This post from the financial sector policy blog Finance: Facts and Follies summarizes the dismantling of consumer protections in the mortgage and credit card industries in the 2000s.

Many of the steps violating unsophisticated consumers’ protections against predatory lending came from a cascade of federal, not state, regulatory actions and legislation.]]>

“Federal regulatory functions all had become dominated by political pressure from the providers of services promulgating ‘free markets’ and ‘lifting the regulatory burden’, greased by millions of dollars of campaign contributions and lobbying.”

One of the sticking points in the Senate in enacting the financial reform bill is the creation of a new consumer financial protection agency, which Republicans have ardently opposed.

This post by former World Bank and Federal Reserve economist Barbara N. Opper, on the financial sector policy blog Finance: Facts and Follies, summarizes the dismantling of consumer protections in the mortgage and credit card industries in the 2000s.

Many of the steps violating unsophisticated consumers’ protections against predatory lending came from a cascade of federal, not state, regulatory actions and legislation.

The financial industry’s influence on Washington, evident in the late 1980s when Alan Greenspan went to Chair the Fed, gained momentum between 2000 and 2008 when the industry ‘captured’ the administration and Congress. Investors sophisticated or not lost protection, as did consumers, especially the unsophisticated. As the famous post-Napoleon expression goes, this was “worse than a crime it was a blunder” because US financial institutions’ ability to attract profitable business worldwide rested on the trust that had been the outcome of our once-effective regulation.

To set the stage, in the 1970s a lot of consumer protection came into place. States enacted “Truth in Lending Laws” and the Fed was to handle consumer protections related to bank lending. By then, 64% of residents owned their homes, financed by self-amortizing home mortgages most of which carried fixed rates. With regulators enforcing strict underwriting standards, delinquency and foreclosure rates were very low. Credit cards were issued only to those with very strong credit records.

So when we started hearing about consumers being lured into very disadvantageous credit card and mortgage loans, it was reasonable to ask how so much predatory lending could prevail against Truth in Lending and other consumer protection in place. The answer is two rulings from the Office of the Comptroller of the Currency (OCC). One in 2003 prohibited states from enforcing their own truth in lending laws. Eliot Spitzer, former NY State Attorney General, said “Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye … all 50 state attorneys general and all 50 state banking superintendents actively fought the new rules.” It took until June 29, 2009 for the U.S. Supreme Court to rule in favor of the states. The other, in 2004, prohibited state bank supervisors from inspecting, supervising and overseeing national banks located in their state.

The impact of this regulatory approach on the examination and supervision functions should not be ignored. Examiners used to look at samplings of loan underwriting that would have caught “liars’ loans”, no-down-payment loans, wishful thinking property valuations, and other abuses of the go-go-mortgage lending years from 2003 to 2008. Instead, they focused more on the way banks handled Bank Secrecy Act and Patriot Act laws monitoring customer transactions.

Between 2000 and 2008, the economy was stagnating. Encouraging consumption with ready access to debt evidently turned into a policy tool to maintain economic growth. Household debt doubled. That growth was fueled not just by mortgages but also by credit card use as federal regulators looked the other way while credit cards were issued to youth and other elements of the population ill-equipped to handle such ‘easy’ credit. By then, states could not effectively offset federal regulators’ inaction because of the OCC rulings and the domination of the banking industry by national banks. Also, interest-sensitive home building with its collateral durable goods purchases is always a standard Fed policy tool. With more-than-accommodative monetary policy and lax underwriting standards, home property values rose at a pace never before seen. This was the kind of bubble the Fed was created to prevent. It was possible to track GDP growth with and without consumption fueled by home-equity draws.

Securitization was once a reasonable approach to improving the marketability of a home mortgage portfolio but it became destructive. One reason is lenders’ eliminating the free prepayment option to improve predictability of the payment stream for the investor. That removed a long-standing valuable right of borrowers, especially those who woke up too late to the predatory terms of their mortgages.

Many criticize the patchwork of overlapping banking regulatory authority involving several federal agencies and the state where a bank did business. But these two OCC rulings show the value of that overlap. Federal regulatory functions all had become dominated by political pressure from the providers of services promulgating ‘free markets’ and ‘lifting the regulatory burden’, greased by millions of dollars of campaign contributions and lobbying. If it had not been for these two OCC rulings, state authorities could have prevented the predatory terms foisted on unwitting borrowers.

The United States system had been designed by people who understood the dangers of concentration of wealth and power, moral hazard, conflict of interest and self dealing. It was a lesson learned from the Pecora hearings, and is the lesson to be relearned by the Angelides Commission.

]]> http://economybeat.org/banking-and-finance/dismantling-consumer-protection-a-history/feed/ 1 http://economybeat.org/arts/thats-what-i-want/?utm_source=rss&utm_medium=rss&utm_campaign=thats-what-i-want http://economybeat.org/arts/thats-what-i-want/#comments Mon, 29 Mar 2010 17:55:42 +0000 Jon Brooks http://www.economybeat.org/?p=7622 From the UK artist Shardcore, a currency-defacing project called Money, that’s what I want.

For those of us living in a capitalist society, there is an inexorable link between our lives, our perceived happiness, and the bits of paper we exchange for goods and services. A banknote has no inherent value, it is merely a reference to a sum, held in our names, by the issuing authority – in the UK, the bank of England.

There is an imbalance of opportunity inherent in cash, the rich have access to more of the world than the poor. Many people are obsessed with money, the ‘creation’ and acquisition of wealth in-and-of itself. This is, of course, an illusion – the actual value of money is a flexible agreement within a society mediated by the shifting tides of the economy. When that agreement of trust is compromised the ramifications can be substantial. Witness the recent crash in world markets, leaving this country, and many more, with unimaginably large debts, created in our name to prop up ‘the banking system’.

I started a campaign of subtly defacing currency about two years ago. Using a custom ink-stamp and UV ink, I have been tagging all the money that passes through my hands. To date, that’s now well into the thousands of pounds. The stamp itself is invisible, until illuminated under a blacklight – commonly used in this country to check for counterfeit notes.

This work is really about how we use these pieces of paper as markers of our passage through time. We spend to live, and live to spend. Each note we hand over gets us a little closer to death…

Video:

]]> http://economybeat.org/arts/thats-what-i-want/feed/ 1 http://economybeat.org/banking-and-finance/the-dirt-on-jpmorgan-chase/?utm_source=rss&utm_medium=rss&utm_campaign=the-dirt-on-jpmorgan-chase http://economybeat.org/banking-and-finance/the-dirt-on-jpmorgan-chase/#comments Wed, 24 Mar 2010 11:28:57 +0000 Jon Brooks http://www.economybeat.org/?p=7435 We first found this on The Awl. It’s a photo of what’s described on the blog I ought to be working as a pile of manure left in the entrance of a Chase Manhattan bank ATM at 10th street and 2nd Avenue in Manhattan, with this explanation:

This happened across the street from my apartment. The protest happened yesterday. Chase is one of the biggest investors in mountain top removal mining. The protesters said they would leave a mountaintop in every Chase.

The blog EV Grieve, however, clarified that the pile was actually dirt, and a comment there directed us to the Reverend Billy, an activist/performance artist famous for his stunts targeting American corporations. Here is the Reverend and his choir doing their thing at Chase:

More on that protest from the Reverend Billy site. And the Rainforest Action Network has a page called JPMorgan Chase, Banking on Dirty Energy, which claims “JP Morgan Chase is the largest US bank financing mountaintop removal coal mining, which literally involves blowing the tops off historic Appalachian Mountains and poisoning drinking water to extract a relatively small amount of dirty coal.”

In the interest of providing equal time, here’s JPMorgan Chase’s 2008 Corporate Responsibility Update. But let’s face it, without the singing and dancing, it’s a tough slog…

]]> http://economybeat.org/banking-and-finance/the-dirt-on-jpmorgan-chase/feed/ 0 http://economybeat.org/arts/sub-prime-the-musical/?utm_source=rss&utm_medium=rss&utm_campaign=sub-prime-the-musical http://economybeat.org/arts/sub-prime-the-musical/#comments Thu, 18 Mar 2010 19:32:14 +0000 Jon Brooks http://www.economybeat.org/?p=7228 Tip o’ the hat to Laura at EconomyStory for sending us Sub-prime the Musical. The site consists of a series of podcasts by a college student named Madison Koshy, who created them from research she did on the causes of the credit crisis. Naturally, she then wrote song parodies to illustrate the concepts she had learned. From the About page:

I was extremely upset about the state of the economy, but I found it very difficult to understand what was happening. So this summer, I pursued an independent project where I read and researched about what was going on, and then I attempted to re-explain it through podcasts as a means of better understanding the information. Wanting to make my blog a little more interesting, I incorporated song parodies that tied into the material.

Here is Act I, Scene I, called “How it All Began.”

And here is a song parody, based on “The Brady Bunch” theme, called accompanying song, called “The Credit Crunch.”

You can also follow “Sub-prime the Musical” on Twitter.

]]> http://economybeat.org/arts/sub-prime-the-musical/feed/ 11 http://economybeat.org/banking-and-finance/lehman-geithner-and-a-new-bank-crisis/?utm_source=rss&utm_medium=rss&utm_campaign=lehman-geithner-and-a-new-bank-crisis http://economybeat.org/banking-and-finance/lehman-geithner-and-a-new-bank-crisis/#comments Tue, 16 Mar 2010 15:52:09 +0000 Jon Brooks http://www.economybeat.org/?p=7122

“…there is every reason to believe the biggest banks are hiding huge losses on second liens….Another financial crisis is nearly certain to hit in coming months. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.”

In a post on the blog New Economic Perspectives, L. Randall Wray, a professor of economics at the University of Missouri-Kansas City, says that as President of the New York Fed, Timothy Geithner had to have known about an accounting gimmick that allowed Lehman to help hide massive debts in the months leading up to its bankruptcy in 2008. The Lehman collapse was one of the immediate triggers of the financial crisis that led up to the Great Recession.

Furthermore, he believes, banks are similarly hiding additional losses that will cause another financial crisis this year.

Timmy-Gate: Did Geithner Help Hide Lehman’s Fraud?

Just when you thought that nothing could stink more than Timothy Geithner’s handling of the AIG bailout, a new report details how Geithner’s New York Fed allowed Lehman Brothers to use an accounting gimmick to hide debt. The report, which runs to 2200 pages, was released by Anton Valukas, the court-appointed examiner. It actually makes the AIG bailout look tame by comparison. It is now crystal clear why Geithner’s Treasury as well as Bernanke’s Fed refuse to allow any light to shine on the massive cover-up underway.

Recall that the New York Fed arranged for AIG to pay one hundred cents on the dollar on bad debts to its counterparties—benefiting Goldman Sachs and a handful of other favored Wall Street firms. The purported reason is that Geithner so feared any negative repercussions resulting from debt write-downs that he wanted Uncle Sam to make sure that Wall Street banks could not lose on bad bets. Now we find that Geithner’s NYFed supported Lehman’s efforts to conceal the extent of its problems. Not only did the NYFed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better. Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)

Geithner told Congress that he has never been a regulator. That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NYFed. Apparently, Geithner has never met an accounting gimmick that he does not like, if it appears to improve the reported finances of a Wall Street firm…

Geithner has denied that he played any direct role in the AIG bail-out—a somewhat implausible claim given that he was the President of the NYFed and given that this was a monumental and unprecedented action to funnel government funds to AIG’s counterparties. He may try to deny involvement in the Lehman deals. (Again, this is implausible. Lehman executives claimed they “gave full and complete financial information to government agencies”, and that the government never raised significant objections or directed that Lehman take any corrective action. In fairness, the SEC also overlooked any problems at Lehman. But here is what is so astounding about the gimmicks: Lehman used “Repo 105″ to temporarily move liabilities off its balance sheet—essentially pretending to sell them although it promised to immediately buy them back. The abuse was so flagrant that no US law firm would sign off on the practice, fearing that creditors and stockholders would have grounds for lawsuits on the basis that this caused a “material misrepresentation” of Lehman’s financial statements. The court-appointed examiner hired to look into the failure of Lehman found “materially misleading” accounting and “actionable balance sheet manipulation.” But just as Arthur Andersen had signed off on Enron’s scams, Ernst & Young found no problem with Lehman.

In short, this was an Enron-style, go directly to jail and do not pass go, sort of fraud. Lehman’s had been using this trick since 2001. It looked fine to Timmy’s Fed, which extended loans allowing Lehman to flip bad assets onto the Fed’s balance sheet to keep the fraud going.

More generally, this revelation drives home three related points. First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable. He must determine what did Geithner know, and when did he know it. All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released. Further, Obama must ask what has Geithner done to favor his clients on Wall Street? It now looks like even the Fed BOG, not just the NYFed, is involved in the cover-up. It is in the interest of the Obama administration to come clean. It is hard to believe that it does not already have sufficient cause to fire Geithner…

Point number two. Lehman used an innovation, “Repo 105″ to hide debt. The whole Greek debt fiasco was caused by Goldman, et. al., who helped hide government debt. Whether legal or illegal, Wall Street has for many years been producing financial instruments designed to mislead shareholders, creditors, and regulators about the true financial position of its clients. Note that Lehman’s counterparties in this fraud included JP Morgan and Citigroup (who actually precipitated Lehman’s final failure when they finally called in their loans). It always takes at least three to tango: the firm that wants to hide debt, the counterparty that temporarily takes it off their books, and the accounting firm that provides the kiss of approval…

Third point. To the extent that debt is hidden, financial institution balance sheets present an overly rosy picture—of course, that is the purpose of the financial “innovations.” Enron did it; AIG did it; Lehman did it. What about Bank of America, Citi, JP Morgan, Wells Fargo and Goldman? We now know that the New York Fed subjected Lehman to three wimpy “stress tests,” all of which it failed. Timmy’s Fed then allowed Lehman to construct its own sure-to-pass “stress” test. (We know, of course, that the test was absolutely meaningless because, well, Lehman passed the test and then immediately failed spectacularly. Timmy then let the biggest banks run their own stress tests, which they (surprise, surprise) managed to pass.

As our all-time favorite Fed Chairman Alan Greenspan liked to put it, “history shows” that when financial institutions pass their own stress tests, they are actually massively insolvent. There is no reason to believe that this time will be different. Mike Konczal reports that there is every reason to believe the biggest banks are hiding huge losses on second liens. These are second mortgages or home equity loans that amount to about $1 trillion of which almost half are held by the top four banks. Since the first principal of a mortgage is paid first, it is likely that much of the second liens are worthless. Yet banks are carrying these on their books at 86 to 87 percent of face value—which was necessary to allow them to pass the stress tests. Konczal shows that at a more reasonable loss rate of 40% to 60%, the four largest banks would have “an extra $150 billion hole in the balance sheet”. I won’t go into the policy conundrum implied for President Obama’s plan for principal reduction to help homeowners (the banks will not allow renegotiation of underwater mortgages because that would force them to recognize losses on the second liens).

Of greater importance is the recognition that all of the big banks are probably insolvent. Another financial crisis is nearly certain to hit in coming months—probably before summer. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking. In the bigger scheme of things, this is only 1931. We have a long way to go before bank assets (and nonbank debts) are written down sufficiently to allow a real recovery. In other words, a Minsky-Fisher debt deflation is still in the cards.

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