Conferring

Today I'm off to the Wharton Restructuring and Turnaround Conference, which looks to be a great, high level discussion of all things chapter 11ish. But it is surely a sign of the times that the keynote speaker is a banking lawyer.

Why No Investigation?

Here's a bombshell: the San Francisco City Assessor commissioned a serious audit of foreclosure documentation filed in the past few years. The audit examined 400 foreclosures.  It found problems with 85% of them, often multiple problems. What's more, some of the problems are pretty serious as they implicate not only borrowers' rights, but the integrity of mortgage-backed securities and the property title system.  

The San Francisco City Assessor's audit also serves as a benchmark for evaluating the Federal-State servicing settlement.  The San Francisco City Assessor managed to accomplish in a few months what the Federal government and state Attorneys General weren't able to do in nearly a year and a half with far greater resources at their disposal:  perform a credible investigation of foreclosure documentation with serious implications about the securitization process in general.  That's a lot of egg on the face of Shaun Donovan, Eric Holder, Tom Miller, et al.  The SF City Assessor report shows that it really wasn't so hard for a motivated party to undertake a serious investigation. And that raises the question of why the largest consumer fraud settlement in history proceeded with virtually no investigation. 

The lack of investigation was the compelling criticism that led the NY and DE AGs to stay out of the settlement for quite a while. I've never heard an answer as to why no serious investigation. As the SF City Assessor's audit shows, the documentation is all a matter of public record.  It's not that hard to do, especially if you have the resources of the federal government.  So the resources were there. The capability was there. So why no investigation?  The answer has to lie with lack of motivation. Were the Feds and AGs scared of what they would find if they delved too deeply into the issue? 

I hope that members of Congress will question the Attorney General and HUD Secretary the next time they show up to testify on the Hill.  The issue is also worthy of a GAO or IG examination.  

Revisiting Lehman

For reasons that I don't quite understand, Krugman has gone all upside Taylor based on a two year old post from Economics of Contempt, and DeLong has joined in the fun. Its kind of an undead debate.

The basic problem is that the parties are talking past each other -- some using Lehman's "bankruptcy" to mean its failure, whereas Taylor may be referring to the bankruptcy process itself. Maybe -- I'll admit I'm probably giving Taylor more credit than he deserves here.

BTW, here is my take on this general topic (via Dealbook).

Recommended Reading

For those following financial reform:  Paul Volcker dismantles the only respectable (i.e., not obviously self interested) argument against the Volcker rule.

Quote of the Day

In re Bank of America, N.A, 11-24503 MER, 2011 WL 2493056 (Bankr. D. Colo. June 21, 2011):

Since there is no allegation Bank of America is a railroad ...  the Court accepts Bank of America's representation that it is a “bank” for purposes of § 109(b)(2).

 

The Servicing Settlement: Banks 1, Public 0

What are we to make of the servicing settlement announced today with much hoopla?  The short answer is not much.  The settlement is the large consumer fraud settlement ever, but it accomplishes remarkably little in terms of either alleviating the foreclosure crisis of holding to account those responsible for the housing bubble and subsequent foreclosure abuses.  As my Texas relatives say, it's “All sizzle, no steak.” 

Instead, I think the settlement needs be seen as the conclusion to round one of an on-going struggle for accountability and reparations for the enormous damage the housing bubble did to the United States.  Whether we will ultimately see meaningful accountability and reparations in the end is very much in question.  Round two, featuring the Residential Mortgage-Backed Securities Fraud taskforce, could well be stillborn; the taskforce combines more motivated and more capable agencies, but it isn't clear of the motivated can leverage the more capable or will be bogged down by them. But as for this settlement, if this is all that we get, it’s a big nothing. 

Private Equity Works on Its Image Problem

Bloomberg out with an interesting story about how private equity firms are buying single family homes at foreclosure to rent out. It surprises me that there is real interest in what remains a relatively small scale, highly heterogeneous asset. Previous attempts to achieve economies of scale in this area have been disastrous -- see Bank of America.

Break up Bank of America?

Steve's title was subtle, so in case anyone missed it, here are the materials on Public Citizen's website. The petition calls on the Federal Reserve and the Financial Stability Oversight Commission to use their authority under Dodd-Frank to break up Bank of America. (But still check out Steve's analysis on Dealbook!).

Caught up on this line again

Bank of America, OLA, and the problems of oversized financial institutions, up now on Dealbook.

The Fed on Mortgage Servicing

I had the privilege today of hearing Federal Reserve Board Governor Sarah Bloom Raskin deliver the keynote address to the Section on Financial Institutions at the American Association of Law Schools Annual Meeting.  Governor Bloom Raskin's topic: mortgage servicing, which is not something the Fed has previously addressed.  I strongly commend her speech to you. It's rare to see a bank regulator invoke Shakespeare to great effect, as she does, but it's much more important for some of the other things she says:

This wave of foreclosures is one of the factors hindering a rapid recovery in the economy. Traditionally, the housing sector, buoyed by low interest rates and pent-up demand, has played an important role in propelling economic recoveries. The increase in housing sales and construction often is accompanied by purchases of complementary goods, like furniture and appliances, which magnify the effect of the housing recovery.

However, six years after house prices first began to fall, the pace of the economic recovery remains slow. Nationally, house prices have fallen by nearly one-third since their peak in the first quarter of 2006, and total homeowners' equity in the United States has shrunk by more than one-half--a loss of more than $7 trillion. The drop in house prices has had far-reaching effects on families, neighborhoods, small businesses, and the economy, in part because so many American families--more than 65 percent--own their homes. The fall in house prices has caused families to cut back on their spending and has prevented them from using their home equity to fund education expenses or start small businesses. The decline in house prices has also impeded families from benefiting from the historically low level of interest rates, as perhaps only half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.

This is a really important set of points. They shouldn't sound new to Credit Slips readers, but it's really important to have a Fed Governor saying them.  

MBIA v. Countrywide Ruling

There's been a lot of media coverage of the recent ruling of the NY Supreme Court (that's the trial court, not the final Court of Appeals) in MBIA v. Countrywide, a suit by the monoline bond insurer against Countrywide for fraud, negligent misrepresentation, etc. that induced it to insure Countrywide's mortgage-backed securities. This and Syncora's similar suit are being carefully watched because they are the MBS litigation that is the farthest along and thus seen as a belleweather for other rep and warranty suits.  While the monolines are in a somewhat different position than MBS investors, they provide a good indicator of what to expect from investor suits.  

For all the discussion of the opinion, no one seems to have actually read the damn thing, so here it is.

A New Theory of the Role of the GSEs in the Housing Bubble

Bill Black has an interesting new take on the role of Fannie and Freddie in the housing bubble. He sees their investment in non-prime mortgages as being driven by executive compensation, rather than a fight for market share against investment bank securitization conduits or govt affordable housing policy. The government affordable housing policy point has been repeatedly debunked (and Susan Wachter and I have a new paper that adds to this debunking via an examination of the commercial real estate bubble, where there was no government involvement whatsoever). Black is not, however, able to disprove the market share theory. What he does point to is that the GSE's involvement with nonprime mortgages was as whole loans kept in portfolio, rather than securitized (and also via purchases of MBS), which he says was a move to increase the short-term yield for the GSEs and thus maximize short-term executive compensation.

I think this is an interesting theory, but there are a few data points necessary to make it work, and I'm skeptical that they all support Black. 

More Rot in the OCC Foreclosure Reviews

Michael Olenick, Gretchen Morgenson, and Yves Smith have all written pretty damning things about the foreclosure reviews persuant to the OCC consent orders with major mortgage servicers. (For my own previous thoughts, see here and here.) I've just started to peruse some of the engagement letters with the firms conducting the reviews, and the rot is even worse that these other critics portray.

What follows is in no way a comprehensive cataloging of the problems in the OCC foreclosure review process--this is just what I spotted from the briefest of perusals.  Yet it is clear that there are two types of serious problems:  conflicts of interest and flawed substance of the review process. I'll lay both out below and then give some thoughts as to what could and should be done to remedy this farcical process in order to ensure some accountability to the public and justice for homeowners. The post concludes with some thoughts about the core problem--the OCC--and what can be done to remedy it.   

Robbing Peter to Pay Paul: US Economy Edition

The Administration seems to have cut a deal to extend the payroll tax cut, which is a smart economic move in terms of trying to support demand. But it's being paid for by an increase in the "G-fee" (guarantee fee) charged by FHA and Fannie Mae and Freddie Mac on the loans they purchase. In other words, anyone refinancing or taking out a mortgage now will be subsidizing reduced payroll taxes.  The result is robbing Peter to pay Paul, which means the economic benefits from extending the payroll tax cut are going to be muted by the chill this puts on the struggling housing market.  

The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts. Homeowners don't choose whether they have a GSE loan or not. They choose whether to do FHA or not, but if it's not an FHA loan, the homeowner doesn't know if the loan is going to stay in the lender's portfolio, be sold to another lender, be sold to a GSE (and maybe securitized by the GSE) or be privately securitized. Raising the costs of the GSE execution might encourage more portfolio lending, but it's hard to believe that a few basis point change in GSE execution costs is going to suddenly make the private-label securitization market revive.  The problems in that market aren't just the economics--particularly of servicing--but the utter lack of trust investors have in the underwriting, documentation, and servicing. For the private-label market to revive, there will need to be a much more significant difference in execution costs between private-label and the GSEs. The increased G-fee doesn't do it. 

It's painfully apparent that this Administration doesn't have a housing policy, and that's a serious problem when housing is the anchor weighing down the economy.  Consider, on the one hand, the Administration tries to make refinancing easier via the expansion of HARP.  Then it raises the "G-fee" that Fannie Mae and Freddie Mac charge on every loan they purchase, which gets passed on the homeowner in the form of a higher mortgage rate.  (I'm not sure of the pass-through rate, but I'd guess it's pretty high.)  If the Administration is trying to fix the housing market, this sure isn't the way to do it.

Lies and Denial: the 2012 GOP Strategy

The last 24 hours have witnessed some remarkable historical revisionism on financial regulation coming out of the GOP.

First, we had one of the most bizarre and simply untrue attack ads I've ever seen, courtesy of Karl Rove's Crossroads GPS outfit. The ad calumnies Elizabeth Warren, claiming that first she was responsible for the TARP bailout and then set out to butter up bankers. Is this man on drugs? Rove seems to be confusing Elizabeth Warren with George W. Bush. 

Let's set the record straight.  Elizabeth Warren involvement with TARP was as chair of the Congressional Oversight Panel.  That was a body created by Congress to monitor and report on the effectiveness of TARP bailout.  The Oversight Panel did not create the bailout.  Congress did at the urging of the Bush Administration. The Oversight Panel had absolutely no authority to direct the use of the bailout. Its sole authority was to act as a watchdog.

And what a watchdog it was! It was Elizabeth Warren's trenchant criticism of the bailout that catapulted her to the national stage. The reason she started being invited to appear on the Daily Show and the like was because there was no better and more articulate critic of the bailout than Elizabeth Warren. The Oversight Panel could easily have been a sleepy, impotent backwater. Elizabeth Warren turned it into a ferocious bully pulpit for the interests of middle class Americans who were confused and angry over what was happening to their country. To blame Elizabeth Warren for the bailout is like calling Larry Bird the greatest New York Knick ever. It's so ridiculous that it's insulting. (And fighting words in Boston.) 

Then there's a hooter of a claim that Elizabeth Warren was courting bankers. Let's put that in some context to show how silly the charge is.  Elizabeth Warren left the Oversight Panel to help push for the creation of the Consumer Financial Protection Bureau, and for a long time it was thought that she would be nominated as the Bureau's Director. One reason she wasn't nominated was because the banks took an "over our dead [but now rescusitated via bailouts thank you very much] bodies" approach to Warren, claiming that she was "anti-bank."

Now, some might think that's a compliment, but Warren tried to show that she's not anti-bank. She just wants fair, transparent markets.  (Apparently, that's a problem for banks.  Heck, apparently, if you want market to be fair, and transparent and work as they are supposed to that makes one anti-bank, a socialist, a communist, or worse.  Capitalism, it turns out has nothing to do with markets.) To show that she wasn't anti-bank, Warren took great pains to reach out to banks and to show them that she's open-minded and willing to listen to their concerns, especially the concerns of small community banks and credit unions.  So now Elizabeth Warren is being damned for having been gracious and fair and open-minded. 

For more commentary on this lunacy, see here and here. 

Is Bank of America Gambling on Resurrection (or Is BoA Holding the US Hostage)?

What would you do if you were running an insolvent company? The smart thing is to bet big:  go with a high-risk/high-return strategy.  If the gamble pays off, you're solvent, and if not, well, you're already insolvent.  You're playing with the creditors' money. (And without a tort of deepening insolvency, there really isn't a clear downside for management.)  This is gambling on resurrection.  

We've seen the disastrous results of banks gambling on resurrection.  That was the S&L crisis. Rising interest rates in the late '70s decapitalized the S&Ls as the S&Ls' assets were long-term, fixed rate mortgages that paid lower rates than the S&Ls had to pay depositors.  The S&Ls, however, got a pliant Congress to agree to massive deregulation that allowed them to expand into all sorts of new business lines, like commercial real estate and race horses and junk bonds. Insolvent S&Ls went chasing high risk/high return projects.  The result was that the tab for taxpayers to fix the S&L mess was significantly greater.

Today, it looks like Bank of America is repeating the S&Ls' gamble on resurrection and using this gamble to hold the US government hostage.  

The Multistate Foreclosure Settlement

The New York Times came out with a strong editorial urging state AGs and the Administration not to rush into the proposed multi-state settlement deal. I think it's worthwhile reviewing what we know about the deal and the arguments for and against it.  Let's start with the facts that we know.  There aren't many that are publicly confirmed; the Administration, the AGs leading the multi-state settlement, and the banks very much want to avoid public comment on the deal--they want to present it as a fait accompli.  As a result, there hasn't been definitive reporting on the contents of the term sheet currently circulating among AGs.  It appears, however, the the deal has the following features.

Some 16 banks that do mortgage servicing will:

1. contribute a total of $5 billion in cash;
2. contribute total of mortgage assets with a face value of $20 billion, but a market value considerably lower; 
3. agree to uniform servicing standards.

In exchange, the state and federal authorities signing on would give the banks:

1. a release of all servicing claims;
2. a release of all origination claims, including discriminatory lending claims;
3. a release of all MERS claims against the banks, leaving MERS Inc. as a potential defendant for MERS related issues (MERS Inc. has no financial assets of note.)  

Perhaps $20B of the money would be used for principal write-downs and for interest rate reductions (via refinancings, which have the added benefit of relieving the banks of rep and warranty problems on the old loan) on the loans owned by these banks, which is less than 10% of the first lien loans in the U.S. 

Let's start with the argument for this deal and then consider why it is wrong.  

The US's Missing Housing Policy

The United States has no housing policy. And there's none on the horizon either. That's a scary thing, given the centrality of housing to domestic economic woes.  

Once upon a time, the US had a housing policy. It was focused on increasing homeownership. It might have been a misguided policy or at least a policy taken too far, but it was a policy and everyone understood that. It meant that programs were designed to work toward that goal.

Today, 4 years into a housing crisis, we still have no housing policy. There's no plan to clean up the legacy of the housing bubble and no plan to build the future of housing finance. This sad state reflects a singular failure of political leadership.  It also reflects a deeply fragmented housing finance world in which no one is in a position to call the shots. 

Change.org Petition Plays Part in BoA Debit Fee Reversal

In early October of 2011, Bank of America announced that it would begin charging its customers an additional $5 users fee for using its debit cards. In my financial literacy class the weekend after the announcement, some students were resigned to it, some furious, but we all vowed to switch banks if we banked at BofA. Yet we all also knew what would happen next, if history was any indication. Other banks would follow suit and eventually we’d all get charged the fee, which would just go up even more over time. It turns out, at least for now, the ending is happier. People mobilized around recent college grad Molly Katchpole’s online petition requesting a reversal of the fees.The petition was brilliant in its simplicity, stating simply this:

Greetings,
I'm writing to express my deep concern over Bank of America's decision to charge customers $5 a month to use their debit cards when making purchases.

The American people bailed out Bank of America during a financial crisis the banks helped create. You paid zero dollars in federal income tax last year. And now your banks profiting, raking in $2 billion in profits last quarter alone. How can you justify squeezing another $60 a year from your debit card customers? This is despicable.

CDS Again

I want to draw about two trillion underlines under Alphaville's point that

we’d also like to know about concentration. That is, are there just a few counterparties out there that are big net sellers of Italy CDS or are there many? Which CDS have the most non-dealers involved?

Especially in light of this, where Jeffries reports that it has

no meaningful net exposure to European sovereign debt.

(emphasis mine).

 

N.B. It now appears that Jeffries' has primarily hedged by short selling, rather than CDS, but whenever we see a "net" number, we have to worry that the problem simply moves to another location in the system.

The Multistate Settlement Lottery: Bupkis

The NY Times had some details today about the multi-state attorney general mortgage servicing settlement in the works. It looks every bit as awful as one might have feared. Here's the criticial take-away:  this is bupkis. It gives meaningless relief to a meaningless number of randomly or adversely selected homeowners.  It doesn't do justice, even by halves. 

First, though, there's a detail reported in Gretchen Morgenson's otherwise insightful piece that I have on good source is incorrect.  The piece states that the banks would be doing principal write-downs on loans they own or service.  That's gotta be incorrect.  The banks can do principal write-downs only on loans that they own.  They have no legal authority to pledge write-downs on loans that they service on behalf of investors.  (Remember the Greenwich Financial suit against Countrywide for doing just that?)  

There's a critical implication here, then about the scope of the multi-state settlement:  at best 20% of the population of underwater mortgagees will be helped by this settlement, say 2.2 million homeowners.  The other 8.8 million (and probably 10 million by my reckoning) are SOL.  How do you think they're going to feel about their AGs?  About their President?  Too many times have American homeowners been promised help without receiving any.  It's getting old. 

Now you know better than that, I said

Over on Dealbook, I look at a fight between Lehman and Deutsche Bank regarding classification of a claim Deutsche Bank bought from Lehman's German estate, and then partially sold to some hedge funds. The stakes are only four or five cents on the dollar -- on a claim of several billion dollars.

BTW, I'm now writing on Dealbook as the "In Debt" columnist, with all my past columns available under that link. But you can also find them all right here on Credit Slips -- and you only get the interesting titles over here.

Love lost, fire at will

Over at Dealbook, I take a look at the fight among tranche members in the case of a CDO that is in chapter 11 in New Jersey. Yes, that's not suppose to happen . . . which is what makes it so interesting.

SemCrude Again

The SDNY requires mutually too, according to Judge Peck.

Do you feel the same?

Over at Dealbook, I look at the very different treatment awaiting unsecured creditors of Countrywide, depending on whether they are bondholders or tort litigants.

Everybody got a reservation

Over at Dealbook, I explore the parallels between the Penn Central bankruptcy case of the 1970s and the chapter 11 cases arrising out of the financial crisis, like Lehman and WaMu.

Bully for BofA: New Debit Card Fees!

Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

Regulatory Bankruptcy

My Jotwell review of Sarah Woo's last article is here. 

Safe Harbors Gone Wild

Yesterday's decision from the District Court court in the Madoff-Mets litigation is yet another example of why Congress desperately needs to revisit the safe harbors which exempt a host of financial transactions from the workings of the Bankruptcy Code (in this case, the Code as incorporated into SIPA).

The opinion is available here, but briefly, Judge Rakoff blew a giant hole in the trustee's suit against the owners of the Mets, dismissing all claims based on preference and constructive fraudulent transfer, whether under the Code or New York Law. The basis? Section 546(e) of the Code, which provides 

Notwithstanding sections 544, 545, 547, 548 (a)(1)(B), and 548 (b) of this title, the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker...  in connection with a securities contract, as defined in section 741 (7)...  that is made before the commencement of the case, except under section 548 (a)(1)(A) of this title.

Madoff was a stockbroker, in the loose sense that he was registered as a stockbroker. We now know that he was not actually doing any stockbroker like things for his investors. The Judge does not look into the definition of stockbroker in §101(53A) of the Code -- I think there might be an argument Madoff didn't meet it -- and moves right to the analysis of whether the transactions involved securities contracts and settlement payments.

Of course, there is no real reason to apply the safe harbors to this case. Madoff's transactions are not going to disrupt the financial markets if they were subjected to avoidance actions -- there was essentially no link to the financial markets whatsoever. But the Judge went with the planing meaning of the statute, which contains no such common sense exception. Hence the need for Congress to get involved.

Believing Pain and Fear Outside

But this whole living will thing actually has a way to go -- my latest Dealbook column, up now.

Housing Finance: Role of the Government Guarantee

I'm testifying before the Senate Banking Committee on Tuesday about the role of the government guarantee in housing finance (a/k/a wtf do we do with Fannie and Freddie). My testimony is here. I expect it will manage to piss off people left, right, and center, but that's the nature of this GSE reform debate. 

I'm not thrilled with the prospect of a government guarantee, but I just don't think that there's sufficient the market demand for credit risk on U.S. mortgages for a non-guaranteed system to function. Do we really think that $6 trillion dollars of interest risk investors are suddenly going to decide they want credit risk as well?

Realistically, if it gets hairy enough, the government will bail out the system, Dodd-Frank, Tea Party, and all that jazz aside. We'll keep chanting no more bailouts until we do the next bailout. (Remember the War to End All Wars?) That means that it's better to have an explicit guarantee and price for it.  

Put differently, the choice we face is not guarantee or no guarantee. That's just a false dichotomy. The choice instead is between an explicit and an implicit guarantee. The implicit guarantee is a guarantee of moral hazard. The government will bail, but won't price for it. The explicit one certainly has its own problems, but at least it means we are being candid about the risks the government is assuming and trying to price for them and structure the guarantee to mitigate the risk that it will be used.   

CDS News

I've got a Dealbook post up about an interesting dispute that has cropped up with regard to the definition of "Bankruptcy Credit Event" as used in the ISDA CDS definitions.

Nevada AG: Securitization Fail

The Nevada AG is looking to reopen the 2008 AG settlement with BoA:  the AG alleges rampant and immediate non-compliance with the settlement.  The NYT coverage missed what is arguably the bigger story:  the Nevada AG came out and alleged a securitization fail.  The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words: 

Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages.  Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.   

See also paragraphs 53 and 137-149. Amazing how the federal regulators missed all of this. Realize that it's been less than a year since the robosigning scandal broke and the chain of title issues started getting some attention. I expect we will see a lot more action on this front over the next year. Prosecutors, investors, and consumer attorneys are getting a lot more savvy about these issues, and it's getting harder and harder for the banks to dance around the problem.      

More on Refinancing Plan

Chris Mayer, one of the authors of the refinancing plan, a version of which is currently being considered by the administration, wrote in to the comments on an earlier post, protesting my characterization of his proposal. I have no argument with Chris about there being too many frictions in the refinancing process. I'm not sure that this is the best way to fix them, however, and I'm also puzzled by what problem the proposal aims to solve.  Is the goal to stabilize the housing market or to provide economic stimulus?  

Conflicts on the New York Fed Board

The regional federal reserve banks are weird, hybrid creatures, both private bankers' banks and public governmental agents. This hybrid existence means that they have conflicts baked into their DNA--they are both supposed to serve and regulate their member banks. These conflicts have been most patent with the New York Fed. During the AIG bailout, it was represented by the very lawyer who minutes before had been representing the private bank consortium that was trying to arrange a bailout of AIG and which benefitted from the public bailout. Yes, a client can waive conflicts and the lawyer probably knew the deal constraints better than anyone else, but that doesn't mean that the conflicts always should be waived.

The latest manifestation of this problem is FRBNY Director Kathryn Wylde criticizing NYAG Eric Schneiderman for having the chutzpah to sue the hometeam over fraud with MBS and mortgage servicing: 

“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible."

Gee, some might just think that what's going on with servicing fraud is indefensible. What does Wylde want? A trail of corpses? Apparently it's not ok to be hating on the hometeam.     

Wylde, of course, is a woman whose salary is paid by the banks. She heads the Partnership for New York City, an influential NYC business booster club. I haven't tracked down their finances, but it's hard to imagine that a fair portion of PFNYC's funding doesn't come from its "partners," which include all of NY's major financial institutions and the law firms that handle their legal work. 

Yves has previously riffed about the way in which Wylde is compromised by PFNYC's ties to the financial services industry, but it strikes me that the problem is by no means limited to Wylde, even if her public statements were pretty revealing. Instead, the problem is with all the selections of the Board of Governors of the Federal Reserve (Bernanke et al.) for the Class C directors, who are appointed by the Board of Governors of the Federal Reserve to represent the "public".  All three Class C directors have a serious conflict of interest because of their day jobs involve hitting up the banks for donations.  

Feds to AGs: Can't Touch This

As this NYT story notes, the administration has been putting pressure on the AGs, particularly NY AG Schneiderman, for several weeks now, urging them to fall in line with the administration's hear-no-evil, see-no-evil position on MBS and servicing fraud.  The NYT story makes it sound as if the feds were jolted into intervening because of pleas from the banks.  It's enough to make one think that we're back in 2005.   

There are three things that particularly bother me about what's happening.  

Any Bright Ideas?

Jean Braucher has noted the FHFA's RFI on foreclosure prevention. A huge problem with any proposal is the time to implementation for anything. It took months to develop flops like FHASecure, Hope4Homeowners, and FHAShortRefi. Any program where the government and/or private parties have to do much gets a major ding in my book because by the time its rolled out and the kinks are worked out, it'll be too late.

So here are some thoughts. First, the government needs to settle on its policy goal. Why are we trying to prevent foreclosures? Is it a macroeconomic goal of stabilizing the housing market? Is it a macroeconomic goal of deleveraging consumer balance sheets? Is it a moral goal of helping unfortunates? Is it an electoral goal of making people feel that the government is doing something/is on their side?

Second, there are obvious limitations on what the administration can do. Anything involving legislation is a non-starter with this dysfunctional Congress. Rule-making too might be problematic. But there's plenty the administration can do without legislation or rule-making. What's upsetting is that the adminsitration doesn't seem to be giving any consideration to these options because it will involve some tussling with the financial sector. It's easier to pretend that its hands are tied by Congressional acrimony and that ideas don't exist. 

So let me throw out an idea: why not have FHFA order the GSEs as a safety-and-soundness measure to write-down the principal on all underwater mortgages?  Or to offer all underwater homeowners with GSE loans a shared equity refinancing? At the very least, this could be done no question on GSE portfolio loans, and with some smart lawyering probably also on GSE securitized loans. (And if there is securitizaiton fail with the GSEs, then they're all portfolio loans!) That deals with (1) strategic default/negative equity, and (2) consumer balance sheet deleveraging. It doesn't take much to expand that move to FHA/VA, bank portfolio loans, and to private-label (ah, what a squandered opportunity the servicing consent orders were...).  

Now this won't help with unemployment, but deleveraging consumers is the key to increasing consumer credit and increasing consumer spending, which is the key to increasing job growth. It's all connected.  It probably won't kick in until 2013-2014 (Maybe just in time for it to be known as the Bachman or Romney or Perry recovery?  If so, the GOP can thank the bank regulators), but it's the right thing to do. 

The Systemic Risk Industry

There seems to be a cottage industry now in proposals to solve and/or mitigate systemic risk. I'm myself somewhat of a guilty party. The producers here are law profs and economists (and probably some other disciplines as well). These proposals fall into three buckets. One focuses on executive compensation as the key area for reform, a second on activity and/or size limitations, and the third on changing banks' capital structures. Strangely there seems to be little integration of these three approaches, although they would seem to be complements, rather than alternatives. But we scholars tend to see every problem as a nail for our particular hammer. 

It'll be interesting to see if this industry has a half-life longer than a couple of years; I suspect not, as many of the producers in the industry are not particularly interested in financial institutions per se and are likely to migrate to the next hot application of their tool box. Among existing proposals, the most intellectual activity has focused on capital structures as key. We've seen myraid co-co bond proposals, living wills, holding company structures, alternative capital risk-weighting, leverage limits, liquidity requirements, expanded shareholder liability, and all sorts of other variations on contingent capital. (I'm pointedly not linking any of these because my point isn't to pick on any single proposal, but to note a phenomenon.)  Some of these ideas are quite creative; some reinvent the wheel (it's astonishing how many proposals are blissfully unaware that similar devices have been tried and rejected by the market in US banking history).  Some are realistic that they can at best mitigate risk; others seem to truly believe that they will make the world safe for banking and eliminate risk.  

I'm rather conflicted regarding how to view this industry. On the one hand, I'm thrilled to see this level of scholarly attention to financial regulatory issues. Would that had been the case pre-crisis. On the other hand, I get the eerie sense from reading some of these proposals that I'm witnessing a redux of structured finance, in which a lot of excellent brain power was spent on trying to develop capital structures that eliminated risk, only to find out that it had been shifted and concentrated, rather than removed. (This might be because of the prominence of co-co bond proposals, which, like securitization, are automated bankruptcy systems.) 

I've argued elsewhere that at best we can reduce risk--akin to building higher levees or flood walls--but that doing so has its own costs.  The key point is that we cannot eliminate it from the system and need to learn to live with it and allocate losses more efficiently, fairly, and transparently ex-post.  Even this, I'm not sure will hold up. Credit Slips' Own Anna Gelpern has wisely pointed out that rules are inevitably tossed overboard during financial crises as soon as they become inconvenient. I have to think that this would apply both to capital structure rules (would co-cos really convert if it affected other financial institutions' holdings?) and to ex-post loss allocation rules (again, co-cos being in effect an automated loss allocation). I hate to take such a nihilistic position, but I think we risk deluding ourselves if we think we can seriously contain, much less eliminate risk by solely by adopting new capital structures.

Fannie Mae Pushing Foreclosures

Story in the Detroit Free Press today here, and my commentary at Consumer Law & Policy here.

NY AG Unsheathes Excalibur

NY AG Eric Schneiderman came out with guns blazing in the proposed Countrywide investor settlement litigation.  It his filing intervening in the action and suing Bank of New York Mellon for breach of fiduciary duty, persistent fraud, and violations of the Martin Act (the "Excalibur" of the NY AG), General Schneiderman didn't mince words.  He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese):

One of BNYM’s primary obligations as trustee under these PSAs wasto ensure the proper transfer of loans from Countrywide to the Trusts.  The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages.  These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.  

A Template for MBS Settlements and How Safety-and-Soundness Regulation Is Incompatible with Law Enforcement

Over the past couple of years, the Massachusetts Attorney General's office has reached settlements with a number of major banks regarding mortgage securitization. These settlements has received very little notice in the press, but I think they provide a real template for future AG settelements and are worth examining. 

1. The Mass AG has gotten a good deal of principal reduction as part of these settlements. Of the $102M paid by Morgan Stanley for its New Century dealings, $52M went to principal reduction. Similarly, check out the remedy chart (below) for the settlement with Goldman Sachs. Granted, it only covered around 700 loans, but it should be the template for any AG settlement.  I haven't attempted to calculate what the cost would be for doing that nationwide (it'd be huge), but we'd have a real estate market that was immediately cleared.  It might require the recapitalization of our biggest financial institutions, but I've got to think that there are plenty of funds to invest in them once their balance sheets are cleared up. 

 

 

 

 

 

 

 

 

 

 

 

The Politics of the Durbin Rulemaking

It goes without saying that I think the Fed did a real jerk move on the Durbin Amendment rulemaking. But the more interesting issue is why? 

The Fed didn't have any new data to work with after the proposed rulemaking in December. Sure, it had lots and lots of comments, and there was some a crazy amount of lobbying. But it's hard to see what that lobbying would have accomplished in the January-June window that it hadn't in the July-December window. 

Instead, I think that the volte-face was the result of bigger picture Federal Reserve Board politics. For the Fed, interchange is the regulatory issue that they have with merchants. The Fed doesn't have to handl-vandl with merchants on other regulations. But the same can't be said about the banks. The Fed has an on-going regulatory relationship with the banks that it has to manage.  And interchange just isn't a very important issue for the Fed. It's not a regulatory duty that they wanted in the least. So the Durbin Amendment rulemaking offered Bernanke (and the other Governors) a low-cost way a chance to throw the banks a bone and build up some goodwill before the gloves come off on the real fight about capital adequacy levels. 

If that's correct, I think it's a bad calculation by Bernanke et al.  The banks are going to fight on capital as ferociously as they can and $4B annually of goodwill payments aren't going to change that. And given the way the Fed did the rulemaking, I think there are a good grounds for a litigation challenge that would defeat Chevron deference. If that happens, there'll be a lot of egg on the Fed's face. 

Banks Refusing to Honor Their Own CD Maturity Dates? We have the Answer!

Has anyone faced this issue? Karen Talley in my law school’s IT Department did. She received a notice from Bank of America, stating that “Your CD will be maturing soon. The account number, maturity date, and other information pertaining to your CD are listed below:

Account Number:    XXXXX
Current Product: FIXED TERM CD
Current term:    18 months
Maturity date:    April 23, 2011

The notice then said “You have 7 calendar days after the maturity date to make changes to your account. If no changes are made, your CD will automatically renew to the new term and maturity dated noted above. To make a change:  Come see us. Simply stop by the banking center nearest you to talk with us about your options…”

Karen appeared on April 30, 2011 to close this out and the bank said it rolled over the days before. The way I do the math, it should not have rolled over until April 30, the day she arrived to close and cash in the CD. This one day difference cost Karen $1026.04. 

The BoA MBS Settlement

The $8.5B dollar figure of the Bank of America settlement with a cohort of MBS investors has gotten all the attention, but I think there's a bunch of more interesting things going on than the price tag.  Still, it's hard not to talk about the price tag, so let's get that out of the way.  Then we can get into servicing, documentation, and the question of whether anyone can/will object to the settlement.

The Fed Bails Out the Banks...Again

[Updated 6.30.11]

If anyone doubted who set the marching tune for the Federal Reserve Board, it was sure clear today. The Fed announced its final rule under the Durbin Interchange Amendment, and it was quite the handout to the big banks.  

The Durbin Amendment instructed the Fed to pass rules that clarified its instruction that debit interchange fees must be reasonable and proportional to the incremental cost of authorizing, clearing, and settling an individual debit card transaction.  The Fed came out with a proposed rule last December that solicited comments on two alternative safe harbors.  One was for a flat fee of 7 cents per transaction, the other for 12 cents per transaction. The Fed also solicited comments on whether debit cards should have to be routable on 2 unaffiliated networks or on 2 unaffiliated PIN and 2 unaffiliated signature debit networks (4 networks total). 

Well, today the Fed came out with the final rule, and what a surprise.  

Why I Was the Skunk at the Party

Yesterday's hearing -- my Dealbook on it here -- was clearly all about political posturing: the Democrats are defensive about Dodd-Frank, rightly afraid that any change to it becomes a chance to repeal or gut, while the Republicans too often veer off into some free market rhetoric that really makes no sense when you are talking about financial institutions. Since when have banks been subject to the free market? Even pre-Fed they were (at least theoretically) under State oversight.

So basically neither side wanted to hear what I had to say.

But as is so often the case, Alan Sloan comes through with some clear thinking on the matter here.

OLA and Too Big to Fail

I'm off to D.C. this morning to talk with the House Financial Services Subcommittee on Financial Institutions regarding my thoughts on Dodd-Frank’s Orderly Liquidation Authority. My written testimony is here.

Oh Swell

Alphaville has a very important post on AIG's attempt to gross up its ROE post-bailout.

Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback

As early as this Tuesday we might find out who runs this country.  Is it Wall Street and the financial economy or the real economy of consumer citizens and retailers?  We will know the answer to this question based on what happens when the Senate votes on a bill to unwind a Dodd-Frank Act provision that would prevent banks from charging anticompetitive debit card swipe fees.

This provision, known as the Durbin Amendment is a bellwether for the state of political power and thus financial regulatory reform in the United States. Banks are working furiously to roll back the Durbin Amendment, and their success or failure at doing so is a measure of the political power of financial institutions. If the banks win, it will not just be the traditional story of the banks' routing the consumer groups. If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.  (Heck, the US Chamber of Commerce is on the banks side on this, which might say something about the Chamber's funding. It's certainly not from all the small businesses over which they weep crocodile tears.) 

About Those Notes...Evidence of Securitization Fail

Since last October, shortly after the robosigning scandal broke, I've been talking until I turned blue in the face about robosigning being the tip of the iceberg with mortgage problems and that the real issue was chain of title. Robosigning appeared to be an almost unexpected deposition by-product; the real goal in the depositions that uncovered the robosigning was exposing the backdating of mortgage endorsement. And that they did--the notaries' whose seals were on the documents didn't have their commissions when the assignments supposedly took place. 

But why would anyone bother backdating mortgage assignments? The immediate reason is to show that the foreclosing entity was the mortgagee at the time the foreclosure action was brought. And lurking behind this is the mother of securitization fail issues (see also here and here)--the potential failure to transfer the mortgage notes into the securitization trusts.  

When the securitization fail issue was getting attention last fall, one thing that was sorely lacking from the discussion was empirical evidence. I could refer to individual mortgage files I'd seen and a host of anecdotal evidence, but I hadn't attempted to do any sort of empirical survey. 

But Abigail Field at Fortune has actually gone and done this. Incidentally, this is what federal bank regulators were supposed to do--go and look at the actual notes for foreclosure filings. Amazing how one intrepid journalist was able to accomplish much more than a beavy of bank examiners. And Field finds that there are real problems with the mortgage files.