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“A Picture Of Massive Corruption And Cowardice”: The Decline Of The American Justice System

Jed Rakoff, a former prosecutor, has an interesting piece in the NYRB about why there have been no prosecutions of financial industry employees over the systemic fraud surrounding the financial crisis. The whole piece is worth a read, but here are the main points boiled down:

1) The FBI is consumed with terrorism, apparently cutting their financial fraud investigation force from over a thousand agents before 2001 to about 120 by 2007. Whether that’s justifiable or not, it does remind me of a line from one of the finest action movies of all time: “Jesus man, wake up! National security’s not the only thing going on in this country.”

2) Regulators and law enforcement, especially at the SEC, have been focused on insider trading cases and Ponzi schemes like the Madoff affair, which are easier to investigate and to prosecute. Mortgage and securities fraud, by contrast, are far more complex and difficult.

3) Government complicity. This isn’t a bad point, but Rakoff directs too much blame at subsidies for the poor. As I’ve written in the past, the whole government housing policy regime, most definitely including subsidies for the rich like the home mortgage interest deduction, are to blame as well.

4) A new trend in prosecuting companies instead of individuals. This seems unambiguously true, and it’s a reminder of how new trends in legal theories always seem to move in the direction of increased subsidies and decreased accountability for wealthy elites.

Those points are all fair enough. But taken together, I don’t think they go nearly far enough. As an instrumental account of the details of why these prosecutions aren’t happening, it makes a lot of sense. Though, for the record, they might not even be instrumentally true: according to a new David Kay Johnston report, the Justice Department has been running interference for JPMorgan Chase against Treasury investigators.

But in any case, make no mistake: added up, this is a picture of massive corruption and cowardice at the top levels of our law enforcement agencies. Because regardless of whatever structural trends are happening, no prosecutor with a single fair bone in her body could possible tolerate, oh I don’t know, a minor slap on the wrist for laundering money for drug traffickers and terrorists.

 

By: Ryan Cooper, Washington Monthly Political Animal, December 27, 2013

December 29, 2013 Posted by | Financial Institutions | , , , , , , , | Leave a comment

“Now If Congress Could See The Light”: A Fully Private Mortgage Market Is Good For Nobody

Let’s be clear about one thing: just about everyone agrees that the federal government is providing too much direct support to the mortgage market today. That support should be scaled back over time, but it cannot be eliminated entirely.

We believe, as do many others across the political spectrum, that a modest level of government support is necessary to promote a stable, accessible and affordable housing market. That includes an explicit guarantee on certain kinds of mortgage debt – but not the financial institutions that issue that debt.

Rather than keeping taxpayers on the hook for every dollar of loss on mortgage-backed securities – as we do now with Fannie Mae and Freddie Mac – we would rather see private capital take losses first. Financial institutions should have the opportunity to buy limited government insurance on those securities in exchange for a fair and financially responsible fee, much like the Federal Deposit Insurance Corp. offers on bank deposits.

Regardless of whether you own or rent, a government guarantee is critical to your economic well-being. Here are two reasons why.

First and foremost, the guarantee plays a crucial role in preventing and lessening the intensity of boom-and-bust cycles in the housing market. When private capital retreats from residential mortgages during a downturn, government-backed entities stay open for business, ensuring that money keeps flowing into housing. First-time homebuyers can still get a home loan. Homeowners can still refinance or find a buyer if they’re looking to move. Developers can still access the capital they need to start construction on new apartment buildings. Each of these activities sends ripples throughout the economy – new construction jobs, more demand for household goods, stronger and more stable home values – which improves everyone’s bottom line.

In the most recent example, purely private mortgage lending basically ground to a halt when the financial crisis began in 2008. Ever since Fannie Mae, Freddie Mac and the Federal Housing Administration have backed roughly 9 in 10 mortgages made in the U.S., saving the market from even worse collapse.

According to a recent analysis from Moody’s Analytics, a fully private market would have “difficulty providing stable mortgage funding during difficult financial times.” The authors concluded that “the resulting credit crunch further undermines housing demand, driving down prices and unleashing a vicious cycle.” That’s not good for anybody.

Second, it’s important to note that government-backed mortgages don’t just help homebuyers – who benefit from lower interest rates and access to longer-term, fixed-rate mortgage products. They also help the one-third of the U.S. population that rents.

In addition to their homeownership operations, Fannie and Freddie guarantee so-called “multifamily” mortgages, which finance apartment buildings with five or more units. That guarantee plays an important role in ensuring that quality, affordable rental options are available for low- and middle-income families. In 2009, the first full year of the financial crisis, Fannie and Freddie backed 85 percent of new multifamily mortgages; today that number is closer to 50 percent.

According to a recent analysis from Freddie Mac, if the government guarantee on multifamily mortgages were to go away, the market would shrink significantly. New construction on rental housing would plummet by as much as 27 percent, while average rents would rise by as much as 2 percent.

It’s clear that America’s families, regardless of their housing situation, benefit from an explicit, limited and paid-for government guarantee on mortgage debt. And a growing bipartisan consensus agrees: of the 25 plans for housing finance reform reviewed by the Center for American Progress, all but five preserve some sort of government guarantee.

Now, if only Congress could come to a similar agreement.

 

By: Andrew Jakabovics and John Griffith, Analysts at Enterprise Community Partners, U. S. News and World Report, August 13, 2013

August 18, 2013 Posted by | Financial Institutions, Home Owners | , , , , , , | Leave a comment

“Someone Please, Alert The Media!”: The Budget Deficit Is Shrinking Rapidly And Most Americans Don’t Know It

The deficit is down 37.6 percent for the first 10 months of the 2013 budget year, according to the Congressional Budget Office. But a new survey conducted by Google at Paul Krugman’s request finds that more than 50 percent of Americans think it’s still growing.

Last year the government spent $973.8 billion more than it took in for the first 10 months of the budget year. The deficit for the same period this year is $607.4. This year’s deficit is projected to be $670 billion.

As a share of gross domestic product, the deficit was recently as high as 10.1 percent in 2009, when the deficit was $1.4 trillion. It is now closer to 2 percent of GDP, which means the deficit has been cut by more than half since then, in both actual dollars and as a share of GDP.

A poll in February found that only 6 percent of Americans were aware the deficit was shrinking. The new survey finds that a little over 17 percent of those polled know the deficit is shrinking, with only 8.3 percent giving the correct answer: that it has decreased by a lot.

Deficit poll

The perception that the deficit is still growing has been fed by Republicans including House Minority Leader Eric Cantor (R-VA), who recently said the deficit is growing and Senator Rand Paul (R-KY), who said last week that we have trillion-dollar deficits.

What’s causing the deficit to drop so drastically? Probably even too quickly?

Economic growth, lower spending, increased taxes, and windfalls from government-sponsored mortgage corporations Fannie Mae and Freddie Mac brought on by the resurgent housing market.

Republicans are intent on keeping the so-called sequester in place, which will cut government spending by $85 billion, leading to the loss of up to 1,600,000 jobs. The government is only funded through September 30 and the debt limit will need to be raised soon after that. House Republicans have vowed to use both deadlines to demand even more cuts in spending, along with a delay in or defunding of Obamacare.

 

By: Jason Sattler, The National Memo, August 13, 2013

August 14, 2013 Posted by | Deficits, Public Opinion | , , , , , , , | 1 Comment

A “Historian” By Any Other Name: Freddie Mac Hired Newt Gingrich As It Reshaped Strategy

Within months after taking over as chief lobbyist at mortgage lender Freddie Mac in 1999, Mitchell Delk hired a prominent Washington insider to advise him on how to build support among conservatives on Capitol Hill: Newt Gingrich, the former speaker of the House of Representatives.

A key part of Delk’s strategy, as outlined in Federal Election Commission records, was to build goodwill in Congress by holding fundraising events for influential members of House and Senate committees that had oversight of Freddie Mac.

Gingrich had experience in such matters as an architect of GOPAC, one of the Republican Party’s most important political action committees.

Gingrich’s activity at Freddie Mac has been under scrutiny during his run for the 2012 Republican presidential nomination, as rivals have accused him of lobbying for Freddie Mac.

The former speaker has rejected such allegations, and his first $300,000-a-year contract with Freddie Mac, released this week by his campaign, states that he would not “engage in lobbying services of any kind.”

But the contract, together with the FEC records describing Delk’s revamping of Freddie Mac’s lobbying shop, sheds light on how Gingrich could avoid the lobbyist label and still be valuable to the mortgage lender as a strategist.

Gingrich’s contract says the former House speaker would work with Delk and other Freddie Mac officials on “strategic planning and public policy.”

And, it calls on Gingrich to contribute to the lender’s “corporate planning and business goals.”

“He was a consultant for us, and … not a lobbyist,” Freddie Mac spokesman Doug Duvall said, declining to comment further on the lender’s arrangement with Gingrich.

Gingrich’s campaign has offered few specifics about his work for Freddie Mac, for which he earned as much as $1.8 million during two contract periods. It said late last year that part of his job was to help Freddie Mac build bridges to conservatives.

He has called himself a “historian” who advised the mortgage lender on issues such as its lending policies.

Gingrich joined Delk’s government affairs shop at a time when the former Freddie Mac senior vice president was hiring several former members of Congress and congressional aides for his lobbying team.

At the time, conservative Republicans on Capitol Hill were seeking regulations to rein in the profits of government-sponsored lenders such as Freddie Mac.

Delk, who did not respond to phone calls seeking comment, successfully fought back against such legislation by hiring dozens of outside consultants and spending as much on lobbying as many major corporations.

FEC INVESTIGATION

However, his lobbying team came under investigation by the FEC in 2003.

The FEC probe found that under Delk’s guidance, Freddie Mac improperly used corporate resources to put on 85 fundraising events that raised about $1.7 million for federal candidates.

The majority of the events were for Republicans, the FEC found.

FEC investigators concluded that at least one major contribution to a Republican entity came directly from Freddie Mac funds and that some fundraisers were held in Freddie Mac’s offices – both violations of FEC rules.

In 2006, Freddie Mac agreed to a $3.8 million settlement for violating federal election rules, the largest civil fine the FEC had ever levied.

Delk, who resigned from Freddie Mac in 2004, was not charged in the case. Delk’s lawyer in the case, Ken Gross, said Gingrich’s name “never came up in connection with (the FEC) case.”

Vin Weber, a former Republican representative from Minnesota who also was hired as a Freddie Mac consultant, said he never worked directly with Gingrich on Freddie Mac matters.

He said the mortgage lender did not want congressional arm-twisting but hoped to “create a positive buzz for Freddie Mac.”

Weber said someone like Gingrich could provide an important service without lobbying.

“I wouldn’t ask him to pick up the phone (to call a member of Congress), because that is really not necessary. He is circulating all the time with members of Congress,” said Weber, who is supporting Mitt Romney in this year’s race for the Republican presidential nomination.

Former New York Representative Susan Molinari, another Romney supporter, also was hired by Freddie Mac during Delk’s tenure. She did not return phone calls or emails.

Republican Michael Oxley, who was House Financial Services Committee chairman and attended at least 19 Delk fundraisers, said that at the time he did not know Gingrich worked for Freddie Mac.

Oxley “may have seen him from time to time at a social thing,” said Peggy Peterson, a spokeswoman for Oxley.

Gingrich signed a second contract with Freddie Mac in 2006. The lender ended its relationship with outside consultants in 2008, when the U.S. Treasury placed Freddie Mac and Fannie Mae in conservatorship.

Republicans have blamed the government-sponsored lenders, which sustained $14.9 billion in losses when the U.S. housing market crashed, for a major role in the subprime lending crisis.

By: Marilyn Thompson and Samuel Jacobs, Reuters, January 28, 2012

January 29, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

Mitt Romney On Foreclosurers: ‘Any Owners Who Lose Their Homes Are Getting What They Deserve’

Since the housing bubble began to burst six years ago, prices nationwide have fallen by a third. Nearly $7 trillion of home equity has been wiped out. Currently, some 14.7 million homeowners owe $700 billion more on their mortgages than their homes are worth. Going forward, prices are likely to fall further as banks put a backlog of foreclosed properties on the market. As home prices fall and more homeowners sink underwater, there will be more foreclosures and more price declines.

So what is Mitt Romney’s response? Bring it on.

In interviews and in the Republican presidential debates, Mr. Romney has said that the cure for foreclosures is for the government to get out of the way and let the process run its course. Once prices hit bottom, investors and want-to-be homeowners would presumably swoop in and prices would stabilize.

The argument might have some red-meat appeal, playing off the notion that any owners who lose their homes are getting what they deserve. It is wrong on several counts:

Efficiency.

Mass foreclosures are a rotten way to stabilize the market. They impose huge costs on neighbors, communities and local governments, and on the broader economy, as falling prices erode equity, depress consumer spending and mire the housing market in a deep hole.

Logic.

Who does Mr. Romney think will buy up millions of foreclosed properties? Borrowers who lose their homes to foreclosure or who sell their homes for less than the balance on their mortgages can be denied credit for years; many will never be homeowners again.

Many college graduates, unable to find jobs, are moving in with their parents, not starting careers, not starting families and not becoming first-time home buyers. High school graduates are despairing of any economic toehold. Investors are inclined to buy distressed properties only if they believe home values will rise, a confidence that is hard to come by in a market that is threatened by more foreclosures and renewed price declines.

Danger.

With the economy still weak and vulnerable to shocks, more foreclosures and the resulting price declines would only weaken the economy further.

Fairness.

The let-it-crash argument conveniently ignores that the housing bubble was the result not only of overborrowing but of reckless lending too. When the bubble burst, the banks were bailed out, while speculators and uncreditworthy borrowers — whom lenders had aggressively pursued during the boom — quickly began to lose their properties. But the economic damage went far beyond the “bad” borrowers, as evidenced by deep recession, ensuing slow growth, high unemployment and crashing home values — all of which has now harmed millions of homeowners who never went near a subprime mortgage. They are the collateral damage of the banks’ binge and bailout. They deserve help, not scorn.

That is not to say that every troubled borrower can be saved. Of the estimated 14.7 million underwater borrowers, 1.6 million are lost causes, according to Moody’s Analytics. Many have already abandoned their homes, leaving them vacant, or are hopelessly behind on their payments, often because of long-term unemployment. This group needs policies to help convert homes to rentals.

Another 1.6 million underwater borrowers have missed payments because of a setback, like job loss, that may prove temporary. They could be helped with forbearance, allowed to make no or reduced payments for a time, and make up the difference later, or with loan modifications that result in meaningfully smaller payments.

The remaining 11.5 million underwater homeowners are current in their payments, but are at high risk of default, since they have no equity to cushion a financial setback and no incentive to keep paying, especially if prices go down again.

Loan modifications that reduce principal balances are the best solution, because they restore equity and reduce monthly payments. The banks would take a hit on principal write-downs. So be it. Refinancings, which the Obama administration is in the process of expanding, also help, because a new loan with a lower rate makes staying in the home more affordable. Mr. Romney has said refinancing is “worth further consideration.” Investors in mortgage-backed securities will take a hit on refinancings. So be it.

At a recent debate, Mr. Romney was asked why he was willing to risk further huge losses in home equity by pushing foreclosures. “What would you do instead?” he replied. “Have the federal government go out and buy all the homes in America?”

No one is suggesting that. What is needed is a set of policies — rentals, forbearance, principal write-downs and refinancings — on a scale that tackles the problem.

By: The New York Times, Editorial, November 26, 2011

November 28, 2011 Posted by | Banks | , , , , , , | Leave a comment

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