banks

Massive Justice Department Attack on Banks?

by Hans Bader on September 2, 2011 · 15 comments

in Bailout Watch, Economy, Legal

A monumentally-destructive Justice Department attack on banks may soon occur. Earlier, I wrote about how the Obama Justice Department is now forcing banks to make risky loans (in the name of “fair lending”), thus planting the seeds of a future financial crisis. In response, I received an e-mail from a former Justice Department lawyer who told me that the Justice Department’s HCE (Housing and Civil Enforcement Section, Civil Rights Division) is planning to block foreclosures across America (“across the whole [banking] sector”), even for irresponsible deadbeats who deserve to be foreclosed upon, citing racial disparities in foreclosure rates (which generally exist between black and white borrowers due to causes unrelated to intentional discrimination — as the Supreme Court has observed, racial disparities often occur for reasons completely unrelated to racist decision-making, as it has noted in cases like Richmond v. J.A. Croson Co., Watson v. Fort Worth Bank & Trust,  and United States v. Armstrong).

He wrote that “there is a unit in the HCE section headed by a nut running this. They are next going to BLOCK foreclosures based on this theory. It is part of an administration wide-strategy to stop foreclosures.  I’ve heard from people who have participated in the internal meetings.” He also asked that I not print his name yet, but allowed me to pass on the content of his e-mail.

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Voodoo Economics Behind Government Demand for Mortgage Write-Downs by Big Banks

by Hans Bader on June 14, 2011 · 3 comments

in Bailout Watch, Economy, Legal, Regulation, Stimulus to Nowhere

In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way).

But as Mark Calabria notes, this demand makes no sense at all economically. Any mortgage write-off that increases the disposable income of borrowers will reduce the disposable income of investors whose mortgage-backed securities are worth less after mortgages are partly written off. The government’s demand reflects irrational, magical thinking, a kind of voodoo economics. This  proposed rip-off of investors would not create any wealth or income, but rather merely redistribute wealth and income from investors to borrowers (reducing the disposable income of the suddenly poorer investors), discouraging future investment.

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Federal Government and State Attorneys General Push Arbitrary Mortgage Bailout

by Hans Bader on March 16, 2011

in Bailout Watch, Economy, Features, Legal, Property Rights

Post image for Federal Government and State Attorneys General Push Arbitrary Mortgage Bailout

Back before the election, intellectuals with ties to the Obama administration proposed a trillion-dollar bailout for some (but not all) underwater mortgage borrowers, as a way to increase consumer spending.

Last week, The Washington Post reported that bureaucrats at the newly-created Consumer Financial Protection Bureau (CFPB) want to do something similar on a smaller scale. Their proposal would require banks to write off part of the mortgages of certain (but not all) mortgage borrowers who owe more on their mortgage than their house is worth. Worse, they would require mortgage servicers to write off loan principal on loans owned by other institutions, like pension funds, violating their property rights.

Virtually all of America’s pension funds own mortgage-backed securities. Pension funds that millions of people rely on for their retirements would lose billions of dollars due to reduced mortgage value. These demands are contained in a 27-page proposed settlement sent to the banks by the CFPB, the Justice Department, and state attorneys general who sued the banks over their recent foreclosure documentation lapses. Such demands flout court rulings like Louisville Joint Stock Land Bank v. Radford (1935), which overturned a federal law that wiped out mortgage value.

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Human Achievement of the Day: Mobile Phone Credit Card Processing

by Michelle Minton on March 2, 2011 · 1 comment

in Features, Tech & Telecom, Zeitgeist

Post image for Human Achievement of the Day: Mobile Phone Credit Card Processing

It’s a hot summer day, you pass by a lemonade stand and you think “An ice-cold lemonade would really hit the spot,” but you have no cash and there are no ATMs in sight! That is no longer a problem thanks to Twitter co-founder Jack Dorsey’s Square, a small credit processing device anyone can use with their mobile devices to accept debit and credit payments on the spot.

Small businesses from corner flower merchants, garage and estate sale holders, or street food vendors and farmers markets can now offer their customers a more convenient way to pay for their goods, allowing them to compete with larger businesses. Square is literally a small square device that can be attached via cable to mobile devices, and which processes credit payments for a small per-transaction fee. Square is currently compatible with Apple products such as the iPhone, iPad, and iPod, as well as Google Android products such as the Droid or Nexus One, and will likely increase compatibility with other devices as the technology catches on. There are no monthly fees and no contracts for those who sign up — just a per transaction cost of 2.5 percent plus $0.15, which Square uses to cover interchange fees to credit card companies. Dorsey claims that, with Square, merchants can see an immediate increase in sales of around 20 percent.

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Bailout of Fannie and Freddie Will Cost Double Earlier Estimates

by Hans Bader on October 22, 2010 · 5 comments

in Bailout Watch, Deregulate to Stimulate, Economy

The bailout of Fannie Mae and Freddie Mac will cost double earlier estimates, and could cost $363 billion over the next three years, report NBC and the Associated Press.

Fannie Mae and Freddie Mac are the corrupt government-sponsored mortgage giants that contributed to the mortgage crisis by engaging in fraud and misrepresenting subprime mortgages as prime.  Earlier, the Obama administration showered their executives with $42 million in pay, even as Obama’s pay czar was ordering productive private-sector banks to chop the pay of their executives and traders (leading one bank to dump a profitable trading operation), and imposing new taxes and burdens on private banks (but not Fannie and Freddie).

As Professor Roy C. Smith noted, because of the Obama administration’s attempt to restrict bank employee pay, “Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.” Meanwhile, Bank of America’s stock has fallen over the last six months from over $19 to less than $12,  shrinking many Americans’ 401(k)s, as it has been injured by new rules and red tape such as the Dodd-Frank Act (which also is wiping out most free checking accounts).

While the taxpayers have lost a huge amount of money on the government-sponsored mortgage giants, they have actually made money on many private banks that accepted government bailout funds and then returned the money with interest.  (Healthy banks that never wanted a bailout and repaid their “bailout“ in full with interest, like BB&T, were pressured by the Treasury Department into accepting bailout money along with their unhealthy competitors, so that the public would not know which banks really needed a bailout; the Treasury Department feared that such knowledge would result in a run on those banks.)

The Huffington Post Report on Tax Liens and Banks May Miss the Point

by Lee Doren on October 18, 2010 · 1 comment

in Economy

The Huffington Post is reporting that banks are purchasing tax liens from local governments to collect when people fail to pay their property taxes. Supposedly, the banks charge additional fees and require the homeowner to pay the entire lump-sum up front. This often leads to people having to sell their homes to pay the tax. You can see the entire video below:

The video is puzzling because it is difficult to understand what The Huffington Post is arguing. The easy solution would be to avoid using property taxes as a means to fund local governments; this does not appear to be addressed. Although all taxes have negative consequences, a consumption tax would be preferable to a property tax and would not require a tax lien in the first place.

While those on the Left argue that a consumption tax is inherently regressive, the example that The Huffington Post cites in the video certainly demonstrates that property taxes harm the poor just as easily.

However, if the Left argues in favor of a property tax to fund local governments, isn’t an efficient means of collecting the tax necessary? The reason why local governments sell the tax liens to banks is because they don’t have the necessary funds to enforce the liens. If they wanted more funds to accomplish that goal, they would need to tax people more, which is the problem in the first place. Is it not?

The Huffington Post seems to be concerned about the fees that the banks charge on top of the original tax. Again, this misses the point. The local governments created a tax scheme that was so burdensome on citizens that people could not even pay the tax. Worse yet, the local governments did not have the resources to enforce payment. Therefore, to solve the self-imposed problem, the local government needed to create an incentive for banks to enforce the tax lien by offering them an additional fee. When it is all over, The Huffington Post turns around and blames the banks.

It seems that The Huffington Post missed the point: The government created a mess with an unworkable tax structure that harms the poor, and needs a bailout from the banks to fix their problem. This isn’t the fault of the banks, but the fault of local governments.

Stop Coddling Mortgage Deadbeats

by Hans Bader on October 14, 2010

in Bailout Watch, Economy, Legal, Politics as Usual, Property Rights, Regulation

Right now, there’s a big manufactured outrage over the fact that at a few banks, paperwork errors occurred in foreclosures.

The Wall Street Journal summarizes it well:

A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front. The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

At CNBC, John Carney has an insightful column entitled “Let’s Not Start Lionizing the Anti-Foreclosure Deadbeats.”

Dismissing foreclosure actions based on technicalities that have nothing to do with whether a borrower defaulted on a loan will lead to negative “consequences” for borrowers in the future, like much more costly handling of paperwork, that will likely lead to increased closing costs for people purchasing a home.  “Total war over missing paperwork” is a bad thing for honest borrowers and lenders alike.

As The Journal notes,”Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states,” vetoing it last week simply because one possible use of this measure would be to speed foreclosures otherwise slowed by interstate red tape.  At the liberal publication Slate, Stephen Sachs explains why that bill was a good idea for reasons having nothing to do with mortgages or foreclosures, and how it will promote interstate commerce and protect honest creditors.  Sachs notes, “The vetoed bill wasn’t aimed at the housing crisis. It was introduced back in 2005 and passed the House with bipartisan support in December 2006.”

I was an outspoken critic of the 2008 bank bailout at the time it was being pushed through Congress (I called it “unconstitutional,” “dangerous,” and “unnecessary”), and I completely understand and share public outrage at mismanaged banks that ended up being bailed out.  But I don’t understand why people think the bailouts should be compounded by letting deadbeat borrowers avoid hundreds of billions of dollars in unpaid mortgages without consequences — which would be the result of a permanent foreclosure freeze — at the expense of healthy banks that never wanted a bailout and repaid their “bailout” in full with interest.   (Healthy banks like BB&T that didn’t need or want any bailout were pressured by the Treasury Department into accepting a bailout loan along with their unhealthy competitors, so that the public would not know which banks really needed a bailout, resulting in a possible run on those banks).

It’s worth keeping in mind that a $75 billion mortgage bailout program backed by the Obama administration actually ended up harming the real estate market and the economy.  Other Obama administration mortgage bailouts have involved giveaways to even high-income borrowers who were financially irresponsible and had mortgage payments that were not especially high as a percentage of their income.  Preventing foreclosures may also end up creating a class of bailout-seeking deadbeats who don’t pay their mortgages and then agitate for giveaways at taxpayer expense.

Public’s confidence in institutions at odds with Administration’s and Congressional attacks

by Fran Smith on July 22, 2010

in Deregulate to Stimulate, Politics as Usual, Sanctimony

In a new Gallup poll on confidence in institutions, Congress ranked last out of 16 institutions consumers were asked to consider.  Only 11 percent of respondents had confidence in Congress, down 6 points from last year’s poll.  Confidence in the presidency dropped the most this year from last – down a full 15 points to 36 percent.

What I think is more interesting, however, is that the main institutional targets of President Obama’s and the Democratic Congress’ recents attacks and draconian laws gained in confidence in this year’s poll.  The Administration’s demonization of the health care system didn’t seem to resonate with the public.  In this year’s poll, the medical system ranked as number five in overall confidence, up 4 points from last year.

Banks and big business – also the targets of the Administration’s ire, were up one and three points, respectively, in the 2010 poll.

With these kinds of polling results, the Dems are right to be running scared.  Their big “successes” – ramming through an inchoate health “reform” bill and banking legislation that threatens to bury banks and their would-be customers in red tape – don’t sound like they’re going to get a lot of support among their constituents.

Senate Passes Financial “Reform” That Leaves Corrupt Bailout Recipients Unreformed, While Harming the Public

by Hans Bader on July 16, 2010 · 1 comment

in Bailout Watch, Economy, Environment, International, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

Yesterday, the Senate passed a so-called financial reform bill by a vote of 60-to-38, making it all but certain to become law.  The bill will do nothing to prevent another financial crisis or end bailouts, but it will cause all sorts of new problems.

The bill does nothing to reform the biggest bailout recipients, the government-sponsored mortgage giants Fannie Mae and Freddie Mac, even though administration officials admit they were at the “core“ of “what went wrong.”  But it will impact farmers and others who had nothing to do with the financial crisis, by imposing restrictions on derivatives they use to hedge against risk, restrictions that could cost U.S. companies as much as $1 trillion in lost capital and liquidity.

Fannie Mae and Freddie Mac have been incredibly costly to taxpayers.  The Obama administration earlier lifted a $400 billion limit on bailing them out.  At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes. Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public, reported The Washington Post.

Fannie and Freddie helped spawn the mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk: “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  The situation was recently found to be even worse than feared by the federal Financial Crisis Inquiry Commission.

Meanwhile, they paid their CEOs millions, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses. As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Democrats Block Reform of Corrupt Mortgage Giants; Fannie Mae and Freddie Mac Will Receive Billions More in Bailouts for Government-Sponsored Enterprises

by Hans Bader on May 12, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

In a party-line, 56-to-43 vote yesterday, Senate Democrats blocked any reform of Fannie Mae and Freddie Mac, the corrupt, government-backed mortgage giants that even administration officials admit were at the “core” of “what went wrong” in the financial crisis.

President Obama received $125,000 in contributions from Fannie Mae and Freddie Mac executives as a senator, second only to the corrupt Senator Chris Dodd, who is retiring this year over financial improprieties (such as his real estate gift from a lobbyist and “sweetheart mortgage from Countrywide Financial“), yet is the chief drafter of the financial “reform” legislation expected to pass the Senate by next week.

The financial “reform” bill would devastate the venture capital markets needed to create jobs and small businesses, by imposing onerous restrictions on so-called “angel financing.”  It would also give government officials the ability to nationalize businesses that they claim are at risk of failing–and block meaningful judicial review of such seizures by shareholders alleging violations of their constitutional rights.  (That will increase the ability of presidents to shake down businesses for donations to their political allies, since a business in danger of being seized by the government will try to curry favor with government officials.)  The bill’s House architect, Barney Frank, boasts that it will create “death panels” for American companies (this is the same Barney Frank who for years blocked any reform of Fannie and Freddie).

Mortgage giant Fannie Mae is seeking another $8.4 billion in federal bailout money, after the Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).   Last week, the other GSE, Freddie Mac, asked for $10.6 billion more in bailouts. The Obama administration is certain to approve the new bailout request: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports the New York Times.

Obama’s so-called financial “reform” proposal does nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury secretary, Timothy Geithner, who concedes they were “a core part of what went wrong in our system.” (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative “aims to wind down, and break up” Freddie Mac and “limit taxpayer exposure” to its losses.

“American taxpayers are paying for $6.8 billion of the Greek bailout” through contributions to an international bailout fund backed by the Obama administration.   Greece is being bailed out by Europe and the international community because it is running up huge budget deficits due to a bloated bureaucracy and government pensions that let many Greeks retire in their 50s. “The Obama administration wants to use U.S. tax dollars to bail out a nation that is in a financial death spiral brought on by years of amazingly irresponsible deficit spending and similar behaviors often found in socialist states.”

Rioters in Greece killed three bank employees last week in their rage over possible budget cuts.  “The protesting civil servant workers trapped the bank employees in a burning building.”

The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter Wallison, who warned for years about the risky practices of Fannie and Freddie, says Obama’s proposals will lead to “bailouts forever.”  Obama claims that it will not lead to more bailouts.  But as Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was a major cause of the mortgage crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

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