More on The Fed Audit, “Secret Loans”, and Conflicts of Interest

The last couple of days I’ve posted some thoughts on The Fed and the summer 2011 “audit” by the Government Accounting Office (GAO) here and here.  A long time reader and commenter, AZleader, apparently also wrote about The Fed audit.  I like his post a lot.  In particular, AZleader went beyond the press releases and news documents to read the actual report itself, something real historians do and journalists used to a long time ago.  He makes some good points (emphasis is mine):

Politicians and Press Releases

Shock of shocks! What you read in politician press releases doesn’t always jive with unbiased, objective truth. Politician press releases, as is true in the Sanders one, are often a mixture of fact and false implication crafted toward a political agenda.

It is not casual reading but ya gotta study the small print of the GAO’s very complex 253 page report that Sanders based his press release on to get to fundamental truths:

  1. The $16 trillion in “secret” Fed loans are not loans. They are MOSTLY innocuous financial services transactions provided by The Fed for which it was paid banking fees.
  2. There is nothing “secret” about the loans. According to the GAO Report all information it includes is in existing publicly available annual financial statements of the 12 federal reserve banks.
  3. The GAO audit isn’t “The first top-to-bottom audit of the Federal Reserve” as Sanders’ claims.  It isn’t even remotely close to that. Such an audit was proposed by Congressman Ron Paul and others but, as often happens in Congress, it got watered down in Dodd-Frank.
  4. The GAO audit is very limited in scope. It covers only temporary emergency loan programs between December 1, 2007 and July 21, 2010.

The main outcome of The Fed audit was to make recommendations on how The Fed can protect itself against exposure as the “lender of last resort” in emergencies.

Almost all the $16 trillion in transactions by The Fed are money swaps or very short-term 82 day or less collateralize loans to banks.

In other words, not only was The Fed not “out of control” as I noted, but it was instead actually doing what a central bank is supposed to do:  act as lender of last resort, facilitate transactions between banks, and facilitate international currency exchange — the precise things The Fed didn’t do so well in 1929-1933 and we paid for it with a Great Depression.

He also points out that while

…two CEOs were involved in conflict of interest situations. JP Morgan CEO, Jamie Dimon, and NY Fed Bank President, William Dudley, were both in positions of conflict of interest during the crisis.

The Fed was in a crisis mode and needed all the expertise it could get, even at the risk of having some conflict of interest.  I would agree that given the situation at the time, it was probably necessary to involve Dimon and Dudley.  However, what I fault The Fed for is for not having been prepared for such a situation.  The Fed has been too cozy with the banking executives for too long and too slow to move when changes in the industry or markets create a possible conflict of interest.

I agree with AZleader also in noting how the real scandal, the real damning information in the audit hasn’t gotten the attention it deserves.  Specifically:

….The vast majority of actual dollars spent by The Fed was in the “Agency Mortgage-Backed Securities Purchase Program“.

That isn’t even a loan program at all.

That program was created “to support the housing market and the broader economy”. It bought up all the toxic home mortgage loans approved by and backed up by Fannie Mae and Freddie Mac, the home mortgage lending giants.

The Fed had to buy all of Freddie and Fannie’s bad debt because it was required by law. Both companies are government sponsored enterprises (GSEs) created by the government. Those companies went into government receivership in September of 2008.

The total real dollar net purchases in that program was $1.25 trillion. Some of those assets have since been sold. There is still a $909 billion debt balance outstanding.

The Fed paid out about $80 billion in investment management fees to outside vendors, all of them American companies

Again, the problem here isn’t so much that they bought the Freddie and Fannie debt. Something had to be done to help “support the housing market”.  The problem is again a lack of foresight, planning, and consideration of alternatives.  In the reality, what The Fed did was prop up Freddie, Fannie, and the big banks involved in wholesaling mortgages and the MBS market.  The way it was done didn’t really address the fundamental issues in the housing and mortgage market, as evidenced by us being in the fourth year of a continued housing depression, declining house prices, and rising foreclosures.  Sick lenders were a symptom, not the disease in housing.  The Fed only addressed one symptom.  The Fed has also exposed itself to serious losses by taking on much of this mortgage debt.  What options The Fed might have considered is a topic for another discussion.

AZleader and I don’t always agree on a lot of things, but I think we’re close on The Fed audit.  Of course, how we fix The Fed is another topic….

Banks Want to Do To Student Loans What They Did to Mortgages

On the heels of yesterday’s post about student loans and their growth.  I want you to know that Wall Street is hot on the problem.  They’ve made a quiet proposal to the “supercommittee” that’s supposedly addressing government deficits to have the government subsidize the banks via fees without creating any more student loans or taking on any risk.  The essence of the whole proposal is to leave the government on the hook for student loans but to use accounting tricks to “take them off the books”.  It’s similar to the ways the big banks prior to the crisis would take debt and obligations they had and hide them in “special purpose entities” so they wouldn’t have to show them on their books.  There’s no benefit to investors, students, or the government from the proposal. Only the banks benefit.  But maybe that’s why they aren’t talking about the proposal in public but instead try to get it passed quietly through lobbyists.

Jason Delisle of New America Foundation’s Higher Ed Watch explains (bold emphases are mine):

The investment banking industry – and its friends in Congress – have cooked up a scheme they are pitching to the “supercommittee” that they say would reduce the federal debt and cut federal spending. Supposedly, the plan would take the government’s $555 billion direct student loan holdings off of its books. In reality, the plan, which would allow the bankers to earn fees on a $555 billion deal, plus $100 billion more every year, would not reduce the debt or cut spending. But that hasn’t stopped Wall Street from trying.

A proposal that could only have been be cooked up by investment bankers is circulating on Capitol Hill. It would refinance the $555 billion direct student loan portfolio with new debt backed 100 percent by the federal government. But this new debt would not be called U.S. Treasury debt, despite the 100 percent guarantee, and therefore not counted as part of the national debt. In other words, the new debt would be used to pay off the old debt (Treasury bonds) that the government issues to finance direct student loans. To be sure, the mechanics of the proposal are more complicated than that, but the effect of the proposal would be to move all outstanding and future student loans from bonds backed 100 percent by taxpayers to another set of bonds backed 100 percent by taxpayers but not counted as part of the national debt. …

The proposal would increase federal spending because the new securities the government would issue to finance direct loans would have higher interest costs than the Treasury bonds they would replace, effectively increasing the cost of every direct loan. Investors would view the new securities as slightly less desirable than Treasuries (even though they still carry a 100 percent guarantee from the federal government) because they will not be as liquid (easily bought and sold among investors). The new securities would also be subject to prepayment risk…Then there are the fees that the government would have to pay to investment banks (the “syndicate of underwriters”) to put the new securities on the market each year. Those fees could cost taxpayers tens or even hundreds of millions of dollars every year.

Apparently the supporters of the proposal claim that it would “diversify funding sources”.  In other words, if someday, somehow, some investors wouldn’t want to buy U.S. Treasury bonds (something is emphatically NOT happening now since interest rates are at record lows), then maybe they might be interested in something that’s backed by the U.S. but isn’t called a Treasury bond.  In other words, there’s a slight chance that pigs might someday fly away from the farm so let’s have a bunch of hogs that well call “pink cows”.  Jason speaking again:

Some members of Congress – particularly Republicans – would simply feel better if the direct loan program were funded with “private capital” rather than U.S. Treasury bonds….[but] the securities would be sold in the same markets as Treasury bonds and the capital raised to finance direct student loans would be no more or less “private” than it was before.

If the Wall Street proposal to refinance direct student loans doesn’t actually reduce the debt, increases the federal budget deficit, and doesn’t make the program’s financing any more dependent on the private market than it already is, what does it do? It effectively addresses what some see as the direct loan program’s biggest shortcoming; it doesn’t allow Wall Street to make a ton of money off of it.

So Wall Street wants to do to student loans what it’s done to home mortgage finance.  Have somebody else, such as the federal government, guarantee that they cannot lose any money.  Then, they want to bundle them and re-sell them solely for the purposes of making more fees – just like they did with mortgage-backed securities and credit default swaps and other derivatives.  If I recall correctly, that didn’t really work out too well now did it?  Well it worked out for the banks, but not for the rest of us.

Finally Some Justice for a Homeowner

This from WFMY TV Channel 2 in Florida:

Have you heard the one about a homeowner foreclosing on a bank?  Well, it has happened in Florida and involves a North Carolina based bank. Instead of Bank of America foreclosing on some Florida homeowner, the homeowners had sheriff’s deputies foreclose on the bank.

It started five months ago when Bank of America filed foreclosure papers on the home of a couple, who didn’t owe a dime on their home.  The couple said they paid cash for the house.  The case went to court and the homeowners were able to prove they didn’t owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay. A Collier County Judge agreed and after the hearing, Bank of America was ordered, by the court to pay the legal fees of the homeowners’, Maurenn Nyergers and her husband.  The Judge said the bank wrongfully tried to foreclose on the Nyergers’ house.

So, how did it end with bank being foreclosed on?  After more than 5 months of the judge’s ruling, the bank still hadn’t paid the legal fees, and the homeowner’s attorney did exactly what the bank tried to do to the homeowners. He seized the bank’s assets.

“They’ve ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, ” attorney Todd Allen told CBS.

Sheriff’s deputies, movers, and the Nyergers’ attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller’s drawers.

After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.

“As a foreclosure defense attorney this is sweet justice” says Allen.

Allen says this is something that he sees often in court, banks making errors because they didn’t investigate the foreclosure and it becomes a lengthy and expensive battle for the homeowner.

Of course if there were true justice, some Bank of America executives should spend a few days in the county lockup for contempt of court.

Home Foreclosures – Write Your Attorney General

I support this from Yves Smith at Naked Capitalism.  The law must be upheld. Fraud is fraud. It is not “paperwork glitches” or “snafus” or “correctable errors”.  It has been the policy of the banks and mortgage servicing organizations to file en mass false statements and false documents in our courts.  These practices will not stop unless the senior executives are held accountable for the actions of the organizations they lead.

“Crime Shouldn’t Pay”: Tell the State AGs You Want Mortgage Fraud Prosecuted

Tomorrow, a group of homeowners is meeting with Iowa’s attorney general Tom Miller, who is leading the 50-state effort which is investigating foreclosure and mortgage lending abuses.

This group is presenting a letter to Miller asking them to prosecute bank executives for mortgage fraud and wants to show broad-based support for this idea via having concerned citizens sign it.

Here is the text of their letter:

Dear Attorneys General,

We, the undersigned thank you for investigating fraudulent and illegal foreclosure practices by the nation’s biggest banks.

Your investigation is the best hope for homeowners and communities since this crisis began. Americans are watching. Our expectations are high that we will see justice for the millions of families who have lost their homes, the millions more who are at risk of foreclosure, and the neighborhoods across the country devastated by falling housing values and vacant properties as a result of widespread mortgage fraud.

The bank executives who committed fraud should be prosecuted. Any settlement needs to go beyond fixing paperwork, fully addressing ongoing abuse and ending the flood of unnecessary foreclosures.

We demand that any overarching settlement agreement contain mandatory loan modification programs, including principal reduction for owner-occupant families facing foreclosure and remedies for those families who have already lost their homes.

Now is the time for bold leadership from the nation’s Attorney Generals to hold big banks accountable for the damage they have done to families, communities and the nation’s economy.

I have signed this letter and strongly encourage you to do so. Please visit the site, www.crimeshouldntpay.com to support this effort. Thanks

more Bankers: FAIL

Yves Smith at naked Capitalism tells us of a case where Wells Fargo Bank (which acquired Wachovia 2 years ago), foreclosed and evicted a homeowner for failing to make payments.  Then Wells sold the foreclosed house at auction to a new owner.  Then Wells attempted to foreclose on the new owner for alleged failure to payoff the original first mortgage from the previous owner.  How could this happen?  It seems the mortgage Wells used to foreclose the first time was a second mortgage.  Wells took the money from the auction sale and paid off the second mortgage without paying any money to the owner of the first mortgage, which has legal precedence.  In fact, it didn’t even notify the owner of the first mortgage of the sale.  It just took the money and ran.  A gross violation of mortgage law. But it gets even more bizarre.  Turns out Wells Fargo is also the servicer and the party leading the foreclosure effort on the first mortage.

How could this happen?  Well, first off, this is the stuff that happens when mortgages (and transfers of mortgages) are not properly recorded publicly at the county and are instead kept in secret in bankers’-only databases like MERS.  Second, it most likely amounts to attempted fraud and theft.  See, Wells owned the second mortgage.  House gets sold. Wells gets all it’s money back.  But Wells Fargo is most likely only the servicer on the first mortgage. The first mortgage was most likely “securitized” and sold to the MBS trusts where ownership is by a host of bond holders.  If Wells had sold the house and paid off the first mortgage, then the bond holders would have gotten their money back (as legally they should), Wells would only get a small fee, and Wells would be left with no money for the second mortgage.  Wells Fargo most likely defrauded the bondholders.  It’s Bankers FAIL again.

Yves Smith at Naked Capitalism tells the full story:

The Times has a completely different sort of account, with a headline that is remarkably blunt: “Avoid Foreclosure Market Until the Dust Settles.” This is the sort of article that gives industry lobbyists nightmares. And with good reason. It contains a horror story that is enough to scare lots of people who are thinking of buying properties out of foreclosure.

Just as the account of a man who had his house foreclosed upon when he has no mortgage persuade a lot of people that there could be real problems with foreclosures, this one illustrates how title has become a mess.

Todd Phelps and Paul Whitehead bought at a foreclosure auction. It turns out the lender who had seized the house was the second mortgage-holder; unbeknownst to them, the property had a large first mortgage outstanding, which meant it was now their obligation.

The buyers had asked their broker to check the records to make sure the title was clear; he appears not to have done so. The auction company would not refund their payment.

But the really nasty bit here is…both loans on the house were from the same bank, Wachovia, now part of Wells Fargo. The Times story does not draw out the implication: first, that the bank foreclosed on a second, rather than a first (is that a weird way to provide a data point to justify not writing all seconds down to zero? And the fact that the buyers were saddled with the first says, in effect, that Wells defrauded the first mortgage holders, presuming, as is likely, that the first mortgage was part of a securitization, as opposed to on Wells’ books. The proceeds of the foreclosure sale should have gone to the first lien holder, not the second.

The hapless buyers did get out whole; the inquiries of the reporter led Wells to reverse the deal. But anyone in that situation who didn’t get a big media outlet shining a bright light on the transaction would have been stuck. Caveat emptor indeed.

Bankers: FAIL

A quote from Jamie Dimon, the CEO of JP Morgan Chase this week (from the Wall Street Journal via Yves Smith at Naked Capitalism):

“We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

Now let’s turn to the Lansing State Journal reporting the day before Jamie Dimon made his comment (emphasis mine):

HOLT – Army National Guard Capt. Bill Krieger was talking to his wife, who’s stationed in Iraq, at the very moment his mail carrier came to his Delhi Township home Saturday with a registered letter requiring Krieger’s signature.

It was a foreclosure notice from Chase Home Finance:

“THIS NOTICE …,” it growled, “AFFECTS YOUR RIGHT TO CONTINUE LIVING IN YOUR HOME.”

Let me pause here to inject a little background into this story. Capt. Krieger served in Iraq in 2006-07. His wife, Army National Guard Sgt. Kristin Krieger, is there now, as is their 21-year-old son, Pfc. Aaron Krieger, who’s regular Army. They keep in touch via Skype, software that allows voice calls over the Internet.

Let me point out, furthermore, that JPMorgan Chase is one of the banks American taxpayers bailed out in 2008. Chase is currently under investigation for its alleged sloppy approach to foreclosures.

Oh – and one other thing … since they bought their house five years ago, the Kriegers have never missed a payment. Not one.

Mr. Dimon’s assertion that all foreclosures deserve it is demonstrably false.  He is either lying or ignorant.  If ignorant, then we can conclude that the organization he heads, JP Morgan Chase, is our of control and cannot account for it’s own assets properly and report them properly.  Either way, it’s FAIL on the bank.

Unfortunately, Mr. Dimon will not only not suffer consequences for his and his bank’s misbehavior, he will be rewarded with hundreds of millions of dollars in bonuses.

We need a new banking system.