FDIC, that will prevent all future foreclosure fraud. They must also adopt plans to remedy the injuries their foreclosure frauds have already caused, and assist the FBI, Department of Justice, and legal ethics officials investigations of their officers’ and attorneys’ frauds and ethical violations.
Second, it is time to place the financial institutions that committed widespread fraud in receivership. We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud. We should prioritize the receiverships to deal with the worst known “control frauds” among the “systemically dangerous institutions” (SDIs). The SDIs’ frauds and fraudulent leaders endanger the global economy.
We propose Bank of America for the first receivership. In the last few weeks, the SEC has obtained a large (albeit grossly inadequate) settlement of its civil fraud charges against the former senior leaders of Countrywide. (Bank of America acquired Countrywide and is responsible for its frauds.) Fannie and Freddie’s investigations — with their findings reviewed by their regulator, the Federal Housing Finance Agency (FHFA) — have identified many billions of dollars of fraudulent loans originated by Countrywide that were sold fraudulently to Fannie and Freddie through false representations and warranties. The Fed, BlackRock, and Pimco’s investigations have identified many billions of dollars of fraudulent loans provided by Countrywide under false reps and warranties. Ambac’s investigation found that 97% of the Countrywide loans reviewed by Ambac were had false reps and warranties. Countrywide also engaged in widespread foreclosure fraud. This is not surprising, for every aspect of Countrywide’s nonprime mortgage operations that has been examined by a truly independent body has found widespread fraud — in loan origination, loan sales, appraisals, and foreclosures. Fraud begets fraud. Lenders that are control frauds create criminogenic environments that produce “echo” epidemics of control fraud in other professions and industries.
We have been amazed that, as one financially sophisticated entity after another found widespread fraud by Countrywide in the entire gamut of its operations, the administration, the industry, and the financial media act as if this is acceptable. Countrywide made hundreds of thousands of fraudulent loans. It fraudulently sold hundreds of thousands of loans through false reps and warranties. It fraudulently foreclosed on large numbers of loans. It victimized hundreds of thousands of people and hundreds of financial institutions, causing hundreds of billions of dollars of losses. It has defrauded more people, at a greater cost, than any entity in history.
Bank of America chose to purchase Countrywide at a point when it — and its senior leaders — were infamous. Bank of America made some of these Countrywide leaders its senior leaders. Yet, Bank of America is not treated as a criminal entity. President Obama, Attorney General Eric Holder, Donovan, and Barr cannot even bring themselves to use the “f” word — fraud. They substitute euphemisms designed to trivialize elite criminality. The administration officials do not call for Bank of America to be the subject of a criminal investigation. They do not demand that Fannie, Freddie, Ambac, the FHFA, and Pimco file criminal referrals about Countrywide’s frauds. They do not demand that Fannie, Freddie, and the Fed refuse to purchase or take as collateral any mortgage instrument from Bank of America. No one at the Harvard Club in New York moves to kick Bank of America’s officers out of their club! The financial media treats Bank of America as if it were a legitimate bank rather than a “vector” spreading the mortgage fraud epidemic throughout much of the Western world.
For the sake of our (and the global) economy, our democracy, and our souls this willingness to allow elite control frauds to loot with impunity must end immediately. The control frauds must be taken down and their officers removed promptly. Receivership is the way to begin to reclaim our souls, our economy, and our democracy and Bank of America has the track record that makes it a good place to start. It is sufficiently large and powerful that its receivership will send the credible signal that America is restoring the rule of law and that even the most elite frauds will be held accountable.
Next we need to remove the rest of the “too big to fail” institutions — we call them systemically dangerous institutions, or SDIs — to reduce the global systemic risks that they pose. We are rolling the dice with disaster every day. The SDIs are inefficient, so shrinking them will reduce risk and increase efficiency. We need to follow three types of policies with respect to SDIs.
- They cannot grow larger and compound the systemic risk they pose.
- They must create an enforceable plan to shrink to a level and functions such that they no longer pose a systemic risk within five years.
- Until they shrink to the point that they no longer pose systemic risks they must be regulated with far greater intensity than other banks. In particular, control fraud poses so severe a risk of triggering another global financial crisis that there must be no regulatory tolerance for control frauds at the SDIs. One of the best ways to reduce their risks is to mandate that high levels of executive compensation be paid only after sustained and superior performance (at least five years), and with “claw back” provisions if compensation was obtained by fraudulent reported income or seriously inadequate loss reserves.
Appointing a receiver for an SDI will be a major undertaking for the FDIC, but it is also well within its capabilities. Contrary to the scare mongering about “nationalizing” banks, receivers are used to returning failed banks to private ownership. Receiverships are managed by experienced bankers with records of competence and integrity rather than the dread “bureaucrats.” We appointed roughly a thousand receivers during the S&L and banking crises of the 1980s and early 1990s under Presidents Reagan and Bush.
Here is how it works. A receiver is appointed on Friday. The bank opens for business as normal (from the bank’s customers’ perspective) on Monday. The checks clear, the ATMs work, and the branches all open. The receiver’s managers direct the business operations, find the true facts about the bank’s operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted.
The receiver is also a well-proven device for splitting up banks that are too large and incoherent by selling units of the business to different bidders who most value the operations.
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Job well done…