Archive for the ‘TARP’ Category
The ‘F’ word is FRAUD. It’s the ROOT of our problem.
Neil Barofsky, who was the special investigator general of the US government’s Troubled Asset Relief Program until his resignation in 2011, spoke to RT about how the Washington-Wall Street political culture could lead to another devastating collapse.
The incessant pumping by CNBC claiming “Rise Above” as a mantra along with other foolishness reminds me of what happened in 2008, and prompts me to issue a stern caution to anyone in the markets – it can happen again.
Let’s remember 2008, shall we?
The original TARP vote failed and the DOW plunged ~770 points. That much “everyone” knows.
What is not talked about is that just a couple of days later it was passed, as Congress “interpreted” the collapse in the market as a demand to pass the bill, helped along by Hank Paulson, CNBC and everyone else in the “punditry.” The Senate passed the bill on October 1st overnight, with the House following on the 3rd.
But the market did not want TARP passed. It wanted an actual solution to the problem, and TARP was not that solution — it was a SCAM.
When TARP passed the DOW initiated a 3,000 point collapse over a bit more than a week’s time.
The market, in fact, was not done going down until the spring of 2009, when balance sheet fraud via mark-to-fantasy was officially made legal through the bludgeoning FASB took in a Congressional hearing room.
The issue today is that the actual problem is a roughly 8% intentional overstatement of economic demand in the form of GDP financed with government deficit spending. A “half-ass solution” that makes a $100 billion annual dent in a $1,200 billion deficit will probably be looked at exactly as was TARP by the markets — that is, it will not be greeted with a big rally, but rather with a collapse as the market will (correctly) read this move by Congress as an unsuccessful can-kick and not a solution!
The government has backed itself into a corner over the last four years. The time available to actually resolve the deficit spending problems along with forcing the insolvent into the open and reorganizing them has been squandered.
Now the market is once again stomping its feet. But unlike the spring of 2009 there is no fraud game that can be played this time around. Deficit spending and false economic demand is the problem and the only solution is to take it on. The bad news is that where we had to take a roughly 10% adjustment in the amount of federal spending in 2000, and 20% in 2008, it is now approximately 40%.
There is nobody in Washington seriously talking about even 1/4 of that amount in spending reductions – even going off the “fiscal cliff” full-bore would only impose about 1/2 of the necessary correction between spending cuts and tax increases.
And let’s not forget that the sequester and tax increases, half of what would be required to simply stop the deficit spending this next year (not doing anything about the debt or acceleration in medical spending over time), is being called ”Armageddon” by virtually everyone.
I expect the market will give the politicians a couple of weeks — maybe — before it starts to demand an actual answer. And, as in 2008, I also expect that what Congress will cough up will not be an answer, but rather, as it was in 2008, another attempt to run a scam and will be far less than the sequester and tax increases would be.
We shall soon see if the market again pukes up 3,000 DOW points in response.
1. The Obama TARP fiasco Romney can’t use:
If the dynamics of the presidential campaign were different, a book called Bailout by Neil Barofsky would be getting a lot more attention. Barofsky left a post in late 2008 as a top federal financial fraud prosecutor in New York to become the special inspector general overseeing the $700 billion TARP bailout program. He’s written a Mr. Smith-Goes-to-Washington-like account of how even after TARP was turned over to a Democratic administration – in fact more so after the Democrats took over – TARP money was dispensed and TARP rules were written almost completely for the benefit of the bankers who drove America into a ditch.
For example, there’s Barofsky’s blow-by-blow description of how the rules written by the Obama administration for its much-heralded $50 billion program to help homeowners whose mortgages were underwater were so tilted in favor of the banks and against homeowners actually being able to get relief that only $1.4 billion of the $50 billion was dispensed, with few homeowners getting any help. And Barofsky is not writing about compromises the Obama administration had to make with banker-sympathetic Republicans in Congress; this is all about internal decisions that unfailingly seemed to put the needs and mindset of Wall Street above those of Main Street consumers.
A presidential campaign that wanted to call out the Obama administration for being too friendly to Wall Street and the banks at the expense of Main Street would be using Bailout as the cheat sheet that keeps on giving. But with the Romney campaign’s attack coming from the opposite direction – that the president and his team have killed the economy by shackling Wall Street – and with Romney on record in favor of allowing the mortgage crisis to “bottom out” with no government intervention, the former Massachusetts governor and his team have no use for Bailout.
That doesn’t mean reporters covering Wall Street and financial regulation shouldn’t be digging in, if not now, then after the voting. I want to read a story challenging officials, such as Treasury Secretary Timothy Geithner, to offer their response to Barofsky’s detailed and convincing indictment.
Did Geithner really refuse repeatedly to meet with Barofsky and try time and again to torpedo his investigations into fraud at TARP or his efforts to write rules that would prevent fraud? Did the Obama White House and the Treasury Department really argue to Barofsky that implementing what seem to me to be commonsense reporting and auditing rules for those accepting TARP money would scare off the banks from taking these handouts?
Did both the White House and Treasury constantly try to undercut their inspector general with leaks to the press portraying him as an ambitious partisan, when in fact he is a Democrat and was a relatively obscure if accomplished prosecutor with no previous predilection for showboating?
Did Geithner deputy Herbert Allison, a veteran Wall Street banker, really take Barofsky to lunch at a D.C. power restaurant after Barofsky had issued a series of reports critical of Treasury’s administration of TARP’s billions (which is an inspector general’s ostensible job), during which he delivered a clichéd “You’ll never work in this town again” speech?
According to Barofsky, Allison observed that Barofsky was “a young man, just starting out with a family, and obviously this job isn’t going to last forever. Have you thought at all about what you’ll be doing next?” After which he added, writes Barofsky, “I’m telling you, you’re doing yourself real harm. Out there in the market there are consequences for some of the things you’re saying.”
Worse, according to Barofsky, by dessert Allison had asked if he was looking for “something else in government? A judgeship?”
There’s lots more, including Barofsky’s account of capitulations the Obama team has made in the implementation of the Dodd-Frank financial reform bill that has rendered some of its key provisions relatively toothless. Again, that’s not something the Romney folks would criticize. Nor would they be terribly exercised over Barofsky’s explanation of how the rules governing the way TARP money was to be used and accounted for were so watered down that they never required or even encouraged the bailed-out banks actually to lend it out and thereby help revive the economy.
Reporters on the beat ought to get out there and tell us if Barofsky’s stories hold up. And they should use his description of these crucial, but often arcane, in-the-weeds issues, as a road map for future coverage no matter who wins in November.
2. Do CEOs ever pay the price?
Last week’s announcement that Bank of America was going to pay $2.4 billion in a shareholders’ class-action suit brought as a result of the bank’s disastrous 2008 purchase of Merrill Lynch reminds me that I wish I could read something explaining who actually benefits (other than the plaintiffs’ lawyers) when massive shareholder suits like these are settled or get decided for the plaintiffs. More important, who actually pays?
Dispatches like this one did a good job of explaining what the claims were – that BofA and Merrill Lynch executives hid the nature of Merrill Lynch’s near-total meltdown as BofA shareholders were being asked to approve the merger. And some, such as this New York Times story, provided a snapshot of who will get the settlement money: “those who owned Bank of America shares or call options from September 2008 to January 2009,” which was the period that began when the deal was announced and ended when it was voted on by the shareholders.
But that leaves lots of questions. A shareholders’ suit is supposedly brought on behalf of shareholders who own a company. Yet the prime defendant is the company. So it is the company that pays the settlement, which would mean that the shareholders’ assets are being used to pay the shareholders.
Of course, if I owned shares between September 2008 and January 2009 and sold them later in January 2009, I’d only be on the receiving end. But if I still own the shares, wouldn’t I be paying myself with my own assets (and with the plaintiffs’ lawyers taking their cut on the way through this round trip)?
More important, it is the company’s lead executives, such as then-BofA CEO Kenneth Lewis, who allegedly misled the shareholders. They are also defendants in these cases. But I haven’t read anything about them paying anything. Did they? Or did the company indemnify them from such suits and/or provide company-paid insurance to cover any personal liability? Did the company or company-paid insurance cover their legal fees? If so, then what’s the point of suing them?
And, as long as we’re talking about harm done to shareholders, why wouldn’t we now see a new, post-settlement shareholders’ suit not against the company but targeted only at Lewis and some of his former colleagues who got Bank of America into this jam in the first place and just caused it to pay out $2.4 billion? (The plaintiffs here could be any current shareholders, because they are the ones who are writing the $2.4 billion check.) Again, did the company indemnify Lewis and other executives against shareholder suits, meaning that if a shareholder now sues Lewis over this $2.4 billion settlement, the shareholder is once again only suing himself?
Can someone please sort this out?
Steven Brill – Reuters
Oh boy, what a minefield to wade into today…
European Central Bank President Mario Draghi said that revelations about the setting of the Libor, or London offered interbank rate, undermine confidence in the the world’s financial system, according to an interview with French newspaper Le Monde.
Of course the problem is that he and his cohorts knew about it and did nothing. That much is documented fact at this point, just as it is documented fact that The Fed knew in early 2008 (and perhaps earlier) and did nothing.
The problem with these sorts of “exhortations” is that the way to restore confidence in the system is for those in government who knowingly averted their eyes to commit seppuku. They won’t, of course.
Why not prosecute them? Because we as citizens have consented to laws that have no “or else.” Look at The Federal Reserve Act over on The Fed’s own web site. Read the whole thing. Do you see an “or else” anywhere? There is no penalty clause anywhere within the “act”; it is therefore nothing more than a grant of power with a suggestion, but not a stricture, on how it is used and abused. And abused it has been — serially and wantonly.
Barofsky, Mr. TARP, has written a book. It is due out Tuesday and I may well pick up a copy and read it. I don’t know if I need to read it though; the story says:
His story is illuminating, if deeply depressing. We tag along with Mr. Barofsky, a former federal prosecutor, as he walks into a political buzz saw as the special inspector general for TARP. Government officials, he says, eagerly served Wall Street interests at the public’s expense, and regulators were captured by the very industry they were supposed to be regulating. He says he was warned about being too aggressive in his work, lest he jeopardize his future career.
In other words, don’t prosecute frauds if you find them. Issue “stinging rebukes” if you must and stern warnings, but by God, no breaking out of the handcuffs and indictments!
In other words, there is no “or else” to be applied.
Unfortunately when it comes to crime without an “or else” there is no reason to abstain from committing crime, other than your personal moral scruples. And those seem to be in damn short supply these days, especially among financial types and politicians. This is even more-true when one can take the cost of whatever crimes you commit and get caught executing and force others to pay for them.
This cost-shifting paradigm is particularly pervasive in the financial and medical industry. The reason, of course, is that a bank is always free to pile on some junk fee and the medical industry, shielded from competitive forces by law, can effectively force you to cover the fines by jacking up the price of some drug, device or procedure. It would be nice to believe that a bank that was fined $1 billion would be at a competitive disadvantage and thus would wind up bankrupt for lack of business, but it simply doesn’t work that way. The reason is not very complex either; if virtually all major financial institutions commit the same offenses then the cost of doing business goes up for all of them and they’re all able to pass it on! Further, for those who are penalized “more” than their competitors they simply cheat more, since there is nothing preventing them from continuing to do so — like a jail sentence. Lehman serves as a prime example of this; they simply cheated more and more as their position deteriorated until finally the firm went “boom”, but nobody went to jail for all the cheating.
Sociopaths are willing to commit any crime they think they can get away with. There are few if any “moral” barriers that can be aimed at these people and “work.” The only sanctions that are effective are those that come with prison sentences; those cannot be shifted to others but must be personally served. Likewise, corporate charter revocation works too, for the same reason — the entity involved cannot offload the expense on someone else.
Is there reason to be hopeful that this will change? Not really, in the present tense. People claim this is “too abstract” for the common man to understand but that’s not true either. The simple fact of the matter is that theft is easily understood by virtually everyone if you bother to take the few minutes to explain it in that context.
Our real failure is that we as people refuse to rise and demand that thieves go to prison and that corporations that cheat lose their charters, thereby being forced from business.
Until that happens there will be no return of confidence, and no true economic recovery.
From CNN Money:
Taxpayer-owned Fannie Mae just bought the servicing rights to a bunch of bad loans from the struggling Bank of America. Where does it end?
By Abigail Field, contributor
FORTUNE — Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.
The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis. But Bank of America (BAC) continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That’s escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.
But apparently the federal government is determined to resurrect BofA: the Wall Street Journal reports the feds have just used Fannie Mae, which is controlled by the U.S. government, to infuse BofA with $500 million and ease one of the bank’s biggest headaches.
Yesterday afternoon on CNBC, Bank of America CEO Brian Moynihan mentioned that five of BofA’s six businesses were making money. The one black spot was its massive portfolio of problematic mortgages and the liabilities flowing from it. Moynihan also mentioned that BofA had just sold some “mortgage servicing rights” as part of its balance sheet strengthening efforts, but he didn’t elaborate.
According to the WSJ, Fannie Mae spent $500 million to buy the servicing rights to a big chunk of the “seven million loans still causing the most problems.” Although the $500 million is a paper loss to BofA, in that the rights were “originally worth more,” it looks like BofA is still getting a good deal because the portfolio’s “value is expected to deteriorate further.”
In fact, the deal is worth much more than $500 million to BofA, because getting rid of those servicing rights lifts a huge cost burden off BofA’s shoulders. And if securitized loans are involved, which they most likely are, the sale also limits the BofA’s potential liability to investors for its current servicing violations. Finally, the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to “deteriorate further,” the goal of the intervention can only be to fix Bank of America’s capital structure, which is easier for the government to do if it overpays for the rights.
In short, purchasing these servicing rights was another Troubled Asset Relief Program.
I’m sure this has nothing to do with their stock chart looking like this…and that they might be having capital raising issues.
Do you know where YOUR deposits are?
Just so all of you are clear: Bank of America just got over $500 Million in taxpayer money, but in just a few days, the “Supercommittee” of Congress is going to convene so it can raise your taxes and cut inconsequential things like Social Security, Medicare and Unemployment benefits. No, no. We can’t afford those. We can only afford to keep giving money to the insolvent banking institutions so they can also keep handing out money to bankroll political campaigns. YOU ARE MEANINGLESS!
ARE YOU GETTING THE PICTURE YET? Now maybe you can understand what has been going on in London.