REPORT: FED NEGLECTED ITS MISSION — CRISIS WAS AVOIDABLE

ONE ON ONE WITH NEIL GARFIELD ONE ON ONE WITH NEIL GARFIELD

COMBO ANALYSIS TITLE AND SECURITIZATION

NOTABLE QUOTES:

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence. (EDITOR’S NOTE: GREENSPAN NOW ADMITS THAT HIS FAITH IN FREE MARKET CORRECTIONS WAS WRONG)

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Financial Crisis Was Avoidable, Inquiry Finds

EDITOR’S COMMENT: This is an important report. The book comes out Thursday  nearly 600 pages, chapter and verse of what they found. Much of what has been alleged as “theory” is now corroborated as fact. The big question, which nobody wants to address, is what is the right thing to do NOW?

  • The current status is that our title recording system has been corrupted beyond recognition and continues to get worse every day.
  • The current status is that more and more homeowners are being pitched out of homes they own on the mistaken assumption that they don’t own them anymore.
  • The growing number of empty homes is causing housing prices, already at historic lows, to continue downward.
  • The fear that the entire financial system could collapse has ended up rewarding the very people on Wall Street who are accused of gross misconduct.
  • The pension funds that bought mortgage backed securities found out that may have paid money but there was no security, no mortgage, no asset.
  • The forward sale of these “securities” was a scam and now investors are suing the investment bankers that issued them. The investors (actual lenders) who supplied the money for this chaos have chosen not to get involved in housing foreclosures or claims of any kind against the beneficiaries of the money that was stolen from the investors — leaving the door open for intermediaries to pretend to be lenders, creditors and holders of notes that are fabricated and forged, and bring foreclosure actions that look right but are fundamentally wrong.
  • THAT IS OUR STATUS QUO.
By SEWELL CHAN

NY TIMES

WASHINGTON — The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”

While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude or both, some of its gravest conclusions concern government failings, with embarrassing implications for both parties. But the panel was itself divided along partisan lines, which could blunt the impact of its findings.

Many of the conclusions have been widely described, but the synthesis of interviews, documents and testimony, along with its government imprimatur, give the report — to be released on Thursday as a 576-page book — a conclusive sweep and authority.

The commission held 19 days of hearings and interviews with more than 700 witnesses; it has pledged to release a trove of transcripts and other raw material online.

Of the 10 commission members, the six appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent focusing on a narrower set of causes; a fourth Republican, Peter J. Wallison, has his own dissent, calling policies to promote homeownership the major culprit. The panel was hobbled repeatedly by internal divisions and staff turnover.

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.”

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them.

Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment before the report was released.

The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.

On the other hand, the report is harsh on regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed “neglected its mission.”

It says the Office of the Comptroller of the Currency, which regulates some banks, and the Office of Thrift Supervision, which oversees savings and loans, blocked states from curbing abuses because they were “caught up in turf wars.”

“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” the report states. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”

The report’s implications may be felt more in the political realm than in public policy. The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission. But the report is sure to be a factor in the debate over the future of Fannie and Freddie, which have been run by the government since 2008.

Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence.

It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.

“When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.”

The report, which was heavily shaped by the commission’s chairman, Phil Angelides, is dotted with literary flourishes. It calls credit-rating agencies “cogs in the wheel of financial destruction.” Paraphrasing Shakespeare’s “Julius Caesar,” it states, “The fault lies not in the stars, but in us.”

Of the banks that bought, created, packaged and sold trillions of dollars in mortgage-related securities, it says: “Like Icarus, they never feared flying ever closer to the sun.”

13 Responses

  1. 40:1 leverage, provided by Congress as a result of lobbying from Hank Paulsen and others, was insanity on crack, and they knew it. Never in the past 500 years of documented speculative activity anywhere in the world has such leverage not exploded.

  2. Steve

    They knew for a long time and ignored. Interesting that many of these mortgage loans were to pay credit card debt that the banks had also lent. And, the banks knew who had lower credit scores — thus, they would target and assess higher interest rates (most often teaser adjustable) on mortgage loan. There was much solicitation for mortgage loans.

    Banks had all information — they knew who to target — and who could be assessed high interest rates. Many will recall that banks also did heavy solicitation of credit cards during the same period – with the same teaser rates. The banks dubious credit card practices were strategically implemented to quickly lower credit score. Today, few get the same credit.

    I have also seen documents that show relatively low income was verified. And, that loans may have been initially declined- only to then be magically approved.

    Predatory lending was common practice — that is granting loans based on the value of the asset (falsely appraised home) rather than on the ability to pay — so it did not matter whether or not income was verified.

    The reason there was a blind eye by government and regulators is because economy was expanding by heavy consumption. They wanted everyone to buy goods and services – because they had long given manufacturing away. Very ironic that many are cheering for the return of the consumer — who they have all blamed as the cause of all the problems.

    All was no accident — it was strategically planned — and government did nothing to stop.

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  4. Article on zero hedging is about CDOs — synthetic derivatives. Have to get our heads out of securitization. This is odd for me — as I one of first here who emphasized REMICs and chain in securitization.

    Funding, leveraging, or currency circulation is not relevant to borrowers. The focus has to be on where collection rights now lie — and whether loans were properly conveyed anywhere (they were not) — that is the only focus that borrowers should focus on — we are not investors — and have no concern about pass-through securities – except if that pass-through security holder is not entitled to foreclose on our home.

    If they want to claim foreclosure rights lies with the trustee — have to examine every bit of PSA – and see what was violated as to those claims — you will find them- along with no authority for document signing. .

    By becoming too broad — we lose focus. Also, very little in case law about origination fraud — because most courts will not allow challenge of origination in foreclosure action. Need parties who are current to address this fraud — before they go into foreclosure.

    No one knows where collection rights lie — or the path the mortgage/loan actually took — we are being denied this access. It is time to regroup and focus on what courts understand — the loan collection rights are not where foreclosure attorneys state it is. Courts understand standing and real party in interest. They only get the law. if someone is falsifying documents to conceal the actual whereabouts of the loan — courts will listen and they ARE starting to get this.

    Want to also add that securitization of scratch and dent mortgages (also called investor kick-outs) are not the same as sale of whole loans to investment banks (who then securitize). No court has addressed this issue (except Judge Schack a little)- but government should know that this was a large part of the process.

    If anyone else wants to address investor fraud, currency manipulation, politics, power, funding, financing , FDIC, accounting, etc. etc. — those are all interesting topics and great if fraud can be established – but that is not going to happen in courts where borrowers can only fight their individual claim.. Court will not let you get that far. Need to pinpoint individual fraud in your case — need to focus on what judges understand.

    Need to change sentiment and expose that someone is profiting by the foreclosure fraud. This affects the failure of valid and legal modifications – in the name of the current creditor. And, yes, there is a creditor — just do not know who it is. But, do know who it is not. .

  5. What happened matters little, because even though past events and ocurrences are not so blurred anymore our FUTURE still is. Yes it’s good to know who f&%@! up (come on, ‘we’ already knew), but are we gonna take the same risks again and leave it in the hands of those who have failed us and have proved we cannot depend on them?

    I’d say NO, but I know that most likely mostly everyone here and everybody else is going to wait and ‘Hope’ that the Government will do what’s ‘morally right’. When the sad truth is they filed for Chapter 7 Bankruptcy on their ‘integrity’ YEARS AGO.

  6. There is no “actual lender/creditor” or party that “funded” the ‘loan’, all the credit that was EXTENDED (remember that, extended as in passing along) was by and from the same place which also backs our currency “the Dollar $” the “Full Faith and Credit” of the US. The FED controls the amount in circulation (and pays itself its own fees plus net interest from member banks), Wall Street and the Banks or so-called Lenders/Creditors create and/or fund markets for ‘whatever’ eg. Housing Finance with credit that is ‘lent’ to them by the FED(our credit controlled by a private bank), but for providing service to the ‘market’ they are permitted to collect ‘finance’ and ‘service’ ‘charges’. The same thing goes for Wall Street and securities, commodities, stocks etc.. markets.

    Read this article about how Goldman created ‘markets’ and ‘products’ for sale in ‘non open market’ transactions, created ‘rating agencies’ to value them (because there was no other way) and then always kept at least 86% of the loan pools itself (good luck getting that 25%).
    http://www.zerohedge.com/article/guest-post-dirty-little-secrets-about-goldmans-collateral-calls-aig?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

  7. Please explain what is TBTF ? Please

  8. Ian

    But, some of the TBTF banks were the also investment banks. Repeal of Glass Steagall Act allowed commercial banks to both lend and securitize the receivables (investment banking). All provided warehouse lines of credit to originators — from whom they purchased loans. If they sold securities forward before origination — that does not change fact that the TBTF bank was the creditor at origination (also RESPA violation). Our issue is with the TBTF bank – despite who may have indirectly funded their “endeavors.” Security investors do not directly lend to borrowers.

  9. Could have saved a lot of time and money by simply stating the obvious, the rat bastards on wall street looted the world with total reckless abandon, while the legislators and regulators looked the other way, all the while extending their hands behind their backs to receive large contributions from their criminal associates. It’s a perfect cycle of fraud, aided and abetted by the very people on the commision who are only now pretending to be alarmed at their own conclusions.

    And now four years later, what has changed? Besides the promise of a consumer protection agency that is already being battered around by these same hooligans before even getting off the ground, absolutely nothing has changed. Actually, something has changed. Bernanke is funneling even more graft to his bankster friends by ripping off the savers of the world, the pensioners, through QE2. They no longer even bother to hide their crimes.

    And even more bewildering is the fact that Americans seem not to care, or even pay attention. Hardly anyone I know is aware of the foreclosure abuses and crimes taking place on such a massive scale. And how could they be? The media never lets these stories see the light of day. Our legislators aren’t willing to question the outright criminality going on all around us, as millions more are thrown to the curb like so many bags of garbage.

    And our legislators decide to sit in each others lap while our entirely impotent president speaks to the nation, in a show of solidarity. Solidarity in what? Crimes against their constituants on a scale never before witnessed on the planet? And they all pretend that it never happened, or is still happening, in hopes that it will all somehow go away.

    When I looked at the hall filled with our so-called representatives last night, I was filled with shame and resentment. Shame that these suits could be so drawn to wealth and fame as to completely turn their backs on the populace, and resentment that they aren’t affected whatsoever by the ills that are torturing their constituants. They’re safe and sound in the halls of the capitol…their paychecks come on time….their healthcare is free…..their retirement packages are safe, sound, and enormous.

    Just like Dodd and others were members of the “friends of Mozilo” club, so are the rest of these jerks friends of Dimon and Blanfein and Lewis and Thane …..keep filling in the blanks. A government totally captured by the allure of endless money at the expense of the very nation and it’s people they’re supposed to be serving. They are a disgrace and embarrassment when held up to any hard working American who still works for a living trying to keep a roof over their families heads honestly, a day at a time. At least for those who are still managing to hold on during these tough times.

    I’ve lost all faith in the America that lies inside the beltway.

  10. ANONYMOUS- how about this as a somewhat believable explanation? The investment banks sold shares in the MBS, took the money for themselves,with a token payment to the TBTF banks for their warehouse lines of credit. Then, at least on paper, the TBTF banks funded each mortgage via the 0-5% fractional reserve (Tier 1 capital) for each loan. One billion in mortgage loans equals 5% or less cash. Maybe this is why the notes were never transferred into the trusts. They all list TBTF banks as mortgagee. This could explain why identifying creditor is near impossible.

  11. It will be interesting to read this “book.”

    Agree with Neil’s box — except for last point – as Neil knows.. Although security investors may have indirectly “funded” their own securities that they purchased, they did not “fund” the mortgage originations. Security lenders do not lend directly to borrowers. Borrowers recourse for fraud is never against security investors. Security investors are never the creditor – and perhaps that is why the Fed Res came out to expand definition of creditor in its Opinion on TILA Amendment. In order to claim violations of TILA — you need a creditor — and it is not security investors.

    Neil writes — “The investors (actual lenders) who supplied the money for this chaos have chosen not to get involved in housing foreclosures or claims of any kind against the beneficiaries of the money that was stolen from the investors.”

    First, the security investors, who are not the creditor, have been repaid full principal. Second, these security investors cannot show their face as the creditor in foreclosures, because they are not the creditor. Any action security investors have regarding not being paid the interest rate promised to them — would be against the security underwriters/investment banks — not the borrowers.

    VIce versa, borrowers cannot sue the investors for origination/foreclosure fraud. Foreclosure proceeds do not pass-through as current cash payment (required) to beneficial security investors.

    However, there are “derivative” contract investors. These contracts are not securities and not part of the trust. These investors purchase collection rights via swaps and direct sale — and do not put up any money that directly or indirectly “funds” the mortgage originations or securities. In fact, there is no money involved on these derivatives/contract sales — (except premiums for insurance) until loans are in default and removed from pass-through security “pool.” It is these so-called derivative/collection rights “investors” that are being concealed in foreclosure actions. Note, many large banks purchase the derivatives themselves — and also purchase collection rights. It could the bank itself, therefore, that is the “collection” “investor” — or, could be another entity whose identity is being protected by servicer given agreements/contracts/deregulation, etc. etc.

    Know this is sticky point between Neil and I. Neil is right to an extent (indirect funding for securities), but borrowers have no contract with security investors. By stating that security investors are creditor, takes away borrowers right to know their actual creditor which must be known for actions in violation of consumer protection laws. In effect, without identification of actual creditor (which Fed has said is not security investors), borrowers have no right to any TILA/RESPA/and other consumer protection laws. No court will ever grant legal action by borrower against security investors.

    A 600 page “book” should give more insight to all. Will see.

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