FedUpUSA

Archive for April 7th, 2011

The U.S. government surrendered. That’s the only conclusion to draw from reports that federal financial regulators have abandoned state legal officials negotiating a foreclosure settlement with Wall Street banks and instead struck their own deal.

All 50 state attorneys general and multiple federal agencies had joined forces last year to hammer out a pact with big mortgage servicers. Among the terms under discussion was making banks reduce struggling homeowners’ mortgage principal, accept loan-servicing standards, and pay financial penalties for “robo-signing” and related foreclosure abuses.

That looks to be dead. Instead, the Federal Reserve, Office of the Comptroller of the Currency, FDIC and other bank regulators have started signing individual “consent agreements” with Bank of America (BAC), Wells Fargo (WFC) and other large servicers.

Legal experts who have reviewed the government’s agreement (which you can review here) describe it as exceptionally weak. Banks aren’t forced to cut loan balances or pay a fine. They also don’t have to admit any wrongdoing in connection with the robo-signing scandal. Rather, banks are simply required to tighten their internal loan modification and foreclosure processes. Said Georgetown University law professor Adam Levitin, a noted housing finance expert:

The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern [cease-and-desist] order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser.

Feds to states: You’re on your own

The agreement does require loan servicers to hire independent consultants to examine some foreclosures that occurred between 2009 and 2010. But it doesn’t specify what foreclosures are eligible for review, meaning that is left up to servicers. It also puts few limits on the third-parties banks may hire to conduct these reviews. Presumably, such experts won’t be paid based on how many foreclosures they red-flag.

Iowa Attorney General Thomas Miller, who has led the states’ robo-signing investigation, told Bloomberg he’s “disappointed” that the feds are going their own way. He should be. By laying down such minimal requirements and forgoing all punishment, the consent agreement removes whatever negotiating leverage the states may have had. Any real help for homeowners or serious punishment for financial firms is off the table.

The banks will resist further pressure to offer mortgage relief by pointing to the settlement with bank regulators. The AGs, some of whom had begun to think twice about pushing for a strong agreement, must now decide whether to effectively sign on to the federal agreement or pursue action on their own. Given the obstacles in fighting Wall Street and Uncle Sam, most will relent.

What the robo-signing scandal is really about

No doubt some people will continue to dismiss the robo-signing fiasco as one big clerical error by the financial industry. They will argue that ramrodding illegal foreclosures through the courts is justified by the need to stabilize the housing market. They will say that losing your home is proof-positive of reckless borrowing. And they will claim that helping some struggling homeowners is unfair to those who, by luck, circumstance or hard work, managed to stay out of trouble.

But let’s remember what’s at stake here. This isn’t only about preventing unnecessary foreclosures, although as an ethical and economic matter that’s critical. In a larger sense it’s about preserving the rule of law.

Robo-signing isn’t some kind of administrative misdemeanor. It amounts to a massive case of fraud and willful obstruction of justice. Legal documents were forged. Banks wrongly, deliberately kicked numerous homeowners to the curb. People were royally screwed. This is about some of this country’s most powerful institutions deciding to play by their own rules.

And getting away with it.

Alain Sherter for BNet

Visit msnbc.com for breaking news, world news, and news about the economy

Now Portugal has come to the ECB and IMF with its hand out, claiming it needs help – this after denying the need for “outside assistance” for months.

Immediately Spain issued a statement that it had “absolutely ruled out” the need for a bailout.

Of course this is what Portugal said just a few weeks – and months – ago.

It was also what Ireland said, just before they folded and refused to force the bank bondholders to take haircuts.  And who were those bondholders?  To a large degree they were foreign banks – specifically, those in Germany and France.

What did the Irish get in exchange?  Nothing, other than continued ability to spend more than they tax – for a little while.  And what did they lose?  Their sovereignty.  The latest insult is the revelation that the ECB and EU have effectively imposed a property tax on real estate in Ireland as a “hidden condition” of their “assistance.”

When one sovereign nation demands fealty of another, including payment, we usually call that event “an invasion”, and with good cause.  It in fact is an invasion, whether tanks roll across a border or not.

At its core the problem with all this nonsense is that nobody wants to talk about and resolve the actual issue: You cannot spend, on a continual basis, more than you make.  Doing so always eventually causes a debt spiral as you start paying interest on interest, and eventually the laws of exponents take center stage and bankrupt you.

Why is the ECB and Euro Zone talking about “bailing out” these nations?  Because private banks in those nations irresponsibly bought these bonds and will fail if they are forced to eat the haircuts that would result from a default.

That is, rather than allow those who did idiotic things to eat the consequences of their actions these governments, effectively captured, bribed and extorted by the banksters, instead are forcing the citizens to eat the loss that they should be forced to eat on their own.  The next question is how much more of this is tolerated by the citizens before they decide they’re not going to put up with it and revolt themselves, either economically or otherwise.

We cannot solve this in America without dealing with Medicare and Medicaid, and we cannot fix either with the medical system we have now.  Specifically:

• America cannot fund development of medical technologies for the world, then have those other nations price-fix and force Americans to eat the cost.  Until we respect private property rights this cannot be resolved.  If I buy a drug or device in Canada and wish to bring it back across the border and sell it here, or do the same thing in Spain, Germany or Britain, that product, once purchased is mine.  Ownership of a thing gives me the right to resell that thing.  The laws preventing the market from leveling prices are why drug and device makers can sell a dick pill in the US for $25 that sells for $2 in Canada.  Such price disparities are impossible without explicit interference in the free market by the government and they are a major part of why our medical system is broken.
• America cannot have a sustainable and reasonable medical system so long as we allow forcible cost-shifting from one person to another.  Providers complain that Medicare and Medicaid pay less than the cost of providing services and goods.  In a free market these services would not be provided at that price since it is below cost (if the claim is truthful.)  In a controlled, monopolist market the provider forces you, either privately-insured or uninsured, to pay for the Medicare and Medicaid patient’s care by charging you more for your procedure, drug or device.  This is even more true when Juanita, an illegal immigrant, shows up and poops out a kid – with no money and no insurance.  Prior to the mid 1980s Juanita would not be treated.  EMTALA, passed in the 1980s, forced providers to treat those who could not pay under any event that was an “emergency” – even one that was foreseen (e.g. childbirth may be emergent but it is hardly unforeseen that it is going to happen once you get pregnant!)
• We cannot have a sustainable medical system in this country so long as the standard for whether you’re entitled to some sort of treatment is simply “will it provide any benefit whatsoever irrespective of cost.”  Dendreon’s Provenge is just one of thousands of examples.  There are many conditions that are, within medical certainty, a death sentence.  Metastatic prostate cancer is one of them.  Most pancreatic cancers are another.  The fact of the matter is that we can write checks with our medical technology that we cannot cash with our economy.  There are two ways to ration any product or service: by price, and by political fiat.  We choose to do neither and instead force the cost on others.  This practice is bankrupting the country.

In the European zone they dealt with this up front via setting hard caps and then saying “this is how it’s going to be, deal with it.”  People largely did.  There are fewer ridiculously obese people in Europe.  Part of the reason may be that “emergent” things may get put off and you may or may not make it to that surgery.  The same thing has occurred with Canada.  I don’t like the Canadian system as it is rationing by political fiat; I’d prefer to let the market do it, but not if medical providers and the government can shove a gun up my nose and force me to pay for Juanita’s birth expenses and Joe’s Provenge treatment that will get him a whole four months of additional life at a cost of $100,000!

At the core of this over-leverage game in both the US and Europe is the fact that the financiers have defrauded the public.  They sold people in both places on the idea of ever-increasing “growth” that was funded by nothing – that is, it was simply pulling forward tomorrow’s demand to today.  This is false demand; it is not represented by economic output that is turned back into consumption but rather by borrowing to have something today on the promise to pay the next day, the next week or the next year.

This is nothing more than a time shift in demand, and it comes with ever-increasing interest cost.  When you and I do it it’s bad enough, but governments have a habit of doing this perpetually, never paying down the borrowing at all.

This leverage upon leverage game is now detonating across the Eurozone.  The beginning of that detonation in the consumer space is what caused the crash in 2008.  The attempt to prevent the banks who had made bad loans and imprudently leveraged themselves, along with lying about whether their bets were “covered” with various credit instruments, from blowing up has now transferred that risk to governments.

We have been serially lied to since 2006 by governments on both sides of the pond.  Paulson and Bernanke lied repeatedly about “Subprime being contained”, even though if they were doing their jobs they had to know that Citibank had in their board room emails stating that eighty percent of their loan volume by 2007 was being fraudulently misrepresented to buyers of that paper – it did not meet stated quality standards.  They were not alone – Lehman was playing games with their balance sheet as was everyone else, and the biggest scam of all was that AIG had written hundreds of billions of dollars of “credit protection” to these banks, thereby allowing them to claim their assets were “money good” even though they had almost no money to actually pay on any of those protection contracts. 

Honest bank examiners should have detected this and disallowed the credit protection to be counted.  If they had the terminal part of the housing bubble would not have occurred, the blow-off top in the stock market would not have occurred and the crash would not have occurred.

Failure of “systemically-important” businesses is bad.  But the flaw is not in that failure; it is in allowing businesses to become “systemically important” through intentional acts of deception in the first place.  That is, it’s not that a big bank fails that causes severe systemic risk – it is that regulators allowed that bank to claim to have “coverage” of assets at risk via worthless credit instruments that creates the systemic risk.  In the United States “Prompt Corrective Action”, if actually followed by OCC, the former OTS and the FDIC, absolutely prevents any risk to the deposit insurance fund – that is, it prevents any depositor from being at risk of losing their money. 

It is only through willful and intentional malfeasance and misfeasance of government that these risks arise.

We did not correct that malfeasance and misfeasance in 2008 and 2009.  We did not prosecute wrong-doing, even acts as ridiculously unlawful as money laundering of nearly four hundred billion dollars for Mexican drug gangs.  Instead we tried to paper it over by ”bailing out” these institutions.  All we’ve done is transfer the risk and losses to government and since the governments don’t have the money either (as they were spending more than they made before this all began) they’ve simply borrowed more and more, all without any intention or plan to pay it back. 

Now the same risk has become emergent in those very same governments for the simple reason that we solved nothing and moving a ticking bomb from one person’s pocket to another’s doesn’t stop it from ticking!  Portugal is just the latest example, but by no means the final one.  The United States is no more immune to this than is Greece, Ireland or for that matter, Iceland.  The fact that the United States currently has the “reserve currency” doesn’t change the outcome – it only changes timelines.  We may have a stronger hull on our submarine, but I assure you that if we’re over the Marianas Trench and continue to descend in depth, we will reach our crush point. 

It is a certainty.

The Market-Ticker