by Thomas J. Wheat rough draft
For More News on current litigation with Banks over their role in the 2008 crisis, please scroll down to end of paper
Common Perception among Americans and rank file neoconservatives assigns the blame for the 2008 Financial crisis, and collapse of the real estate market, as being not the result of market deregulation, but the concept that quasi-public-private companies like Fannie Mae, and Freddie Mac's irresponsible lending, to low income whites and minorities was the cause of the problem, and that the ensuing mortgage defaults by these people precipitated the collapse of the Housing market. This is a fallaciously overly simplistic argument, and overlooks the role of several key factors that actual caused the crisis. The first factor was the role of international banking committees, like the Basel Committee's dilution of Tier 1 capital requirements for banks. The second contributing factor was FED Chairmen Alan Greenspan's role, arguing that homeowners would save money if they took on variable interest rate loans, (ARM) and his dilution of USA bank's capital requirement ratios corrsponding to deposits. The third factor was the 1999, repeal of Glass Steagall banking act, advanced by Republican Senator Phil Graham of Texas, and passed in the republican controlled senate, which provided for the mega-mergers of commercial banks, vertically integrated with investment banks, Something Glass Steagall disallowed. Finally, fraudelent Predatory lending and financially irresponsible mortgage underwriting standards also contributed to the 2008 crisis.
Furthermore, the neoconservative argument overlooks the predatory lending practices, and fraudulent underwriting standards of major mortgage lenders, in the subprime lending market like CountryWide Financial, (Bank of America) and NovaStar Financial's role in exacerbating the Financial loan default crisis. Furthermore, the analysis overlooks the duopoly of credit rating agencies, like Standard and Poor's and Fitch Ratings, and their conflicts of interest, regarding their decisions to be influenced by high commissions fees for assigning high credit ratings to these popular toxic securities, without comprehensive analysis of their credit worthiness. Furthermore the neoconservative argument that blames Fannie Mae and Freddie Mac for being the sole cause of the crisis, is debunked, because according to Federal reserve data, over 80 percent of the subprime loans were issued by private lending institutions, and the top 5 banks received billions more in individual bailout funds from the tax payer than did Fannie Mae. However, it should be acknowledged, that if Fannie Mae had been allowed to go into public receivership there would have been enough regulatory oversight to prevent Fannie Mae from purchasing toxic Collaterized debt obligations,(CDO's) from private lending institutions.
On November 12th 1999 The Republican Controlled Senate passed a Bill, “The Financial Services Modernization Act of 1999. This legislation Was sponsored by Republican Senators Phil Graham of Texas, Jim Leach of Iowa, and Thomas J. Bliley. Bill Clinton Foolishly signed the Bill into law. The Bill had the strong support of Sanford I. Weill, who was the CEO of Travelers Group, who saw the new bill proposal as a way to merge his insurance business with Citibank. The Glass Steagall Banking Act regulations forbid the mergers between insurance companies and commercial banks, or commercial banks like Bank of America merging with investment banks, Goldman Sachs or Merrill Lynch. This legislation was also influenced by a former New York Federal Reserve official William C. Dudley, who wrote the article “Rethinking Glass Steagall.” In his article he wrote about the need for restoring the Banking system to the pre-Roosevelt era, despite the fact that rampant speculation and market deregulation under Herbert Hoover caused the collapse of the American economy in 1929. Former Senator Byron Dorgon , opposed the recall of Glass Steagall, noting that Congress was forgetting the lessons learned from the Great Depression.
Glass Steagall's Repeal allowed banks to engage in riskier ventures that put consumer deposits at risk, with the merger of commercial banks with investment banks. Customer deposits were at risk because the banks invested these deposits into risky hedge funds who were profiting from speculation in the real estate market. Originally the FDIC IA, 1992 era law required that banks maintain at least 5 percent of capital to total assets and restricted banks abilities to leverage assets. (110 )The law grew out of the public out rage over the Savings and Loan debacle of the `1980's of which George W.Bush's Brother Neal Bush was involved in the scandal. That fiasco cost the tax payer 500 million dollars in bail out funds to the savings and loan industry. Essentially the repeal of Glass Steagall, made the top 5 banks even bigger, and created the “To Big to Fail”concept, meaning that the government would be forced to bail out these banks when they went under or risk having the economy crash, since depositors accounts, annuities, mortgage securities, etc. were now also being traded on an unregulated multi-trillion dollar derivatives market. Initially these speculators were able to drive up the price of real estate market, but when they cashed in their credit default swaps options, real estate prices plummeted. Although home mortgage default was part of the problem, however, speculators were rigged the market so that these people would have no choice but to default, since borrowers now suddenly owed more on their homes than they were worth.
Gretchen Morgenson argues that the 1992 privatization of Fannie Mae and Freddie Mac initially created the seeds for their partial demise and bailout later by the US government. (156)
Fannie Mae became saddled with thousands of CDO's (Collaterized Debt Obligations) of which Countrywide Financial was its 2nd largest supplier of these toxic assets, as these loans were bundled into mortgage backed securities for sale to investors. (48) The fact is Fannie Mae and Freddie Mac got at most a 150 billion dollar bail out package, while TARP, provided the additional 550 billion, to banks like Bank of America, JP Morgan Chase, and Wells Fargo.
The fact is Wall Street banks received billions more in bailout funds then Fannie Mae received, and Conservative bigots overlook this and target Fannie Mae as being the cause of the collapse, when the fact is over 80 percent of all subprime lending (loans to People with less than perfect credit scores) directly responsible for banks and other lenders assuming toxic assets, (defaulted mortgage loans) were issued by private lenders and not Fannie Mae.
http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html
“Federal Reserve Board data show that:
More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.”
The fact is 25 percent of all americans fit into the Subprime loan category. The fact is Investment banks, like Bear Sterns, and Lehman Brothers were parceling out massive lines of credit to mortgage lenders while selling the CDO's attached to those loans to investors.
What got Fannie Mae in trouble was a few of its executives got greedy, and began buying billions of dollars in collateralized debt obligations from companies like CountryWide, now owned by Bank of America, even though CountryWide knowingly falsified income earnings amounts of borrowers to the account managers in order to increase the borrowers loan amount and their own commissions on the loan. (pg. 192) They, offered these fraudulent contracts to low and middle income people, white or minority race alike.
These mortgages, over half were zero down Adjustable Rate Mortgages, in which interest rates averaging 12 % skyrocketed later to 18% later on during the loan cycle. The contracts were written in incomprehensible legalese that even a PHD in finance probably wouldn't know what he was signing.,(pg 194) So with the collapse of the market starting in november of 2007, due to speculators cashing in their default futures options (credit default swaps), companies invested in these mortgage backed securities, seeing their bottom line under assault began laying off millions of workers, home prices dropped to almost 10 year lows, people suddenly owed more on their home than it was worth, and with job losses accruing, and high interest payments required from these ARM loans, of which Countrywide-Bank of America was the second largest issuer of these "toxic assets" in to Fannie Mae, fraudulently screwed millions of people, who had no choice but to default, and all of these factors caused the collapse of the housing market.
The role of Predatory lending and fraudulent underwriting standards contribution the 2008 financial crisis
From 1994 – 1997 subprime origination grew from 35 billion dollars to 125 billion dollars. (97)This did not just extend to mortgages but also the car loan market, , which by 1996, had grown to 60 billion dollars, and was projected to grow by 15% in 1999. To protect against losses, these lenders would charge a subprime loan borrower, 10 – 15 times the rates that that a prime borrower would receive. Ford and GM were major players in the car subprime loan market.
The most egregious examples of predatory lending were through mortgage lenders issuing ARM Adjustable rate mortgages, with low teaser rates, only to later on skyrocket to higher interest rates later on during the loan cycle. One example of this was the practice by mortgage lenders to use No income/No asset documentation, in which underwriters claimed was limited to those with excellent credit histories, when in fact there were lent to subprime lenders. These toxic loans were later sold as securities, to Fannie Mae and Freddie Mac. (192) Robert Gnaizda of the Berkeley non profit Green Lining Institute, complained about deceptive practices by these mortgage lenders, especially CountryWide Financial, who was famous for offering no money down, option ARM mortgages.(194) These mortgages were written in incomprehensible legalese, and targeted low income whites and minorities. CountryWide even altered documents regarding borrowers income just so they could qualify, and so that brokers could get extra commissions, never mind that the borrower would later be snared in the trap of default and bad credit history. (195)
In 2005 CountryWide sold 12.7 billion in subprime loans to fannie mae, all classified as toxic assets. In fact the second largest supplier of toxic assets to Fannie mae was CountryWide Financial. Furthermore two thirds of all subprime loans underwritten by CountryWide (Bank of America)had loan to value ratios of 100 percent, in which borrowers paid no money down to purchase their home. (195) These accounts involved actual bribery by CountryWide Brokers, who bribed account managers with envelopes full of cash, to approve the loan contracts. (196)
Just how profitable the subprime lending market became for CountryWide compared to Prime A borrowers, was a difference of 5% to 15% profit in the subprime lending category. Furthermore debt to income ratios of borrowers could not be documented because of lack of documentation. (192)Countrywide lend 95% of the purchase price, using inflated appraisals on the homes, and by 2004 more than one half of CountryWide’s mortgages were ARM mortgages. This is a dramatic increase from 2003 when only a third of its loans were ARM loans.(194)
The other most egregious predatory lender after CountryWide, was NovaStar Financial. Both specialized in lending to subprime borrowers. NovaStar was known to approve loans over the phone, and would loan to anybody, and they also had fraudulent underwriting standards. Also NovaStar Financial’s loan agreements were full of hidden fees, and high commission costs that borrowers were forced to pay. They inflated their numbers and sold these loans on the open market in a formula know as “burying costs.” The terms of their mortgages, was the common 9% ARM mortgage, , that would later rise to as high as 17% later on during the loan cycle. More prudent borrowers, who asked for fixed rate mortgages, were actually given ARM mortgages as well. Regarding the fraudulent underwriting standards of this company, in 2004, the mortgage securitization trust assembled by NovaStar Financial, sold to investors, over one half of the loans that were securitized had no documentation, or limited documentation of borrowers financial standing , or had inflated borrower income amounts, in order to increase loan amounts to these borrowers. NovaStar then sold these loans to Wall Street firms who pooled them to investors. NovaStar did not’t care if these loans failed , because generating more loan volume meant increased fee revenue for the company. Also it should be noted that the FDIC had no real oversight over these companies, like NovaStar Financial, and CountryWide (Bank of America), like they had on traditional banks.
Currently NovaStar Financial had their stock delisted from the new York stock exchange, however they are still in the appraiser and financial services business, that targets low and moderate income people. (218)
CountryWide and Novastar were not’t the only main groups who engaged in predatory lending or fraudulent underwriting practices. Fremont Financial? Was also responsible as well. 45% of all subprime loans were “liar loans,”, no income or asset verification,(283) and there was much pressure to originate volume, which caused many lenders to falsify borrowers loan applications. (284) Furthermore by 2005, 40% of all subprime loans were for amounts exceeding the value of the property purchased. (285)
The role of Credit Rating Agencies, Standard and Poor's, and Fitch Ratings
Major Credit rating agencies like Standard and Poor's, and Fitch Ratings exacerbated the 2008 Crisis. Take for example Fitch Ratings, it upgraded Fremont Investment and Loans subprime loan servicer rating not due to its credit worthiness but on the basis of volume of loans that Fremont Investment Financial was churning out, which meant for a healthy commission for Fitch ratings. Fremont Financial wrote mortgages but also serviced them, i.e., collected payments, tracked escrow accounts and insurance obligations. Fremont’s volume was so high that they were servicing more than 100000 loans totaling 19.1 billion, and they were projecting a servicing portfolio of 24 billion by the end of 2005, which was the peak of the real estate market.(286) The amount of loans that Fremont churned out meant big fees for credit rating agencies, and this conflict of interest influenced these agencies to highly rate subprime mortgage securities.(285) Fitch ratings based their credit upgrade of Fremont based on trivial issues like the fact that the company had set up a central database and the company’s retaining of a few more auditors.
Fitch ratings published a glowing report on Fremont and upgraded its rating regarding its corporate debt based on assumptions about Fremont’s improved financial condition, increased capital and liquidity. However, Fitch ratings failed to acknowledge amount of capital that would be required to if Fremont’s loans became “toxic” due to default, and that this would have made it impossible to sell these CDO loans to investors. Like the mortgage lenders described in this paper, Fremont had a lot of “liar loans,” on its books, i.e., inflated income amounts, overstated property value, etc. The fact is there is a warranty attached to most securities that astute investors are aware of in which, requires the lender to repurchase the loan from the investor if it is found to be materially defective. (287) Credit rating agencies failed to warn investors that there were capital short falls by lenders in case they needed to repurchase buyback's of “liar loans,” loans for which borrowers did not have to produce any income or assets, or those loans in the overall predatory lending class. (283, 287)However, in 2006 Fremont’s fortunes turned when it was reported that there profits were down 40% from 2005. However the credit rating agencies tripled their mortgage securitization volume . In fact by 2006, 60% of the entire mortgage pool showed material defects in underwriting, and lenders had no outsized borrower cash reserves. Furthermore early payment defaults allowed investors in mortgage backed securities to return loans to the lender and get full refunds.
If the lender did not have the money, investment banks like Goldman Sachs, Bear Sterns and Lehman Brothers, who had provided generous credit to these agencies would be the ones financially liable to the investors.
One cant lay the entire blame on the credit agencies, since Investment banks like Goldman Sachs’s sold defective trusts, called Goldman Sachs Alternative Mortgage Product (GSAMP Trust 2006, which was issued in April of 2006. The fund was loaded with 54% of “toxic assets” from Fremont loans. (291)
16 months after issuing the fund the pool had a 40% loss due to liquidations. By this time thousands were beginning to default due to liar loans and predatory lending loan terms. The credit rating agencies did there part by inflating the credit rating of these funds (293-294)Fremont’s practice of selling ARM mortgages to subprime borrowers greatly increased the risk that the buyer would default.
So this came to bear, in April of 2008, when Fremont Investment and Loan, began receiving default notices on over 3 billion dollars of subprime mortgages it had originated in March of 2007. Fremont did not have the cash to buy back these loans, and in fact did not have the minimum of 250 million dollars in net tangible book value. (298) Fremont’s employees sued the company including James McIntyre, Fremont’s chairman, who had sold 11 million dollars of his stock during the summer of 2006. Other Fremont directors had sold their shares for 5.5 million. Obviously a case of insider trading. (297) Fremont later went bankrupt in the end of 2008.
The Basel Committee named for a city in Switzerland where this international banking committee meets, consist of central bankers from each member country, and top bank supervisors from those countries. The members of this committee hail from France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland UK, and the USA. These bankers proposed common standards for oversight, but participating countries determined how to implement them and police its recommendations. (112) The original Basel Accord set up in 1988 appeared to encourage solvent Tier 1 capital requirements. However, In 1996, the Basel Committee, implemented a new rule reducing capital requirements on assets held by banks in their trading books, versus those it held in its investment portfolio. (112) “To be considered well capitalized a bank must have a Tier 1 capital that is at least 6% of its risk adjusted assets.”(112) This new 1996 ruling allowed banks to set aside less capital on risky assets they traded than they put against their buy and hold portfolios. (112)
This problem was further exacerbated when in 1996, chairman of the FED, Alan Greenspan, imposed a new rule allowing USA banks to include in their calculation of Tier 1 assets, any holdings that they had in Trust preferred securities (TRUPS). These TRUPS had the characteristics of both debt and equity, i.e., debt instruments to be counted towards the least risky calculation of capital. This essentially allowed banks to cook their books, and to inflate the soundness of their financial statements. Essentially FED rules under Greenspan, allowed for riskier, "Trust preferred Securities," to be included in Tier 1 calculations. (112) Not all regulators like Former FED Chair Alan Greenspan were enchanted with "Trust Preferred Securities," Because they included outstanding debt and distorted actual equity holdings, by commingling liabilities as assets. (113)In 2004, Alan Greenspan also argued that Americans could save tens of thousands of dollars if they took on adjustable rate mortgages,as opposed to fixed rate mortgages, when in fact the majority of the later home foreclosures were due to surging interest rates from these ARM variable interest rate loans.
Source: http://www.federalreserve.gov/boardDocs/speeches/2004/20040223/default.htm excerpt: "Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade"
In 1997 after the Basel Committee recommendation of 1996, a 100 institutions began issuing 31 billion of TRUPS (Trust Preferred Securities), and they also received favorable tax treatment for doing so. Wall Street pulled these securities into Trusts and began selling them to investors. These TRUPS helped feed the Bank merger boom during the early 2000's. These banks instead of issuing stock, issued these TRUPS. (113) By 2005, TRUPS issuance was worth 85 billion dollars, issued by more than 800 banks. Banks were the most aggressive buyers of these TRUPS. "Although regulations limited a bank to tying up only one fourth of its Tier 1 capital in these exotic securities their immense issuance increased the perilous interconnectedness in the banking system. When banks began to quake in the crisis of 2008, TRUPS investors raced to sell their positions, hobbling the already troubled institutions." (113-114)
The growth of TRUPS was directly influenced by the Basel Committee recommendations issued in 2001 regarding Banking Supervision, that called for asset backed securities to be merged with bundles of loans, mortgages, corporate loans, car loans and credit card receivables to be sold by banks to investors. Departing from the banking standards of the Basel committee 1988 accord, the Basel committee changed the risk weightings that regulators would apply to these types of securities. Furthermore this resulted in lowering capital requirements that the banks would have to set aside if they held these liabilities on their balance sheets. (133)
The overall effects of the 2001 Basel Committee recommendations are summarized as follows:
1.) It lowered amount of Capital set aside by banks on privately issued mortgage backed securities, like those issued by Countrywide Financial (Bank of America), New Century and other mortgage lenders.
2.) It vastly increased the importance of Credit rating agencies, like Standard and Poor's, and Fitch Ratings. (134)
The overall effect of the Basel committee's 2001 recommendations allowed banks to reduce capital requirements banks had to set aside on their holdings of privately issued securities. USA regulators were also encouraging Banks to purchase them. Therefore, by allowing a lower risk weightings for these securities that received specific grades from credit rating agencies like Standard and Poor's and Fitch ratings, whose rating system was directly influenced by commissions on the sales volume of rating these securities, Regulators relying on the faulty credit rating data blessed these ratings, thereby duping investors into purchasing riskier securities with inaccurate ratings regarding their risk, which duped thousands of investors. The end result was 100's of billions of dollars of losses among institutions that bought these securities falsely rated by these credit reporting agencies assigning lofty grades to these fraudulent and materially defective securities. In sum the 2001 Basel committee's rule change, recommendation on "risk weighting s for mortgage securities codified and legitimized the work of the credit rating agencies." (134) Furthermore no central bankers or regulators bothered to check if these ratings were should have earned such an endorsement.
Furthermore in 2001 the Basel committee also issued a rule recommendation that any Asset-backed securities with credit ratings of AAA or AA regardless of issuer, could have 20 percent risk weights. "No longer did banks have to set aside one half of these securities values in their capital cushion." (135)
Furthermore newer more complex mortgage related securities such as CDO's (Collaterized Debt Obligations) duped the credit rating agencies assessment of their risk, or they were directly influenced by profit from the commissions earned for rating these CDO's from the companies selling these riskier securities, or both. Furthermore the duopoly of the credit rating agencies, such that 2 out of three agencies are only needed to rate a security and the fact that they were given too much power to determine the viability of securities also exacerbated the 2008 financial crisis. In the next section I will discuss their role in encouraging predatory lending in the subprime loan market.
One of the most common areas in the UNited States subject to predatory lending was the state of Georgia. Credit rating agencies like Fitch ratings began a propaganda campaign against regulators attempting to regulate this predatory lending phenomena in Georgia, and other states, such as New York, California, New Jersey. Fitch ratings was opposed to pending legislation regarding regulations on predatory lending features such as hidden fees, and Option ARM mortgages. (147) The Fitch rated pools for Georgia was 2%, in New York, 3%, and 67% of pools on securities in New Jersey and California. (147-148)
Standard and Poor's was the most aggressive of the credit rating agencies in opposing regulations related to predatory lending. On 1/16/2003 the Georgia State Assembly was trying to pass a Fair Lending Act, similar to the old Georgia Fair Lending Act that had been repealed, which Gretchen Morgenson argues was one of the toughest anti predatory lending laws in the nation, and Standard and Poor's responded by saying that if the act was passed they would no longer allow mortgage loans originated in the state of Georgia to be placed in the securities that they rated. (148) This crippled Georgia lenders who had no access to the securitization money machine that these ratings provided, causing a sharp decline in home lending loans in Georgia. Also in 2002 US lawmakers wanted the SEC to review the "special treatment," afforded to these credit rating agencies, which that body under Bush appointed regulators refused to audit these credit agencies conflict of interest practices tied to their ratings. (156-157) Furthermore the most egregious example of these credit rating agencies ability to accurately assess risk ratings was evinced by the collapse of Enron. Essentially, Morgenson argues that there were too many regulatory exemptions and Corporate First Amendment protections regarding lack of disclosure of true risk.
In December of 2004 the International Organization of Securities Commissions published a voluntary code of conduct for credit rating agencies that attempted to address conflicts of interest tied to ratings on securities. Then in 2006 the Credit Rating Reform Act was signed into law by Bush, but this was too little too late. The market would collapse less than a year later.
Furthermore regarding the troubled quasi government agencies such as Fannie Mae and Freddie mac, Standard and Poor's took the lead in defending the market deregulation status quo by threatening to down grade Fannie Mae's securities holdings if it went into receivership with the government after several accounting scandals. Some in the USA congress wanted greater regulatory power over Fannie and Freddie, to reduce the risk of tax payer funded bail outs, and calling for receivership of these companies, before the crisis began. The rating agencies responded by Standard and Poor's taking the lead by threatening to downgrade its credit rating on their securities holdings if the government entered into receivership with Fannie and freddie. Had Standard and Poor's initially downgraded after potential receivership of Fannie and Freddie by the USA government, it would have resulted in an even further generation of massive losses for investors around the world and in this country.
In 2005, investors held a total of 4 trillion in debt held by these companies and the mortgage backed securities guaranteed by them. S & P took the lead in threatening to downgrade Fannie Mae's and freddie Mac's Triple AAA credit rating, placed on GSE bonds (159) had they entered into receivership Had S & P not threatened downgrade due to potential receivership, Fannie and freddie's losses would have been much less. Furthermore had not these credit rating agencies issued flawed and potentially fraudulent ratings on subprime mortgage securities sold to Fannie and Freddie by private lending companies, the debacle for these two companies could have been mitigated. AS gretchen Morgenson state's "Obviously the threats were potent. The receivership legislation, was never enacted. Just as these agencies refusal to rate securities that held Georgia Mortgages in the wake of the State's tough Predatory lending law, put an end to that act, and their threat to downgrade Fannie and freddie debt, helped insure government backing would remain intact." (160)
In sum credit rating agencies limited the amount of information they were required to collect from mortgage securitizers and their conflict of interest tied to commissions based ratings system, caused them not to see insolvent portfolios that they rated as solvent, thereby incapacitating their ability to predict actual risk. Credit downgrades were only issued in response to such acts as government receivership, or attempts to intact tougher predatory lending laws, like in Georgia, or when,.."the loan woes became self apparent." (162)
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The fact is the lack of market regulation allowed top 1 percent of income earners to engage in risky speculation, which tanked the economy. So while they doubled their money under George Bush, while middle class income declined by 2300 dollars from 2001 - 2007. This all occurred as a result of the Bush Tax cuts, where Billionaires where getting multi million dollar tax cuts, millionaires getting 100000 dollar tax cuts, while the middle class only got a couple of thousand dollars of tax cuts. We've had these bush tax cuts since 2001, and during that period we lost over 5 million manufacturing jobs outsourced, to china. So there is no proof that low tax rates on the rich stimulate the job growth. They just hoard their money, spirit away to overseas tax shelters, since its their nature to practice tax avoidance, and the speculative bubble burst because they were engaged in risky speculative derivatives trading, that artificially shot up home prices, and then reduced their values by almost one half, due not to just loan defaults, which the majority, were due to predatory surging interest ARM mortgages, predatory lending practices, fraudulent underwriting standards, and credit rating agencies, like Fitch Ratings, and Standard and Poor's, giving false ratings since their commissions were tied to profitability of the mortgage security industry.
The crisis could possibly have been avoided if Glass Steagall banking act had not been repealed in 1999, which would not have allowed investment banks too merge with commercial banks, which by the way was passed in the republican controlled Congress, and foolishly signed by Bill Clinton. The fact is after Bush we have the most uneven distribution of wealth in this country since the start of the great depression, under republican president Herbert Hoover. The fact is the top 400 richest people in America, all billionaires, own more wealth than the bottom 150 million americans. Now Home Prices are down 61% from their high in 2006, and millions of Americans, have either lost their homes, or now owe more on their homes than they are worth.
Wall Street reform: A year down a bumpy road
By Jennifer Liberto @CNNMoney July 21, 2011: 5:27 AM ET
http://money.cnn.com/2011/07/21/news/economy/dodd_frank_reform/index.htm
http://www.washingtonpost.com/wp-dyn/content/article/2010/07/15/AR2010071505111.html
http://www.nytimes.com/2011/06/29/business/29mortgage.html
http://www.nytimes.com/2011/06/30/business/30mortgage.html
Indeed, even that $20 billion announced Wednesday will not be enough to completely stanch the bleeding at Bank of America — it says litigation over troubled mortgages could cost it another $5 billion in the future.
Meanwhile, Bank of America’s stock was falling, sinking nearly 20 percent this year in part because of the fallout from the mortgage debacle, which encouraged the Charlotte, North Carolina. based bank to resolve claims. Rather than just address mortgages held by Ms. Patrick’s investors, however, Bank of America decided to reimburse investors in all 530 deals — nearly all of the subprime loans that were assembled and sold to private investors on behalf of Countrywide.
Nevertheless, investors appeared to endorse the proposed settlement, with Bank of America shares rising nearly 3 percent, to $11.14, a move mirrored by shares of other big financial's.
The $8.5 billion settlement on $424 billion worth of mortgages suggests that 2 percent of Countrywide’s loans may have been underwritten or serviced improperly. A much bigger segment of those mortgages — about a quarter — are either in default or severely delinquent now. Bank of America attributes many of the foreclosures and defaults to the downturn in the economy.
In addition to the financial terms, the settlement also requires Bank of America to adhere to more rigorous servicing standards, on top of new requirements imposed by federal regulators.
Home loans from 300,000 borrowers will be removed from Bank of America’s servicing arm, and placed among 10 special sub-servicers, with the goal of fast-tracking a resolution of their cases. Borrowers will get answers on any possible modification within 60 days, have a single point of contact and avoid having to resubmit documents.
http://www.economist.com/node/18898008
Some dangers remain. The settlement deals with much of the Countrywide dross but it does not cover loans handled by other Bank of America units or those securitised after being sold to third parties. Merrill faces $11 billion of residential-mortgage claims, reckons Christopher Whalen of Institutional Risk Analytics, a ratings firm.
Bank of America still has lots of haggling to do with Fannie Mae and Freddie Mac, the housing-finance agencies that guaranteed piles of duff loans, and with private bond insurers. The final bill will be far higher than the cheque written this week. The bank plans to set aside a further $12 billion for mortgage-related charges and thinks another $5 billion may be needed on top of that, though given the waywardness of Bank of America’s past estimates, it could be more. The prices paid at the time for Countrywide and Merrill were, it turns out, just deposits.
The capitulation will worry other large banks even though they are less exposed than Bank of America, which services one in five American mortgages. The two most vulnerable are Wells Fargo and JP Morgan Chase—again, largely thanks to crisis-era acquisitions (of Wachovia and Bear Stearns, respectively). Bear Stearns alone faces $18 billion in securities-fraud claims out of an industry total of roughly $200 billion, calculates Mr Whalen.
http://www.nytimes.com/2011/07/13/business/bank-of-americas-mortgage-deal-questioned.html
By GRETCHEN MORGENSON
Eric Schneiderman, the New York attorney general, has asked for information about the $8.5 billion settlement agreed to late last month by Bank of America and representatives of 22 large investment firms holding soured mortgage securities, indicating that he may intervene to challenge the deal.
The proposed Bank of America settlement covers 530 mortgage pools issued by Countrywide Financial, the lender purchased by the bank in a distress sale in 2008. But the investment firms that agreed to the deal held interests in only about one-quarter of those pools, leading some investors to question its fairness. Furthermore, the proposed settlement does not allow investors who do not like its terms to opt out and bring their own suits against Bank of America. Any outstanding claims against the bank by investors who hold any of these securities would be extinguished under the deal.
The agreement could also speed up the foreclosure process, pushing more delinquent borrowers out of homes more quickly.
The terms of the proposed settlement appear to be favorable to Bank of America. Given that the unpaid principal amount of the mortgages covered by the settlement is $174 billion, the $8.5 billion to be paid by Bank of America represents just under 5 cents on the dollar. On June 29, when the deal was announced, Bank of America’s shares closed almost 3 percent higher.
Mr. Miller noted. “Independent investigations show that perhaps two- thirds of the mortgages did not comply with the representations and warranties,” he wrote.
http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/0805091203/