The Economic Scam of the Century

Government Backing for Toxic Mortgage Securities?

by MIKE WHITNEY

The leaders of the U.S. Senate Banking Committee,  Sen. Tim Johnson (D., S.D.) and Sen. Mike Crapo (R., Idaho),  released a draft bill on Sunday that would provide explicit government guarantees on mortgage-backed securities (MBS) generated by privately-owned banks and financial institutions. The gigantic giveaway to Wall Street would put US taxpayers on the hook for 90 percent of the losses on toxic MBS the likes of which crashed the financial system in 2008 plunging the economy into the deepest slump since the Great Depression. Proponents of the bill say that new rules by the Consumer Financial Protection Bureau (CFPB) –which set standards for a “qualified mortgage” (QM)– assure that borrowers will be able to repay their loans thus reducing the chances of a similar meltdown in the future. However, those QE rules were largely shaped by lobbyists and attorneys from the banking industry who eviscerated strict underwriting requirements– like high FICO scores and 20 percent down payments– in order to lend freely to borrowers who may be less able to repay their loans.  Additionally, a particularly lethal clause has been inserted into the bill that would provide blanket coverage for all MBS  (whether they met the CFPB’s QE standard or not) in the event of another financial crisis. Here’s the paragraph:

“Sec.305. Authority to protect taxpayers in unusual and exigent market conditions….
If the Corporation, the Chairman of the Federal Reserve Board of Governors and the Secretary of the Treasury, in consultation with the Secretary of Housing and Urban Development, determine that unusual and exigent circumstances threaten mortgage credit availability within the U.S. housing market, FMIC may provide insurance on covered securities that do not meet the requirements under section 302 including those for first loss position of private market holders.” (“Freddie And Fannie Reform – The Monster Has Arrived”, Zero Hedge)

In other words, if the bill passes,  US taxpayers will be responsible for any and all bailouts deemed necessary by the regulators mentioned above.  And, since all of those regulators are in Wall Street’s hip-pocket, there’s no question what they’ll do when the time comes. They’ll bailout they’re fatcat buddies and dump the losses on John Q. Public.

If you can’t believe what you are reading or if you think that the system is so thoroughly corrupt it can’t be fixed; you’re not alone. This latest outrage just confirms that the Congress, the executive and all the chief regulators are mere marionettes performing whatever task is asked of them by their Wall Street paymasters.

The stated goal of the Johnson-Crapo bill is to “overhaul” mortgage giants Fannie Mae and Freddie Mac so that “private capital can play the central role in home finance.” (That’s how Barack Obama summed it up.) Of course, that’s not really the purpose at all. The real objective is to hand over the profit-generating mechanism to the private banks (Fannie and Freddie have been raking in the dough for the last three years) while the red ink is passed on to the public. That’s what’s really going on.

According to the Wall Street Journal,  the bill will

“construct an elaborate new platform by which a number of private-sector entities, together with a privately held but federally regulated utility, would replace key roles long played by Fannie and Freddie….”
“The legislation replaces the mortgage-finance giants with a new system in which the government would continue to play a potentially significant role insuring U.S. home loans.” (“Plan for Mortgage Giants Takes Shape”, Wall Street Journal) 

“Significant role”? What significant role? (Here’s where it gets interesting.)

The WSJ:

“The Senate bill would repurpose the firms’ existing regulator as a new “Federal Mortgage Insurance Corp.” and charge the agency with approving new firms to pool loans into securities. Those firms could then purchase federal insurance to guarantee payments to investors in those bonds. The FMIC would insure mortgage bonds much the way the Federal Deposit Insurance Corp. provides bank-deposit insurance.”

Unbelievable. So they want to turn F and F into an insurance company that backs up the garbage mortgages created by the same banks that just ripped us all off for trillions of dollars on the same freaking swindle?

You can’t be serious?

More from the WSJ: 

“Mortgage guarantors would be required to maintain a 10% capital buffer against losses and to have that capital extinguished before the federal insurance would be triggered.”

10 percent? What the hell difference does 10 percent make; that’s a drop in the bucket.  If the banks are going to issue mortgages to people who can’t repay the debt, then they need to cover the damn losses themselves, otherwise they shouldn’t be in the banking biz to begin with, right?

This is such an outrageous, in-your-face ripoff, it shouldn’t even require a response. These jokers should be laughed out of the senate. All the same,  the bill is moving forward, and President Twoface has thrown his weight behind it. Is there sort of illicit, under-the-table, villainous activity this man won’t support?

Not when it comes to his big bank buddies, there isn’t. Now check out this clip from an article by economist Dean Baker. Baker refers to the Corker-Warner bill, but the Crapo-Johnson fiasco is roughly the same deal. Here’s Baker:

“The Corker-Warner bill does much more than just eliminate Fannie and Freddie. In their place, it would establish a system whereby private financial institutions could issue mortgage-backed securities (MBS) that carry a government guarantee. In the event that a large number of mortgages in the MBS went bad, the investors would be on the hook for losses up to 10 percent of its value, after that point the government gets the tab.

If you think that sounds like a reasonable system, then you must not have been around during the housing crash and ensuing financial crisis. At the peak of the crisis in 2008-2009 the worst subprime MBS were selling at 30-40 cents on the dollar. This means the government would have been picking up a large tab under the Corker-Warner system, even if investors had been forced to eat a loss equal to 10 percent of the MBS price.

The pre-crisis financial structure gave banks an enormous incentive to package low quality and even fraudulent mortgages into MBS. The system laid out in the Corker-Warner bill would make these incentives even larger. The biggest difference is that now the banks can tell investors that their MBS come with a government guarantee, so that they most they stand to lose is 10 percent of the purchase price.” (“The disastrous idea for privatizing Fannie and Freddie”, Dean Baker, Al Jazeera)

Just ponder that last part for a minute: “The bill would make these incentives even larger.”

Do you really think we should create bigger incentives for these dirtbags to rip us off? Does that make sense to you? Here’s more from Baker:

“The changes in financial regulation are also unlikely to provide much protection. In the immediate wake of the crisis there were demands securitizers keep a substantial stake in the mortgages they put into their pools, to ensure that they had an incentive to only securitize good mortgages. Some reformers were demanding as much as a 20 percent stake in every mortgage.
Over the course of the debate on the Dodd-Frank bill and subsequent rules writing this stake got ever smaller. Instead of being 20 percent, it was decided that securitizers only had to keep a 5 percent stake. And for mortgages meeting certain standards they wouldn’t have to keep any stake at all.

Originally only mortgages in which the homeowner had a down payment of 20 percent or more passed this good mortgage standard. That cutoff got lowered to 10 percent and then was lowered further to 5 percent. Even though mortgages with just 5 percent down are four times as likely to default as mortgages with 20 percent or more down, securitizers will not be required to keep any stake in them when they put them into a MBS.”

Hold on there, Dean. You mean Dodd Frank didn’t ”put things right”?  What the heck? I thought that “tough new regulations” assured us that the banks wouldn’t blow up the system again in five years or so. Was that all baloney?

Yep, sure was. 100% baloney. Once the banks unleashed their army of attorneys and lobbyists on Capital Hill,  new regulations didn’t stand a chance. They turned Dodd Frank into mincemeat and now we’re back to square one.

And don’t expect the ratings agencies to help out either because they’re in the same shape they were before the crash. No changes at all.  They still get paid by the guys who issue the mortgage-backed securities (MBS) which is about the same as if you paid the salary of the guy who grades your midterm exam. Do you think that might cloud his judgment a bit? You’re damn right, it would; just like paying the ratings agencies guarantees you’ll get the rating you want. The whole system sucks.

And as far as the new Consumer Financial Protection Bureau, well, you guessed it. The banks played a role in drafting the new “Qualified Mortgage” standard too, which is really no standard at all, since no self-respecting lender would ever use the same criteria for issuing a loan or mortgage. For example, no banker is going to say, “Heck, Josh, we don’t need your credit scores. We don’t need a down-payment. We’re all friends here, right? So, how much do you need for that mortgage old buddy, $300,000, $400,000, $500,000.  You name it. The sky’s the limit.”

No down payment? No credit scores? And they have the audacity to call this a qualified mortgage?
Qualified for what? Qualified for sticking it to the taxpayers?  The real purpose of the qualified mortgage is to protect the banks from their own shifty deals. That’s what it’s all about. It provides them with “safe harbor” in the event that the borrower defaults. What does that mean?

It means that the government can’t get its money back if the loan blows up.   The qualified mortgage actually protects the banks, not the consumer. That’s why it’s such a farce,  just like Dodd Frank is a farce. Nothing has changed. Nothing. In fact, it’s gotten worse. Now we’re on the hook for whatever losses the banks run up peddling mortgage credit to anyone who can fog a mirror.

We’ll leave the last word for Dean Baker, since he seems like the only guy in America who has figured out what the hell is going on:

“In short, the Corker-Warner plan to privatize Fannie and Freddie is essentially a proposal to reinstitute the structure of incentives that gave us the housing bubble and the financial crisis, but this time with the added fuel of an explicit government guarantee on the subprime MBS. If that doesn’t sound like a great idea to you then you haven’t spent enough time around powerful people in Washington.”

The Johnson-Crapo bill doesn’t have anything to do with “winding down” Fannie and Freddie or “overhauling” the mortgage finance industry. It’s a bald-face ripoff engineered by two chiseling senators who are putting the country at risk to beef up Wall Street’s bottom line.

It’s the scam of the century.

The Tea Party thinks it hates Wall Street. It doesn’t.

By Mike Konczal, Published: October 12

When it comes to financial regulation, there are no substantial issues on which Tea Party Republicans differ from Wall Street.

This fact may surprise you, because the latest argument among conservatives is that the Tea Party agenda isn't shaped by the financial sector. In fact, they'll say, the Tea Party is where the smartest ideas on financial reform are being generated.

Tim Carney of the Washington Examiner has made this case, writing that a “Republican who doesn’t care about Bank of America checks wasn’t possible before the Tea Party.” And Ross Douthat argues that the same far-right members of the Tea Party who called for the shutdown are “more open to new ideas on ... financial reform.”

One problem with this argument is that many Tea Party Republicans are in favor of the same bills favored by the financial industry. Take the Financial Takeover Repeal Act of 2013, a one-line bill sponsored by Sen. David Vitter (R-La.) that repeals Dodd-Frank and replaces it with nothing. This bill has 22 co-sponsors this year, including notable Tea Party senators such Mike Lee, Rand Paul and Ted Cruz.

Of course, not everyone on Wall Street is in favor of repealing Dodd-Frank and replacing it with nothing. After all, that could produce a backlash from the public. In many cases, the financial industry would just prefer to weaken existing regulations. And here, too, they've often found support from Tea Party types.

For instance: One change favored by Wall Street is to pull back on the more aggressive parts of Dodd-Frank's derivatives regulation. And here we see Citigroup actually writing the text of a bill that House Republicans took up and voted for. That was just one of many in the grab-bag of derivatives reforms that the Republican House, with some Democratic support, pushed for this year.

The financial industry has also pushed to weaken the independence of the Consumer Financial Protection Bureau (CFPB). And changing the funding of the CFPB has been a demand from the GOP from the beginning. Notice that the question of funding independence doesn't usually break down along ideological lines. The bank-friendly Office of the Comptroller of the Currency, for instance, also isn't funded through the annual appropriation process. Yet Senate Republicans didn’t make a fuss over this when they voted to put Thomas Curry in charge of the OCC last year.

Another reform at issue is whether the Federal Deposit Insurance Corp. (FDIC) should be able to force financial firms into a receivership during a crisis — a move that would end Too Big To Fail. For this process to work, those financial firms would have to be subject to scrutiny, special capital requirements, restrictions on capital purchases and bonuses, and possible restructuring. Yet the GOP wanted to lift these requirements as part of their government shutdown wish-list. It’s also a major feature of Paul Ryan's plan.

And there's more than Dodd-Frank at issue here. The Department of Labor, for instance, is releasing new fiduciary requirements to better deal with 401(k)s, IRAs and the rest of the wave of personal, private, tax-exempt savings accounts. House Republicans are trying to block these rules.

One might think conservatives would support these fiduciary requirements as a way of bolstering support for private-savings vehicles like 401(k)s over Social Security. Back in the 1980s, conservative think tanks supported tax carve-outs for private-savings vehicles in order to create the conditions for ending Social Security. And nowadays, one of the strongest arguments for boosting Social Security is the growing suspicion that 401(k)s and other private retirement programs are ripping people off. The lack of clear standards can actually strengthen support for government safety-net programs.

Still, the financial industry doesn’t want the fiduciary requirements, and the Tea Party doesn’t either.

These are not minor nitpicks, or obscure regulatory codes I’m bringing up as cheap shots. These are the major, substantive issues of the regulatory response to the largest financial crisis since the Great Depression. I’m not saying that you should support all these measures (though I do think this list, on the whole, is smart policy). But the pattern is obvious.

Some people will bring up the Brown-Vitter plan to raise capital significantly. That's a plan to strengthen financial regulation and is supported by a Republican. But the bill only has one other Republican co-sponsor, having lost one since its debut. And it's worth noting that Vitter hasn't pushed for higher leverage requirements at other points. (Indeed he didn’t acknowledge the surprise increase in leverage requirements over the summer proposed by U.S. banking regulators.)

Similarly, there are now three remaining important capital rules still on the table, dealing with liquidity, extra capital for the biggest banks and the question of how banks hold debt. There’s no support, or acknowledgement, of any of these rules from either the Tea Party or Vitter (other than a push to repeal Dodd-Frank entirely).

What are the takeaways here? The first is that the actual disagreements between the Tea Party and Wall Street appear to be over tactics — whether shutting down the government will help or hurt the cause. Tactical disagreements are important, but they shouldn’t be confused with substantive disagreements on policy.

Another point is that the alliance between Tea Party Republicans and Wall Street often gives substantial power to centrist Democrats on these issues, who become the swing vote on what gets passed. Given that financial influence is large with this group, it’s of grave concern that there's not actually a left-right alliance concerned with Wall Street.

The one time a left-right alliance on financial matters did emerge, in the form of support for a Fed audit amendment during Dodd-Frank, the alliance collapsed quickly. Those on the right wanted to dismantle the dual mandate, while those on the the left half wanted to remove bankers and regional Fed chairs from decision-making. Meanwhile, most of the “smart” conservative takes on financial reform start with the premise that Dodd-Frank is the law on the books, while Tea Party intellectuals do not.

Finally, the way the conservative press approaches this topic doesn't help. Take a recent piece by Tim Carney on the House Republican plan, known as the PATH Act, to privatize the GSEs without maintaining a credit guarantee. There are financial groups who oppose this bill (“The most powerful opposition to the House ... comes from the Mortgage Bankers Association”), which leads Carney to suggest that conservatives are standing up to "special interests." But he doesn’t mention that other parts of the financial industry do support the bill. Indeed, the American Securitization Forum has testified that they “strongly support the introduction of the PATH Act.”

Which is to say that there’s no neutral position here. The key question is how to best create rules for the financial system so that it works better for the economy as a whole, a process that will necessarily create winners and losers. Perhaps it is just a coincidence that Tea Party anger over the idea of a federal, regulatory state just happens to overlap with the interests of Wall Street. Perhaps. But I see no reason people should take comfort in that.

Sen. Elizabeth Warren slams Republicans: Worry less about helping big banks

By Eric W. Dolan | RAW Story
Tuesday, March 12, 2013


Democratic Sen. Elizabeth Warren of Massachusetts slammed Republicans on Tuesday for holding up the confirmation of Richard Cordray to be director of the Consumer Financial Protection Bureau.

At a Senate Banking Committee hearing, the progressive senator suggested Republicans were using false arguments to fight the nomination of Cordray. Warren, who was a key figure in setting up the relatively new agency, questioned why Republicans believed it was wrong for the CFPB to have a single director, but was acceptable in the case of numerous other agencies like the Office of the Comptroller of the Currency.

“I see nothing here but a filibuster threat against Director Cordray as an attempt to weaken the consumer agency,” Warren said. “I think the delay in getting him confirmed is bad for consumers, it’s bad for small banks, bad for credit unions, for anyone trying to offer an honest product in an honest market.”

“The American people deserve a Congress that worries less about helping big banks, and more about helping regular people who have been cheated on mortgages, on credit cards, on student loans and on credit reports,” she added.

The Consumer Bureau was created by the Dodd–Frank Wall Street Reform and Consumer Protection Act to regulate financial services such as mortgages and credit cards. The agency issued new rules to restrict high-risk home loans in January and began looking into predatory private student lenders in February.

Senate Republicans previously blocked Cordray’s confirmation to the CFPB in 2011, but Cordray later became the director of the agency through a recess appointment. Republicans have called for the agency to have significantly reduced powers, claiming it currently lacks proper oversight.

Watch video, uploaded to YouTube by Sen. Warren, below:

Yet Another Housing Bubble on the Horizon

Those who do not learn from history are doomed to repeat it. The power structure of the United States is comprised solely of short-sighted, greedy cunts who don't have to suffer the failure they commit over and over. We, the people, do. Fuck them!





The "Qualified Mortgage" Rule
by MIKE WHITNEY


The US Consumer Financial Protection Bureau’s rule defining a “qualified mortgage”, which was announced on Thursday, creates vast new opportunities for the nation’s biggest banks to engage in predatory lending practices with impunity. While the corporate mainstream media describes the rule as an attempt to protect borrowers from the risky types of loans that caused the financial crisis, the opposite is true. The real purpose of the rule is to provide legal protection for the banks from homeowner lawsuits, and to lay the groundwork for more reckless lending that could inflate another housing bubble. In other words, the rule was designed to serve the interests of the banks and the banks alone. This is why bankers everywhere are celebrating the final draft. Take a look at this from Forbes:

“We applaud the Bureau for offering a legal safe harbor to lenders when they originate loans that meet the rigorous ‘qualified mortgage’ standards in the rule,” said Debra Still, chairman of the Mortgage Bankers Association, in a statement. “This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties.” (Could New Tighter Mortgage Rules Actually Ease Lending?” Forbes)

The banks are happy because they got everything they wanted; blanket legal immunity for garbage mortgages they plan to offload onto US taxpayers, a green light to resume extending credit to high-risk borrowers, and a first-rate public relations campaign that makes the entire coup look like genuine consumer protection.

As one cheery bankster quipped, “This was the Superbowl of rules”.

Indeed. It’s a big victory for the banks, but a major defeat for consumers. And the aftershocks will be felt for years to come, because (as we said in an earlier article) housing sales are already above trend and prices are back to normal which means that the only way the banks can reduce their huge backlog of 5 million distressed homes (which will face foreclosure in the next few years) is by creating another housing bubble. And, as we all know, housing bubbles require lax lending standards so that people who are not really creditworthy, end up borrowing hundreds of thousands of dollars that they’ll never be able to repay. This is what the new rule is really all about; it provides new opportunities for predatory lending, but with one notable difference from before, that is, if the loan meets the pitiable standard of a qualified mortgage, then the losses from the defaulting loan will be paid by taxpayers. That’s why the bankers are celebrating.

So, ignore the PR-hype about the banning of “deceptive teaser rates” or “no documentation loans” or “protecting the consumer”. That’s just a smoke screen to confuse you. The meat and potatoes in this rule, is what it doesn’t say. Here’s a clip from the Wall Street Journal that sums it up perfectly:

“Do qualified mortgages have a minimum down payment or credit score requirement?

No. Instead, the rules focus primarily on documenting a borrower’s ability to make monthly payments.” (“What the CFPB Measures Mean For Borrowers”, Wall Street Journal)

Have you ever heard anything more ridiculous in your life?

Didn’t we just go through a massive housing implosion which sent the financial system and the real economy into a 4-year death spiral? And now the agency which is supposed to protect consumers from another similar catastrophe is allowing the banks to issue mortgages that will be guaranteed by the government to applicants who don’t have the wherewithal for a lousy 5 or 10 percent down payment (No “skin in the game”) and whose credit scores will not be used to help decide whether they’re capable of repaying the loan or not?

What sense does that make? Does CFPB Director Richard Cordray think that he’s protecting consumers from the ravages of predatory lending by abandoning traditional standards and criteria for issuing a mortgage? Is that it?

Or is Cordray just another “captured” regulator doing the banks’ bidding? (It was clear that Cordray was another malleable bank toady back in Oct 2012 when this issue first arose. See: “Consumer Protector Caves to the Banks“, CounterPunch)

The media is making a big deal about the “ability-to-repay” provision of the new rule which requires banks to see that borrowers have sufficient assets or income to pay back the loan. But, once again, it’s all fluff. Banks don’t operate on the “honor system”. They’re going to stretch the new QM rule as far as possible, fitting borrowers into loans that will certainly fail sometime in the future. The losses for those loans will then be passed on to taxpayers. This is the same scam that took place during the subprime mortgage crisis. The banks booked profits on all manner of junk loans to high-risk borrowers figuring that the losses would be shifted onto investor groups who purchased the (subprime) bonds in the secondary market. The same nightmare is about to unfold again, only this time the banks won’t get stuck with the tab. Here’s an excerpt from an article in the New York Times that explains:

“As regulators complete new mortgage rules, banks are about to get a significant advantage: protection against homeowner lawsuits … some banking and housing specialists worry that borrowers are losing a critical safeguard. Industries rarely get broad protection from consumer lawsuits, and banks would seem unlikely candidates given the range of abuses revealed during the housing bust.” (“Banks Seek a Shield in Mortgage Rules”, New York Times)

Can you believe it? Even the business-friendly NYT is shocked that the CFPB is giving the banks legal immunity. (“Safe harbor”) Why? Why would the government agree to insure the activities of private industry (through Fannie and Freddie), especially when that industry has shown that it is loaded with crooks and criminals? This is corporate welfare at its worst and, unfortunately, it creates a powerful incentive for the banks to game the system and recklessly extend credit to anyone who can sit upright and sign a mortgage application.

Here’s more from the NYT:

“The Consumer Financial Protection Bureau, the fledgling agency that is shaping the rules, faces a crucial but difficult task. Banks are pressing for a strong version of the legal shield. They also want qualified mortgages to be available to a broad range of borrowers, not just those with pristine credit.”

Of course they do. That’s how they make their money, by creating toxic loans that are passed along to Uncle Sam. How else are the banks going to boost profits in an economy where unemployment is 7.8%, underemployment is tipping 14%, where wages are shrinking, and where the net wealth of the average American has plunged by a harrowing 40 percent in the last decade?

Business investment?

Don’t make me laugh. The only way the banks can survive is by attaching themselves parasitically to the US government and sucking for all they’re worth. Bad loans are simply the modus operandi, the means by which they extract fluid from their victim. Cordray and Co. appear to be only-too-eager to assist them in this task. Here’s more from the Times:

“Big financial institutions have faced an onslaught of litigation since the downturn, although mostly by the government, investors and other companies instead of borrowers. In February, five large mortgage banks reached a $26 billion settlement with government authorities that aimed, in part, to hold banks accountable for foreclosure abuses.”

Okay, so now we’re getting down to brass tacks. The banks want the new rule to shield them from future losses that will naturally accrue when they start ripping people off again. Right? This is why they fought tooth-n-nail to keep Elizabeth Warren off the CFPB board, because they knew she wouldn’t play ball with them. So they turned to “rubber stamp” Cordray instead, who has performed admirably executing Wall Street’s latest big heist with the skillfulness of a paid assassin.

Way to go, Rich.

There’s one more tidbit in the new QM rule that’s worth noting, a provision that states that “loans would be deemed qualified mortgages if borrowers are spending no more than 43% of their pretax income on monthly debt payments.”

“43% pretax income”?

You gotta be kidding me. That means that borrowers can qualify even if they’ll have to fork over 50% or more of their weekly paycheck. How many of those loans are going to get repaid?

Not many, I’d wager. This bill is a joke. Cordray has set up taxpayers for some hefty losses just to ingratiate himself with the Wall Street Bank Mafia. It’s shocking.

Can you see what’s going on?

The banks don’t want to act like banks anymore. They don’t want to hold capital against the loans they issue, they don’t want to keep loans on their books, and they don’t want to pay the losses when the loans blow up. The just want to keep printing private money (credit), booking profits on that money (loans), and then dumping the red ink on Uncle Sam. That’s how the whole thing works.

The QM rule was designed to work hand in hand with the Fed’s $40 billion per month purchases of mortgage backed securities. (MBS) This is key to understanding what’s going on.

The Fed, in concert with the Obama administration and the big banks, has replicated the same conditions that existed just prior to the last big bubble. The Central Bank will play the same role as investors in the secondary market (from 2003 to 2007), that is, the Fed will buy up all the garbage MBS the banks can produce. All the banks have to do is to find mortgage applicants who meet the wretched “no down payment, no credit score” requirements of the CFPB, and then “Let ‘er rip.”

All the pieces are now in place for another humongous, economy-crushing housing bubble. This isn’t going to end well.

Consumer Protector Caves to the Banks

Cordray Fails to Protect

by MIKE WHITNEY

 

Richard Cordray might be the most powerful man in America today, and you’ve probably never even heard of him.

As head of the new US Consumer Financial Protection Bureau (CFPB), Cordray can effectively set the clock back to 2005 and inflate another gigantic, economy-busting housing bubble without breaking a sweat. All he has to do is define the term “qualified mortgage” in a way that suits the big banks and–presto–$40 billion per month will start flowing into new mortgages. It’s that simple. Here’s the story from Bloomberg:

U.S. lenders may get strong protections from lawsuits over most government-backed mortgages under rules being weighed by the Consumer Financial Protection Bureau, according to two people briefed on the policy.

The so-called qualified mortgage regulations would give banks including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) safeguards against legal action arising from the underwriting process, according to the people who spoke on condition of anonymity because the discussions aren’t public.(“CFPB Mortgage Rule Said to Give Lenders More Protection”, Bloomberg)

So this is why the banks haven’t stepped up their mortgage originations yet, eh, even though the Fed said it will buy $40 billion in mortgage-backed securities (MBS) per month via its QE3 program? It’s because they want blanket legal immunity from lawsuits from homeowners who may have been foreclosured on unfairly.  But why is Cordray helping them? Why is he making it harder for the victims to sue the miscreants who booted them out of their homes? Isn’t his job to protect consumers? Instead, he’s doing the banks bidding. What gives?  Here’s more from Bloomberg:

The consumer bureau, which is crafting the rules as part of a broader overhaul of housing-finance oversight, revealed its plans in a meeting with other federal regulators yesterday, according to the people. About 80 percent of loans backed by Fannie Mae (FNMA), Freddie Mac or government insurers such as the Federal Housing Administration, would qualify for a legal safe harbor under the bureau’s plan, according to data from the Federal Housing Finance Agency.

So, it’s a done-deal, eh? They just need to dot a few “i’s” and cross a few “t’s” before making the big announcement. But just look at the details: “80 percent of loans …would qualify for a legal safe harbor under the bureau’s plan.” What a joke.  Fannie and Freddie already insure 90 percent of all new mortgages, so now they’re going to provide legal immunity on mortgages that they’re already insuring for free? That’s one helluva freebie for the banks, don’t you think? Why not just hand them the keys to Fort Knox right now and be done with it. The fact is, Cordray shouldn’t be making any concessions at all. The whole thing is ridiculous. More from Bloomberg:

Protections would cover loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43 percent.

How long do you think you’d be able to keep your head above water if a 43% chunk of your paycheck vanished before you ever got your mitts on it? Not long, I’d wager. In fact, experts think that house payments should never exceed 33% of income. So what does that tell you? It tells you that Cordray has agreed to a deal that’s going to cost taxpayers a bundle to cover the rancid mortgages that the banks plan to make as soon as the ink dries. But that’s okay, right, because at least the banks will make a chunk of dough chopping this dreck into securitized morsels and selling it to the Fed at top-dollar. What a scam!

Think about it for a minute. If the Fed says it’s going to buy $40 billion in MBS per month, then the smart money is going to dredge up enough mortgage applicants to sign on the dotted line, right? Because you need mortgages to make mortgage-backed securities.  Well, guess what, the banks don’t care if these new candidates default or not. Why would they? As long as they can slip them in under the new definition, they’ll get their money anyway. They just want to make sure all their bases are covered so that when Joe Blow defaults  (because he was fitted into a mortgage that he clearly couldn’t afford to repay) he can’t sue them for sloppy underwriting. Now Mr. Blow will have to take it on the chin and find a cheap rental somewhere because Cordray sold him out to the banksters.

Thanks Rich.

And, there’s more to this story, too,  because the banks aren’t merely angling for carte blanche guarantees on their boomerang mortgages; they also want to make sure they don’t have to pony-up one red cent to backstop their garbage MBS. They think they should be able to create as much credit as they want without any risk to themselves or their shareholders. It is arrogance in the extreme. Here’s an excerpt from an op-ed in the Washington Post by economist Mark Zandi that explains what’s going on:

A second looming decision with big implications for mortgage credit involves something called the “qualified residential mortgage” rule. Although the name is similar, this is quite different from the qualified-mortgage definition, and is designed to curb bad lending by forcing lenders to hold a financial stake in their riskiest mortgages.

Under Dodd-Frank, a lender must hold 5 percent of any loan that isn’t a “qualified residential mortgage” (QRM) so that if it later goes sour, the lender loses something, too. This makes sense in principle, but like the qualified-mortgage rule, the devil is in the details. These are quite complicated, reflecting regulators’ fear that lenders will work hard to circumvent any rule. But complexity adds to costs, and as a result, non-QRM loans threaten to have meaningfully higher mortgage rates than QRM loans.(“Defining a ‘Qualified’ Mortgage”, Mark Zandi, Washington Post)

Right. It’s too complicated for you to understand, Mr. Taxpayer, so just go about your business and leave it to us, the experts. We’ll take care of everything.”

Give me a break, Zandi, anybody can get this stuff. The banks just don’t want to hold enough capital to back up their shitty MBS. That’s it, isn’t it? They want to be able to create more toxic MBS in their off-balance sheet boiler rooms but not keep enough money on hand to pay off investors when the ship goes under. It’s called “risk retention”, and it’s no different than requiring insurance companies to have sufficient reserves to pay off claims in the event that your house burns down. Here’s more from Zandi:

Since Dodd-Frank stipulates that loans made by the federal agencies are qualified residential mortgages by definition, how QRM is defined will help shape the federal role in the mortgage market. If the definition is too narrow, private lenders won’t be able to compete, given the higher interest rate they will need to charge to compensate for the extra risk. The government will thus continue to dominate mortgage lending in the near term. On the other hand, if Fannie Mae and Freddie Mac are privatized down the road, a narrow QRM definition could significantly shrink the government’s role in the mortgage market, potentially threatening the existence of the 30-year fixed rate mortgage loan.

Oh please. Forget about the government’s role in the housing market; it’s completely irrelevant. What we’re interested in is making sure that the banks have a few bucks in the vault to back up their crappy assets when their next zeppelin crashes. Is that too much to ask? The fact of the matter is that capitalism requires capital; that’s just how it works. You just can’t keep cranking out credit without sufficient collateral to back it up or even the smallest blip in the market will send the financial system barrel-rolling into oblivion.  Lenders need to have enough skin in the game to cover their potential losses and to prevent another meltdown that requires trillions in gov support to fill the black hole that they (the banks) created.

Can you see what’s going on here? Behind all the legal rigamarole, the banks are blackmailing the government.  They’re saying that they won’t step up their mortgage originations until they get everything they want. And what they want is a safe harbor (legal immunity) and no more “put-backs”. (mortgages that the banks have been forced to repurchase because they exhibited “substantive underwriting and documentation deficiencies”.) In other words,  they don’t want to get stuck with the bill next time they blow up the financial system. That means that the way Cordray defines “qualified mortgage” matters a great deal, because it will determine whether the banks ease lending standards, increase mortgage originations, boost credit to marginal applicants, and fulfill Bernanke’s dream of inflating another housing bubble. That’s what this is all about. The CFPB’s definition could have a profound impact on the direction of the economy, so there’s a lot at stake.

Unfortunately, it looks like Cordray has caved in on all counts, which means we could see a sudden surge in housing activity as the banks put the Fed’s  $40 billion per month subsidy to work and start lending like madmen again.

Doesn’t it seem like we keep making the same mistakes over and over again?

More Americans opting out of banking system

By Danielle Douglas, Washington Post
September 12, 2012

In the aftermath of one of the worst recessions in history, more Americans have limited or no interaction with banks, instead relying on check cashers and payday lenders to manage their finances, according to a new federal report.

Not only are these Americans more vulnerable to high fees and interest rates, but they are also cut off from credit to buy a car or a home or pay for college, the report from the Federal Deposit Insurance Corp. said.

Released Wednesday, the study found that 821,000 households opted out of the banking system from 2009 to 2011 and that the so-called unbanked population grew to 8.2 percent of U.S. households.

That means that roughly 17 million adults are without a checking or savings account. Another 51 million adults have a bank account, but use pawnshops, payday lenders or rent-to-own services, the FDIC said. This underbanked population has grown from 18.2 percent to 20.1 percent of households nationwide. 

The study also found that one in four households, or 28.3 percent, either had one or no bank account. A third of these households said they do not have enough money to open and fund an account. Minorities, the unemployed, young people and lower-income households are least likely to have accounts.

Stubbornly high unemployment and underemployment have placed millions of Americans in precarious financial positions, leaving them unable to absorb overdraft charges or minimum-balance fees.

In the past year alone, Wells Fargo, Capital One and SunTrust have alerted customers to pending fee hikes on checking accounts or have raised overdraft charges. Banks say service charges are needed to offset the loss of revenue from a cap on debit-card transaction fees imposed by the government.

“Banks need to have pricing and practices that consumers can trust and allow them to build wealth and have economic mobility,” said Deborah Goldstein, chief operating officer at the Center for Responsible Lending. “If the account fees will leave them worse off, then its going to be a challenge for people to use banking services.”
 
Banks say it is difficult to make money serving lower-income communities because the cost of managing their accounts outweighs the return.

“There has to be a recognition that there are costs to providing accounts and those costs have to be covered,” said Nessa Feddis, vice president and general counsel at the American Bankers Association. She estimated that it costs banks up to $300 a year to maintain a checking account because of expenses such as processing transactions.

National Community Reinvestment Coalition chief executive John Taylor argued that banks could make up some of that cost by the sheer volume of new accounts.

Feddis disagreed. “You can’t take a losing account and make it up in bulk,” she said. “You’re not going to spend money to lose money.”
 
Without access to traditional banks, Taylor said, Americans are susceptible to abusive practices at non-bank institutions and are likely to remain trapped in a vicious cycle of financial strain.

“A part of changing the condition of unbanked people is keeping them away from predatory lenders who keep them mired in debt,” he said. “One of the reasons you had all of these mortgage companies preying on low-income communities is because there were no options.” 
 
A report from SNL Financial in April showed that banks have closed dozens of branches in neighborhoods with a median household income of $25,000 or less since 2007, shifting resources to areas where the median income is $100,000 or more.

“The [Community Reinvestment Act] has had a significant impact over the last 30 years, but did not contemplate some of the new abuses that we’re seeing and the way banking has changed,” Goldstein said. “But we’ve now seen financial reform that includes additional consumer protection.”
 
Congress passed the act in 1977 to address the shortage of credit available to low- and moderate-income neighborhoods. Consumer advocates, however, say that regulation has fallen short of ensuring that banks offer reasonably priced services.
 
The newly minted Consumer Financial Protection Bureau has jurisdiction over non-bank institutions and plans to weed out predatory practices. The agency reviews compliance with federal consumer financial laws such as the Fair Credit Act. 

In the past year, a quarter of households have used at least one type of alternative financial service, such as a tax refund anticipation loan or money order, the FDIC study found. Some households, 7.5 percent, said they simply did not trust or feel comfortable dealing with banks. Another 6.6 percent said they could not open accounts because they lacked required identification or suffered from poor credit.

A growing number of consumers without bank accounts are turning to prepaid cards, with nearly 18 percent of households, up from 12 percent in 2009, reporting the use of such products.

Feddis of the banking association said prepaid cards are an innovative tool that banks could use to serve lower-income communities without incurring much cost.

“There are fewer ways to access the account, so there are fewer opportunities for fraud, which banks pay a lot to protect against,” she said.

Consumer Financial Protection Bureau Caves on Credit Card Fees

Anyone surprised by this? Anyone? No one was! If you were surprised, you haven't been paying attention.--jef


Friday, April 13, 2012 by Common Dreams
Credit card companies win battle over introductory fees

The Consumer Financial Protection Bureau has decided not to challenge credit card companies on introductory fees. Credit card companies had been more aggressive in charging fees to users before they use a credit card, ever since new regulations made it so they could no longer charge more than 25 percent of the total credit limit in standard fees.

The CFPB originally proposed regulations to eliminate the introductory fees, but on Thursday relented and decided not to pursue the matter.

Consumer advocate groups expressed discontent over the decision, and what it says about the possibility of the CFPB as a sufficient consumer watchdog of financial products.

“Even if it is a small rule, it affects the most vulnerable of consumers — consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards,” said Chi Chi Wu, a lawyer at the National Consumer Law Center, told the New York Times. “Exactly the sort of consumers that we think CFPB. should stand strongest for.”

* * *

NY Times: Consumer Bureau Declines to Resist Upfront Credit Card Fees

In one of the first tests of its willingness to show its muscle, the new agency created to protect consumers declined on Thursday to put up a fight.

The agency, the Consumer Financial Protection Bureau, introduced a proposal that would make it easier for credit card issuers to charge fees before borrowers’ accounts were officially open. 

The bureau, which began overseeing many consumer financial products last year, said it was issuing the proposed rule in response to a federal court decision that challenged how the Credit Card Act was being applied. The act, which took effect in February 2010, put several rules in place aimed at curbing abusive lending practices. 

Part of the new law said that credit card issuers could not charge fees equal to more than 25 percent of the borrower’s credit limit in the first year after the account was opened. But after certain credit card issuers started charging application or processing fees before consumers’ accounts were opened, the Federal Reserve expanded the rule so that the fee limit would also apply to those upfront charges. That’s the piece of the rule that the consumer protection agency, which has since assumed regulatory authority, is proposing to eliminate. 

The bureau declined to say why it took this course. But some consumer advocates said they believed that the consumer agency, led by Richard Cordray, may be backing down because it has decided to “pick its battles,” while trying to show that it is not unfriendly to business.
But other advocates said they could not understand why the agency was not taking a more aggressive stand. “Even if it is a small rule, it affects the most vulnerable of consumers — consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards,” said Chi Chi Wu, a lawyer at the National Consumer Law Center, referring to cards marketed to people with tarnished credit histories. “Exactly the sort of consumers that we think C.F.P.B. should stand strongest for.” 

The bureau’s proposal stems from a ruling in September by the Federal District Court for South Dakota that granted a preliminary injunction blocking the rule on the upfront fees from taking effect. To resolve the matter, the consumer agency said it was seeking comment on whether it should revise the rule so that it no longer applies to fees charged before an account is opened. 

The initial lawsuit that led to the federal ruling was brought in July 2011 by First Premier Bank of South Dakota, which issues cards to borrowers with troubled credit records. The bank told the court that it would “suffer irreparable harm” if it were not allowed to collect the upfront fees. “The regulation will threaten First Premier’s very existence by causing the loss of millions of dollars in profits,” the bank said.

* * *

Huffington Post: Consumer Financial Protection Bureau Backs Down In Fight To Limit Credit Card Fees

Last summer First Premier took the Federal Reserve and the Consumer Financial Protection Bureau to court, arguing that the government didn't have the authority to cap the fees associated with opening an account. The judge ruled in favor of First Premier, effectively freezing the amendment. 

In response to the judge's decision, on Thursday the consumer agency threw in the towel and proposed striking the amendment completely so that up-front fees would not be subject to any cap. The agency is advocating the change to "resolve the uncertainty" in light of the judge's ruling, according to its filing with the Federal Register. 

The Consumer Financial Protection Bureau, which was created as part of the 2010 Dodd-Frank financial reform legislation, inherited responsibility for regulating credit card fees upon opening its doors last summer. Prior to that, the Federal Reserve Board oversaw the issue. The agency's decision not to fight the judge's ruling has frustrated Wu, who said the agency should have fought harder to maintain the cap. 

"The Federal Reserve always had a lot of authority" on credit card fees, Wu said. "The CFPB inherited this authority. It should have appealed the ruling." 

The agency's change of heart is a win for credit card companies, said Mark Williams, a former Federal Reserve examiner, in an interview with the Associated Press. 

"Just a year ago, the view was that this agency was going to be devastating for business," he said, adding that Thursday's action shows that the agency "could be very effective for consumers and also bridge the needs of business to make profits."

The Regulation Killers

Making the People Pay
by RALPH NADER
The Republican Party has a sense of humor, however inadvertently. It’s ardent advocates regularly accuse the Obama Administration of heavy handed regulation of business.

Tell that to the hundred federal poultry inspectors who just picketed the Department of Agriculture in opposition to a proposal that would allow those crammed, bacterial poultry slaughterhouses to do their own inspections. The picketers fear that with this license, the poultry bosses will speed up the slaughter rate to 175 birds per minute from the present 70.

Tell that to the Securities Exchange Commission that will have to allow the return of the notorious boiler room practices where “start-ups” with up to $1 billion in annual revenues can sell stock to investors like the old Wild West days with little discourse or regulation. After the recent devastating Wall Street crash and bailout, here they go again—just throw the federal cop off the corporate crime beat.

Tell that to Donald Michaels, the superbly qualified head of the Occupational Safety and Health Administration who can’t get the White House to approve issuance of long-overdue life-saving safeguards for worker health and safety. Fear of Republicans by the Obamaites in an election year super-cedes their oath to enforce laws that save lives in hazardous workplaces. Nearly 60,000 workers lose their lives to workplace-related diseases and trauma every year. That is equivalent to nineteen 9/11 casualty tolls every year.

Tell that to a strapped Environmental Protection Agency that at long last was trying to reduce the toxic materials in your air and water. President Obama personally intervened on two of their forthcoming regulations to stop them.

Tell that to the Food and Drug Administration (FDA) that was the subject of a front page New York Times article on April 3, 2012 titled “White House and the F.D.A. Often at Odds.” It seems that President Obama’s deputy chief of staff, Nancy-Ann DeParle, has been leaning on FDA Commissioner, Dr. Margaret A. Hamburg to drop proposed rules requiring labeling of calories for foods served on airplanes and movie theaters, as well as regulation of sunscreen and asthma inhalers.

The Obamabush White House objected to what the Times said was “the enforcement of an agency decision on a drug to prevent premature births.”

The FDA believed that the Obama “hope and change” campaign in 2008 would start a new day from the years of George W. Bush who believed, for example, that the agency should not issue rules preventing contamination of eggs and other produce. Alas, said a top FDA official to the Times: “Employees here waited eight long years for deliverance that didn’t come.”

Mr. Obama, as with his other choices of White House staff, set himself up by choosing the “regulation czar,” Cass R. Sunstein who can give thumbs down on agency safety proposals. Professor Sunstein, who thinks harder than he feels the pain of victims of non-regulation (or law and order) has a philosophy known as “libertarian paternalism”. (Google it if you wish to discover its meaning.)

FDA scientists sadly recall Mr. Obama’s White House ceremony to sign a memorandum in 2009 to replace Mr. Bush’s politicization of science in government with scientific integrity and to listen to scientists “even when it’s inconvenient—especially when it is inconvenient.” Once again, words, words, words, succumb to the power of corporatism.

Obama’s regulatory agency officials receive constant pressure from Congressional corporatists on their meager enforcement budgets. They are made to behave as if they should fear the criminals and defrauders they are supposed to be catching to protect the American people.

All of them are envious of the new Consumer Financial Protection Bureau (CFPB) created by Congress to shield consumers of credit, mortgages, payday loans and other financial transactions from the Wall Street-driven crime wave. You see, the CFPB resides inside the Federal Reserve and receives its $500 billion budget from the Fed, which gets its budget from bank frees and is free of the Congressional hammers.

Still, the CFPB and its sterling staff (with few exceptions) is an agency waiting to start producing long-needed rules of decent business behavior. It is not clear what is causing the delay, but it couldn’t be Congress now. It may be the high hurdles that the Bureau has to overcome vertically with its supervisory council—real or fancied.

Occupy Washington needs to mass in front of these agency buildings soon to highlight the truth about Obama’s weak-kneed regulatory agencies. In a perverse way, the Obamaites would probably welcome such protests as enhancing their corporate fundraising efforts.

Meanwhile the people pay!

Enemies Await Consumer Financial Protection

Monday, July 18, 2011 by CommonDreams.org

by Elizabeth Warren

 

This is a big week for the Consumer Financial Protection Bureau (CFPB). Today, the President will announce his intent to nominate Richard Cordray to serve as the first Director of the Consumer Financial Protection Bureau. On Thursday, the CFPB makes its transition from a start-up to a real, live agency with the authority to write rules and to supervise the activities of America's largest banks.

Rich will be a strong leader for this agency. He has a proven track record of fighting for families during his time as head of the CFPB enforcement division, as Attorney General of Ohio, and throughout his career. He was one of the first senior executives I recruited for the agency, and his hard work and deep commitment make it clear he can make many important contributions in leading it. Rich is smart, he is tough, and he will make a stellar Director. I am very pleased for him and very pleased for the CFPB.

The DNA of the new consumer agency is well established. Our mission is clear: No one should be tricked in any financial transaction. Prices and risks should be clear. People should be able to make apples-to-apples comparisons. Fine print should be mowed down, not used to hide nasty surprises. And, everyone -- even trillion dollar banks -- should follow the law.

We're underway. We are working through a much-simplified mortgage disclosure form. We are designing a new consumer complaint process, with the first piece coming on line this week. We have set up a strong Office of Servicemember Affairs that reaches out to military families and is already working on problems they face. And, on Thursday, we will have cops on the beat -- making our first contacts with the 111 largest financial institutions in the country so we can monitor their compliance with the law. We have hired the people and built the systems to make all this work. And, to cap it all off, we got a strong evaluation from the Inspector General last Friday about our efficient and drama-free set up period.

There's lots of good news, but make no mistake: this agency still has enemies in Washington, D.C. And they have a plan.

In May, forty-four Republican Senators wrote a letter saying that they will block anyone from serving as CFPB Director. Many of them don't like the agency or the ideas that led to its creation. They lost that fight last summer in a straight-up vote, but they say they will use a filibuster over a Director nomination to undercut the agency. Without a Director, however, the agency's authority over payday lenders, debt collectors and other non-bank financial companies can be challenged. The Republicans say that they will permit a Director only if the agency is amended to make it less independent and less likely to act.

I remain hopeful that those who want to cripple this consumer bureau will think again and remember that the financial crisis -- and the recession and job losses that it sparked -- began one lousy mortgage at a time. I also hope that when those Senators next go home, they ask their constituents how they feel about fine print, about signing contracts with terms that are incomprehensible, and about learning the true costs of a financial transaction only later when fees are piled on or interest rates are reset. I hope they will ask the people in their districts if they are opposed to an agency that is working to make prices clear or if they think budgets should be cut for an agency that is trying to make sure that trillion-dollar banks follow the law. I hope they will ask their constituents if they are opposed to the confirmation of someone who saved $2 billion for retirees, investors, and business owners as Ohio Attorney General and who has worked hard on the front lines fighting against fraudulent foreclosures and abusive lending practices.

This week is the culmination of two years of hard battles. The President put the consumer agency in his first outline of financial regulatory reform, and he never wavered in his support for it. The agency was declared dead several times, and weak versions and lousy bargains were offered again and again, but he stood fast. When he signed Dodd-Frank into law, creating the new agency, he offered me the chance to stand it up -- something for which I will always be grateful. The fights continued, and again, the President never wavered in his support. In fact, just last week he issued a veto threat if the Republicans try to move the agency's funding to the political process, and I know that in the future he won't allow opponents of reform to succeed in weakening the CFPB.

The agency has stepped out in the right direction. The work is good. But this agency needs to have its full powers right now, and that means we need Rich in place as Director. Today, I'm celebrating -- but I'm not taking my eye off those who want to cripple this agency. We got this agency by fighting, we stood it up by fighting, and, if takes more fighting to keep it strong and independent, then we can do it.

Obama Snubs Elizabeth Warren (2 articles)

(Proving Obama is a president for the bankers, of the bankers and by the bankers, the fix is in: Elizabeth Warren--long thought, by everyone who is NOT deeply entrenched in Wall Street, to be the ideal and most qualified candidate with the most integrity to head the CFPB--gets snubbed for former Ohio attorney general Richard Cordray, a career politician. Obama sucks, man.--jef)

++++++++++++++

Sunday, July 17, 2011 by The Daily Beast
After a months-long guessing game, the president has chosen Richard Cordray to helm his new consumer protection agency—passing over the woman who proposed it in the first place.

by Gary Rivlin
 

Barack Obama finally named his nominee to head the new Consumer Financial Protection Bureau. And his name isn’t Elizabeth Warren.

The White House press office on Sunday announced that the president had chosen Richard Cordray, the former attorney general of Ohio to head his new agency, and not Elizabeth Warren who had proved controversial for championing the rights of consumers over bankers.

The White House press office on Sunday announced that the president had chosen Richard Cordray, the former attorney general of Ohio to head his new agency, created when he signed the sweeping Dodd-Frank financial reform package into law last July.

The move will likely hurt the president’s relationships with those who wanted him to push for Warren, a plain-spoken consumer champion who first proposed the new bureau. In the wake of the financial crisis, Warren envisioned an agency that better protected Americans against suspect financial products ranging from mortgages and credit cards to fringe financial services like check-cashing and payday loans.

The president pleased his left flank last summer when he appointed Warren to create this new bureau—but he stopped short of nominating her as its permanent director. Several other names surfaced over the months as possible nominees, including Cordray and also Ted Strickland, the former governor of Ohio, and Jennifer Granholm, former governor of Michigan. But whatever the liberal bonafides of these and other choices, Warren remained the overwhelming pick among consumer champions, especially those involved in the fight against predatory lending.

A permanent director, who would be appointed to a five-year term, needs Senate confirmation. When in May word spread that the president would appoint Warren to head the agency through a recess appointment (the disadvantage of that maneuver being that Warren would serve only for the remainder of Obama’s term, rather than a full five-year stint), Senate Republicans responded by refusing to adjourn for its traditional Memorial Day recess.

"There was always something outsider about her that scared people here,” said one high-ranking Obama appointee of Warren. “They couldn’t trust her because she wasn’t one of them."

“I really like Elizabeth and think she would have been a great choice, but there was always something outsider about her that scared people here [in Washington],” said one high-ranking Obama appointee, herself a woman. Warren taught at Harvard Law and had only gotten involved in politics a few years earlier. “They couldn’t trust her because she wasn’t one of them.”

Yet whether the Senate approves Cordray remains to be seen. These days, it takes 60 votes to get anything done in the Senate—and in May, 44 of the Senate’s 47 Republicans vowed to block any nominee unless the president agreed to a watered down agency, which stands as Dodd-Frank’s most significant and controversial provision.

A career politician, Cordray served a partial term as Ohio’s attorney general (he filled the term of a fellow Democrat caught up in a sex scandal) before losing a race for reelection in November 2010. The next month, Warren chose him to head up the agency’s enforcement division—in no small part, no doubt, because in his two years as attorney general he aggressively sought punishment of those guilty of foreclosure fraud in his state.

In response to today’s news, Warren issued a statement saying: “Rich has always had my strong support because he is tough and he is smart—and that’s exactly the combination this new agency needs. He was one of the first senior leaders I recruited for the agency, and his work and commitment have made it clear that he will make a stellar Director.”

Under Dodd-Frank, the Consumer Financial Protection Bureau goes live this Thursday—one year to the day that the president signed the bill into law. Until the Senate confirms a permanent director, though, the agency’s powers are limited. The bureau can start regulating the country’s largest banks, but it will have limited rule-making authority and won't have jurisdiction over payday lenders, debt collectors, or other non-bank financial institutions until a permanent director is in place.

Obama will announce his choice at a White House event on Monday.

+++++++++++++++++++++++

07.17.11 - 5:24 PM
Too Good, Too Smart, Too Able for Wall Street Approval 
by Ralph Nader

Statement by Ralph Nader on the rejection of Elizabeth Warren by President Barack Obama to be the Director of the new Consumer Financial Regulatory Bureau.

To dump Elizabeth Warren, the most qualified, most motivated and most articulate candidate for the directorship of the Consumer Financial Regulatory Bureau is an act of political cowardliness by President Obama and a boon to anti-consumer Republicans and their corporate paymasters in Wall Street.

Elizabeth Warren apparently is just too good, too smart, and too able to arouse the just concerns of millions of American families about the need to put the law-and-order wood to the corporate criminals, defrauders and reckless speculators with the savings and pensions of millions of Americans.

President Obama should realize that his back-of-the-hand attitude to his liberal and progressive supporters – who sent him to the White House – can have consequences. He believes they have no where to go. But they do. They can stay home in 2012, as so many did in 2010 to the detriment of the Democrats and many Congressional races.

Too Big to Fail Redux?

Neil Barofsky on TARP, SIGTAP, IGS and Elizabeth Warren

By RUSSELL MOKHIBER

We spent $700 billion to bail out the too big to fail banks on Wall Street.

And yet, we might have to do it again.

Why?

Because the big banks are still too big to fail.

And next time, we might have to spend $5 trillion.

It ain't a pretty picture.

As Neil Barofsky knows better than most.

He was the Special Inspector General for the Troubled Asset Relief Program.

Known in Washington as SIGTARP.

He's now a adjunct professor at New York University Law School.

"The largest banks are now 20 percent larger today than they were going into the crisis," Barofsky told Corporate Crime Reporter in an interview last week. "They are systemically more significant, they are bigger, they are more important. And we just haven't seen the political or regulatory will to take on the fundamental problems that are presented by these institutions."

"Standard and Poors recently put the U.S. government's credit rating on watch. And one of the things they talked about was the contingent liability to support our financial institutions. And they estimated that the up front costs of another bailout could be up to $5 trillion."

"And when you think about the focus on our budget issues, our deficit and our debt – what happens with the next crisis and we have to come up with another $5 trillion to bail out our system once again?"

"It's a terrifying concept. One of TARP's biggest legacies is that it emphasized to the market that the government would not let these largest banks fail. And we haven't done anything to address this problem. So, we are going to be right back where we were in late 2008 – if not in a worse position."

During the debate over financial reform, the Senate voted on the Brown-Kaufman amendment, which would have limited the size of big banks – making them no longer too big to fail.

The measure was voted down, with only 33 Senators voting for it.

Barofsky says that it would have passed had the Obama administration gotten behind it.

Instead, Treasury Secretary Timothy Geithner lobbied against the bill.

"The reason it didn't pass was because the Treasury Secretary lobbied individual Senators to convince them to vote against this bill," Barofsky said.

And what was Geithner's argument against the amendment?

"As it was explained to me, it was – this was too blunt of an instrument to accomplish this. It would be better to give the regulators the power to treat the problem with a scalpel."

And your response to that?

"The regulators have failed spectacularly in the run up to the financial crisis," Barofsky said. "They have demonstrated that they are human beings. They are fallible as human beings. They, like the rest of the market, have repeatedly proven to be unable to see bubbles as they are being formed, and to comprehend the consequences of the concentration of risk and size."

"The reality of financial systems is such that there is no omniscient person who can understand and see around corners. Having a system that tries to see things before they happen and tries to deal with crises before they happen is doomed for failure."

"The FDIC's Sheila Bair has been very forceful about advocating for the use of Dodd Frank tools to address the size and significance of institutions, requiring them to spin off business, become less complex, have more capital. That is the one path that is out there. She is putting forth a path that has a chance at success. 

Unfortunately, she is stepping down in a few weeks."

Barofsky pushes back at the suggestion that there have been no major criminal prosecutions to come out of the 2008 financial crisis.

"I always like to take issue with the claim that there haven't been any big prosecutions," he says.

"At SIGTARP, we uncovered a multi-billion fraud that was being run by Lee Farkas, the chair of Taylor Bean & Whitaker – one of the country's largest non-depository mortgage companies," he says.

"It was an historic fraud. It's not that often that you run across multi-billion dollar criminal accounting frauds. Our agents uncovered that fraud. It had been going on for six or seven years. We already had seven convictions, including that of Farkas after trial."

"We got involved after they tried to steal $550 million of TARP funds through Colonial Bank, which was closely related to Taylor Bean & Whitaker."

"But the question you are referring to is this thirst for accountability for the largest Wall Street financial institutions."

"These cases and these investigations were really outside of our jurisdiction. Our jurisdiction started after the crisis ended. It started with the passage of the TARP funds in October 2008."

"So I was never privy to the evidence being gathered in those investigations."

"I'm always a little reluctant to make a judgment on whether the prosecutors looking at those cases are making the right or wrong judgment."

"Although there is a lot of smoke in these investigations – and there's Senator Levin's subcommittee's report – to really know whether there is fire underneath that smoke, you have to look at what the evidence is, what the defenses are, what the mitigating factors are, what the arguments are."

"We are talking about an extremely complex accounting fraud at a level that is far more complex than in past financial crises."

"The underlying representations and valuations of incredibly complex structured products are neither simple nor straightforward."

"And it's very difficult for me, without knowing the details of the evidence and the responses, to say they are doing a good job, a bad job, that there has been criminal activity, there hasn't been criminal activity."

"I do think there is something to the argument that much of this behavior, which seems strikingly unethical and inappropriate, may at the end of the day fall short of provable criminal liability."

"We created a regulatory system that blessed in many ways or gave tacit approval to activities that appear to be just downright wrong. But all of this activity has to be looked through that prism of the absence of regulatory activity and to some extent regulatory knowledge of what was going on."

"It may be a little bit too early to write the final story on this. There are ongoing investigations. These investigations by their nature take time. As the parallel civil cases make their way through the courts, there is going to be a lot of eyes taking a look at the same set of evidence, more evidence is going to be uncovered, and it's not impossible or improbable that we are going to see additional prosecutions."

"Whether the country is going to get what it wants – to get a CEO of a major bank – I don't think that is going to happen."

"This is far different from the savings and loan crisis. In that crisis, you had relatively straightforward fleecing of banks by senior executives.

This is a little bit more complex and difficult to prove."

Barofsky concedes that out of the more than 60 Inspectors General across the federal government, only a handful aggressively pursue criminal wrongdoing against the agencies they were set up to protect.

"It's unfortunate that we don't read or hear more from Inspectors General. So much is entrusted with these IGs in the oversight of these federal agencies. And they come in all different shapes and sizes, all different types of experiences," Barofsky said.

"You can have a relatively small shop, like the one run by David Kotz at the SEC. He is quite aggressive. And he gets a lot of information out there to Congress and to the American people. And then you have other agencies whose Inspectors General offices could be five or six or nine times the size of the SEC IG – and yet you never hear anything."

"It can't be that those agencies are just so perfectly run that there isn't a need or important value for those offices to fulfill in exposing misconduct, waste, fraud and abuse."

Barofsky believes TARP would have been better off with someone like Elizabeth Warren on the inside – instead on the outside looking in.

"It is striking how overwhelmingly the key decision makers in the TARP program came from Wall Street."

"When you look back on it, it shouldn't be that surprising that TARP, a program that was designed to help both Wall Street and Main Street, has done a phenomenal job in helping Wall Street and a terrible job in fulfilling its Main Street goals."

"This is not because the people who came from Wall Street were corrupt. It's not because they were out to screw the little guy. It's because of the lack of diversity. They did what they knew best and what they thought was best."

"But you had this uniform group of people from Wall Street – Hank Paulson from Goldman Sachs, the people who were running TARP who came from Merrill Lynch and Goldman Sachs, the investment officers came from a series of Wall Street banks, right down to the housing person who came from Bank of America."

"So, it's not that surprising that your policies reflect Wall Street's priorities."

"Think about how much different this program would have been had Elizabeth Warren – instead of being appointed to provide oversight of TARP – was instead put inside the bubble and was part of the decision making process in designing TARP's response."

"You'd see a much different and a much better program."

And Barofsky is critical of the Obama administration for not appointing Warren to head the Consumer Financial Protection Bureau.

"If the President made the decision that Elizabeth Warren was the right person to stand up this agency, which he essentially did in appointing her as an advisor, then he should have nominated her for the position," Barofsky said. "This was her idea. I got to know and work with Elizabeth when she was chair of the Congressional oversight panel, which also provided TARP oversight. She is doing a terrific job in her more limited role right now.

And she would be a terrific nominee and a terrific director for that agency. By not getting 100 percent behind her early on, they put themselves in a very difficult position. Now, it's going to be difficult to even have a recess appointment – whether it is Professor Warren or whether it is somebody else."