I should have promised myself to stop reading books on the last financial crisis, but I saw Bull By the Horns by Sheila Bair (FDIC chair during the crisis).
A little tidbit I thought which deserved to go here:
The gentlemen [at the American Securities Forum] started lecturing me about how it wasn't possible to help "these people," referring to subprime borrowers. "You give them a break," he said, "and they will just go out and buy a flat-screen TV."
So why, I asked, if he felt that way about "these people," did he extend mortgage loans to the to begin with? I will never forget his answer: "Bad regulation."
So there you had it, straight from the heart of U.S. capitalism. It had been okay for the masters of the universe who filled that conference room to shovel out millions of mortgages to people who clearly couldn't afford them because no one in the regulatory community had told them to stop. And if there was a problem now, it was because the regulators hadn't protected these securitization whiz kids from their own greed and corruption.
Okay, so there are five bills in Congress currently, designed to neuter bank regulation:
HR 677"Inter-affiliate Swaps Clarification Act" clarifies that banks are to be exempted from Dodd-Frank oversight when they shift around their liabilities and assets among their numerous inter-affiliates; i.e. tentacles. In other words, when Goldman Sachs wants to do some tax, liability, or regulatory dodging by shifting around assets from one of its 3,391 subsidiaries to some other of its 3,391 subsidiaries, it doesn't want any regulatory oversight. Yves Smith at Naked Capitalism where I got the lion's share of this info:
The reason this matters is that swaps can be used to move risk, profits, or other economic exposures from one entity to another. And the effect of this sort of arrangement is to tie entities that might have been separated out legally back into one big economic hairball. That would make it impossible to hive them into pieces, so it would also impede legislation aimed at forcing the banks to break up. Think this sort of thing doesn’t happen now? One of the reasons that AIG was not broken up and sold as originally planned was that its property and casualty operations in the US are tethered together in a dense web of cross company-guarantees, turning what on paper are subsidiaries licensed and supervised in 19 states into one operation overseen by no one.
HR 992"Swaps Regulatory Improvement Act" is an "improvement" for the banks, in that their dodgy investments would now explicitly be subject to bail-outs by the federal government; and an "improvement" in regulation by voiding part of Dodd-Frank. This bill, along with the others mentioned here, are being pimped by ex-Goldman Sachs officer and Connecticut Democrat Jim Himes, who is also the national finance chair of the DCCC, as in the Democratic Congressional Campaign Committee. A slimier low-life you might never hope to meet. This bill is sponsored by Illinois Republican Randy Hultgren. Here's text from the letter from Americans for Financial Reform, opposing this bill:
If H.R. 992 passes, it would almost completely eliminate Section 716 of the Dodd-Frank Act. Section 716 bans taxpayer bailouts of a broad range of derivatives dealing activities. Section 716 does not in any way limit the swaps activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities. The practical effect of this prohibition is to force banks to conduct large-scale derivatives dealing activities in a separate subsidiary which is backed by adequate private investment capital, and which is not eligible for government insurance or guarantees. Section 716 was a direct response to the events of the financial crisis, during which taxpayers were forced to bail out the full range of bank derivatives dealing, despite the fact that these activities were not part of the core business of banking. If it goes into effect Section 716 will be a limitation on the ‘heads I win, tails you lose’ culture of Wall Street– the ability of the biggest Wall Street banks to benefit from the upside of derivatives risks while pushing losses on to the public.
And here is why this also is important: banks are already shifting their derivatives into subsidiaries where they have all their depositor's accounts. Bloomberg, Oct 2011:
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Why are they doing that? Because if the derivatives go south and they have to pay out money, they are required- by the 2005 bankruptcy revisions law they helped write- to pay out to the people who are first in line, i.e. those with secured accounts- the counterparties holding the other end of those derivatives. John Q. Public's bank account? That is classified as an unsecured account.This means they can raid all those depositor bank accounts to pay the derivatives investors, and then the depositors can go get their money from the FDIC. Short version: the government and the taxpayers and the account holders get fucked, the bank gets much lower losses. Because they passed them on to you.
S 474 is the same bill but on the Senate side, sponsored by North Carolina's Democrat Kay Hagen.
HR 1003, "To improve consideration by the Commodity Futures Trading Commission of the costs and benefits of its regulations and orders." This is a bill to shove the CTFC's head up its ass, so that it spends more time regulating itself and much less time doing its supposed job of regulating derivatives. This one's sponsored by Texas Republican Michael Conaway.
HR 1256 Basically acts to deregulate derivatives, and exempt overseas swaps- the lion's share of the too-big-to-fail banks' derivatives trading- from regulator oversight and Dodd-Frank. This one is from New Jersey Republican Scott Garrett.
Like I said earlier, I got the lion's share of this info from here, and it is worth reading, but I wanted to share it and try to wrap my own head around it. I'm going to write my Senators and Representatives and ask them to kill these bills that are essentially the banking lobby and their puppets, both Democrats and Republicans (yay bi-partisan cooperation?), pushing through legislation designed to kill Dodd-Frank and any regulation of these economy-destroying behemoths.
Below is a link to an article at Americablog which succinctly outlines what derivatives are, how they put economies at risk, and why the apparently seven bills in Congress to gut Dodd-Frank (I missed a couple) are worth yelling about.
Futures contracts are gambling — I can bet on the Dow to go down or up, for example — but trading in futures contracts is regulated gambling, in which winners are protected from losers, and in many cases, losers protected from themselves.
Not so, derivatives, in the usual meaning of the word. Derivatives in that sense are contracts between parties who want to trade risks, but they aren’t market-traded. They aren’t standardized. And counterparties aren’t vetted by any controlling institution.
In derivatives trading, the counterparties know each other, the contracts are one-off between the parties directly, and the only guarantee that either party will get paid is trust … or the naked belief that they just can’t lose on this one.
AIG wrote billions of dollars of CDS “insurance” against the mortgage market without having even a fraction of what it would take to pay off claims … in the naked belief that they could collect fees forever and never have to pay out once. When the whole thing collapsed, they were wiped out. And because their “insurance” was part of the balance sheet of AIG’s many counterparties (Goldman Sachs and everyone like them), Goldman Sachs would have been wiped out too by AIG’s failure (in effect, by their lies and deception).
That’s why the government bailed out AIG — and insisted on giving them 100 cents on the dollar — so that they could pay off Goldman et al. AIG was bailed out to bail out all their counterparties.
Also, for any who are interested, here's the email I sent to all my Senators and Representative.
I am writing to ask you to oppose any weakening of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Currently there are several bills being pushed through which only benefit “too-big-to-fail” banks, primarily by removing basic regulation of derivatives and allowing banks to put taxpayers on the hook if the derivatives market should fail. Here are the five bills:
HR 677 would allow banks to continue to move profit and risks to their affiliates, creating a tangled web that in the case of bank failure makes it impossible to actually regulate or break up. The poster-child for this being the infamous AIG.
HR 922 and its twin, S 474, would remove Section 716 of Dodd-Frank. That’s the part that says taxpayers are not bailing out derivatives activity in the case of a bank failure. So this legislation would put taxpayers on the hook for the massive derivatives market that the banks are currently working hard to keep unregulated and opaque.
HR 1003 is simply designed to keep the Commodity Futures Trading Commission too busy examining and regulating itself to do its job and regulate banks and derivatives activity.
HR 1256- the lion’s share of “too-big-to-fail” banks’ derivatives trades are overseas; this bill would make all those trades unregulated by the CFTC.
Americans for Financial Reform opposes these bills; and I think the public would also oppose dismantling Dodd-Frank, especially considering that there is clear evidence the “too-big-to-fail” banks systematically engage in massive risk-taking and are all too happy to continue a practice of private profit but socialized risk.
Please help stop this odious give-away to giant banks.
"If you took the most ardent revolutionary, vested him in absolute power, within a year he would be worse than the Czar himself." -Mikhail Bakunin
"All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." -Adam Smith
Wells Fargo in Louisiana was found to be engaged in "systematic, persistent foreclosure abuses," and the appeals court, after years of litigation by the bank, affirmed punitive damages against Wells Fargo of $3.1 million. The two bankruptcy cases which led to this are pretty amazing, in that the first bankruptcy case resulted in Wells Fargo revealing that it was systematically screwing over its clients; after promising to fix their error the second bankruptcy case months later showed that no changes had been made by Wells Fargo, which continued to fuck with the courts and the clients in an attempt to snowball all involved. Via Naked Capitalism:
Bankruptcy judge, Elizabeth Magner of the Eastern District of Louisiana, had found Wells Fargo guilty of egregious foreclosure abuses in a 2007 case, Jones v. Wells Fargo. In it, the bank admitted that the types of overcharges it made in bankruptcy cases were “part of its normal course of conduct, practiced in perhaps thousands of cases.” The judge awarded damages and recovery of attorney fees on top of repayment of the impermissible charges, and ordered the bank to fix its accounting.
Fast forward four months, and another case appears in Mangers’s court with the same sort of verboten charges, proving that Wells has not taken the required corrective measures.
Anyone interested in Magner's ruling can read it here.
Of worthy note are a number of things about this case, and I encourage the reading of the article in full, but one is that Wells Fargo really went the extra mile to screw the clients that were supposedly in bankruptcy and that they were overcharging while violating their contract. From Magner's ruling:
While every litigant has a right to pursue appeal, Wells Fargo’s style of litigation was particularly vexing. After agreeing at trial to the initial injunctive relief in order to escape a punitive damage award, Wells Fargo changed its position and appealed. This resulted in:
1. A total of seven (7) days spent in the original trial, status conferences, and hearings before this Court;
2. Eighteen (18) post-trial, pre-remand motions or responsive pleadings filed by Wells Fargo, requiring nine (9) memoranda and nine (9) objections or responsive pleadings;
3. Eight (8) appeals or notices of appeal to the District Court by Wells Fargo, with fifteen (15) assignments of error and fifty-seven (57) sub-assignments of error, requiring 261 pages in briefing, and resulting in a delay of 493 days from the date the Amended Judgment was entered to the date the Fifth Circuit dismissed Wells Fargo’s appeal for lack of jurisdiction;47 and
4. Twenty-two (22) issues raised by Wells Fargo for remand, requiring 161 pages of briefing from the parties in the District Court and 269 additional days since the Fifth Circuit dismissed Wells Fargo’s appeal.
The above was only the first round of litigation contained in this case….
Here's some details of the second bankruptcy case:
By September 2005, New Orleans homeowner Dorothy Stewart and her since-deceased husband had filed twice for bankruptcy protection and were having frequent problems keeping current with the payments on the small home they bought six years previous.
On Sept. 12, agents working for Wells Fargo Home Loans generated two “broker price opinions”—estimates, basically, of the value of the Stewart home. As loan servicer, Wells Fargo was in charge of collecting payments and managing a default or foreclosure if the borrowers fell behind.
A charge of $125 for each opinion was posted to the Stewart’s mortgage account. There was only one problem — Jefferson Parish, where the home was located, was under an evacuation order and closed to all but emergency personnel, thanks to Hurricane Katrina.
In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.
Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home, the judge said.
The charges were assessed under circumstances contrary to Wells Fargo policy and were “unreasonable under the circumstances,” she ruled, after spending months unraveling the complicated loan file.
Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.
Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.
One of the other important points made was that the regulatory oversight here- the OCC which I've criticized in this thread before- did fuck-all about this. Here's a bankruptcy judge with the fourth-largest bank in the US admitting in court that this is how they do shit, at least in that part of Louisiana- likely involving thousands of individual bankruptcies- and the OCC? Not a peep.
Banks have been systematically running with Zombie Titles as a strategy to reduce their costs- avoiding property taxes and maintenance costs-which they pass on to the evicted and the local governments, meaning you. Yves Smith:
We’ve written before about the perverse phenomenon known as “zombie title.” Servicers initiate a foreclosure and complete most of the steps, including evicting the borrowers, but then fail to take title to the house. Adding insult to injury, the banks rarely inform the former homeowner of this cynical move. Not only does often find out years later that he’s on the hook for property taxes and in some cases, fines from the local government, but the servicer has made such a mess of title that the owner can’t get rid of the property, unless he takes a quiet title action, which typically can’t commence until five years after the foreclosure was abandoned.
Kate Berry of American Banker provides an update. She flags that this abuse has skyrocketed since 2010, when the GAO estimated that abandoned homes ranged between 14,500 and 35,600. They are now pegged at 35% of the one million homes in foreclosure.
Homeowner advocates are up in arms because both the Fed and OCC have issued guidance requiring servicers to inform borrowers and municipalities if they intend not to complete a foreclosure. They also contend that this is a fair lending practice abuse, since, natch, the borrowers tend to live in low-income communities. And abandoned homes are a blight.
Normal local statutes dealing with vacant properties hit the owner, which is the hapless homeowner, not the servicer.
A lot of the article lambastes not only the banks but also the regulators, who seem to be waving ineffectually from the sidelines; also the potential fallout of these Zombie Titles to the supposed returning home values is covered.
The other thing in the news recently is Banks propagating their own version of usurious payday loans: MSN:
People who might never turn to a storefront payday lender for an emergency loan can now get a paycheck advance from many big banks. Not everyone celebrates the trend.
“This is loan-sharking,” said Kathleen Day, spokeswoman for the Center for Responsible Lending, which has been tracking these high-cost loans. “It doesn’t make any sense to give people a loan they can’t afford and that leaves them worse off.”
The four major banks that offer the loans -- Wells Fargo, U.S. Bank, Fifth Third Bank and Regions Bank -- say that assessment isn’t accurate. They insist their versions are typically less expensive than storefront or Internet payday advances and provide a valued service to customers.
Some of those customers agree. Amy Dykstra of Davis, Calif., said she used payday advances from Wells Fargo as well as from a credit union. Wells Fargo charges $7.50 for each $100 borrowed, which translates into an annual percentage rate of 274% for a 10-day loan.
Although payday advances offered through banks are somewhat cheaper, with interest rates averaging 225% to 300%, the pattern of repeated borrowing is similar, Day said. A report released last month by the center found the median bank payday borrower took out 13.5 loans in 2011, and over one-third of borrowers took out more than 20 loans. Payday advance users were twice as likely to incur overdraft fees as other customers, since banks typically take the loan amount automatically from their checking accounts, whether or not there’s enough cash to cover the payment.
Regulators are looking into curbing this practice. One wonders how it cropped up: WaPo:
The proposed guidance is modeled after rules the OCC issued in 2000 that barred banks from engaging in direct payday lending. Banks circumvented that guidance by tying their short-term loans to direct deposits.
There are a number of banks engaging in this: Wells Fargo and US Bank are the biggest names of the group.
Senators Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) Have introduced legislation to impact Too-Big-To-Fail Banks. Matt Taibbi points out not only the aim of the bill, but an interesting set of allies:
Rather than impose size limits, it simply insists that banks with over $500 billion in assets maintain higher capital reserves than are currently required. Companies like J.P. Morgan Chase, Wells Fargo, Morgan Stanley, Goldman Sachs, Citigroup and Bank of America will have to keep capital reserves of about 15 percent, about twice the current amount.
The bill only has such tough requirements for just those few megabanks, which sounds unfair, except that the aim of the bill, precisely, is to level the playing field. Right now, the biggest U.S. banks enjoy a massive inherent market advantage in that they're able to borrow money far more cheaply than other banks, because everybody on earth knows the government will never let them fail and will always bail them out in a pinch, making their debt essentially U.S.-government guaranteed. Studies have shown that these banks borrow money at about 0.8 percent more cheaply than other banks, and that this implicit government subsidy is worth about $83 billion a year just to the top 10 banks in America. This bill would essentially wipe out that hidden subsidy and make the banks bailout-proof.
As soon as Brown-Vitter was introduced, a very interesting thing happened. The Independent Community Bankers of America, or ICBA, issued a press release boosting the bill. "ICBA strongly supports this legislation," the release read, "and urges all community banks to join the association in advocating passage of legislation to end too-big-to-fail."
This sounds good, but it is suggested by Lynn Stuart Parramore that this is a half-measure.
...there were other financial institutions that were NOT commercial banks that were also extremely dangerous. Remember Lehman Brothers? It was an investment bank, rather than a commercial bank, and it would not be covered under Brown-Vitter. So was Bear Stearns. Does the name AIG ring a bell? Astonishingly, the bill asks nothing new of the giant insurer that we actually did bail out in 2008 to avoid complete meltdown. Giant hedge funds like Long Term Capital Management, which nearly went belly-up in the late 1990s and got a bailout, would also escape the requirements.
The right question to ask is, why would anyone seek to exclude the non-commercial banks from Brown-Vitter?
...>snip<... In the realm of finance, big insurers, big commercial banks, and large investment houses extensively compete with each other and many of their activities overlap. The big banks now have the upper hand, and they should certainly face restrictions. But giant insurers like AIG should also have to put up more capital because they, too, put the rest of us at risk. If we focus all our attention on big banks and forget the risks posed by other types of firms, we could set ourselves up for a nasty shock when one of them collapses.
...Sherrod Brown and David Vitter both have strong ties to the insurance industry and have received a high rate of donations from that sector (see Vitter’s donations here, and Brown’s here). Both lawmakers have received more money from the insurance industry than from commercial banks. In a recent article, “Senators tell Feds to back off bank-centric standards for insurers” you can see Brown and Vitter making arguments against tightening restrictions on insurers that are actually very much like those the big banks are making against their bailout bill. As always, if you want to know what’s going on in Washington, follow the money.
While I am all for commercial and non-commercial entities to be required to have greater capital requirements, and even more so for size limitations on economic gravity wells like these, I still would argue that Brown-Vitter is an improvement over not having Brown-Vitter.
So some bank notes: H.R. 992, the Swaps Regulatory Improvement Act bill, is in committee and appears to be the most likely of the heap of shitty bills to be passed. This is the bill that would do away with parts of Dodd Frank and make government bailouts on derivatives allowed. Banks have been actively shifting these derivatives into the same parts of the banks that are FDIC insured- where all the public's regular accounts are- so as to leave the taxpayers on the hook if those derivatives go belly-up. By all accounts the House Financial Services Committee is already far along towards securing lots of donations from the banks while they prepare to send this through.
Also more info on the Brown-Vitter bill.
Yves Smith has offered her calculations on why Brown-Vitter is not useful here; mostly involving tightly coupled systems, as an introduction to this longer piece by Bill Black, detailing why the bill misses the regulatory marks. From Bill Black:
Senators Sherrod Brown (D-OH) and David Vitter (R-LA) have introduced a bill entitled “Terminating Bailouts for Taxpayer Fairness Act of 2013.” It is a miracle of modern staffing that Vitter, who loves polluters as much as his prostitutes, was able to pull himself away from demanding that President Obama’s nominee to run the EPA answer over 600 questions and join Brown in proposing the bill. Under Obama, bipartisan bills have a dismal fate because the Democrats negotiate away key elements necessary to create a good bill and add provisions that make parts of the bill harmful – just to pick up a few token co-sponsors – and then the Republicans kill good parts of the bill anyway and try to enact the bad parts.
Brown-Vitter (BV) exemplifies all three problems. It would fail to achieve its desirable goals even if it became law. It would help the largest fraudulent banks continue to cripple effective examination. The Republicans will kill the well-meaning parts of the bill and try to enact the bad parts of the bill that are so bad that they are criminogenic.
One of the most essential actions we need to take is to eliminate systemically dangerous institutions (SDIs) (the rough dividing line is any bank with > $50B in liabilities). Dodd-Frank did nothing effective to end SDIs. So BV could be a sensible, even vital reform if it were drafted to end SDIs and if it were enacted. It was not drafted to end SDIs and it will be weakened before it is killed.
BV’s harmful provisions, by contrast, will likely be made worse by amendments. Those harmful provisions may become law.