Los Angeles Personal Injury Lawyer - mortgage mess

SEC Chairman Chris Cox: "Market Ripe for Fraud and Manipulation"

Paul Kiesel — Tue, 23 Sep 2008 14:15:15 GMT

SEC Chairman Chris Cox testified this morning at the Senate Banking Committee hearing in regards to the potential Wall Street Bailout plan that was proposed over the weekend. Cox said that his agency has more than 50 investigations open on subprime mortgage cases. However, Cox said that he's also trying to "ascertain" if anything illegal went on in the risky-mortgage market that contributed to the current crisis.

If Chris Cox was truly uncertain as to whether any illegal activity and lending was going on amongst Wall Street firms and mortgage lenders that led the way to the financial crisis, then why would he later say in his testimony, "This market is regulated by absolutely no one [. . .] It is a market ripe for fraud and manipulation."

The only thing that's left to ascertain is to pinpoint where this type of "illegal activity" originated, and why it was allowed to spiral as out of control as it did.

Interestingly, Cox does mention credit-default swaps (CDS). CDSs are unusual or creative financial instruments where the risk of default on credit is passed among lenders and investors, much like the game Hot Potato. This type of creative financial packaging became popular after the Gramm-Leach-Bliley bill gutted Glass-Steagall and the subsequent passage of the Commodity Futures Modernization Act. Cox believes, and is most certainly correct, that CDSs allowed a forum for the shorting of corporate debt without the oversight imposed on cash markets.

Unfortunately, Cox doesn't mention fraud or manipulation in mortgage documents like TILA forms or the presence of both in the Alt-A/Option ARM loan market. Fraudulent claims and ambiguous language were littered throughout Truth in Lending documents. For instance, whenever a loan failed to state that it was a negative amortizing loan -- when it was that type of loan -- it was in explicit violation of the Truth in Lending Act.

The reality is that the fraud and manipulation Cox is aware of, suspects, and/or turned his head away from could have been prevented: A Republican-led Congress chose in 2000 not to extend regulation to OTC derivatives markets. One of the most influential proponents of not regulating OTC derivatives was Alan Greenspan, then chairman of the Federal Reserve. Greenspan said, "OTC transactions in financial derivatives are not susceptible to - that is, easily influenced by - manipulation.” Nobody questioned Greenspan when he made this claim. Nobody questioned Greenspan when he said on October 9, 2006 that the housing market would soon rebound from its slight slump, "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out [. . .] There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over."

Without proper oversight, the people responsible for this mess were able to do and say whatever they felt looked and sounded good, whether their claims were accurate or a series of mistruths.

I think it's safe to say that the next time broad claims like Greenspan's, Ben Bernanke's, Hank Paulson's or anybody pushing a heavily deregulated industry goes unquestioned, consequences are likely to follow again.

Originally posted at InjuryBoard by Paul Kiesel

McCain: Mortgage Flip-Flopping

Paul Kiesel — Thu, 10 Jul 2008 17:41:14 GMT

To have a change of mind or heart is not a bad thing. People change their minds all the time. So when most people accuse politicians of flip flopping, they're really accusing them of changing their opinion on a particular issue, which is technically a natural thing to do and perfectly acceptable.

However, when a politician is unequivocal in his/her view and appears to be inexorable, and then he or she changes positions on that issue in a short amount of time (within months and with no new information available), that is more or less a "flip flop" maneuver; it also proves the politician was unaware of some cracks or flaws in their former stance and has likely changed perspectives for political reasons.

Senator John McCain has done this today in regards to the mortgage crisis. With news of Fannie Mae and Freddie Mac having liquidity problems (which federal regulators are denying) and possibly needing a government bailout soon, McCain said, "Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail [. . .] They are vital to Americans' ability to own their own homes. And we will do what's necessary to make sure that they continue to function," (The New York Times, 7/10/08).

However, just three months ago, McCain suggested that it's the borrowers' fault for why we're in this mortgage mess and that he couldn't understand how such a small percentage of foreclosures and/or troubled mortgages are causing this much financial turmoil, "[Americans] bought homes they couldn't afford [. . .] 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). He also said in March that government intervention is unnecessary and he wouldn't support it, but clearly his statements today contradict his former ones.

McCain changed his mind not because of a change of perspective (the writing was on the wall back in March and April, as I wrote about a potential bailout that Fannie and Freddie might need later this summer), but, rather, because he would be politically killing himself to stick to his stance that terrorism is the most pressing matter for Americans, as McCain commented that, "Even if the economy is the, quote, No. 1 issue, the real issue will remain America's security [. . .]" But this is clearly not the case as polls show that most Americans are in fact more concerned with the economy and other domestic issues. Now McCain is presumably more concerned with the economy.

Therefore, McCain had to switch his stance -- he had to flip flop, but it wasn't necessarily due to a genuine change of economic perspective; because banks and homeowners were struggling just as much in March as they are now. So does McCain really care about economic pains that Americans have been facing for months now or is he more in line philosophically with his top economic adviser former Senator Phil Gramm? -- who today said that America was in a "mental recession" and was a "nation of whiners." The New York Times reported on this just hours after McCain claimed to be concerned with the health of Fannie and Freddie and each institution's ability to loan mortgages to Americans and not become insolvent.

Originally posted at InjuryBoard by Paul Kiesel

How We Got into this Mortgage Mess

Paul Kiesel — Mon, 07 Jul 2008 17:43:17 GMT

Over the last 15 years, there have been five "avoidable events" stemming from Wall Street's or Congress' actions (or inaction), that led directly to the mortgage crisis.

1. Newt Gingrich and the Home Ownership and Equity Protection Act of 1994 (the latter's goal was written to protect consumers against predatory loans, but it instead helped spark the subprime boom).

2. The "Rodash Fix" revolved around a woman's lawsuit, Martha Rodash, against atwo lenders because of fee misstatements on her Truth in Lending Disclosure form. After Rodash's victory in recouping those costs/fee, dozens of class action lawsuits were filed in similar fashion. However, Congress then passed a major amendment to the 1968 Truth in Lending Act, making certain fees, that were grounds for litigation prior, mute.

3. Phil Gramm and the Commodity Futures Modernization Act of 2000.

4. Senator Sarbanes' unsuccessful effort in instilling "appropriate regulation" to the mortgage industry. Paul Sarbanes and John LaFalce tried to pass the Predatory Lending Consumer Protection Act of 2001 and it failed each and every time is was reintroduced.

5. Wall Street's Darwinian view: Many people in the finance community view the people who have been victimized by the subprime fallout and the lenders who have suffered most on Wall Street as "welcome additions" to the fallen competitor list.

For more on each of these five events that helped precipitate the subprime boom after 2001, CLICK HERE.

Originally posted at InjuryBoard by Paul Kiesel

The Subprime Mess and Phil Gramm: An Experiment in Deregulation

Paul Kiesel — Tue, 24 Jun 2008 16:12:58 GMT

In 1933, a few years following the stock market crash, Congress passes the Glass-Steagall Act, in hopes that regulating banks will help prevent market instability, particularly amongst Wall Street banks. The purpose of the act is to separate commercial banks that focus on consumers from investment banks, which deal with speculative trading and mergers.

The Glass-Steagall Act provided the proper oversight and entity separation that would prohibit banks and other financial companies from merging into giant trusts (conflict of interests) -- giant trusts or corporations being more powerful, naturally, and having the seemingly limitless capital to lobby their corporate interests, however, with a very myopic scope (particularly when it comes to factoring in potential losses -- most banks, as seen in contemporary times, chose not to anticipate losses in the mortgage market; they presumed home prices would continue to appreciate).

In 1999, former Senator Phil Gramm (who is, incidentally, Senator John McCain's economic adviser and cochairs his presidential campaign) set out to completely gut the Glass-Steagall Act, and did so successfully, replacing most of its components with the new Gramm-Leach-Bliley Act: allowing commercial banks, investment banks, and insurers to merge (which would have violated antitrust laws under Glass-Steagall). Sen. Gramm was the driving force behind the Gramm-Leach-Bliley Act, as he had received over $4.6 million from the FIRE sector (Finance, Insurance and Real Estate donations) over the previous decade, and once the Act passed, an influx of "megamergers" took place among banks and insurance and securities companies, as if they had been eagerly awaiting the passage of Gramm's Act. Everything in between Glass-Steagall and Gramm-Leach-Bliley (i.e. Savings and Loan crisis/bust) was, in large part, the incubation period for what would take place over the nine years that would follow the passage of Gramm's Act: an experiment in deregulation.

Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm's wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.

In 2003, Gramm left the Senate to join UBS, which had acquired investment house PaineWebber due to his deregulation bill. At UBS, Gramm lobbied Congress, the Fed and the Treasury Department. During Gramm's tenor at UBS and as a lobbyist, Congress passed the Responsible Lending Act, billed as an anti-predatory-lending measure, but was called the "Loan Shark Protection Act" by consumer advocates, as it was designed to preempt stronger state laws against anti-predatory lending. The Fed largely ignored the underlying and growing problems within the subprime mortgage/housing markets, as Bernanke famously acknowledged the housing market in April, 2007 as, "[showing] signs of softening," but said that a "sharp slowdown," is unlikely. Then, according to Mother Jones magazine, Henry Paulson became the Treasury Secretary in July, 2007, when, "In 2005, [at] Goldman [he] securitized $68 billion in residential mortgages and $23 billion in 'other assets' primarily related to CDOs," (Mother Jones, August, 2008). With such self-interest, and a lack of the nation's interest, we can see how this subprime mess was allowed to escalate to such great proportions.

Some justice was served, however, this spring, as UBS became one of the subprime debacle's biggest losers, having to write down $37 billion -- the same amount as their previous four years of profits combined. UBS also made the public aware that two-thirds of its losses were due to reckless investing in collateralized debt obligations (CDOs).

Now, Gramm has a second chance of extending his out-of-touch and ill-performing policies, as Senator John McCain appointed Gramm to be his "economic expert" and cochair of his presidential campaign, last year. Also, it is likely that if Senator McCain were to win in November, Gramm would be our next Treasury Secretary, which means more of the same deregulatory mess and the continuation of failed and insidious economic policies.

Originally posted at InjuryBoard by Paul Kiesel