HUD Inspector General Hints at a Nuclear Bomb in the Mortgage Settlement

Mar 14, 2012Matt Stoller

Did Bank of America just get called out for failing to follow crucial procedures?

Most of what I have to say about the settlement is in this post over at Naked Capitalism. But there is a remarkable tidbit I left out, which the HUD OIG noted in a wry part of the audit on Bank of America.

Did Bank of America just get called out for failing to follow crucial procedures?

Most of what I have to say about the settlement is in this post over at Naked Capitalism. But there is a remarkable tidbit I left out, which the HUD OIG noted in a wry part of the audit on Bank of America.

Bank of America may have conveyed flawed or improper titles to HUD because it did not establish control environment which ensured that affiants performed a due diligence review of the facts submitted to courts and that employees properly notarized documents.

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This is the so-called "clouded title" problem, which is to say that bank servicers might have been foreclosing on properties they had no legal claim to. Yves Smith and Tom Adams jumped up and down on this in 2010 over a lawsuit called Kemp versus Countrywide. In this suit, a Bank of America employee revealed that Countrywide didn't properly follow securitization procedures to establish a clear chain of title. Therefore, the investors should technically get all their money back, because the loans were never actually turned into mortgage-backed securities. This is a multi-trillion dollar problem, a put-the-toothpaste-back-in-the-tube issue that no one wants to even whisper about.

And the HUD OIG somewhat alluded to the fact that it's out there. Awkward.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

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Dorian Warren: Why Resetting the Agenda is No Easy Task

Mar 14, 2012Tim Price

Roosevelt Institute Fellow Dorian Warren appeared on MSNBC's Melissa Harris-Perry along with Shelby Knox of Change.org on Saturday to discuss why Republicans are so good at setting the political agenda and why it may have backfired on them recently. In the video below, Dorian notes that on the right, "all it takes is one big fat guy with a microphone spouting off to set the agenda, but it takes thousands of people to come together for us to reset the agenda. That's the reality of grassroots politics."

Roosevelt Institute Fellow Dorian Warren appeared on MSNBC's Melissa Harris-Perry along with Shelby Knox of Change.org on Saturday to discuss why Republicans are so good at setting the political agenda and why it may have backfired on them recently. In the video below, Dorian notes that on the right, "all it takes is one big fat guy with a microphone spouting off to set the agenda, but it takes thousands of people to come together for us to reset the agenda. That's the reality of grassroots politics."

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Dorian argues that over the last 40 years, "Republicans have been better at all three faces of power" -- not just setting the agenda, but coercing people through the use of tools like Super PACs and influencing ideas with their free market rhetoric. But he notes that while dominant ideologies and institutions might seem too big or entrenched to change, "we always have to challenge reigning ideas that are oppressive" and "challenge those in power who are setting the agenda which is not in our interest." He cites the Occupy movement as one example of ordinary Americans coming together to take on titans like Bank of America.

Of course, as Republicans have learned all too well through their attempt to exhume the long-buried contraception debate, "you never know when you're agenda-setting what the backlash might be."

For more, check out Dorian's take on how rules are shaping the GOP primaries, the forgotten plight of the 99ers, and the cultural impact of the Notorious B.I.G. (Hey, even the AARP misses him.)

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Are Bankers Capitalists?

Mar 1, 2012Bruce Judson

wall-street-150Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?

wall-street-150Jamie Dimon says banks are more successful than media companies, but which industry is actually following capitalist principles?

The phrase "Wall Street" is evocative in American culture. For generations, it has referred to the showcase of American capitalism: our financial services system that ensured the efficient use of funds by channeling capital to its most productive use. Indeed, the governing ethos in America is that Wall Street is the heart and soul of our capitalist economy.

As I have written before, capitalism involves four basic principles: absolute responsibility for anything and everything that happens to your company (i.e. total accountability), equal justice under the law, compensation based on the real value created for society, and competition, which involves failure and what is often called creative destruction.

The CEO of JPMorgan Chase, Jamie Dimon, has repeatedly touted the success of his efforts and disparaged critics. Earlier this week he compared compensation in the banking industry to the struggling media world, suggesting that the banking industry was far more successful. In speaking to journalists, according to Bloomberg, he noted, "Worse than that, you don't even make any money... [while] we make a lot of money."

Mr. Dimon is right. He and his colleagues are successful. But the real question is this: What are they successful at? By almost any criteria, the banks operate under rules that are so far from capitalism as to be unrecognizable. Let's take Mr. Dimon's comparison of the media industry and the banking industry further.

Both industries have been affected by unforeseen events. The Internet has undermined the viability of innumerable media businesses, leading to bankruptcies, changing business models, and intense competition for advertiser and subscriber dollars. In the face of these changes, industry participants have been forced to adapt or die. The forces of creative destruction, which are central to capitalism, have operated with an unforgiving ferocity. Formerly dominant entities have been forced to declare bankruptcy, while new media competitors and business models emerge on a seemingly daily basis.

In contrast, the banks argued that TARP was warranted because the economic tsunami of 2008 was unforeseeable. One of the essential functions of a financial institution is to manage risk. The majority of our large institutions failed entirely in this central responsibility as the economic crisis struck. In effect, many of our leading financial services firms were (and often continue to be) led by such poor businesspeople that if the principles of capitalism were enforced they would be out of business. My friends who are media entrepreneurs in Silicon Valley actually laugh when they hear the "we should not be responsible because this was not foreseeable" claims from the bankers. Every entrepreneur knows that they must make payroll each week or they are bankrupt.

At the same time, no one in Washington seriously believes the too big to fail legislation in Dodd-Frank will ever work. Inevitably, as in the case of AIG, counter-parties will declare that they will suffer irreparable harm if one of our leading banks is allowed to fail. I have come to call this "the Washington wink." You ask a federal official if too big to fail legislation will work, they dutifully say of course it will. However, the "of course" is inevitably accompanied by a knowing wink.

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In another divergence, the government has not subsidized media businesses. The banks may be showing profits, but they are on government life support. These so-called zombie banks can borrow from the Federal Reserve at almost no cost, and a long list of government initiatives have served as additional "stealth" bailouts of the banks. In the absence of this government support, would the banking industry still be successful? If media companies could borrow funds at almost no costs, I suspect their balance sheets and profits would be dramatically enhanced.

Capitalism is built on the idea that compensation and profits reflect the relative contribution an individual or firm makes to the total wealth of a society. Real societal wealth is anything that can be consumed or experienced. Profits are an accounting proxy meant to measure wealth. As I have written before, this proxy has failed miserably with regard to the banking industry. Given the loss of real societal wealth that accompanied the economic crisis as a result of poor bank management, the employment crisis, and the ongoing support the industry needs from the government, there is only one possible conclusion: at this moment the financial services industry is far more of a destroyer of real wealth than a wealth creator.

Meanwhile, media companies don't profit by repeatedly breaking the law. The lack of enforcement against Wall Street undermines our democracy and capitalism, and is effectively another form of stealth government support for the industry. As noted here, JP Morgan Chase (like several of the large banks) is in the middle of a host of potential scandals. In a true capitalist economy, the government would enforce the law to prevent repetitive malfeasance. The executives leading a firm that repeatedly violated the law would be held accountable by the firm's board for failure to exercise this basic responsibility to society.

Since the start of the economic crisis, the financial services industry has grown even more concentrated. It's hard not to regard our largest financial services institutions as effective monopolies. Yet, to my knowledge, no investigation of antitrust issues related to the industry is underway. This is yet another stealth government subsidy. By contrast, in an earlier article I wrote about the misguided Justice Department investigation of e-book pricing, another area that is already suffering badly.

Yes, Mr. Dimon, you are a success. However, I would suggest that the success you so proudly proclaim reflects the loss of two of our nation's most important values. The first is the failure of individuals and leaders to simply take responsibility for their actions and the actions of their companies. The second is that Wall Street, which should be the heart of American capitalism, has instead become the heart of a dysfunctional system that is destroying the nation's wealth.

No, bankers are not capitalists. At every turn, they demonstrate that the last thing they want is the return of real capitalism to America.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Wall Street Fixer Rodge Cohen: Big Banks Key to American Global Dominance

Feb 27, 2012Matt Stoller

Sometimes finance executives let slip the way they really feel: that they hold the world in the palm of their hands.

Sometimes finance executives let slip the way they really feel: that they hold the world in the palm of their hands.

It's not often that the people in charge admit what is really going on: a global game for political dominance. I just saw an interview with Wall Street superlawyer Rodge Cohen, the secret force behind (among other things) the expanded emergency lending power of the Federal Reserve through section 13(3). You know, that's the law allowing the Fed to lend unlimited sums based on whatever it wants to lend, a section amended in 1991 at Cohen's behest. He was involved in "more than 17 deals" during the crisis in 2008, including the bankruptcy of Lehman Brothers, the $85 billion AIG bailout deal, and the takeover of Fannie Mae by the federal government. He is, as Bill Black said, the fixer of Wall Street. Here's his quote, at minute 3:39 of this Bloomberg interview:

Hopefully we will not see the major financial institutions in this country disappear because if we do we will also see a loss of ability to influence events not only financially but also politically throughout the world.

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That's pretty clear. It reminds me of this quote from an anonymous military officer while he was touring JP Morgan's trading floor (emphasis added):

JPMorgan Chase yesterday hosted about 30 active duty military officers (across all branches and agencies) from the Marine Corps War College in Quantico, Va. The officers met with senior executives, toured the trading floor and participated in a trading simulation. They discussed recruitment, operations management, strategic communications and the economy. Aside from employees thanking them for their service as they passed by, they also received a standing ovation on the trading floor. Said one officer after a senior JPM exec thanked him for his service: “We promise to keep you safe if you keep this country strong.”

There are always conspiracy theories out there about a global linkage between large financial institutions and American empire. They don't, however, usually come from the people running the place.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

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Why Inequality Matters: 3 Ways the Mortgage Crisis Has Undermined Our Legal System

Feb 17, 2012Bruce Judson

money-justice-scalesBanks are demonstrating that if you have enough money and influence, you're not expected to follow the same laws as everyone else.

money-justice-scalesBanks are demonstrating that if you have enough money and influence, you're not expected to follow the same laws as everyone else.

For several years, I have been writing that extreme economic inequality is among the most destructive forces in a society. As inequality grows, it undermines the effective functioning of the economy, the basic tenets of capitalism, and the foundations of democracy.

Unfortunately, the housing crisis and now the housing settlement increasingly look like an example of how these mechanisms work.

One of the central characteristics of highly unequal societies is that two sets of laws develop: One set for the rich and powerful and one set for everyone else. The more unequal societies become, the more easily they accept the unacceptable, and with each unrebuked violation, the powerful actors at the top of the society gain an ever greater sense of entitlement and an ever greater sense that the laws that govern everyone else don’t apply to them. As a result, their behavior becomes increasingly egregious.

I would suggest that the robo-mortgage scandal is a strong indicator that this type of unequal justice is now becoming ever more commonplace in America. Past bank abuses are typically discussed without a sense of outrage. They have, in effect, become a recognized practice of deception with no consequences. Here are three prominent examples from the past few years:

First, the robo-mortgage scandal was discovered. As powerful members of society, the banks effectively decided what laws they wanted to follow and disregarded others. The banks claimed that their violations were technical and harmed no one. Nonetheless, the activities of the banks constituted massive fraud, perjury, and conspiracy. Bank officials have testified in court that they filed as many as 10,000 false affidavits a month. These are effectively undeniable admissions of law-breaking on a massive scale.

It’s a federal crime, punishable by up of five years of imprisonment, to knowingly file a false affidavit with the court. From the perspective of the law, you are guilty of the same perjury when you falsely testify in court or when you submit a false affidavit. In most states, filing false affidavits with the court similarly constitutes a felony offense of perjury.

If an individual citizen perpetrated this kind of massive perjury, he or she would be prosecuted. For illegal activities to take place on this type of massive scale, other serious crimes, such as conspiracy, are undoubtedly committed as well.

This week an audit of San Francisco mortgage practices, the first systematic audit in the nation, revealed that an astounding 82 percent of the cases analyzed involved suspicious activity by the foreclosing institution and concluded that a large portion of these activities probably involved felony violations of California perjury laws.

Second, when Martha Coakley, the attorney general of Massachusetts filed a civil suit related to the robo-mortgage scandal against several financial institutions, she was demonized by the financial services industry and appropriately recognized for her bravery by housing advocates seeking to end abusive bank practices.

What is noteworthy, however, is that Coakley filed a civil suit. This was a lenient effort as she undoubtedly had the ability to build a compelling criminal case against the banks (as institutions) and the bank officers who knowingly created the robo-mortgage scheme.

Third, the national housing settlement, involving the federal and state governments, was announced last week. A central concern associated with the settlement is how it will be enforced. The banks have a long and well-documented history of agreeing to settlements that will change their behavior and then failing to live up to these binding agreements. Moreover, penalties for failure to comply with these settlements are rarely, if ever, assessed.

Check out “The 99 Percent Plan,” a new Roosevelt Institute/Salon essay series on the progressive vision for the economy.

In her New York Times feature story, "The Deal is Done, but Hold the Applause," Gretchen Morgenson wrote about this behavior, and how it relates to the current settlement:

But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises.

Morgenson then recounts a series of instances where the banks failed to comply with past settlements, including this quote from a former judge involved in these processes and her conclusion:

"It's astounding that in such a huge percentage of cases the lenders are not complying," said Philip A. Olsen, a former Nevada Supreme Court settlement conference judge. "The banks have learned that they can thumb their noses at the program and it won't cost them anything."

So you have to wonder whether banks will thumb their noses at last week's settlement, too. That makes policing compliance crucial.

The full details of the settlement have not been released, but unfortunately, the most recent disclosures suggest that this enforcement power and large penalties per violation are wishful thinking. An executive summary of the provisions of the settlement can be found here. It states, among other things: "If banks fail to remedy violations, they are subject to civil penalties of up to $5 million from the court.”

While the full details may suggest otherwise, the process as described here seems to be a far cry from substantial penalties for each failure of compliance. Why does the monitor need to provide the banks with a chance to remedy violations of the settlement? The banks certainly know what they are supposed to be doing. It is a clear indication that the banks will be able to act without a sense of urgency.

In addition, have the banks agreed that they will not contest the monitor’s request of penalties to the court? If not, then, as I have noted previously, a court fight over each penalty can ensue -- with the possibility that the entire monitoring process is a charade.

I hope that I am wrong, but the above analysis certainly suggests that, in Morgenson’s words, banks will have the opportunity to “thumb their noses at last week’s settlement” without incurring serious penalties.

The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks’ blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities has been a clear example of unequal enforcement of the laws.

Sustainable capitalism requires that all participants in a contract or bargain believe their interests will be enforced equally by the courts: Capitalism requires that Lady Justice wear a blindfold. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy. This uncertainty leads the small businesses, which are so often cited as important to our economy, to shy away from new activities that might put them at the risk of unequal treatment.

President Obama has declared economic inequality to be “the defining issue of our generation.” I agree, but I am terrified that the most recent news related to the housing settlement is not the definition the president intends.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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An Interview with Occupy the SEC About Their Volcker Rule Comment Letter

Feb 16, 2012Mike Konczal

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

February 13 was an important deadline for comment letters relating to the implementation of the Volcker Rule. One group that submitted a comment letter was Occupy the SEC, an Occupy Wall Street-affiliated working group that has an excellent web presence outlining their objectives.  The site also includes their comment letter (available as a pdf here) -- all 325 pages of it.

Felix SalmonMatt YglesiasSwamplandThe NationJosh Harkinson, and Dave Dayen, among many others, have all said great things about it. I was most impressed with the point-by-point, aggressive answering of the regulators' questions -- the stuff that can make a difference. Felix suggests reading the introduction if nothing else, particularly pages 3-6, and I agree.

Since this blog is a fan of all things financial reform, Volcker Rule, and the Occupy movement, I was very fascinated with the backstory on this letter. I was able to speak with two members of Occupy the SEC, Alexis Goldstein (@alexisgoldstein), a former Wall Street technology VP, and Caitlin Kline, a former credit derivatives trader.

Mike Konczal: What is Occupy the SEC? And what is the Volcker Rule?

Alexis Goldstein: Occupy the SEC is a working group inside Occupy Wall Street, which has been focused on writing a comment letter on the Volcker Rule.

The high-level overview is that the Volcker Rule is meant to keep federally-backed banking entities from proprietary trading and from owning more than 3 percent of any given hedge fund or private equity fund.

MK: How did you end up getting involved in Occupy the SEC?

AG: I was going down to Occupy Wall Street every day and one day Naomi Klein came and gave an open forum talk. And I asked a question, over the people's mic, on whether we should bring back Glass-Steagall, and she said yes.

Afterwards, all these people came up afterwards and asked me "What's Glass-Steagall?" And I thought I could help out and do a teach-in. After announcing an upcoming teach-in at a General Assembly, Akshat emailed me and asked if I was interested in forming a group to write a comment letter.

Caitlin Kline: A friend of mine who was involved in the movement called me up one day and told me that he had just seen a teach-in, and that the woman “spoke about derivatives the way you do!” So he put me in touch with Alexis, and I started attending the book club meetings.

MK: How much of the group are people currently or formerly in the financial industry?

AG: Probably a slight majority. Not everyone -- we had people who were leaders or people who wanted to learn and get up to speed. But it definitely had a strong industry contingent.

MK: How did you start focusing the letter?

CK: It took a long time to get our minds around all the different elements of the Volcker Rule and what kind of comment letter we wanted to write. We decided early that we wanted to write about the nitty-gritty of the rule and focus on the specifics, so it required a really deep dive into the material to leverage everyone’s expertise. Right off the bat, we decided that this rule was a good idea, and it has to actually be meaningful. That's how we attacked it -- we wanted to strengthen it as much as possible.

MK: Some people (usually not in the movement) complain about the General Assembly and consensus-driven procedures as not workable for a complex task, like writing hundred of pages responding to regulatory rules. What was your procedure and how well did it work?

AG: There were two tasks. The first task was much like a book club. We treated the Volcker Rule as our book, and we'd assign readings and times for discussion. At first we were meeting once a week, then later twice a week for marathon sessions. During those marathon sessions we'd go through all the questions the agencies asked about the rule.

MK: How many questions were there?

AG: 395. But each of those questions had around three or four questions in it. But 395 numbered questions.

CK: So a total of around 1,200 to 1,400 individual questions.

AG: It's easiest to visualize this. So we are all there in the atrium with our laptops. We are going through this question by question, discussing them, debating what we think the answer should be. Once we all agree on something we put it in a bullet or several bullets. And sometimes we'd go off on these huge tangents and have debates on the best way to address the topic. We'd often have to say "let's move on to the next topic," but we always tried to work from consensus.

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When we went to try and write the initial draft of the letter we'd work collaboratively on these online documents that everyone could see at all times. That way if there was something someone didn't agree with they could leave a comment or send an email to the group and we could talk it out. For the most part we tended to agree -- though there were many instances where we clashed horns.

After that initial pass we broke it up section by section so everyone had their focus area. From there we could embellish those central consensus bullet points we had come up with.

MK: How many people are involved?

AG: There was a core group of seven people, with a variety of people coming in and out. There were many experts in an area who couldn't commit to all the meetings but wanted to work on very narrow areas. They'd drop in and drop out.

There was one person who was very interested with the metrics section. So she attended one meeting where we were going to talk about that and she gave us some great ideas. There was a gentleman who used to work at a special purpose vehicle and was really involved with securitizations. He did a really great job writing and giving insights on those topics via e-mail, even though he couldn't make the groups.

CK: In a lot of cases we pooled our resources to find people with certain expertise on issues we wanted to address in the letter.

MK: What are you worried about with the implementation of the Volcker Rule?

CK: The one that comes up often is that liquidity is going to evaporate overnight, crippling markets. This is the base of the lobbyists' efforts. We spent a while debunking that argument.

MK: How do you respond to that?

CK: Well the whole theory is predicated on the idea that these federally-backstopped banks are the only institutions that can provide liquidity. It is a profitable business, especially the market-making end of it, and any number of firms will step in in order to take this.

MK: Were the members of Occupy the SEC involved broadly with the movement?

AG: It depends on the person. For me I was highly active in the woman's caucus. I would go to the General Assembly often, I'd go to the Spokes Council meetings. I was very involved in the day-to-day. When this letter got started I had to take a step back and focus on that instead.

We had some people that weren't involved with the letter but they'd help us by coming to the meetings, organizing and planning direct actions. Others were involved in the Politics and Electoral Reform group, the Direct Action working group, and the Think Tank, which conducts open air discussions on various topics.

CK: This was the first time that I thought that I could jump in and get involved. Particularly as an ex-trader, I could do this, and be involved with the movement in a meaningful way. Since we started, I've met so many smart people and encountered so many issues that I'm going to continue to be involved with, and I think most of the group has had a similar experience.

MK: There's a saying that goes "Occupy Everything, Demand Nothing." You've written a document giving very technical advice to regulators. Part of Occupy is about creating alternatives instead of making demands, yet your group set out to reform a system very resistant to reform. How do you handle that tension?

AG: There's two points. The first is that all working groups at Occupy are autonomous. Since no one can speak for Occupy Wall Street, each group can choose their own goals that they want to work for as long as you don't say you speak for Occupy Wall Street (without going to the New York City General Assembly). So there's a lot of freedom to work on Occupy Wall Street on whatever projects you want.

The second thing is that though the system is broken and difficult to repair, you don't have to choose between abandoning it or reforming it. I think you can do both -- try to reform it from within while building a new system. This particular effort is about reforming the current system, but that doesn't mean, at all, that we aren't interested in alternative systems. There's another group called Occupy Bank thinking through a completely new banking system from scratch.

CK: From those of us who saw how big and screwed up the financial system is, it's very difficult to know, or even understand, what it would take to fix it. Some people would say to us "why are you even bothering with this? Why not go back to Glass-Steagall?" Well, that's not on the table right now, but this is. And the Volcker Rule is something very real and concrete. It's good intellectual work to think through alternative systems and I want to be a part of it and see where it goes, but in an immediate way there's ways to clean up things right in front of us. A lot of people I know get stuck on this -- "it's really screwed up and there has to be another way" -- and you end up thinking about that other way forever.

MK: Quick question: did your group do the twinkles during meetings?

AG: Yes. In fact when Caitlin was just talking with you I was twinkling.

MK: Over the phone?

AG: Yes, it is such a habit I can't break it.

MK: What are you excited about for Occupy in 2012?

AG: As an activist you are often isolated to your particular cause. Let's say you are an environmental activist and your cause is sustainability. You fight the same fights with the same people, you go against the same industries, and it is easy to burn out. You are stuck in this little bubble. My favorite thing about Occupy Wall Street is that there is this cacophony of causes. You come together for the things that matter the most to you, but you are surrounded by all these other people fighting for all these other causes, with their own expertise, and all those passions amplify each other. If you need a break from your topic, you can jump into another one. And there's so many new people, fresh faces all the time, it gives you courage and the strength of purpose to continue. Because it's so tough to fight a fight and think you are the only one who cares.

Also, I really hope we can retake more public spaces.

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The Mortgage Settlement's Missing Piece: Will Banks Now Follow The Law?

Feb 10, 2012Bruce Judson

home-foreclosure-documentIf the ability for independent monitors to impose fines for failing to follow the law is eviscerated, we'll be back where we started -- or worse.

home-foreclosure-documentIf the ability for independent monitors to impose fines for failing to follow the law is eviscerated, we'll be back where we started -- or worse.

The country's banks agreed to change their behavior as part of the robo-mortgage settlement announced earlier this week. The announcement, however, leaves open a central question: Does the settlement include new, pre-defined penalties for banks that fail to uphold their new promises? Since a change in bank behavior is a vital piece of the settlement, the absence of an answer is highly disconcerting.

When the deal was announced, the Associated Press reported, "The conditions will be overseen by Joseph A Smith Jr., North Carolina's banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators." The initial impression on reading this report is that there are real teeth to it. It sounds like the banks are agreeing to pay $1 million dollars each time they fail to perform as promised.

However, the actual press release from the Department of Justice announcing the deal reads (emphasis added):

Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr. Smith has served as the North Carolina Commissioner of Banks since 2002... The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.

There are two open questions. First, what does "up to" mean? Does the independent monitor have discretion over the size of each penalty? This could effectively make the million dollar figures announced by the Justice Department meaningless. Banks have argued that the tens of thousands of robo-mortgage signatures and well-documented servicing errors were all technical violations that harmed no one. Undoubtedly, they will argue that any single violation was a meaningless error.

This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.

Second, can banks contest these fines? Have the banks agreed that they will pay any fines assessed by the independent monitor? If not, then once again the provisions have the potential to be meaningless. The monitor will assess fines for violations and the banks will challenge the fines through whatever venues, the courts or otherwise, have been established by the settlement. The judgment and ability of the independent monitor to set fines will have been eviscerated.

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Efforts to determine answers to these and related questions have seemingly been rebuffed. The Huffington Post reported on its efforts to understand the details of the enforcement provisions of the settlement:

Details of how the states will make sure banks follow the deal's guidelines haven't yet been released... The announcement on Thursday did not include any new information on bank penalties. A call to the Smith's office was not immediately returned. A HUD spokesman did not immediately return an e-mailed request for comment.

There appears to be near universal agreement that this settlement will do little for homeowners who have been the victims of past bad bank behavior. But there may be real value in the deal if it successfully changes bank behavior going forward. The New York Times quoted the Attorney General of North Carolina as saying, "This agreement is more important for the foreclosures we're hoping to prevent."

At the same time, The New York Times wrote, "Advocates for homeowners facing foreclosure expressed cautious optimism," but indicated that these same advocates believe rigorous enforcement is essential for the program to work:

"We're hopeful," said Joseph Sant, a lawyer at Staten Island Legal Services' homeowner defense project. "But we had a lot of programs that are good on paper. What will make the difference is that it's vigorously enforced."

The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks' blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities has been a clear example of unequal justice. The banks have knowingly and repeatedly violated laws (such as providing tens of thousands of false affidavits to the courts) that would have landed an ordinary citizen in jail.

At the same time, successful capitalism itself depends on the enforcement of rules and contracts in a fair bargain. When powerful players are permitted to alter pre-established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy.

If the settlement enforcement provisions turn out to lack substance, these forces will be reinforced rather than counteracted. We must wait for the details. Like homeowner defense advocates, I am cautiously optimistic -- but terrified that ultimately I will be disappointed.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Seven Questions Begging to Be Answered Before a Foreclosure Settlement is Reached

Feb 2, 2012Bruce Judson

foreclosure-gavel-150Why the secrecy? Why the haste? Rushing into an ill-advised settlement with the banks may undo one of our last chances to avert another economic catastrophe.

foreclosure-gavel-150Why the secrecy? Why the haste? Rushing into an ill-advised settlement with the banks may undo one of our last chances to avert another economic catastrophe.

Tomorrow is the deadline for state attorneys general to sign on to a joint federal and multi-state $25 billion settlement of the robo-mortgage scandal. The settlement will involve Ally Financial Inc. (formerly GMAC), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. The details of the proposed settlement have not been released. However, one thing is clear: This settlement puts the nation at further risk of another systematic financial crisis and runs counter to any notion that the actions of the Obama administration will reflect the president's newly energized populist rhetoric.

As a nation, we need to ask several questions. As a participatory democracy, we also have the right to the answers before any settlement is inked:

1. In his State of the Union Address, President Obama announced a new financial crimes taskforce, yet the administration is rushing to finalize this settlement before the taskforce begins its work. Why?

2. What is the public interest in releasing banks that have openly admitted they broke the law in tens of thousands of separate instances from liability?

3. The bank narrative has been that the robo-mortgage scandal reflected procedural issues of no consequence (despite the fact that they constituted fraud, perjury, conspiracy, and a knowing effort to mislead the court). Recently, a new narrative has emerged that suggests these activities were actually the back-end of even greater malfeasance involving tax evasion and the banks' failure to comply with basic rules in securitizing mortgages. If we are a nation where justice is blind, should we not investigate the full truth before we give the offending financial institutions another free pass?

4. Why are the terms of this settlement secret? Prosecutorial negotiations are normally secret in order to prevent the disclosure of evidence that might or might not be relevant to a later trial if the negotiations collapse. This concern does not apply here.

5. This settlement has far more of the characteristics of legislation than of prosecutorial activities. The offending banks have destroyed the wealth, livelihood, and dreams of millions of Americans. Shouldn't the public at least have two weeks to view the proposed terms of the settlement and make their views known to their state's attorney general? And at a time when trust in government is at historic lows, isn't secrecy for this type of activity the wrong way to build the much-needed confidence of the American people?

6. The press also has a constitutionally guaranteed role in our system of governance. In these unusual circumstances, isn't this precisely the type of situation where the nation would benefit from careful scrutiny of the intended settlement by the press?

7. Officials have indicated that the settlement will require banks to write down the principal on homeowner loans. Unfortunately, a portion of the $25 billion allocated for this purpose is far too little, spread across a large number of homeowners, for any write-downs to make an effective difference. So either these statements are effectively meaningless, or the settlement is based on promises of future activities by banks. To date, the nation has witnessed repeated and egregious failures by the banks to live up to promises of future behavior, with no subsequent penalties for such failures. For any release from liabilities to be effective, shouldn't it be contingent on the banks actually delivering on these promises?

Click here to buy Senior Fellow Richard Kirsch’s new book on the epic health care reform battle, Fighting for Our Health.

Since the start of the economic crisis, none of the administration's housing policies have succeeded. Each policy initiative has been fatally flawed. As a consequence, there's no reason to believe that the policy pursued in the current settlement will aid, rather than hurt, the housing market. Meanwhile, the secrecy surrounding this policy initiative makes its potential positive contribution to the crisis even more suspect.

A month ago, I wrote that we were a nation in denial with regard to housing prices and the impact of ongoing foreclosures. Despite a favorable rent to buy ratio, ultra-low interest rates and an "all time low cost of owning a home," housing prices are continuing downward. There is a simple explanation. With foreclosures and the so-called shadow inventory of homes, our housing supply will overshadow demand for many years to come.

With 29 percent of homeowners already underwater, this creates a massive risk for the economy. Some analysts predict that home prices will drop another 10 to 20 percent, which will put many borrowers deeply underwater. With additional price declines, underwater homeowners may start to simply walk away in droves. This will create havoc for our economy, the mortgage securities markets, and it will destroy solvency of the banks as they are forced to write-down their portfolios. The nation will be plunged into another economic crisis.

Unfortunately, all indications over the past several weeks are that this risk is continuing to grow. Indeed, the most recent reports on housing prices showed larger than expected declines in November. This reflected the third month in a row of declines. "The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand," said David M. Blitzer, chairman of the S&P's home price index committee.

In his State of the Union speech, President Obama stressed assistance for "responsible homeowners." Yet the current definition of a responsible homeowner is someone with a job. (Although yesterday the president did say, "We're working to make sure people don't lose their homes just because they lost their job." ) So, at least for the moment, continued unemployment woes will keep this vicious cycle going.

Here's how this relates to the proposed settlement: All of the activities covered by the settlement took place after the crisis began. They were not unforeseen effects of once-in-a-lifetime systematic risk. They reflected willful, knowing, and egregious malfeasance and disrespect for the rule of law. There is no question that laws were broken on a massive scale with potentially enormous civil liabilities and with criminal offenses. The essence of capitalism is responsibility and accountability. The settlement ignores both.

I suspect that the existing testimony of bank officials in open court, which are effectively admissions of guilt, provides sufficient evidence to lead to state and federal suits that would make the banks insolvent. This means that, because of the banks' malfeasance and greed, the nation has the leverage to bargain for a massive write-down of mortgages -- thereby preventing an economic catastrophe. I am not advocating this option, nor am I saying it is good policy. But I do believe it would be a scandal to limit whatever leverage we have to save our economy by once again permitting gross malfeasance.

In late May, my eldest daughter will graduate from college and join the labor force. Will there be jobs for her and her classmates? Will she come of age in a decade of limited employment opportunities, the collapse of the middle class, and unequal justice while a privileged few live lives of abundance because they have corrupted our democracy? As someone who reveres our system of justice, what is the advice I should give her about working hard and playing by the rules? There is still a chance that we can turn all of this around. But rushing to settle with law-breaking banks is certainly not the way to solve the issue of inequality -- which President Obama called the defining issue of our time. It is also the antithesis of capitalism, which is based on adherence to law, a fair bargain, and accountability.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Jeff Madrick and Tom Ferguson Sound Off on Real Messages of the SOTU

Jan 27, 2012Bryce Covert

After Obama's State of the Union on Tuesday, Roosevelt Institute Senior Fellows Jeff Madrick and Tom Ferguson took to the airwaves to dissect it. Was there substance behind the soaring rhetoric? Can the proposed policies really solve our economic ills?

Jeff Madrick joined Eliot Spitzer on Keith Olbermann's Countdown, and his analysis could be summed up as: "It was a tougher speech than I expected."

After Obama's State of the Union on Tuesday, Roosevelt Institute Senior Fellows Jeff Madrick and Tom Ferguson took to the airwaves to dissect it. Was there substance behind the soaring rhetoric? Can the proposed policies really solve our economic ills?

Jeff Madrick joined Eliot Spitzer on Keith Olbermann's Countdown, and his analysis could be summed up as: "It was a tougher speech than I expected."

Despite what some naysaying economic advisers may be telling President Obama, "he said forget about all those constraints," Jeff pointed out. "Let me go after the Chinese, let me develop some tax breaks, let me develop some tax penalties." Those FDR fans among us may remember his famous welcoming of Wall Street's hatred, a stance Obama has mostly shied away from. Yet, as Jeff notes, not only did he go after Republicans in Congress and big oil, "he said some pretty nasty things about Wall Street."

His policy proposals were important too, Jeff said. "Few things are as unambiguous as a need as updating the American infrastructure," and that was a big part of his "constant mention of jobs." Plus there was a heavy emphasis on bringing back manufacturing, although the question remains as to whether that's really possible.

Meanwhile, Tom Ferguson, while "intrigued" by some of the policies, was "underwhelmed" overall. He told Paul Jay of the Real News Network that "when you start to look at the details" of Obama's proposals, they're "almost meaningless."


More at The Real News

Take the plan to have a massive mortgage refinancing program. That could be "a really striking thing and it would likely have a huge effect on the economy," Tom said. But "their record in the last three years is they keep announcing programs and they all fail." Plus the taskforce on mortgage abuses "looks to me like an effort to to rein in the attorneys general" at the state level, he said.

Things were worse when it came to the "utter tameness" of the ideas around money in politics, Tom said. While banning Congress from insider trading is a good idea, "he's not really touching the essence of the money in politics problem," he points out. "He's basically punted on that one." What could he have proposed that would work? "You could do a lot by simply making the federal election commission a serious part of the civil service to get it out from under its ridiculous domination by Congress," Tom suggests. It's not just Citizens United that should be on reformers' radars.

And overall, while some of the economic policies may sound good, the underlying push from the administration for austerity and a focus on the deficit went unaddressed. "My guess is that these folks are not planning to change course on the economy," he concludes.

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Funding the Academic War on Financial Reform

Jan 26, 2012Wallace Turbeville

mortar-board-and-money-150Wall Street is funneling money toward error-riddled studies that stand to muddy the important conversation about implementing Dodd-Frank.

mortar-board-and-money-150Wall Street is funneling money toward error-riddled studies that stand to muddy the important conversation about implementing Dodd-Frank.

"The moon so long has been gazing down
on the wayward ways of this wayward town
my smile becomes a smirk, I go to work" - Cole Porter

Over the holidays, I finally watched the film Inside Job and was struck by the final section highlighting the corruption of academics by the financial services industry. It was a good thing that I had waited so long to drop the DVD into the player. Real life experience had provided important context.

A year ago, I became deeply involved in the issue of position limits and the effects of trading structures on commodities prices. As time wore on, the regulators made clear that any action beyond the bare bones, historic approach would require academic studies supporting the policy. It was a political necessity. My colleague David Frenk and I undertook a study using the techniques of these experts and found statistically significant relationships between the boom/bust cycle in commodities prices and the structural trading practices of commodity index fund sponsors.

Many like-minded advocates warned of formidable hurdles in this effort, since so many academics were beholden to the financial services industry. I was a skeptic, having spent my career in investment banking and trading, shielded from the corruption of experts by a self-interested industry. I learned that an uncomfortably large percentage of study opinion is molded by venality. And I also understand the weight ascribed to the work of experts, with an astounding disregard for quality and even relevance. Eventually, the CFTC sponsored a two-day academic "battle of the bands" (our study was excluded since we are not academics), which led to nothing.

Decision makers enjoy the cover provided by expert studies using statistical methodologies. If a study uses math and accepted procedures to test the robustness of conclusions, it is imbued with a sanctity that can be critically important in a policy fight. Opponents are cowed by assertions about the economy and financial markets that are figuratively cloaked in white lab coats by use of statistics. The all-important questions of the subject matter and scope of the study and underlying assumptions too often go unchallenged, and conflicting interests are largely ignored.

The legitimate appeal of expert analysis is the assumption that the expert is ethically and intellectually committed to independence of thought and is capable of using rigorous and accurate techniques for measuring cause and effect. On the other hand, if the expert serves an interested paymaster, he or she can use this capability to most effectively rig the results and camouflage the deed. They assume the pop culture role of evil mad scientist, opposing the forces of justice. Who would have thought that the danger would come from regression analyses instead of death rays?

It is troubling when biased research is used to influence regulatory outcomes and to wobble the knees of members of Congress inclined to support sensible regulation. But a far more powerful use of biased studies has emerged. The primary legal challenge to financial reform regulation will assert an inadequate consideration of costs and benefits by the regulators. On this field of battle, expert analysis is a powerful weapon.

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Last week, I testified at a hearing before subcommittees of the House Financial Services Committee along with Simon Johnson and six advocates of the industry's positions. The subject was the economic cost of the centrally important Volcker Rule. Before the hearing, Oliver Wyman consultants, on behalf of industry advocate SIFMA, produced a study that measured the cost of the Volcker Rule in terms of the liquidity that would be "lost" if proprietary trading by banks benefitting from the Federal safety net were prohibited. Professor Johnson and I both submitted testimony that pointed out that the major assumptions of the study that were both illogical and assured a conclusion that costs would be large. (We both were economical in our critiques, recognizing that a full catalogue of errors would have challenged the attention span of readers.)

Perhaps we were able to head off the use of the study in oral presentations by the industry advocates. Professor Johnson later wrote a useful article on the study that might discourage further dissemination, but far more is required. Committee members cited it and it is still floating around in the ether. It will no doubt be used in many private conversations in which no one will challenge its veracity.

Late last week, I was asked to look at a new study produced by NERA consulting (as it turns out, a subsidiary of Oliver Wyman) prepared for an energy industry advocacy group. The study sought to measure the costs and benefits of energy traders being designated as "swap dealers." It was filled with errors and unfounded assumptions, even worse than the Volcker Rule piece. (For a critique see this report and the observations of Professors John Parsons and Antonio Mello).

Academics are a concern as well. Professor Darrel Duffie of Stanford published an article at the behest of SIFMA two days before the Volcker Rule hearing that was largely a discussion of his preference for increased capital over the Volcker Rule approach and expressed concerns about effects on liquidity. He appropriately recognized uncertainty about his concerns. Even more appropriately, he acknowledged that in lieu of compensation, SIFMA made a $50,000 donation to the Michael J. Fox Foundation. Nonetheless, the timing of his piece means that it will probably be conflated with the Oliver Wyman study by casual observers.

Costs and benefits will be an enormous subject as financial reform implementation grinds forward during this election year. Legal academics need to weigh in on the proper judicial approach to this issue. And economists and finance academics need both to act as watchdogs and to enlighten the discussion on both sides of the cost/benefit scale. SIFMA and their colleagues have vast resources available to challenge financial reform in the courts and in Congress. Bought and paid for studies must be challenged so they are not accepted as the truth.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co. He spent a year during the derivatives rulemaking process drafting more than 50 comment letters on proposed rules while working with Better Markets, Inc.

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