Greek Banker Learns Bad (Illegal) Habits from U.S. Banks


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Editor’s Comment: 

People in the U.S. are finally coming around to the view that complete and utter transparency in reporting all aspects of banking is required to prevent moral hazard. In Greece, while transparency is not the virtue of the day, the stumps all rise to the surface when things go down the tubes. The Banker described below essentially used the entire bank as his personal toy and the source — directly or indirectly — of financing deals in which he won if the investment paid off and the bank lost if it didn’t. Sound familiar?

Special Report: A Greek Banker’s Secret Property Deals

By Stephen Grey

(Reuters) – He is the former economics professor behind an upstart bank that rode the Greek boom to become a publicly listed heavyweight with a loan book of over 35 billion euros. She is his devoted wife, who oversees the bank’s sponsorship of museums and the arts, and advised it on corporate social responsibility.

Michalis Sallas, executive chairman of Piraeus Bank, Greece’s fourth largest, and Sophia Staikou are a Greek power couple, symbols of the fast-growth years after the country joined the euro in 2001.

But an investigation of public documents, including financial statements and property records, shows the couple may also be emblematic of the lack of transparency and weak corporate governance that have fueled Greece’s financial problems.

Greek banks will soon be recapitalized with an estimated 30 billion to 50 billion euros, part of the country’s second bailout, backed by the International Monetary Fund and European taxpayers. Analysts estimate Piraeus will take about 3 billion to 3.5 billion euros.

Sallas was put in charge of Piraeus by the government 21 years ago, before the bank was privatized. He owns about 1.5 percent of the bank, whose stock price has plunged 97 percent since its peak in 2007.

But Sallas and his wife and his two children have also run a series of private investment companies that public records show have sealed millions of euros in real estate business with Piraeus, deals that were not disclosed to shareholders.

In wealthy locations in Athens and its suburbs and on at least one Greek island, these companies bought properties with loans from Piraeus and then rented at least seven of the buildings back to the bank, which used them as branches. Piraeus also bought properties from the companies and financed other buyers to buy properties from them.

Among the most unusual deals were transactions involving companies linked to Staikou, Sallas’ children Giorgos and Myrto, as well as key former Piraeus executives. These centered on the sale to Piraeus in April 2006 of three different properties, via three different private businessmen. According to property records, each of the businessmen bought a property for a knock-down price from the family companies and then sold them on to Piraeus for more than double that price. On paper, they generated a 160 percent total cash profit for the men, nearly 6 million euros, within the space of three weeks.

According to real estate and legal experts in Athens, a pattern of quick sales is often used in complex tax avoidance schemes. Such deals are legal if all taxes were paid. But one businessman named in the sales documents told Reuters his name had been used without his knowledge. He had “never owned property in Athens in my life,” he said.

Neither Piraeus nor Sallas would answer questions about the property deals, saying they were unable to do so because of an ongoing legal case against an ex-Piraeus employee. Matthew Saltmarsh, a UK-based spokesman for the bank, told Reuters that Greek banks had become “the most thoroughly audited financial institutions in the world,” and there was no reason to question Piraeus’ governance.

But property records show the deals linked to Sallas were opaque and raise questions about how cleanly the lines between his family and Piraeus Bank were drawn. They also provide a window into some of the often byzantine money-making schemes that characterized what one Athens real-estate agent calls the “crazy times” – the years between the stock market boom in 1999 and the crash in 2009, a span that included Greece’s entry into the Euro and its hosting of the 2004 Olympics.

“It’s nothing compared to what was happening back then,” a businessman who helped run one of the Sallas’ family companies said of the property deals. “It would be unfair to limit your research to Sallas and Piraeus. Everybody in the business knows that there are other banks that used similar tricks to do much worse things than buying and selling a bank branch.”

“This period of time was a crazy party for some.”


Greek banks have long had a reputation for being conservative. In the past decade they mostly avoided the excesses – investment in sub-prime debt and complex derivatives – of U.S. and other Western banks.

In “Boomerang,” his 2011 book on the European debt crisis, former Wall Street trader Michael Lewis argues that Greece’s banks were laid low not by their own misbehavior but by the collapse in value of the sovereign debt they had been pushed by their government to purchase.

“In Greece the banks didn’t sink the country. The country sank the banks,” writes Lewis.

Still, the banks in Greece played a key part in creating the bubble that helped Athens convince the world it could afford its ever-growing pile of debt.

Piraeus was among the fastest growing of those banks. Privatized in 1991, it expanded its total assets, including loans, from less than the equivalent of 4 billion euros in 1998 to 57 billion euros in 2010. Aggressive and willing to innovate, Piraeus swallowed several smaller lenders as well as branches of foreign banks in Greece. It expanded into the Balkans and bought the Marathon National Bank of New York.

Like other Greek banks, Piraeus is now struggling to deal with a massive funding gap, the result of lost access to interbank borrowing and falling deposits as many Greeks citizens withdraw their savings.

Saltmarsh, the bank’s spokesman, said the loan book of all the banks had been examined in the last few months in an independent audit commissioned by the Bank of Greece and carried out by Blackrock, a U.S.-based asset management firm. The size of the banks’ bad loans and the amount of new capital they required, he said, would be “resolved in the most public of ways” when the Bank of Greece publishes capital-raising requirements across the sector sometime in the coming weeks.

A spokesman for Blackrock said they had examined all “Greek domestic debt assets held onshore or in foreign branches”, but they declined to discuss their conclusions. The Bank of Greece, which regulates the country’s banking system, said Blackrock’s terms of reference were confidential. The Bank failed to respond to repeated separate requests to identify what rules of disclosure and conflicts of interest applied to Greek banks, or to questions about the Piraeus property deals.

Last year, with attention focused on Greek banks and their role in the country’s crisis, several Greek newspapers and blogs reported on the existence of a series of private companies, some offshore, that were allegedly loaned up to 250 million euros by Piraeus and whose debts appeared to have been written off. The reports included articles in a widely-read anonymous blog called and Kathimerini, a newspaper.

The origin of the reports appears to be a vague one-page document, of unproven provenance, listing 21 companies. This is now at the centre of a criminal complaint filed in the Greek courts by Piraeus against a former employee, Angeliki Agoulou, a one-time branch official. The bank accuses her of embezzling money from savings accounts and spreading false information.

“Piraeus believes this to be a falsified document distributed to entities including WikiGreeks by a disgruntled ex-employee as part of that employee’s continuing attempt to intimidate Piraeus Bank into dropping legal action against that ex-employee related to an alleged serious fraud perpetrated against Piraeus Bank,” the bank said, referring to Agoulou’s case.

Agoulou denies any wrongdoing and insists the document is genuine.

Agoulou and the contents of the document are now under official investigation by both Greece’s financial police and national anti-money laundering department, the Financial Intelligence Unit, according to one senior Greek official.


Reuters examined publicly available data to try to establish independently if the companies linked to Piraeus existed and, if they did, what business they were in.

Greek companies, whether public or private, are not required to publicly register all their shareholders and there is no public register of directorships. But an inspection of the Greek government’s official gazette, where company announcements and financial results are published, showed an extensive network of private interests connected both to Sallas and his family, and to several former senior executives at Piraeus.

In all, Reuters identified 11 companies in which members of the Sallas family have served on the board of directors, including four mentioned on the disputed document allegedly leaked by Agoulou. Sallas’ wife Staikou served as a director on nine of them, including at least six as chairman, while Sallas’ children Giorgos and Myrto each served on four. Sallas himself was not a director of any of them.

As well as the family, Konstantinos Liapis was just one of many former Piraeus executives who served on the companies’ boards. Liapis, who was financial director of the bank from 2004 until 2006 before becoming vice-general manager until 2009, served on the boards of eight of the companies in all. Stylianos Niotis, a manager of the shipping department until 2009, served on four.

An examination of Piraeus’ public declarations since 1999 appears to acknowledge only two of the companies, both property management firms: Erechtheas Investment and Holdings SA, which was bought by the bank at the end of 2009 and listed as a new subsidiary; and a 2004 mention of MGS (which happen to be Sallas’ initials), in which Sallas held 73.76 percent of shares.

Reuters was unable to locate any disclosures by the bank of any property purchases, rents or sales involving the private companies, despite the apparent links with the chairman and despite public documents showing the companies regularly did business with Piraeus.

Several accounting experts said deals such as rental agreements or the sale of real estate between the companies and the bank should have been defined as “related party transactions.” Under the International Financial Reporting Standards (IFRS), adopted by Piraeus in 2005, such transactions should have been disclosed publicly in the bank’s financial statements so as to highlight any potential conflicts of interest.

The accounts do show, as required by the IFRS, a global declaration of loans to directors and executives and their families, peaking at 244 million euros in 2008, 0.64 percent of the bank’s then total loans and advances to customers. Several Greek banks show high levels of such loans to executives.

But outside the global declaration of loans, Piraeus accounts do not mention any property transactions between the bank and any companies related to its directors, including MGS.

Brian Creighton, a UK-based director at BDO, a leading accounting firm, declined to comment on any specific case. But under the version of the IFRS rules that applied until last year, he said, loans or any case where a company director or close family member had a “significant influence” over another entity should have been disclosed. “Property sales, leases, loans and rent are among transactions that should be disclosed if they are between related parties,” he said.

In its annual accounts, Piraeus often asserted that “the terms of the Bank’s transactions with related parties are those that prevail in arm’s length transactions and according to the financial procedures and policies of the Bank.”

Grant Kirkpatrick, deputy head of corporate affairs at the Paris-based Organization for Economic Cooperation and Development, said that banks had a particular duty to be transparent about lending activities.

“The fact there are family members on the board of a company doing business with a bank is enough to suggest a potential conflict of interest,” he said. “The board of directors of the bank should have a very clear process to deal with such cases, and that process, and the details of any transactions, should be disclosed.”

Former Piraeus financial director Liapis said he was confident Sallas and his family had declared everything they should. “A businessman has his own private activities or assets that he has to handle,” Liapis said. “He only has to declare his so-called related interests and respect the ‘arms-length principle.’ Everything was declared in the bank’s statements. Otherwise, (do) you think that Price Waterhouse (the bank’s external auditors) would sign Piraeus Bank accounts?”

PricewaterhouseCoopers declined to comment.

Piraeus and Sallas did not respond to repeated requests to identify any public declarations about the firms linked to Sallas.


Property is the foundation of almost all personal wealth in Greece, a country with one of the highest rates of home ownership in Europe. Land records are officially public, but routine access is restricted to practicing lawyers. Reuters worked with an Athens-based lawyer who searched for transactions recorded by the firms linked to Sallas’ family.

Land records found by the lawyer and examined by Reuters show that six of the companies had bought at least 11 properties between 1998 and 2012 for a total of 14 million euros. Eight of the properties were subsequently sold.

The documents show that more than 28 million euros in loans, all from Piraeus, were secured on the buildings. One senior official at the Greek ministry of finance said that such a high ratio of loan to purchase price could indicate the loans were issued by Piraeus without sufficient collateral in place.

In all, seven of the 11 properties have been or are still used as Piraeus branches or offices. The rent the bank paid or pays for these properties couldn’t be determined. But deeds found in the land registries show three references to rental contracts with Piraeus, one for 24,000 euros a month, another 11,400 euros a month, and the other unspecified.

Sallas declined to comment on the rental agreements.

Myrto Sallas, who sat on the boards of four of the private companies and heads the family’s wine company, Semeli, referred all questions to her father and said she had no knowledge of any of the property deals.

“I can’t help you with that; you can talk maybe better with my father,” she said. “All the other companies are totally different from Piraeus Bank. They have nothing to do with that.”

Giorgos Sallas could not be reached for comment.

Liapis, who now teaches at the Panteion University of Athens, said he had been a director of thousands of companies because “that’s what accountants do.”

Asked specifically about some of the companies he helped run – including Erechtheas, MS Investing, and MGS – Liapis confirmed he had been a director at each. “It is not a secret to whom they belong. You can even tell by the names sometimes.”

Asked if that meant Sallas and his family, he confirmed: “Of course. There is nothing wrong with that.”

Liapis said he had no conflict of interest since he had not worked at Piraeus between 2000 and 2004, the period in which he was a director on the boards of those companies.

When told records showed that he had remained a director of at least two family companies until at least 2006, after he returned to Piraeus, Liapis conceded that might be possible. “Yes, maybe,” he said. “But still I didn’t sign any transactions with Piraeus Bank. During my tenure as financial director, I had nothing to do with holding companies or real estate.”

Liapis described his role as an agent of Sallas. “It is very simple,” he said. In his position running Piraeus, Sallas could not be the director of another company “so he appointed me.”

Liapis said many Greeks in high-profile positions were not honest in their declarations of assets; Sallas, in contrast, had been sincere and honest.

Niotis, the former Piraeus shipping adviser, said he retired from the bank in 2009. “During my career I accepted, at times, a number of, mostly, non-executive directorships in various companies of different remit. In none of these have I had ever any beneficial shareholding.”


Of all the transactions that involved the Sallas companies, perhaps the strangest were three prime properties in central Athens that Piraeus bought in April 2006 for a combined cost of 9.4 million euros.

One of the properties was the ground floor of an office building; the other two were townhouses. Each had belonged to one of three companies: MGS, Agallon, and Erechtheas. According to company accounts, Staikou then chaired MGS and has previously been a director of the other two.

In each case, the companies sold their properties to individuals who then sold them on within days. In all, the three Sallas family-connected companies declared a total of 4 million euros for their property sales. The new owners sold them for 2.05 million, 2.65 million and 4.7 million respectively. The buyer in each case? Piraeus Bank.

The properties were sold at what would prove to be the height of the property boom, according to Athens real estate experts, and the price paid by Piraeus was close, if not a little above, what was then the market price. “The bank would have lost money later when the price of property fell, but I am not sure it was cheated at the time,” said one experienced agent, who advises the Bank of Greece.

Real estate agents, lawyers, and officials said that the deals could have been a complex attempt to buy properties indirectly from the family-connected companies. Others suggested it was simply a legal tax dodge.

In Greece, explained one senior tax official, most property is typically sold with part of the real price left undeclared and paid in cash. “The problem is when you want to sell the property again, if you declare the real price, then you are left with a huge capital gain to declare,” he said.

One solution, he said, was to make use of an individual who, in return for a cut of profits, operated as a so-called “strawman” who could buy on the gray market, paying both the declared price and an extra portion in cash, and then selling on at the real price.

Piraeus would not comment on these three deals.

Stefanos Vasilakis, a public notary who said he helped draw up the purchase contracts for all three sales for Piraeus, said the reasons behind the complex arrangement “have to do with taxation.”

“When a company sells a property, it has to pay capital gains tax, which is the difference between the property bought and the property sold. Maybe two sales would be more profitable than one because my capital gains tax would be smaller,” he said.

Another tax official said that, under laws that applied briefly in 2006, capital gains tax for such deals was much lower, explaining the timing.

The businessmen who acted as intermediaries in two of the deals confirmed by email and phone that they took part.

The third case – the ground floor of an office block at 157 Mihalakopoulou Street in central Athens – is less straight forward.

MGS bought the property in 2003 for a declared total of 1.05 million euros. At the same time, Piraeus approved a loan to MGS of 2.4 million euros, secured on the property. MGS then got further cash from Piraeus by renting the property back as a bank branch for a monthly sum of 11,454 euros, according to later sale documents.

When it eventually sold the property in April 2006, MGS declared the sale price at 975,000 euros. According to the Athens real estate agent, this was “an extremely low price for those times. About two million euros would be a normal price.”

The buyer listed in the sale documents was a Lebanese-born businessman based in London called Philip Moufarrige. Nine days after buying the building, Moufarrige sold it to Piraeus for 2.65 million euros, according to a contract in the land registry. A lawyer involved in the case confirmed to Reuters he had represented Moufarrige in his absence.

Moufarrige, who lives in London, expressed bafflement when reached for comment. The passport and family details recorded in the sales documents were accurate, he said, but the London address the documents listed was wrong.

“I have never owned property in Athens in my life,” he said. “This was done without my knowledge.”

10 Responses

  1. you know a lot of cases have been well pled and as enraged says its the attorneys stupid, well its also the judges stupid, not that any of them are stupid.really,its the system- it will stay broken unless we get the transparency. The courts are the peoples court our tax dollars pay the judge he is there to administer justice fairness and the law, in other words, to serve the people, and not with “a law per the new world order version” but THE law. when this doesnt happen why are we not holding the judges feet to the fire- if this is not going to happen except in rare cases in new york, then what is coming out is bad case law for example Eason V Indymac (AZ) though i am very proud of Bill Eason.
    Im still needing an attorney on contingency, i have called many- cant get past the secretary ” this firm does not do contingency” i can now mouth the sentance exactly in time with their secretaries…

  2. It’s the lawyers, stupid!

    And it is too. Problem is: we can’t go after them. Not without shooting down the attorney-client privileged communication. As I said a while back, damn if we do, damn if we don’t. Time for the whole thing to blow.

    Tuesday, May 1, 2012
    Mirabile Dictu! The SEC is Getting Disgusted With Lawyers Pulling the Same Tricks in SEC Investigations that They Pull in Foreclosure Land Every Day

    The Wall Street Journal has an entertaining account, if your taste runs to black humor, of how legal chicanery has reached such high levels that the SEC is toying with the idea of going after it directly (hat tip reader Andrea). Officials at the securities watchdog suspect that the way lawyers have instructed clients to behave in its investigations constitutes obstruction of justice:

    ….some SEC officials have grown frustrated by what they claim is direct obstruction of a few investigations and a larger number of probes where lawyers coach clients in the art of resisting and rebuffing. The tactics include witnesses “forgetting” what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook, agency officials say.

    We’re not entirely sympathetic with the SEC’s problem. With the exception of HealthSouth, it has not used false certifications under Sarbanes-Oxley as grounds for going after the certifying officers, who customarily include the CEO and CFO. Sarbox was designed, among other things, to end the use of the “I’m the CEO and I know nothing” defense.

    Nevertheless, the SEC’s conundrum illustrates a serious decay standards in the legal profession and in social values generally. Readers of this blog are welcome to take issue, but attorneys tell me that state bar associations will sanction or disbar only small players. The large firms all make a point of being active in the organization. That makes it socially awkward to suggest a fellow country club member peer might be up to no good, much the less to move forward with charges.

    Florida demonstrates how heavy-hitter law firm miscreants go undisciplined by the bar. One particular egregious example of influence-peddaling involves the foreclosure mill Shapiro & Fishman. The firm has been under investigation by the Florida attorney general’s office (initiated under the last incumbent, Bill McCollum). Shapiro & Fishman is a regular user of mortgage assignments prepared by Lender Processing Services, the employer of the notorious robosigner “Linda Greene” and an avid practicer of “surrogate signing” which is NewSpeak for forgery. Nevada and Missouri have indicted LPS employees. The firm is operating under a consent order from the Federal Reserve Board, the FDIC and the OCC.

    So to deal with its wee problem, Shapiro & Fishman hired “superlawyer” Gerald Richman. Richman (among other things) was on the Host Committee for a $1500 a ticket fundraiser held on April 30 for three incumbent Florida Supreme justices (3 of the 7 judges are up for “merit renewal” votes this year). It also happens that on May 10, the Florida Supreme Court will hear oral arguments in Pino v. Bank of New York, a foreclosure fraud case. Needless to say, the outcome will be of very keen interest to Shapiro & Fishman.

    Now it may sound crass to say that the three justices will be influenced by the participation of Richman, and no doubt well heeled members of the bank side of the foreclosure bar. But research by social psychologist Robert Cialdini says they will be. He has found that a gift as small as a can of soda will make the listener more likely to say “yes” to a sales pitch. And the fundraiser is only an illustration of the influence bigger firms wield. Their partners travel in more elevated social circles, belong to the same clubs, backscratch their colleagues, and may have worked directly together in the past (in law school, as junior members of white shoe firms, and as members of committees in the bar association. The prohibitions against criticizing colleagues in these tight social networks are high.

    Any profession that was serious about conduct should have done some serious soul-searching when the robosiging scandal revealed widespread misconduct. But it has taken AGs like the ones in Nevada and Missouri, and courts like New York’s, which imposed certification requirements on attorneys in foreclosure cases, to do anything about it (note that going after LPS is certain to lead it to try to shift blame to the foreclosure mills).

    Back to main thread. The SEC is considering going after lawyers who approved certain mortgage bond transactions before the crisis or have been stonewalling investigations:

    The SEC enforcement staff has recently reported more lawyers to the agency’s general counsel, who can take administrative action against lawyers for alleged professional misconduct.

    So far, it looks like the SEC is just barking. The Journal points out that it lacks the power that the CFTC has to go after attorneys who make “any false or misleading statement of a material fact.” The SEC has gotten one lifetime ban against an attorney who coached his client to have her memory “fade” if she got a year of severance pay and has another case underway. But it also points out that judges have set the bar high as far as criminal prosecutions are concerned (note the SEC can only bring civil cases, so this isn’t an apples to apples comparison).

    I’m surprised that this article does not get at one legitimate reason to be leery of this SEC effort: any investigation, to really get at what happened, would have to breach attorney/client privilege, unless it had already been compromised. This is critical to the legal process working correctly. Further erosion of attorney-client privilege hurts clients far more than lawyers, which is why the bar won’t take this wake-up call as seriously as it should.

    These are all bad remedies for the real problem: the lack of secondary liability. As we wrote in ECONNED:

    Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

    Unfortunately, fraud now seems to have become such a large percentage of the GDP that lawmakers would no doubt see it as dangerous to employment and growth to restrict it. And the SEC is so preoccupied with winning cases (as opposed to making miscreants afraid that they might be dragged into court and have their dirty linen exposed) that the risk is high that they will file an election-year “we need to look tough” case, and be deterred, as they were with the Bear Stearns hedge fund prosecution, if it goes against them.

    Put it another way: if the usually limp-wristed SEC is so upset with legal misconduct that it is considering action, even if that action is likely to add up to very little, it shows how deep the rot is among the American elites.

  3. Can’t wait for it all to blow. Sheeesh…!

  4. This should frost your hair! And enrage you as much as the mortgage fraud. The government and the judicial system is seasoned at making up their own laws. Enraged put this on and I recommend you all watch it. And expose it to everyone.

  5. @Ian,

    Sherrod Brown has been one of the most vocal senators against the settlement. Following are excerpts of speeches and articles he’s written. One of the few to still rail against it, even after the fact.

    Tnharry wouldn’t understand…

    “To be clear, a substantial number of investors would support principal reductions. They’ve come out and said so. They often end up in a better place with them than with foreclosure sales. But they would not have any say in the matter, according to this proposal, and the banks would get off scot-free for their fraudulent activities. The losses in the system would incur to the homeowners and the investors […] not only is the $19-$25 billion figure inadequate to deal with the massive foreclosure crisis or the extent of the fraud perpetrated, but banks would have a way to wriggle out of some of the charges.”

    “There are reports that the settlement could permit servicers to receive credit for writing down the value of mortgage-backed securities (MBS) owned by investors, without requiring servicers to reduce principal on the mortgages and second liens that they own. Ohio’s public employee pension funds have significant investments in MBS, and therefore have significant interest in the terms of the settlement. The reported settlement terms would allow banks to write down the investments of many of my constituents, without sacrificing anything. And, depending upon the scope, any settlement could potentially preclude these funds from pursuing actions to recoup more than $457 million in losses, allegedly due to credit ratings agencies improperly rating MBS. Such terms are unacceptable.”

    “January 19, 2012

    Dear Associate Attorney General Perrelli, Secretary Donovan, Director Cordray, and Attorney General Miller:

    As the senior Senator from Ohio and a member of the Senate Committee on Banking, Housing, and Urban Affairs, I am all too familiar with the struggles faced by distressed homeowners, resulting from a pattern of abuse by the largest bank servicers. My home state experienced 14 consecutive years of increasing foreclosures until 2010, when some of the nation’s largest mortgage servicers instituted a foreclosure moratorium amid reports of widespread legal document forgery. This issue is at the heart of your 50-state mortgage and foreclosure fraud investigation. Accordingly, I write today to express my concern based upon recent reports outlining some of the proposed settlement terms.

    It is reported that the proposed settlement will include a number of components to address the wrongdoings of Wall Street banks and their affiliated servicers, including a system of mortgage principal reduction based on a credit system. With more than one in five Ohioans owing more on their mortgage than their house is worth, and Ohioans nearly $16 billion underwater on their mortgages, there is no question that principal reduction can and should be an element of any plan to aid homeowners. Many of these people are underwater through no fault of their own. As New York Federal Reserve President Bill Dudley said recently, “[t]his isn’t a moral hazard issue, this is just the bad luck associated with the timing of the purchase and an exceptionally weak jobs market.” A settlement must provide meaningful, widespread relief to Ohio homeowners. Unfortunately, the numbers reported in various media accounts fail to meet this test. The settlement must also redress the injuries suffered by families that have already lost their homes. Any settlement that fails to achieve these two goals would be insufficient.

    A settlement must also impose adequate penalties on servicers who broke the law. There are reports that the settlement could permit servicers to receive credit for writing down the value of mortgage-backed securities (MBS) owned by investors, without requiring servicers to reduce principal on the mortgages and second liens that they own. Ohio’s public employee pension funds have significant investments in MBS, and therefore have significant interest in the terms of the settlement. The reported settlement terms would allow banks to write down the investments of many of my constituents, without sacrificing anything. And, depending upon the scope, any settlement could potentially preclude these funds from pursuing actions to recoup more than $457 million in losses, allegedly due to credit ratings agencies improperly rating MBS. Such terms are unacceptable.

    Teachers, first responders, law enforcement, and other pensioners and retirees should not be penalized for wrongdoing by Wall Street. An adequate loss-sharing arrangement would acknowledge the reality that there is no penalty for servicers writing down the value of assets that belong to someone else. There is also no penalty associated with servicers writing down a portion of their assets – in this case, their second lien holdings – that actually have no value. It is often in investors’ best interest to reduce mortgage principal, but this settlement must penalize the servicers who broke the law.

    As Governor Sarah Bloom Raskin of the Board of Governors of the Federal Reserve said recently, financial penalties “remind regulated institutions that noncompliance has real consequences; the law is not a scarecrow where the birds of prey can seek refuge and perch to plan their next attack.” It thwarts the objective of punishing servicer wrongdoing and deterring future robosigning, predatory lending, consumer deception, and other violations by permitting wrongdoers to settle exclusively with “other people’s money.” State attorneys general tried this approach in a 2008 settlement with servicer Countrywide—it did not work.

    Accordingly, mortgage servicers must not be able to settle these claims using investments held by state pension funds, retirement systems, and universities. The penalty for bank servicer misconduct must come from the bank’s balance sheets, not other sources of mortgage capital. The proposed principal reduction program must focus on banks settling with their own money, rather than shifting their financial liability to Private Label Securities (PLS) trusts. And the net present value (NPV) model for calculating the value of a mortgage modification must be publicly disclosed, transparent, and based upon reasonable economic assumptions (e.g., the correct discount rate), to ensure that principal is being reduced when it is financially appropriate.

    Mortgage servicers must be required to assist homeowners who have lost their homes illegally or are underwater through no fault of their own. But the remedies and penalties must be meaningful, and not come solely from the retirement savings of middle class workers—some of whom may have already lost their homes as result of the illegal practices that the settlement is meant to address.

    This is a critical issue for Ohioans who have been victimized by widespread foreclosure fraud and will be affected by any settlement, both as homeowners and as investors in MBS portfolios managed by public pension and retirement systems. Your efforts to ensure a fair and transparent settlement will have lasting effects for a generation and establish a very important legal precedent.

    Thank you for the opportunity to share my views on this important matter.

    Sherrod Brown
    United States Senator”

  6. enraged- Sherrod Brown- was that the person who had you cornered at the bar mitzvah over the weekend? and why does tnharry think you should be out marching today? tell him you you ate too much of that gefilte fish to march all day. yeeesh. enough already.

  7. Greece had no clue.
    Don’t make me laugh ,, Greece has been at it almost as long as China ,,, they’ve been an empire and lost it due to currency collapse a few times and have had psycho emperors… Joining the eurozone was a green-light to bilk the healthier participants any way they could and they finally hit the end of the road… I personally hand delivered a $500k bribe to an AF general in the 1980’s for a large computer manufacturer that had just won a logistics contract… and it was all perfectly legal and reported to our IRS as a normal part of doing business in such a corrupt country.

    This is what CRONY CAPITALISM looks like as practiced by our current regime.

  8. @tn,

    Been there, done that, came back. Met Sherrod Brown. Good guy. He wants kids to get a break on students loans.

  9. i thought you would be out marching today Enraged

  10. “People in the U.S. are finally coming around to the view that complete and utter transparency in reporting all aspects of banking is required to prevent moral hazard.”

    Yep, we realize that. How’s it working for us? We’ve been at “realizing it” for a few years. Can’t say we’ve mastered transparency…

    And about Greece… They’ve learned from the best! Can’t be Goldman Sachs of Wall Street and not breed your kind everywhere you go, can you? The thing is: Greece had no clue. Can’t say that about our own government and elected reps: they’ve been at it since… the 80s! Read again that AG lawsuit against the banks: they did all that and… they still walk.

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