The Latest In The Endless Series Of Bank Shakedowns
/For third world countries, we often use the word "kleptocracies" -- countries where the entrenched leaders get the funds to enrich themselves and pay off their supporters by regularly shaking down and stealing from anyone who gets a business going. In such countries, the leaders and their supporters can get rich, often very rich. For the ordinary people, this is a prescription for abject poverty. Extreme examples would be the Congo and Haiti. We would never allow anything like that here -- would we???
A couple of years ago I got interested in the string of vast settlements that federal prosecutors were scoring against the big banks -- Citi, JPM Chase, Bank of America, and Wells Fargo, among others. A few years after the financial crisis of 2008 - 09, it seemed like vast new settlements against these entities were coming down once every few weeks. I admit I may be more skeptical than most on many things, but still I would generally give the benefit of the doubt to the federal prosecutors on any given matter, at least until I go and look into it. So I started going around to web sites and reading some of the settlements. That led to the origin of my "Phony Prosecutions" tag. This post from July 2013 lists a couple of dozen settlements between the government and the big banks ranging from $50 million to $25 billion between just 2011 and 2013.
It was reading the settlement documents that really opened my eyes. Not that the banks never did anything that would make them subject to fair criticism. But it was clear that they were in fact repeatedly paying billions upon billions of dollars on the very thinnest of charges. In the early 2000s then-New York AG Eliot Spitzer had shaken down the likes of Citibank and Merrill Lynch for a few hundred mil each on completely phony charges (having investment banking and market research in the same institution!), and had taught the world of prosecutors that these banks cannot risk a trial and will always pay. And Spitzer became governor, largely on his totally undeserved reputation as "the sheriff of Wall Street" -- only to fall immediately in a prostitution scandal (the "Luv Gov"). (By the way, he's caught in a new prostitution scandal in just the past few days. Who would have suspected that it could happen to such a nice guy?)
Anyway, all this history comes to mind with the big settlement with Morgan Stanley announced last week by the Federal Justice Department and the states of New York and Illinois. Here is the Justice Department announcement; and here is the one from the state of New York. Morgan Stanley is paying some $2.6 billion to the feds, and another $550 million to New York (plus a few shekels to Illinois, but at this point who's counting?).
So, is there anything to this, or is it just a shakedown? Let's look at the documents. Supposedly the wrongdoing of MS, and the reason for the settlement, is misrepresentations made by MS in selling mortgage-backed securities back in the run-up to the financial crisis:
As acknowledged by Morgan Stanley in a detailed statement of facts that is a part of this agreement (and is quoted below), the company made representations to prospective investors about the characteristics of the subprime mortgage loans underlying its RMBS – representations with which it did not comply.
OK, what exactly? Here's the first one:
In particular, Morgan Stanley told investors that it did not securitize underwater loans (loans that exceeded the value of the property). However, . . . Morgan Stanley ignored information – including broker’s price opinions (BPOs), which are estimates of a property’s value from an independent real estate broker – indicating that thousands of securitized loans were underwater, with combined-loan-to-value ratios over 100 percent. From January 2006 through mid-2007, Morgan Stanley acknowledged that “Morgan Stanley securitized nearly 9,000 loans with BPO values resulting in [combined loan to value] ratios over 100 percent.”
Got that? Now check out this article from Peter Wallison (of AEI) summarizing the history of sponsorship of subprime and specifically high loan-to-value lending by Fannie and Freddie in the full decade running up to the financial crisis. After reviewing pressure on the GSEs in the 90s from the Clinton administration (particularly HUD Secretary Andrew Cuomo -- fancy that, he's the current NYS gov) he then gets to the changes that occurred in underwriting criteria:
As early as 1995, the GSEs were buying mortgages with 3 percent down payments, and by 2000 they were accepting loans with no down payments. They were also compromising other underwriting standards, such as borrower credit scores, to find the subprime and other nontraditional mortgages they needed.
Now really, in a world of 3% and even 0% downpayment mortgages aggressively promoted by the government, was there really anybody in the world who didn't realize that many of them were immediately "underwater" on day one (due to even a slightly aggressive appraisal or just a slight difference of opinion as to value), let alone that essentially all of them would be "underwater" as soon as the market turned south by even a couple of percent? This is a "fraud" that justifies a $3.2 billion settlement?
Oh, wait a minute. Let's check on who gets the money. Supposedly the reason for the settlement is that the buyers of the mortgage-backed securities were defrauded. So they're getting the money, right? Wrong! The Justice Department announcement describes the settlement amount as a "civil penalty" under the Financial Institutions Reform, Recovery and Enforcement Act. The business about a wrong to investors is all a charade. The government is pocketing the money. But at least as to the federal piece, there's nothing that explicitly says they're giving the money to their political supporters. And how about the state of New York?
The settlement includes $550 million – $400 million worth of consumer relief and $150 million in cash – that will be allocated to New York State. The resolution requires Morgan Stanley to provide significant community-level relief to New Yorkers, including loan reductions to help residents avoid foreclosure, and funds to spur the construction of more affordable housing. Additional resources will be dedicated to helping communities transform their code enforcement systems, invest in land banks, and purchase distressed properties to keep them out of the hands of predatory investors.
Yes, they are very clearly going to pass out some $400 million to their political supporters and cronies, as yet unnamed. We have officially become a kleptocracy.
UPDATE, February 21: Paul Sperry, late of the Hoover Institution (and author of a 2011 book "The Great American Bank Robbery" on the same subject as this post) , has an op-ed in today's New York Post titled "Bank CEO reveals how Obama administration shook him down." Sperry interviews Michael Carpenter, recently-departed CEO of Ally Bank. Ally is the former GMAC, and hence one of the largest players in the auto finance business. Ally recently did a $100 million settlement with the CFPB, essentially conceding to racial discrimination in setting interest rates for auto loans. No current CEO of a major bank would dare say a bad word about the government overlords, but having left his former employer, Mr. Carpenter speaks his mind. He describes the CFPB investigation that led to the settlement as "abuse [of] power," "holding the bank's business hostage," "coerced," and "trumped up," among other similar adjectives. Essentially, Ally was required to and did make all lending and credit decisions based on data from which race of the borrower was excluded, and didn't even have that information in its records; but the government purported to find discrimination by a process of having its "experts" infer race from things like last name and zip code.
Well, $100 million is chump change as these things go. I'm sure that current management of Ally is relieved to have gotten off so easy, although Sperry suggests that CFPB's real game is to force level interest rates on the auto-lending industry, thus making borrowers with better credit subsidize borrowers with worse credit. Meanwhile, refund checks are going out to the supposedly overcharged borrowers. The implicit message: "We, the Obama administration and the Democrats, have caught the evil bankers ripping you off and are giving you your money back." Nothing like stirring up a little racial resentment to keep your voters loyal. Racial healing? Since when was that an important value?
Now that Hillary Clinton has explicitly joined Bernie Sanders in running against "the banks" for alleged crimes that can't even be named or specified, I guess we can expect lots more of this going forward if one of them wins the White House. For those thinking of supporting one of them, I would suggest that you can get an idea of the cost to your economy of having a government kleptocracy by taking a look at the success of some of the countries where they have that system. If not Haiti and the Congo, how about a Venezuela, or an Argentina? Once rich, now poor.