“The Brittle Grip”: Wall Street And The Financial Sector Aren’t Accustomed To Criticism
Republicans often say that the business community feels threatened by President Obama — that he’s hostile to money, hostile to business, etc. You’ve heard this before. And much of it is campaign chatter. But not all. I don’t think we can understand the dynamics of this campaign without getting that a lot of it is actually true — not the reality necessarily (in my mind not the reality at all) but the perception of it in key parts of the financial sector like Wall Street, venture capital and the dread world of private equity.
The case of Wall Street is in many ways the hardest nut to crack. President Obama took a huge political hit for massive amounts of public money that went to bailing out the major banks. By most measures, along with his predecessor, he more or less saved US and global capitalism. And yet, when you talk to people in finance, this is entirely forgotten. What you most often hear about are two or three statements from the President that are still potently remembered.
Most often it’s a late 2009 quote when he said “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street. They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down 10, 20 million dollar bonuses after America went through the worst economic year in decades and you guys caused the problem.”
That’s not something you’d expect folks in finance to like particularly. But it did come after about a year of the President getting grief from Wall Street while simultaneously taking the political hit for bailing the same folks out with tax payer dollars.
I’ve heard similar things talking to folks in the business community in DC. And what strikes me again and again is how much it comes back to a handful of statements and anecdotes, things people remember the President saying over the last three plus years.
Some of this shouldn’t surprise us, I suppose. President Obama has pushed more regulation of business than his predecessor. (It’s certainly a change after eight years of George W. Bush; and it’s an eight years over which quite a lot has changed in the country.) He’s supported — though as yet not acted on — his call to roll back the Bush tax cuts. But Bill Clinton did all of this and more. Clinton after all is the guy whose tax hikes the Bush tax cuts in large part repealed. By most objective standards the President is actually more solicitous of the business community than most or all Democratic presidents over the last half century.
So what’s the explanation? Over recent weeks I’ve come to think that something else is in play: namely, the dramatic run up in wealth at the top of the income scale, not just over the last 35 years but particularly over the last 15 years. More or less since the beginning of the Clinton years. In a sense it’s the other side of the 99% vs 1% meme that has been the most successful legacy of the Occupy Wall Street Movement.
This is less an argument than a theory in progress. So I’d like your input. But I think the very wealthy and those who work in the most advanced and aggressive parts of finance are more defensive about their wealth than in the past — at least in terms of the political expression of it. There’s really no time in the last century in which you’d expect that a candidate running for a major political office who’d been responsible for shutting down a lot of factories wouldn’t have that come up in a major way in a campaign. Simply no way. Agree or not, it would be entirely par for the course. And yet now it’s treated as a possibly unexpected or unacceptable development.
That’s weird.
At the same time, the most important voices in the media are much, much wealthier than in earlier eras. The very wealthy are their friends and peers. Concentrated wealth simply has a stronger hold over mass communications than in the past — not necessarily in venal or corrupt terms but often simply by owning minds and mentalities. What all that amounts to is that people on Wall Street and the financial sector aren’t accustomed to a lot of criticism.
All of it goes to explaining a basic conundrum — President Obama is, when compared to Democrats over the last half century, objectively quite middle of the road. And yet the reaction from Wall Street and the halls of finance is one you’d think meant he was trying to bring capitalism to its knees. The President’s policies and tenure in office simply don’t explain the reaction. And I don’t think political spin does either. We need to look deeper into the political economy of the nation at large to understand it.
By: Josh Marshall, Editor and Publisher, Talking Points Memo, May 21, 2012
“Aiding And Abetting”: Scott Brown Weakened Restrictions On Goldman Sachs Abuses
In his public resignation letter in today’s New York Times, former Goldman Sachs executive Greg Smith said that one of the fastest ways to get ahead with the firm is to persuade clients “to invest in the stocks or other products that [the firm is] trying to get rid of because they are not seen as having a lot of potential profit.” He lambastes a firm culture where colleagues openly boast of “ripping their clients off.”
The sad thing is, this sort of shady might well have been on the way to being curtailed if not for the actions of Sen. Scott Brown (R-MA). After Brown was elected to the senate in 2010, he threatened to join a Republican filibuster of the Dodd-Frank Wall Street Reform and Consumer Protection Act, using that threat to significantly water down the bill. Among the industry-favored concessions he extracted was weakening of the “Volcker rule,” which was meant to curb risky speculative investments that do not benefit customers.
Thanks to Brown’s maneuver, the final bill upped the amount of risky trading big banks like Goldman could engage in, increasing the amount of gambling they’re able to do by billions of dollars. Since then, financial industry lobbyists have been hammering away at the the rule in an attempt to render it completely meaningless.
The financial sector, of course, has repaid Brown with a flurry of campaign contributions. Between contributions from the firm’s leadership PAC and contributions from company employees, Brown has already received more than $40,000 in campaign cash from Goldman Sachs this cycle.
By: Josh Israel, Think Progress, March 14, 2012
“Goldman Sachs’ Million Dollar Man”: Mitt Romney’s Ties To A “Toxic And Destructive” Bank
Republican presidential primary frontrunner Mitt Romney (R) is taking a break from the campaign trail a day after finishing third in the Alabama and Mississippi primaries, stopping in New York City for multiple fundraisers and a visit with campaign surrogate Donald Trump. Romney will attend three fundraisers and haul in an expected $2 million this week, bolstering a fundraising total that has already made him Wall Street’s favorite candidate.
More than any other institution on Wall Street, Romney has ties to Goldman Sachs, the firm that was slammed in a New York Times editorial this morning by a resigning executive director who decried the firm’s “toxic and destructive” culture. Romney and his wife, Ann, have investments in almost three-dozen Goldman Sachs funds valued between $17.7 million and $50.5 million, according to his personal financial disclosure forms.
No Wall Street bank has been as generous to Romney’s campaign, his leadership PAC, and the super PAC that backs him as Goldman. According to an analysis of Federal Election Commission reports, Goldman Sachs employees have given the Romney campaign more than $427,000 during the 2012 cycle, nearly twice as much as he has received from any other major Wall Street bank (Citigroup employees have given roughly $274,000 to Romney, the second-largest amount). According to OpenSecrets.org, total contributions to Romney from Goldman Sachs, its employees, and their immediate family members totals more than $521,000.
The Free And Strong America Leadership PAC, which is affiliated with the Romney campaign, has received $30,000 from Goldman Sachs employees during the 2012 cycle. Goldman employees and their spouses, meanwhile, have given $670,000 to Restore Our Future, the super PAC backing Romney.
After making billions of dollars in the run-up to the financial collapse of 2008, Goldman Sachs benefited from a federal bailout that saved Wall Street banks. The company, like other Wall Street firms, stood opposed to the Dodd-Frank Wall Street Reform Act that was signed into law in 2010 and also fought regulations it contained, such as the Volcker Rule, which would prevent proprietary trading that made the bank billions but left taxpayers on the hook when it nearly collapsed. Romney has rarely missed a chance to tout his opposition to the law on the campaign trail, announcing that he’d repeal it even before he read it.
By: Travis Waldron and Josh Israel, Think Progress, March 14, 2012
Wall Street Is Still Playing Us For Suckers
As a mere youth, I bought a used car in New York to drive to California to be with the woman of my dreams. Inexplicably, she decided to rush back to New York, so I promptly took the car back to the dealer. He made a shockingly low offer. The car had been in an accident, he explained. The chassis was bent. I was flabbergasted. I had just bought the car from him. If the chassis was bent, it was bent when I bought it. The salesman offered me a take-it-or-leave-it shrug. He probably now works on Wall Street.
That the morality of the used car lot has been adopted by Wall Street is now abundantly clear. Citigroup recently settled a civil complaint in which it was accused of selling mortgage-related investments that it knew were dogs. It was so certain that the investments were the financial equivalent of my used car that it bet against them — heads I win, tails you lose — and even selected the investments themselves, choosing from a cupboard of depleted and exhausted financial instruments. An investment in the Brooklyn Bridge would have been safer.
These investments are known as collateralized debt obligations (CDOs), and they consisted of the sort of mortgage securities that nearly sunk the U.S. financial system. According to federal regulators, they were sold with the full knowledge that they were careening toward worthlessness and that, by deduction, their buyers were patsies. The bank made substantial profits on them. But when the Securities and Exchange Commission decided to act, it got Citigroup to pony up a mere $285 million fine that, to presumed chuckles, will doubtlessly be taken out of petty cash. The bank last quarter reported a profit of $3.8 billion.
Mirth must have turned to guffaws when Citigroup read on. It did not even have to admit guilt — “without admitting or denying” is the language the SEC used — and no single executive was held culpable. The CDOs, apparently, were contrived by no one and sold by no one. There’s a Nobel Prize in something (maybe alchemy) for anyone who can explain how that happened.
The Citigroup settlement is being reviewed by a perplexed U.S. District Court Judge Jed S. Rakoff. Among other things, he wants to know why he should authorize a settlement “in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing.” This is a marvelous question that goes to the heart of the matter. The settlement is itself a CDO, a legal version of a black hole in which next to nothing is disclosed. Why no guilt? Why no guilty people? Why such a non-punishing punishment? The SEC will have to tell it to the judge.
I do not want to be excessively harsh on dear Citigroup. It was not the only one selling smoke. Goldman Sachs and JPMorgan did something similar. In the words of Jesse Eisinger of the online journalistic group ProPublica, “This was the Wall Street business model.” And it was a model permitted and encouraged from the top, by people who became filthy rich from filthy practices and now take umbrage when President Obama calls out their industry for approbation. They should first spend a year in community service and then, if they still feel slighted, denounce Obama.
As for Obama’s government, it has been too gentle with these miscreants. Why not a single major banker has been cuffed and frog-marched to some Financial District Guantanamo is unclear. Why their firms have gotten off with modest fines and non-confession confessions is not clear, either. That, in itself, is a crime.
Somebody has to break this culture. In this sense, Wall Street is no different than the New York Police Department, where it apparently has been customary to fix traffic tickets for friends, family and — almost certainly — the odd person with some cash. When 16 of the alleged ticket-fixers were arraigned last week, hundreds of off-duty cops came to cheer them, denounce the DA and manhandle reporters. Their union took a firm position in defending this behavior. An appalled city awaits firm action by the mayor and police commissioner.
An appalled nation awaits a similar response to what went on in the financial sector. What we would like to see is some version of a public hanging, the appropriate reaction to the breathtaking fleecing of investors. In the end, those investors got their money back.
That’s more than we can say about our lost faith in justice.
By: Richard Cohen, Opinion Writer, The Washington Post, October 31, 2011
“Negative Equity”: Make The Banks Pay
There is $700 billion in negative equity in the U.S. housing market. That means Americans owe $700 billion more than their homes are worth. Any plan for the housing sector or the U.S. economy, that doesn’t take a serious bite out of negative equity isn’t serious.
Yet un-serious is what we continue to get from elected officials. This week the Obama Administration announced a new plan to help underwater homeowners refinance their mortgages to lower rates. The plan, really an expansion of an existing program, is the latest in a series of programs designed to deal with the moribund housing market. Each has proven a more dismal disappointment than the next.
So too with the latest version of the proposed settlement between the state Attorneys General, led by Iowa’s Tom Miller, and the mortgage servicing industry. Yes, the deal has been sweetened by the addition of some interest rate reductions for underwater homeowners who are current on their payments. But that’s small potatoes.
These approaches haven’t worked and won’t work because they fail to acknowledge that negative equity is the critical problem in the U.S. economy. We’re in a “balance sheet recession” caused by people pulling back on their spending because they’re concerned about their households’ net financial position. The central reason for this concern is that houses—historically the major asset of most households—are worth much less than they were. In many cases, they are worth less than the debt they secure.
Until households feel more confident in their balance sheets, they won’t go out and spend (and banks won’t make them loans to spend). That means less consumer demand for goods and services, which means less jobs, which means more mortgage defaults and foreclosures, which push down neighbors housing prices, triggering a vicious cycle. But addressing negative equity means that someone will have to accept a loss: the banks or the taxpayer or some combination of the two.
As between banks and taxpayers, we have to start by stating the obvious. Negative equity didn’t just appear by itself. This wasn’t a freak meteorological event. It was a man-made disaster: a housing bubble inflated by the deliberate acts of a limited number of financial institutions that profited greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime in the inflation of the housing bubble and are living with the consequences of it.
Those who broke the economy should pay to fix it. The federal government bailed out the banks because they are indispensable to the economy as a whole, but that doesn’t mean that the banks shouldn’t have to pay now. Simply put, there needs to be accountability for blowing up the economy. (And someone needs to go to jail, but that’s another matter.)
Unfortunately, the goal of the Administration and the Attorneys General seems to be to make the housing problem go away. It won’t go away. Nearly four years of economic malaise and over five million foreclosures attest to that. The goal has to be to fix the market, not to cover it up its problems.
Since 2008, we’ve seen a long and drawn out saga in the attempt to deal with the negative equity problem. First there was a legislative attempt. This was the ill-fated “cramdown” legislation that would have permitted homeowners to slough off negative equity by filing for bankruptcy, something that it currently possible when dealing with every asset except a single-family principal residence. Cramdown would have forced lenders to recognize losses on bad mortgage loans and would have gotten the market clearing again—at least for those borrowers who were willing to endure the costs of bankruptcy.
The cramdown legislation passed the House in 2008, only to die in the Senate in 2009. In 2008 then-candidate Obama endorsed the cramdown legislation. But in 2009, President Obama made no effort to push the legislation, and the Treasury Department, fearing that the banks were too fragile to recognize losses, was just short of openly hostile to the legislation, essentially “slow-walking” the President yet again.
The Obama Administration turned its attention to its hallmark housing rescue programs: the “Home Affordable Modification Program” (HAMP) and Home Affordable Refinancing Program (HARP). HAMP is a program to modify troubled mortgages to lower interest rates, while HARP permits some underwater homeowners (a lucky subset whose loans chance to be owned or guaranteed by Fannie Mae or Freddie Mac) to refinance to lower interest rate mortgages. Neither does anything to reduce negative equity.
HAMP and HARP were kick-the-can-down-the-road programs that aimed to buy time for the economy to recover, thereby bolstering home prices. They failed because they misdiagnosed the problem: the damaged economy wasn’t dragging down home prices; home prices were dragging down the economy.
Collectively, HAMP and HARP have helped about 1.6 million homeowners, but partially because of the failure to deal with negative equity, 15 percent of the HAMP modifications have already redefaulted. And 1.6 million homeowners is only a fraction of the 11 million homeowners with negative equity.
HAMP and HARP were barraged with criticism on both sides from the get-go. HAMP was the program that sparked Rick Santelli’s rant that gave birth to the Tea Party. At the same time, HAMP and HARP were criticized by consumer advocates as too timid. The Administration didn’t want to take on the negative equity problem, which would mean imposing losses on the banks or on the taxpayers.
In the fall of 2010, the “robosigning” scandal provided an entrée for the state AGs to join the fight. It was revealed that banks were routinely submitting affidavits in court cases in which the affiant had no idea about the facts to which he would attest. Several major banks imposed voluntary foreclosure moratoria while they examined their practices. (Unfortunately the media coverage missed the real and much more serious issue of backdating of documents by the banks.) The robosigning scandal provided an entrée for state AGs, some of whom have been dealing with bank mortgage fraud issues for the better part of the last decade, only to find their efforts repeatedly frustrated by federal bank regulators. Quickly all 50 AGs announced an investigation, with Miller taking the lead. Federal bank regulators then announced their own investigation, which ensured that they had a seat at the table.
Miller began negotiating with the largest banks and the federal regulators for a settlement involving robosigning and other assorted violations relating to debt collection practices. But Miller started negotiating without having done any investigation, which meant that he didn’t have any leverage on the banks. When it leaked out that he was demanding something in the range of $20 billion for a settlement, many of the Republican AGs declared that the negotiations were a “shakedown” of the banks and walked out.
While $20 billion sounds like a lot of money, it isn’t actually that much when spread out over several banks. Bank of America, for example, would gladly spend $5 billion to make its mortgage liability disappear. The problem, however, was that the banks weren’t going to pay $20 billion to settle just robosigning. While illegal, it’s not clear that anyone was actually hurt by robosigning itself. If the banks were going to shell out billions, they wanted a very broad release from the AGs covering all of their mortgage market wrongdoings.
Miller, however, couldn’t deliver such a deal. Some AGs realized that $20 billion spread out over 50 states amounted to bupkis for their hard-pressed constituents. ($20 billion works out to less than $2,000 per homeowner for each of those 11 million underwater mortgages. The average negative equity per loan is $65,000.) On top of this, some AGs, like New York’s Eric Schneiderman and Delaware’s Beau Biden just are not willing settle on matters before an investigation is undertaken.
Frustrated by Miller’s inability to cut a deal, the federal regulators took matters into their own hands and entered into consent orders with the banks, in which the banks admitted no wrong-doing, but promised never to do it again. The federal consent orders relieved some of the pressure on the banks to cut a deal with the AGs, and Miller’s negotiations with the banks have dragged on since then. Every month, it seems, rumors emerge that a deal is on hand, only for no deal to be reached. As things stand currently, the banks’ have offered an extra $2 billion to enable refinancing of mortgages with negative equity in exchange for a release of all claims relating the mortgage origination. Miller has countered with an offer of an extra $4 billion. An extra $4 billion will result in meaningful help for perhaps 120,000 homeowners or one percent of the at-risk population.
There’s an element of the absurd in these negotiations. With a $700 billion negative equity problem, the AG’s are debating the difference between $22 billion and $24 billion. At best it’s naïve. At worst it’s an attempt to feign concern for homeowners and distract voters from a lack of engagement.
Robosigning was symptom of a much larger endeavor in reckless lending, in which cutting corners was the order of the day. When the prime borrower market was tapped out, banks simply loosened underwriting standards to keep expanding the pool of borrowers. Like a Ponzi-scheme, the rise in housing prices could only be supported by finding new people to put money in. Lower underwriting standards and exotic mortgage structures were the tools used to maximize profits that could be siphoned off before the Ponzi-scheme collapsed.
If one approaches the housing bubble as a prosecutor—as the AGs should—the major harm wasn’t the robosigning or associated servicing fraud. It was the pump-and-dump the banks did on the entire housing market. They recklessly inflated the housing prices and profited greatly from it. And the taxpayers, the government, and mortgage investors were left holding the bag. Fining the banks $20 or 24 billion for robosigning and calling it a day just misses the point.
We need accountability for the entire financial crisis, not just for mundane consumer fraud. For Miller and the AGs to contemplate waiving the mortgage origination claims that were at the center of the crisis for an extra $4 billion without having even done an investigation is a blatant abuse of the public trust. It’s another give-away to the banks.
The banks can afford to pay for writing down the mortgages from which they benefited. Negative equity is a function of mortgages being held at face, rather than market value on banks’ books. The book value of our major financial institutions is over $1.2 trillion, and that’s not counting Fannie Mae and Freddie Mac with their open-ended government support. That means there’s plenty of ability for banks to take a write-down as a means of remedying the harm they have done.
It might cost the banks a quarter to a third of their book value to get rid of negative equity (Fannie and Freddie hold the majority of negative equity mortgages, which means the federal government is on the hook for part of the cost of eliminating negative equity), but the market already understands the much of banks’ book value is bogus. Bank of America, for example, has a book value of $220 billion, but a market capitalization of merely $65 billion. Investors understand Bank of America to have $155 billion in overvalued assets or unrecognized liabilities, and a substantial portion of that spread is because of negative equity. Investors know that the $200,000 mortgage on a $150,000 house won’t yield $200,000 in most cases.
The framework for a settlement, then can’t be about settling robosigning claims a mere $20-$24 billion. Instead, the AGs should be pursuing a grand bargain—a global settlement deal structured around a broad release of the banks’ varied mortgage liability for origination, securitization, and servicing fraud in exchange for substantial write-downs of principal to whittle away the $700 billion in negative equity. Doing so will fix the economy and bring much needed accountability for the financial crisis. It’s time to press the reset button and clear the market.
By: Adam Levitin, Salon, October 27, 2011
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