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The Ignorance of the SEC

Paul Kiesel — Tue, 27 Jan 2009 14:42:41 GMT

A Preface Concerning The Washington Times

"Maybe, I think, I can get the Washington Times expelled from the association (the American Society of Newspaper Editors)." - Al Franken on the "scandalous breach of journalistic ethics" at The Washington Times.

When thinking of the journalistic integrity of The Washington Times, words like "accuracy," "fact-checking," "objectivity," and "interesting-news-articles" don't immediately come to mind.

In fact, a story Al Franken retells in his book, "Lies and the Lying Liars Who Tell Them," captures the mentality (journalistic and political) of the Washington Times. The story starts with Mr. Franken performing his stand-up act at the White House Photographers Dinner, and how he goes into a "McCain riff." The "riff" or "bit" deals with McCain's time at the Hanoi Hilton in an ironic way (not mean-spirited at all), and the Washington Times reports on Mr. Franken's routine terribly inaccurately.

Now, Mr. Franken likes McCain. He tells a story prior to his riff on McCain about how he finds the senator to be estimable in character and professionally (they had a mutual friend who died, and the story behind that relationship is what Mr. Franken found likeable and sincere about McCain). But the Washington Times journalist who wrote a story on Franken's act the following day was devoid of any ability to sense laughter in the room and humor in Franken's witty storytelling.

An article was subsequently published, reporting on that event, and Mr. Franken objected to the veracity of its content. He got a chance to publicly refute it as a keynote speaker at the American Society of Newspaper Editors, which is where the earlier Franken quote on The Washington Times is extracted from:

"I call the Washington Times and ask for their managing editor. I get a guy named Bill Giles. Giles tells me that there is no way that McCaslin's story is true (McCaslin who was credited with writing the ficticiously-driven Franken article, claims his editor wrote and inserted the article under McCaslin's column as if it was a common procedure at the newspaper). He's adamant. An editor would never inserts something into a columnist's copy without consulting him. It would be a total violation of every journalistic tenet.

"Well that threw me for a loop. So I call McCaslin, and he says no, it wasn't the managing editor who inserted the copy. It was Wes Pruden, the executive editor. My next call is to Pruden who answers his phone.

"I tell him who I am and explain the situation. And I ask him, 'Do you ever insert copy into a column without consulting the columnist?' A pause. then, 'Yes, we do that.'

"I thank Pruden and call back Giles. 'Yeah, I just talked to Wes Pruden. And he confirmed McCaslin's story. You know that policy you said you had. Your paper evidently violates it all the time.' There was silence on the other end of the line. Then, 'Okay. Thanks. That's good to know.' 'One other thing,' I say. 'When do you plan to tender your resignation?' Another beat of silence, then, 'Thanks. Thanks for calling.'

"So I went to the dinner (the American Society of Newspaper Editors dinner), told the group the same story I just told you. There was sort of a collective shrug that said: 'Yeah, that's the Washington Times.'"

Bernie Madoff Whistleblower

However, today, The Washington Times published a very interesting article (I'm just as surprised) on a whistleblower who explicitly tipped off the SEC, back in 2000, on Bernie Madoff's burgeoning Ponzi scheme, and how the SEC neglected to inquire further into this information or even verify that what they were being told was accurate or not.

Incidentally, I came across this gem of a story at TheWashingtonNote.com.

Here is the first half of the article outlining the "regulatory incompetence" of the SEC and how Madoff's business affairs were connected to the global scandal of toxic mortgage assets:

DE BORCHGRAVE: Ignorance is not bliss by Arnaud de Borchgrave

In 2000, Harry Markopoulos, a Greek-American leading expert on derivatives, wrote to the Securities and Exchange Commission's Boston office to inform the federal watchdog of markets that Bernard L. Madoff was running "the world's largest hedge fund fraud." He stipulated, "My name not be released to anyone other than the branch chief and team leader in the New York region, without my express permission."

Mr. Markopoulos was worried about his safety and that of his family. He said his report was written solely for the SEC's internal use." He was clearly afraid of assassination. But his red flag was only one of 28 such warnings to the SEC in the first eight years of the 21st century.

A Greek-American friend of Mr. Markopoulos, now in Switzerland, wrote in his blog, "He nailed Madoff, listing the back-door marketing and financing schemes as if he were an insider. But the SEC did not respond. Powerful political voices ordered the SEC not to proceed. I am not naming names because libel laws mostly favor the criminal in Europe, and their names will never get past libel lawyers. The largest investors were not Jewish charities as was reported by New York newspapers, but French, Spanish and Swiss private banks."

Mr. Markopoulos predicted the implosion of all the main funds (which he named) that dealt with Mr. Madoff four years before they imploded. That nobody listened or did anything about it is an even bigger scandal.

A total mental meltdown of 3,000 SEC bureaucrats, each presumably endowed with average mental faculties, and a headquarters festooned with red flags, taxes credulity.

Cognoscentis laugh at the idea that Mr. Madoff, still under house arrest secured by $10 million bail, was a lone-wolf operator. That his brother, two sons, nephew and niece and his wife Ruth did not know stretches credulity. Mr. Madoff himself knew the jig was up almost 18 months before the end. As Taki Theodoracopoulos, a friend of Mr. Markopoulos, says in his blog from Gstaad, Switzerland, "the great con artist had more than a year to prepare how to con the government about who was in on the con. The so-called 'feeder funds' now claim they knew nothing and are themselves victims. But they should have known. Whatever happened to due diligence?"

Mr. Madoff continued his fraudulent operations with impunity till last September when he was arrested in the $50 billion Ponzi scheme, a tad larger than Charles Ponzi's original scam that bilked investors out of a mere $15 million in 1920, equal to about $150 million today. Who was Mr. Markopoulos afraid of? That's the mystery that remains to be elucidated.

Another is the interesting relationship between Mr. Madoff's niece Shana, a rules-compliance officer at her uncle's business, and her now husband, Eric Swanson, an attorney and former SEC compliance officer. Mr. Swanson was also tasked with reviewing Madoff's business in 1999 and again in 2004. He married Shana in 2006. A co-founder and former head of the Nasdaq stock exchange, Mr. Madoff was widely regarded as beyond reproach. He also bragged about his ties to the SEC.

The Madoff affair is not unconnected to the global scandal of toxic mortgage assets, a criminal enterprise of subprime mortgages that slowly engulfed the entire world in 2006 and 2007 and felled financial houses on both sides of the Atlantic, triggering humongous bailouts at the expense of the taxpayer.

Also not unconnected was Jerome Kerviel, the 32-year-old French junior trader who rocked the financial world a year ago with what was then the biggest trading loss in history - $6.3 billion at the Societe Generale. The bank spent three days unwinding $65 billion of bets Mr. Kerviel had made on its derivatives desk. Both Mr. Madoff and Mr. Kerviel demonstrated in their own way the advantage of cyber heists over bank robberies with a gun and a note at a teller's window.

For the rest of the article, click here.

Originally posted at InjuryBoard by Paul Kiesel

NYT: Former SEC Lawyer, "Phil Gramm is the Single Most Important Reason for the Current Financial Crisis"

Paul Kiesel — Mon, 17 Nov 2008 21:06:05 GMT

If there's no such thing as bad publicity, why is it that 2008, for former Republican senator Phil Gramm, has been nothing but bad publicity for the man who John McCain once credited with saving his sagging presidential campaign back in the summer of 2007. However, when has Phil Gramm ever received good publicity? Even when he ran for president in 1996, he was panned by both left and right political pundits:

"When he ran for president in 1996 and finished fifth in Iowa, all the profiles written of him included the line 'Even his friends don’t like him.' Self-righteous and strident, Gramm demonized his opponents and used bitter, polarizing rhetoric. During a Senate debate over Social Security, a member pointed out that the proposal under consideration would hurt 80-year-old retirees. 'Most people don’t have the luxury of living to be 80 years old,' Gramm scoffed, 'so it’s hard for me to feel sorry for them.'" (New York Times, 1/22/08)

Anyway, today's New York Times had an excellent article that expands upon a lot of what I've discussed in my blog for the past eight months. And, yet, Phil Gramm has no remorse per the country's economic health and still feels that everything he did as a senator was great for the economy and had nothing to do with the current financial crisis. Mr. Gramm, in a very ironic posit, at least ironic based on what almost every economist knows (i.e. his deregulation legislation from the late-90s, says that, "They [his critics] are saying there was 15 years of massive deregulation and that’s what caused the problem [. . .] I just don’t see any evidence of it.” This would be true, Mr. Gramm, if your name wasn't on two of the greatest legislative overhauls to the banking industry since the Great Depression, the Gramm-Leach-Bliley Act and Commodity Futures Modernization Act.

From the New York Times, 11/17/08:

WASHINGTON — Back in 1950 in Columbus, Ga., a young nurse working double shifts to support her three children and disabled husband managed to buy a modest bungalow on a street called Dogwood Avenue.

Phil Gramm, the former United States senator, often told that story of how his mother acquired his childhood home. Considered something of a risk, she took out a mortgage with relatively high interest rates that he likened to today’s subprime loans.

A fierce opponent of government intervention in the marketplace, Mr. Gramm, a Republican from Texas, recalled the episode during a 2001 Senate debate over a measure to curb predatory lending. What some view as exploitive, he argued, others see as a gift.

“Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action,” he said. “My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.”

On Capitol Hill, Mr. Gramm became the most effective proponent of deregulation in a generation, by dint of his expertise (a Ph.D in economics), free-market ideology, perch on the Senate banking committee and force of personality (a writer in Texas once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the financial crisis that has rattled the nation.

He led the effort to block measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home foreclosures that would undermine the financial markets. He advanced legislation that fractured oversight of Wall Street while knocking down Depression-era barriers that restricted the rise and reach of financial conglomerates.

And he pushed through a provision that ensured virtually no regulation of the complex financial instruments known as derivatives, including credit swaps, contracts that would encourage risky investment practices at Wall Street’s most venerable institutions and spread the risks, like a virus, around the world.

Many of his deregulation efforts were backed by the Clinton administration. Other members of Congress — who collectively received hundreds of millions of dollars in campaign contributions from financial industry donors over the last decade — also played roles.

Many lawmakers, for example, insisted that Fannie Mae and Freddie Mac, the nation’s largest mortgage finance companies, take on riskier mortgages in an effort to aid poor families. Several Republicans resisted efforts to address lending abuses. And Congressional committees failed to address early symptoms of the coming illness.

But, until he left Capitol Hill in 2002 to work as an investment banker and lobbyist for UBS, a Swiss bank that has been hard hit by the market downturn, it was Mr. Gramm who most effectively took up the fight against more government intervention in the markets.

“Phil Gramm was the great spokesman and leader of the view that market forces should drive the economy without regulation,” said James D. Cox, a corporate law scholar at Duke University. “The movement he helped to lead contributed mightily to our problems.”

In two recent interviews, Mr. Gramm described the current turmoil as “an incredible trauma,” but said he was proud of his record.

He blamed others for the crisis: Democrats who dropped barriers to borrowing in order to promote homeownership; what he once termed “predatory borrowers” who took out mortgages they could not afford; banks that took on too much risk; and large financial institutions that did not set aside enough capital to cover their bad bets.

But looser regulation played virtually no role, he argued, saying that is simply an emerging myth.

“There is this idea afloat that if you had more regulation you would have fewer mistakes,” he said. “I don’t see any evidence in our history or anybody else’s to substantiate it.” He added, “The markets have worked better than you might have thought.”

Rejecting Common Wisdom

Mr. Gramm sees himself as a myth buster, and has long argued that economic events are misunderstood.

Before entering politics in the 1970s, he taught at Texas A & M University. He studied the Great Depression, producing research rejecting the conventional wisdom that suicides surged after the market crashed. He examined financial panics of the 19th century, concluding that policy makers and economists had repeatedly misread events to justify burdensome regulation.

“There is always a revisionist history that tries to claim that the system has failed and what we need to do is have government run things,” he said.

From the start of his career in Washington, Mr. Gramm aggressively promoted his conservative ideology and free-market beliefs. (He was so insistent about having his way that one House speaker joked that if Mr. Gramm had been around when Moses brought the Ten Commandments down from Mount Sinai, the Texan would have substituted his own.)

He could be impolitic. Over the years, he has urged that food stamps be cut because “all our poor people are fat,” said it was hard for him “to feel sorry” for Social Security recipients and, as the economy soured last summer, called America “a nation of whiners.”

His economic views — and seat on the Senate banking committee — quickly won him support from the nation’s major financial institutions. From 1989 to 2002, federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. He and his staff often appeared at industry-sponsored speaking events around the country.

From 1999 to 2001, Congress first considered steps to curb predatory loans — those that typically had high fees, significant prepayment penalties and ballooning monthly payments and were often issued to low-income borrowers. Foreclosures on such loans were on the rise, setting off a wave of personal bankruptcies.

But Mr. Gramm did everything he could to block the measures. In 2000, he refused to have his banking committee consider the proposals, an intervention hailed by the National Association of Mortgage Brokers as a “huge, huge step for us.”

A year later, he objected again when Democrats tried to stop lenders from being able to pursue claims in bankruptcy court against borrowers who had defaulted on predatory loans.

While acknowledging some abuses, Mr. Gramm argued that the measure would drive thousands of reputable lenders out of the housing market. And he told fellow senators the story of his mother and her mortgage.

“What incredible exploitation,” he said sarcastically. “As a result of that loan, at a 50 percent premium, so far as I am aware, she was the first person in her family, from Adam and Eve, ever to own her own home.”

Once again, he succeeded in putting off consideration of lending restrictions. His opposition infuriated consumer advocates. “He wouldn’t listen to reason,” said Margot Saunders of the National Consumer Law Center. “He would not allow himself to be persuaded that the free market would not be working.”

Speaking at a bankers’ conference that month, Mr. Gramm said the problem of predatory loans was not of the banks’ making. Instead, he faulted “predatory borrowers.” The American Banker, a trade publication, later reported that he was greeted “like a conquering hero.”

At the Altar of Wall Street

Mr. Gramm would sometimes speak with reverence about the nation’s financial markets, the trading and deal making that churn out wealth.

“When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place,” he said at an April 2000 Senate hearing after a visit to New York.

That viewpoint — and concerns that Wall Street’s dominance was threatened by global competition and outdated regulations — shaped his agenda.

In late 1999, Mr. Gramm played a central role in what would be the most significant financial services legislation since the Depression. The Gramm-Leach-Bliley Act, as the measure was called, removed barriers between commercial and investment banks that had been instituted to reduce the risk of economic catastrophes. Long sought by the industry, the law would let commercial banks, securities firms and insurers become financial supermarkets offering an array of services.

The measure, which Mr. Gramm helped write and move through the Senate, also split up oversight of conglomerates among government agencies. The Securities and Exchange Commission, for example, would oversee the brokerage arm of a company. Bank regulators would supervise its banking operation. State insurance commissioners would examine the insurance business. But no single agency would have authority over the entire company.

“There was no attention given to how these regulators would interact with one another,” said Professor Cox of Duke. “Nobody was looking at the holes of the regulatory structure.”

The arrangement was a compromise required to get the law adopted. When the law was signed in November 1999, he proudly declared it “a deregulatory bill,” and added, “We have learned government is not the answer.”

In the final days of the Clinton administration a year later, Mr. Gramm celebrated another triumph. Determined to close the door on any future regulation of the emerging market of derivatives and swaps, he helped pushed through legislation that accomplished that goal.

Created to help companies and investors limit risk, swaps are contracts that typically work like a form of insurance. A bank concerned about rises in interest rates, for instance, can buy a derivatives instrument that would protect it from rate swings. Credit-default swaps, one type of derivative, could protect the holder of a mortgage security against a possible default.

Earlier laws had left the regulation issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who argued that too many restrictions would hurt financial activity and spur traders to take their business overseas. And while the Commodity Futures Trading Commission — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation, there was still concern that step was not enough.

After Mrs. Gramm left the commission in 1993, several lawmakers proposed regulating derivatives. By spreading risks, they and other critics believed, such contracts made the system prone to cascading failures. Their proposals, though, went nowhere.

But late in the Clinton administration, Brooksley E. Born, who took over the agency Mrs. Gramm once led, raised the issue anew. Her suggestion for government regulations alarmed the markets and drew fierce opposition.

In November 1999, senior Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by the Federal Reserve chairman, Alan Greenspan, and Arthur Levitt Jr., the head of the Securities and Exchange Commission, issued a report that instead recommended legislation exempting many kinds of derivatives from federal oversight.

Mr. Gramm helped lead the charge in Congress. Demanding even more freedom from regulators than the financial industry had sought, he persuaded colleagues and negotiated with senior administration officials, pushing so hard that he nearly scuttled the deal. “When I get in the red zone, I like to score,” Mr. Gramm told reporters at the time.

Finally, he had extracted enough. In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Mr. Gramm dominated the Senate debate.

“This legislation is important to every American investor,” he said at the time. “It will keep our markets modern, efficient and innovative, and it guarantees that the United States will maintain its global dominance of financial markets.”

But some critics worried that the lack of oversight would allow abuses that could threaten the economy.

Frank Partnoy, a law professor at the University of San Diego and an expert on derivatives, said, “No one, including regulators, could get an accurate picture of this market. The consequences of that is that it left us in the dark for the last eight years.” And, he added, “Bad things happen when it’s dark.”

In 2002, Mr. Gramm left Congress, joining UBS as a senior investment banker and head of the company’s lobbying operation.

But he would not be abandoning Washington.

Lobbying From the Outside

Soon, he was helping persuade lawmakers to block Congressional Democrats’ efforts to combat predatory lending. He arranged meetings with executives and top Washington officials. He turned over his $1 million political action committee to a former aide to make donations to like-minded lawmakers.

Mr. Gramm, now 66, who declined to discuss his compensation at UBS, picked an opportune moment to move to Wall Street. Major financial institutions, including UBS, were growing, partly as a result of the Gramm-Leach-Bliley Act.

Increasingly, institutions were trading the derivatives instruments that Mr. Gramm had helped escape the scrutiny of regulators. UBS was collecting hundreds of millions of dollars from credit-default swaps. (Mr. Gramm said he was not involved in that activity at the bank.) In 2001, a year after passage of the commodities law, the derivatives market insured about $900 billion worth of credit; by last year, the number hadswelled to $62 trillion.

But as housing prices began to fall last year, foreclosure rates began to rise, particularly in regions where there had been heavy use of subprime loans. That set off a calamitous chain of events. The weak housing markets would create strains that eventually would have financial institutions around the world on the edge of collapse.

UBS was among them. The bank has declared nearly $50 billion in credit losses and write-downs since the start of last year, prompting a bailout of up to $60 billion by the Swiss government.

As Mr. Gramm’s record in Congress has come under attack amid all the turmoil, some former colleagues have come to his defense.

“He is a true dyed-in-the-wool free-market guy. He is very much a purist, an idealist, as he has a set of principles and he has never abandoned them,” said Peter G. Fitzgerald, a Republican and former senator from Illinois. “This notion of blaming the economic collapse on Phil Gramm is absurd to me.”

But Michael D. Donovan, a former S.E.C. lawyer, faulted Mr. Gramm for his insistence on deregulating the derivatives market.

“He was the architect, advocate and the most knowledgeable person in Congress on these topics,” Mr. Donovan said. “To me, Phil Gramm is the single most important reason for the current financial crisis.”

Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets.

“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”

But many experts disagree, including some of Mr. Gramm’s former allies in Congress. They say the lack of oversight left the system vulnerable.

“The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of A.I.G.,” Christopher Cox, the chairman of the S.E.C. and a former congressman, said Friday.

Mr. Gramm says that, given what has happened, there are modest regulatory changes he would favor, including requiring issuers of credit-default swaps to demonstrate that they have enough capital to back up their pledges. But his belief that government should intervene only minimally in markets is unshaken.

“They are saying there was 15 years of massive deregulation and that’s what caused the problem,” Mr. Gramm said of his critics. “I just don’t see any evidence of it.”

Originally posted at InjuryBoard by Paul Kiesel

Senator Barack Obama Discusses the Problems with Senator McCain's Mortgage Plan

Paul Kiesel — Tue, 21 Oct 2008 17:38:41 GMT

In Tampa, Florida yesterday, Senator Barack Obama addressed an estimated crowd of 10,000 supporters about his plans to revitalize a sagging economy. He illustrated his plan to fix the foreclosure crisis, which happened to be his strongest point and sharpest attack against the poorly structured McCain Mortgage Plan.

The foreclosure crisis still blankets many parts of the country (Florida, incidentally, along with California and Arizona, has consistently ranked in the top three states with the most foreclosures per month over the past year).

Here is an excerpt of Obama's speech:

The rescue plan that passed Congress was a necessary first step to easing this credit crisis, but if we're going to rebuild this economy from the bottom up, we need an immediate rescue plan for the middle-class -- and that's what I'll offer as President of the United States.

Last week, I laid out a plan that will jumpstart job creation, provide relief to families, and rebuild our financial system. It's a plan that will also help struggling homeowners stay in their homes -- something that's particularly important here in Florida, where foreclosures are up 30% over the last year. All across this state, there are families who've done everything right, but who are now facing foreclosure or seeing their home values decline because of bad decisions on Wall Street and in Washington.

The other week, Senator McCain came out with a proposal that he said would help ease the burden on homeowners by buying up bad mortgages at face value, even though they're not worth that much anymore. But here's the thing, Florida. His plan would amount to a $300 billion bailout for Wall Street banks. And guess what? It would all be paid for by you, the American taxpayer. That might sound like a good idea to the former bank lobbyists running my opponent's campaign. But that's not the change America needs.

Look, we must act quickly to end this housing crisis. That's why last March, I was calling for us to help innocent home buyers. And that's why I fought to make sure the recent rescue package gives Treasury the responsibility and authority to help homeowners avoid foreclosure. But we should not put your tax dollars at unnecessary risk. We should not let banks and lenders off the hook when it was their greed and irresponsibility that got us into this mess. We should not be bailing out Wall Street -- we should be restoring opportunity on Main Street. And that's what I'll do when I'm President of the United States.

If the American people are going to put up $700 billion to rescue our financial institutions, we should make sure those institutions are doing their part for the American people. That's why I've called for a three-month moratorium on foreclosures. If you are a bank or lender that is getting money from the rescue plan, and your customers are making a good-faith effort to make their mortgage payments and re- negotiate their mortgages, you will not be able to foreclose on their home for three months. Now, we've also put in place long-term measures to restore our credit markets and help families refinance their mortgages, but until those measures start working, we need to help homeowners stay in their homes, and that's what this foreclosure freeze will do.

And while we're at it, there's another step we can take to help innocent homeowners that won't cost taxpayers a dime. Right now, if you own only one home, you're not allowed to write down your mortgage in bankruptcy court. But if you own more than one home -- if you own, say, six or seven homes like my opponent -- you are allowed to write down your mortgage. That might help Senator McCain sleep easier at night. But it isn't right, and it will change when I'm President of the United States.

Originally posted at InjuryBoard by Paul Kiesel

"The Four" Who Helped Usher in the Economic Crisis

Paul Kiesel — Mon, 13 Oct 2008 18:48:50 GMT

There were those that predicted the current economic, foreclosure, housing, and mortgage crisis (Paul Krugman, who incidentally just won the Nobel prize in economics, Robert Shiller, Dr. Nouriel Roubini) and then there were those other figures -- politicians, economists and conservative pundits -- who recklessly enabled or promoted the economic situation the U.S. faces today (see below).

Alan Greenspan (former Fed Chairman)

We now know that stronger regulation of derivatives would have done much to stem the current financial crisis, but Greenspan argued against that philosophy:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so," Mr. Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added. (New York Times, 10/8/08)

Phil Gramm (former Texas senator and economic adviser to John McCain)

From the New York Times: For more than two decades in Congress he argued that the forces of the market had to be freed from government interference. Just a year after the passage of Gramm- Leach-Bliley, he was largely responsible for another bill -- the Commodity Futures Modernization Act -- that clearly did contribute to the current crisis. That law unleashed the derivatives market and paved the way for banks to become more aggressive about investing in mortgages. As recently as this summer, he was still saying that the biggest problem facing the American economy was excessive regulation.

Chris Cox (Head of the SEC)

Cox, who is the current head of the SEC, helped put greater deregulation into effect, and as of last March, was saying the following:

"We have a good deal of comfort about the capital cushions at these firms at the moment."

Henry Paulson (Treasury Secretary)

"I have great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible." -- Treasury Secretary Henry Paulson on March 16, 2008

"There is little public policymakers can, or should, do to compensate for untenable financial decisions." -- Treasury Secretary Henry Paulson on July 8, 2008

From the New York Times: They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

Originally posted at InjuryBoard by Paul Kiesel

Obama Proposes 90-Day Moratorium on Foreclosures

Paul Kiesel — Mon, 13 Oct 2008 14:39:17 GMT

Senator Barack Obama called for immediate action to help relieve the struggling economy and to mitigate the housing crisis, by proposing a 90-day moratorium on home foreclosures at some banks and a two-year tax break fro businesses that create new jobs.

According to the Associated Press, "The presidential candidate also proposed allowing people to withdraw up to $10,000 from their retirement accounts without any penalty for the remainder of the year and 2009."

Obama's proposals will approximately cost $60 billion over two years, however, they can be enacted quickly via government's regulatory powers (which increased through the bailout bill) or legislation that Congress could pass in a special session after the election.

"I'm proposing a number of steps that we should take immediately to stabilize our financial system, provide relief to families and communities and help struggling homeowners," Obama told a crowd in Toledo, Ohio. "It's a plan that begins with one word that's on everyone's mind, and it's spelled J-O-B-S."

Obama said that banks participating in the federal bailout should temporarily postpone foreclosures for families making good-faith efforts to pay their mortgage.

"We need to give people the breathing room they need to get back on their feet," he said, adding that families living beyond their means share some of the responsibility.

Obama's foreclosure proposal draws a stark contrast between Senator John McCain's mortgage plan (which is to buy up $300 billion worth of "bad" mortgages, and take the lenders off the hook), as Obama makes it a point to keep the lenders accountable, but while also allowing breathing room for both borrowers and lenders to work out a deal.

Originally posted at InjuryBoard by Paul Kiesel

McCain Mortgage Plan: The Wrong Approach

Paul Kiesel — Fri, 10 Oct 2008 22:40:28 GMT

John McCain announced, during the last Presidential Debate, that he has a plan to combat rising foreclosure rates and curb the amount of underwater mortgages throughout the country. McCain proposes that the government should buy $300 billion worth of "bad" mortgages and refinance them. McCain did not get into the specifics of his plan or even dare to disclose that his plan would transfer the financial burden and responsibility to taxpayers, thus, taking lenders off the hook.

Members from his own party and even his economic adviser, Douglas Holtz-Eakin, are either angered by McCain's proposal or confused by its purpose (when there are several other better plans and strategies to combat the mortgage crisis). Holtz-Eakin conceded that the plan WOULD place a burden on taxpayers and, under the proposal, taxpayers would be responsible for the difference in value between the old and new mortgages. It is very likely that McCain's plan would result in a loss of taxpayer money.

Another problem with the plan is that if 1 in 6 homeowners are considered to be in "underwater mortgages." Noting that over $5 trillion of mortgages are out in the market, that would result in about $678 billion worth of mortgages that could be considered "bad." McCain's round and even number of $300 billion doesn't even address half of the people he's trying to help. It's almost as if he arbitrarily came up with the number after hearing Senators Barack Obama's and Joe Biden's foreclosure relief plans and approach to helping troubled borrowers.

Even The National Review -- a magazine that is considered to be highly influential amongst conservatives -- railed against the plan as "creating a level of moral hazard that is unacceptable [. . .] a gift to lenders who abandoned any sense of prudence during the boom years." Ouch.

Granted, McCain's plan could be enacted under the rules (Sec. 109 and 110) of the recently passed bailout plan, however, his plan departs from two major issues: 1. The bailout plan relies on the lenders and servicers taking a hit -- as Holtz-Eakin proves while quoted on a conference call per the McCain Mortgage Plan, " This bypasses that step." 2. McCain, just six months ago, said he wouldn't intervene to help borrowers or lenders, noting that he didn't understand how "Only 55 million [homeowners] have a mortgage at all and 51 million are doing what is necessary [. . .] to make their payments on time. That leaves us with a puzzling situation: How could 4 million mortgages cause this much trouble for us all?" (New York Times, 3/25/08).

It sounds like McCain's missing the days when Phil Gramm was his economic adviser, who took control of everything economics for John McCain, while trying to convince Americans, whom he coined as being a "nation of whiners," that the fundamentals of the economy are strong and that we're just in a "mental recession." Phil Gramm rolled the dice with his choice of words and it cost him his job with the McCain campaign. The Arizona senator's own role of the dice will likely come up snake eyes on this all too simplified and myopic mortgage plan.

Originally posted at InjuryBoard by Paul Kiesel

WSJ, Los Angeles Times, and Zillow: One in Six U.S. Homeowners are "Under Water"

Paul Kiesel — Thu, 09 Oct 2008 20:33:31 GMT

From the Wall Street Journal: The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.

Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.

Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.

At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.

The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.

Others aren't so lucky... Click HERE for the rest of the article.

From the Los Angeles Times and Zillow: On average, those 12 million people who are under water owe about $58,000 more than their home is worth. That adds up to $676 billion of "negative equity," Zillow reports.

And that raises a question that Zillow's top numbers cruncher, Stan Humphries, poses: If there is $676 billion in negative equity out there, how can John McCain's mortgage purchasing plan cost only $300 billion? Humphries adds, regarding the McCain plan:

• It benefits those homeowners who assumed the most debt closest to the height of the real estate bubble.
• It could create an incentive for more homeowners to default since they could then qualify for a reduced mortgage versus having to continue paying on an underwater mortgage.
• It places the full burden of relief on taxpayers, but taxpayers get no potential upside.

Originally posted at InjuryBoard by Paul Kiesel

The Second Presidential Debate and the Mortgage Crisis

Paul Kiesel — Wed, 08 Oct 2008 19:44:08 GMT

The beginning of last night's Presidential Debate focused on the economy, naturally. Both candidates laid out their plans for how they would "fix" the economic woes many Americans face and will continue to face in the coming months. Focusing on one of the more important economic issues, the mortgage crisis (and credit crunch), both candidates expressed what they'd do to mitigate the problem, however, John McCain mentioned a form of mortgage relief that already exists, as if he came up with the plan just a few nights ago.

McCain discussed a plan to buy up troubled mortgages; a plan that was part of the bill signed into law by President Bush last week after Congress passed the $700 billion "Rescue Package."

McCain said he would "buy up the bad home loan mortgages in America and renegotiate [. . .] at the diminished value of those homes, and let people be able to make those payments and stay in their homes."

But he prefaced that statement by saying, "We’ve got to give some trust and confidence back to America. I know how to do that, my friends, and it’s my proposal. It’s not Senator Obama’s proposal. It’s not President Bush’s proposal." That statement is false.

Senators Barack Obama and Joe Biden have both echoed similar plans (and Biden revealed how porous John McCain's bailout proposal was just two weeks ago), as Biden, in his only debate appearance last Thursday, said Barack and he support "allowing bankruptcy courts to be able to re-adjust not just the interest rate you're paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal that you owe." That's exactly the same plan McCain proposed last night, just with the government doing it directly. Either plan would require the government's involvement at this point in time.

Biden said earlier in the debate: "Two years ago Barack Obama warned about the sub prime mortgage crisis. John McCain said shortly after that in December he was surprised there was a sub prime mortgage problem. John McCain, while Barack Obama was warning about what we had to do, was literally giving an interview to "The Wall Street Journal" saying that I'm always for cutting regulations. We let Wall Street run wild. John McCain and he's a good man, but John McCain thought the answer is that tried and true Republican response, deregulate, deregulate."

As I pointed out over the past six months, McCain has drastically switched his position recently on the mortgage crisis, even though the facts surrounding it and how we got into it have been apparent for well over a year now, if not two years. His most recent take, buying $300 billion worth of troubled mortgages, isn't a terrible idea, but it's an idea that's part of the current bailout package under Sec. 110.

Section 110. Assistance to Homeowners (and Section 109) states that the FHA, as the Federal property manager, "shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures."

The Hope for Homeowners Program sounds very similar to McCain's plan (that was first mentioned last night), which he dubbed the "Homeownership Resurgence Plan." But also, McCain's plan over simplifies the larger problems that prevent a broad remedy for troubled homeowners. McCain’s plan fails to address the complications of securitization, through which investors buy bundles of loans. The current system is not structured for servicers to distinguish and modify individual mortgages from other securitized loans, an issue overlooked by McCain’s move for the government to buy mortgages directly from servicers. That's why Sec. 110 states that the Treasury Secretary must encourage the sevicers to take a loss on the loan before its modified by a bankruptcy court, the government, or the servicer.

The fundamentals of McCain's plan to attack the mortgage crisis are fundamentally weak and myopic; however, it shouldn't be much of a surprise as he has stated that, "The issue of economics is not something I've understood as well as I should."

Originally posted at InjuryBoard by Paul Kiesel

When it Comes to the Bailout, Some Refuse to See the Facts

Paul Kiesel — Tue, 30 Sep 2008 21:58:03 GMT

There are a lot of different news outlets and political blogs pointing fingers at who's to blame for the financial crisis and why Americans should or should not support the failed bailout (or rescue) package.

The most recent argument being made by conservative journalists, on websites like Human Events, is that Democrats and the Community Reinvestment Act of 1977 are responsible for Wall Street's problems and, accordingly, the $700 billion package. Republicans and Independents were innocent throughout all this, right? Even if Republicans had no hand in this problem (which is false, they did), wouldn't they at least be guilty of negligence for allowing this to occur under their watch? They did control the House, Senate and the White House at one time for four years (2002-2006, and most of the period between 2001 and 2003). But that's a hypothetical almost blameless situation for the GOP, as there are a lot of fingerprints on this mess that belong to key Republican members of Congress.

The Community Reinvestment Act (CRA) of 1977, contrary to the opinion of pundits on FoxNews.com and HumanEvents.com, is not at the foundation of current financial crisis. The CRA was a program designed to force banks to make loans in lower-income neighborhoods, but did not require the banks to make loans to lower-income individuals. There were parts of the Act that provided equal lending to credit worthy borrowers who were also low-income, and provided interest rate restrictions that would not later on in the life of the loan cause or come even close to equaling the economic hardship due to the sloppy subprime lending over the past six years. In fact, over half of the subprime lenders were independent, therefore, not subject to the regulation under the Community Reinvestment Act (which has been revised by Presidents Bush, Clinton and Bush II).

Observers need to understand that there are many parties that could be blamed and a laundry list of variables that have played a role in the mortgage meltdown. Truth in Lending violations were rampant. Mortgage fraud was at an all time high. Defrauding shareholders helped fuel the fire of new bad loans, too.

However, three key important legislative bills did play a direct role in the current meltdown: 1. Phil "We're a Bunch of Whiners" Gramm's Commodity Futures Modernization Act of 2000, which allowed for deregulation of the energy and lending industries, along with Gramm's wife being able to collect almost $1 million as an Enron board member (before its collapse) 2. Gramm-Leach-Bliley Act of 1999 stripping a large part of the Glass-Steagall Act of 1933 (see link) 3. Newt Gingrich's Home Ownership and Equity Protection Act of 1994, which was written to protect consumers against predatory loans, but it instead helped spark the subprime boom and, subsequently, even more predatory lending.

Overall, Congress needs to do what's right and protect the rights of homeowners, those who are in good loans and those in bad loans (a countless number of these troubled loans are due to TILA violations, etc.), because if the latter is jilted on this bailout package and not represented like the executives on Wall Street, the number of foreclosures that WILL occur will adversely effect home values for everyone (which is less profitable for the government who will own these loans anyway; the loans should be reasonably modified so the government can recoup taxpayer money). There are many loans out there that are "avoidable foreclosures" and it would be irresponsible of the Treasury and members of Congress not to approve the rescue package that will be voted on Wednesday evening.

Originally posted at InjuryBoard by Paul Kiesel

Loan Modification and Foreclosure Mitigation Efforts in the Bailout Bill

Paul Kiesel — Mon, 29 Sep 2008 20:04:00 GMT

A key provision added to the bailout bill by Democrats last week, and a provision that likely dissuaded about two-thirds of House Republicans from voting "Aye" on the failed bill today, deals with foreclosure mitigation efforts and the need for the Treasury Department to modify loans that are considered to be "avoidable foreclosures."

According to section 109 of the Emergency Economic Stabilization Act of 2008, "[. . .] the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering the net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures."

The reason for this provision? Because Democrats saw a White House administration trying to get a bill passed without review and one that only provided relief to Wall Street banks (the dumping of "illiquid assets" or securities packed with bad mortgages), and wanted to protect taxpayers from the original version of Bush's Bailout, where the government would have assumed the responsibility of all these bad loans without any taxpayer protection or relief to troubled homeowners, many of who were manipulated into loans with fraudulent/misleading language that broke Truth in Lending laws.

Sec. 109, continued: "Federal Government entities that hold troubled assets [shall coordinate] to attempt to identify opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease."

I wonder if House Republicans and even some House Democrats who voted against this bill today, representatives who are up for re-election this November, will feel comfortable going back to their districts, and telling voters that not only are they not concerned about homeowners, but they are also apathetic to renters who appear to be political collateral damage, as they didn't even participate in Wall Street's avarice.

The loan modification section of the emergency bailout package is not only needed, but it is a less expensive route for the government and taxpayers. Since the government is assuming the responsibility of these bad loans, it would be irresponsible for our government not to prevent avoidable foreclosures and just assume the weight of the net loss. It makes more sense for the government to modify a loan, and hope the housing market bounces back in a couple years, than to let a home foreclose and then force our government to enter the real estate business, thereby nationalizing that industry, too.

Some foreclosures will not be preventable, however, our government needs to be pragmatic in its short and long term decisions and understand that when a loan is considered to be an "avoidable foreclosure," it's in everyone's best interest to prevent it from foreclosing (via loan modification by the Treasury) or else the Treasury is taking a reprehensible route and gambling with taxpayer money.

Originally posted at InjuryBoard by Paul Kiesel