Who's Really Most To Blame For The Economic Collapse? Ever Hear Of Phil Gramm?

Where does a corrupt bankster end & a corrupt politician begin?

The manifestation of conservative Democratic 1%-er-turned-Republican 1%-er, Texas Senator Phil Gramm's "greatest" achievement-- at least in terms of making himself fabulously wealthy, but also in terms of impacting the people of the United States-- was the mortgage meltdown in the finally two years of George W. Bush's illegitimate presidency. Gramm was long gone from politics by then but he had years earlier helmed the victory in the Republican Party's-- and Wall Street's-- long-term jihad against Glass-Steagall. More about that anon. First a few words on how our government-- not Bush's but the one we elected based on Hope and Change to replace it-- has dealt with and is dealing with that manifestation of ultimate corruption. In short, the Obama Administration and most state governments are handing out Get Out Of Jail Free cards to the perps. We're talking about the foreclosure fraud settlement being embraced by every state with the exceptions of New York, Massachusetts, Nevada, possibly California, Delaware and Kentucky (if Kamala Harris, Beau Biden and Jack Conway are serious about national political careers) and maybe even Oregon, Arizona and Washington (state). The settlement the 40-some-odd states' attorneys general-- aided and abetted by the Obama Justice Department-- are about to tie a bow around and present as a fait accompli indemnifies the banksters from prosecution for their criminal behavior in the mortgage meltdown. Gretchen Morgenson writes that "the exact terms are under wraps," but everyone paying attention knows the inexact terms very well by now-- and Morgenson better than almost anyone.

Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.

It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash-- $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.

The rest-- an estimated $20 billion-- would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

Sure, $5 billion in cash isn’t nada. But government officials have held out this deal as the penalty for years of what they saw as unlawful foreclosure practices. A few billion spread among a dozen or so institutions wouldn’t seem a heavy burden, especially when considering the harm that was done.

The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal.

Morgenson goes into a number of concerned she says as "justified because past settlements promising big help to borrowers have failed to live up to their hype. She makes the point, as did Beau Biden in filing his anti-bankster suit last week, that "rules matter... Abiding by the rules has not been the modus operandi in the foreclosure arena. That’s why any settlement must be tough, truly beneficial to borrowers and monitored for compliance. Otherwise, the deal would be another case where our government let the big banks win while Main Street loses."

Before we get back to the elusive, rarely mentioned Phil Gramm and his role in all this, let's take a look at a powerful cheat sheet by Pro Publica that asks what's happened to the big players in the financial crisis. (The criminality of the banksters will never be really examined because there is no one to examine the criminality of our political class-- if that class can even be separated from the banksters-- and that class has increased it's own wealth gigantically while Americans have sunk into economic desperation. "For example, Rep. Darrell Issa reported this year that his 2010 assets were worth at least $295 million, nearly double what they were the year before.") These political gangsters, like career criminal Issa, are not part of the Pro Publica "cheat sheet," although they do look at Gramm (and Bush Treasury Secretary Henry Paulson). Pro Publica breaks down their study into roughly 9 categories of criminals: mortgage originators, mortgage securitizers, people who created and dealt CDOs, the ratings agencies, the regulators, the politicians (though no one currently in Congress), executives of big investment banks and Fannie Mae and Freddie Mac.

Mortgage originators

Mortgage lenders contributed to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back, inflating a housing bubble that was bound to pop. Lax regulation allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through, and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest-- then the nation’s largest subprime lender-- found that “they forged documents, hyped customers' creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual, which went under in 2008 in the biggest bank collapse in U.S. history.

Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits. Countrywide CEO Angelo Mozilo was accused of misleading investors about the company’s mortgage lending practices, a charge he denies.  Merrill Lynch and Deutsche Bank both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank.

Where they are now: Few prosecutions have been brought against subprime mortgage lenders. Ameriquest went out of business in 2007, and Citigroup bought its mortgage lending unit. Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges this summer. WaMu also recently settled a class action lawsuit brought by shareholders for $208.5 million. In an ongoing lawsuit, the FDIC is accusing former Washington Mutual executives Kerry Killinger, Stephen Rotella and David Schneider of going on a "lending spree, knowing that the real-estate market was in a 'bubble.'" They deny the allegations.

Bank of America purchased Countrywide in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settled an SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans. Deutsche Bank is still under investigation by the Justice Department.

Mortgage securitizers

In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straight from subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.

Where they are now: This spring, New York’s Attorney General launched a probe into mortgage securitization at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney General last month following an investigation into problems with the securitization process.

As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage origination and securitization. California and New York have withdrawn from those talks.

The people who created and dealt CDOs

Once mortgages had been bundled into mortgage-backed securities, other bankers took groups of them and bundled them together into new financial products called Collateralized Debt Obligations. CDOs are composed of tiers with different levels of risk. As we’ve reported, a hedge fund named Magnetar worked with banks to fill CDOs with the riskiest possible materials, then used credit default swaps to bet that they would fail. Magnetar says that the majority of its short positions were against CDOs it didn’t own. Magnetar also says it didn’t choose what went its own CDOs, though people involved in the deals who spoke to ProPublica contradict this account.

American International Group’s London-based financial products unit was among the entities that provided credit default swaps on CDOs. Though the business of insuring the risky securities made AIG large short-term profits, it eventually brought the company to the brink of collapse, prompting an $85 billion government bailout.

Merrill Lynch, Citigroup, UBS, Deutsche Bank, Lehman Brothers and JPMorgan all made CDO deals with Magnetar. The hedge fund invested in 30 CDOs from the spring of 2006 to the summer of 2007. The bankers who worked on these deals almost always reaped hefty bonuses. From our story:

Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.

When banks found CDOs hard to sell, some of them, notably Merrill Lynch and Citibank, bought each other’s CDOs, creating the illusion of true investors when there were almost none. That was one way they kept the market for CDOs going longer than it otherwise would have. Eventually CDOs began purchasing risky parts of other CDOs created by the same bank. Take a look at our comic strip explaining self-dealing, and our chart detailing which banks bought their own CDOs.

Goldman Sachs and Morgan Stanley also made similar deals in which they created, then bet against, risky CDOs. The hedge fund Paulson & Co helped decide which assets to put inside Goldman’s CDOs.

Where they are now: Overall, the banks and individuals involved in CDO deals haven’t been convicted on criminal charges. The civil suits against them have produced fines that aren’t very big compared to the profits they made in the leadup to the financial crisis. JP Morgan paid $153.6 million to settle an SEC suit alleging they hadn’t disclosed to investors that Magnetar was betting against Morgan’s CDO. Citigroup just agreed to pay a $285 million fine to the SEC for betting against one of its mortgage-related CDOs. The lawsuit doesn’t mention dozens of similar deals made by Citi.

Magnetar is still thriving (the deals they made weren’t illegal according to the rules at the time). In 2007, Magnetar’s founder took home $280 million, and the fund had $7.6 billion under management. The SEC is considering banning hedge funds and banks from betting against securities of their own creation. As of May 2010, federal prosecutors were investigating Morgan Stanley over their CDO deals, and Goldman Sachs paid $550 million last year to settle a lawsuit related to one of theirs. Only one Goldman employee, Fabrice Tourre, has been charged criminally in connection to the deals.

Though recorded phone calls suggest that former AIG CEO Joseph Cassano misled investors about the credit default swaps that contributed to his company’s troubles, the evidence wasn’t airtight, and federal probes against him fell apart in 2010. Cassano’s lawyers deny any wrongdoing.

The ratings agencies

Standard and Poor’s, Moody’s and Fitch gave their highest rating to investments based on risky mortgages in the years leading up to the financial crisis. A Senate investigations panel found that S&P and Moody’s continued doing so even as the housing market was collapsing. An SEC report also found failures at 10 credit rating agencies
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Where they are now: The SEC is considering suing Standard and Poor’s over one particular CDO deal linked to the hedge fund Magnetar. The agency had previously considered suing Moody’s, but instead issued a report criticizing all of the rating agencies generally. Dodd-Frank created a regulatory body to oversee the credit rating agencies, but its development has been stalled by budgetary constraints.

The regulators

The Financial Crisis Inquiry Commission [PDF] concluded that the Securities and Exchange Commission failed to crack down on risky lending practices at banks and make them keep more substantial capital reserves as a buffer against losses. They also found that the Federal Reserve failed to stop the housing bubble by setting prudent mortgage lending standards, though it was the one regulator that had the power to do so.

An internal SEC audit faulted the agency for missing warning signs about the poor financial health of some of the banks it monitored, particularly Bear Stearns. [PDF] Overall, SEC enforcement actions went down under the leadership of Christopher Cox, and a 2009 GAO report found that he increased barriers to launching probes and levying fines.

Cox wasn’t the only regulator who resisted using his power to rein in the financial industry. The former head of the Federal Reserve, Alan Greenspan, reportedly refused to heighten scrutiny of the subprime mortgage market. Greenspan later said before Congress that it was a mistake to presume that financial firms’ own rational self-interest would serve as an adequate regulator. He has also said he doubts the financial crisis could have been prevented.

The Office of Thrift Supervision, which was tasked with overseeing savings and loan banks, also helped to scale back their own regulatory powers in the years before the financial crisis. In 2003 James Gilleran and John Reich, then heads of the OTS and Federal Deposit Insurance Corporation respectively, brought a chainsaw to a press conference as an indication of how they planned to cut back on regulation. The OTS was known for being so friendly with the banks -- which it referred to as its “clients”-- that Countrywide reorganized its operations so it could be regulated by OTS. As we’ve reported, the regulator failed to recognize serious signs of trouble at AIG, and didn’t disclose key information about IndyMac’s finances in the years before the crisis. The Office of the Comptroller of the Currency, which oversaw the biggest commercial banks, also went easy on the banks.

Where they are now: Christopher Cox stepped down in 2009 under public pressure. The OTS was dissolved this summer and its duties assumed by the OCC. As we’ve noted, the head of the OCC has been advocating to weaken rules set out by the Dodd Frank financial reform law. The Dodd Frank law gives the SEC new regulatory powers, including the ability to bring lawsuits in administrative courts, where the rules are more favorable to them.

The politicians

Two bills supported by Phil Gramm and signed into law by Bill Clinton created many of the conditions for the financial crisis to take place. The Gramm-Leach-Bliley Act of 1999 repealed all the remaining parts of Glass-Steagall, allowing firms to participate in traditional banking, investment banking, and insurance at the same time. The Commodity Futures Modernization Act, passed the year after, deregulated over-the-counter derivatives-- securities like CDOs and credit default swaps, that derive their value from underlying assets and are traded directly between two parties rather than through a stock exchange. Greenspan and Robert Rubin, Treasury Secretary from 1995 to 1999, had both opposed regulating derivatives.  Lawrence Summers, who went on to succeed Rubin as Treasury Secretary, also testified before the Senate that derivatives shouldn’t be regulated.

It’s worth noting the substantial lobbying efforts that accompanied the deregulation process. According to the FCIC [PDF], between 1999 and 2008 the financial industry spent $2.7 billion lobbying the federal government, and donated more than $1 billion to political campaigns. While deregulation took place mainly under Clinton’s watch, George W. Bush is faulted for not doing more to catch the out-of-control housing market.

As president of the New York Fed from 2003 to 2009, Timothy Geithner also missed opportunities to prevent major financial firms from self-destructing. As we reported in 2009:

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound.

Henry Paulson, Treasury Secretary from 2006 to 2009, has been criticized for being slow to respond to the crisis, and introducing greater uncertainty into the financial markets by letting Lehman Brothers fail. In a 2008 New York Times interview, Paulson said he had no choice.

Where they are now: Gramm has been a vice chairman at UBS since he left Congress in 2002. Greenspan is retired. Summers served as a top economic advisor to Barack Obama until November 2010; since then, he’s been teaching at Harvard. Geithner is currently serving as Treasury Secretary under the Obama administration.

Executives of big investment banks

Executives at the big banks also took actions that contributed to the destruction of their own firms. According to the Financial Crisis Inquiry Commission report [PDF], the executives of the country’s five major investment banks-- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – kept such small cushions of capital at the banks that they were extremely vulnerable to losses. A report compiled by an outside examiner for Lehman Brothers found that the company was hiding its bad investments off the books, and Lehman’s former CEO Richard S. Fuld Jr. signed off on the false balance sheets. Fuld had testified before Congress two years before that the actions he took prior to Lehman Brothers’ collapse “were both prudent and appropriate” based on what he knew at the time. Other banks also kept billions in potential liabilities off their balance sheets, including Citigroup, headed by Vikram Pandit.

In 2010, we detailed how a group of Merrill Lynch executives helped blow up their own company by retaining supposedly safe-- but actually extremely risky--  portions of the CDOs they created, paying a unit within the firm to buy them when almost no one else would.

The New York Times’ Gretchen Morgenson described how the administrative decisions of some top Merrill executives helped put the company in a precarious position, based on interviews with former employees.

Where they are now: In 2009, two Bear Stearns hedge fund managers were cleared of fraud charges over allegedly lying to investors. A probe of Lehman Brothers stalled this spring. Merrill Lynch was sold to Bank of America in the fall of 2008. As for the executives who helped crash the firm, as we reported in 2010, “they walked away with millions. Some still hold senior positions at prominent financial firms.” Dick Fuld is still working on Wall Street, at an investment banking firm. Vikram Pandit remains the CEO of Citigroup.

Fannie Mae and Freddie Mac

The government-sponsored mortgage financing companies Fannie Mae and Freddie Mac bought risky mortgages and guaranteed them. In 2007, 28 percent of Fannie Mae’s loans were bought from Countrywide. The FCIC found [PDF] that Fannie and Freddie entered the subprime game too late and on too limited a scale to have caused the financial crisis. Non-agency-securitized loans had an increased share of the market in the years immediately preceding the crisis.

Many believe that The Community Reinvestment Act, a government policy promoting homeownership for low-income people, was responsible for the growth of the subprime mortgage industry. This idea has largely been discredited, since most subprime loans were made by companies that weren’t subject to the act. 

Still, Fannie and Freddie engaged in reckless behavior and sustained heavy losses as a result. The SEC slammed Fannie Mae for improper accounting under the leadership of Frank Raines in the years preceding the financial crisis. A report by the Office of Federal Housing Enterprise Oversight found that Fannie and Freddie didn’t accurately disclose the risks they were taking and “deliberately and intentionally manipulat[ed] accounting to hit earnings targets.” [PDF]

Richard Syron and Daniel Mudd were at the helm of Freddie and Fannie, respectively, when they began to buy large numbers of subprime loans. Current and former Freddie Mac employees have accused Syron of ignoring warnings about the health of the loans the company was buying. Syron and Mudd maintain they could not have foreseen the rapid decline in the housing market.

Where they are now: As borrowers defaulted on mortgages they’d insured, Fannie and Freddie received a nearly $200 billion federal government bailout, and the government took over their operations. They are close to a settlement in an SEC lawsuit, and will neither admit nor deny that they failed to inform investors about risks of exposure to subprime mortgages. The Dodd Frank financial reform law stated that serious reforms of Fannie and Freddie are needed, but didn’t address how they should be carried out. A report from Treasury Secretary Geithner called for the government to “ultimately wind down” the two mortgage giants. [PDF] In the meantime, taxpayers have been shouldering their legal fees. Former Freddie and Fannie executives Richard Syron and Daniel Mudd received Wells notices this spring, a sign that the SEC is considering legal action against them.

No mention of the Supreme Court's ruling that allows Big Business predators to buy the government outright and is the basis of almost all of these problems. But it is this identification with the interests of the 1% by the political class that is at the root of this catastrophe for Americans. I would imagine that if the guillotine is ever used to deal with this Scalia, Thomas, Alito, Roberts and Kennedy will be given precedence even over the banksters themselves. No one should go before Gramm though-- nor other 1%-ers whose existence is a toxic marriage between banksterdom and political crookery, Michael Bloomberg being an outstanding example. Yesterday:

"It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp... [T]hey were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."

Does Bloomburg get this utter crap from Fox or does Fox get it from 1%-ers like Bloomberg? Does it matter in an endless loop?

A few days ago Robert Reich painted a picture of a different political establishment than the one we have. It was whimsy: "Next week," he wrote, "President Obama travels to Wall Street where he’ll demand-- in light of the Street’s continuing antics since the bailout, as well as its role in watering-down the Volcker rule – that the Glass-Steagall Act be resurrected and big banks be broken up. I’m kidding. But it would be a smart move-- politically and economically."

Politically smart because Mitt Romney is almost sure to be the Republican nominee, and Romney is the poster child for the pump-and-dump mentality that’s infected the financial industry and continues to jeopardize the American economy.

Romney was CEO of Bain & Company-- a private-equity fund that bought up companies, fired employees to save money and boost performance, and then resold the firms at a nice markups.

...Economically it would be smart for Obama to go after the Street right now because the Street’s lobbying muscle has reduced the Dodd-Frank financial reform law to a pale reflection of its former self. Dodd-Frank is rife with so many loopholes and exemptions that the largest Wall Street banks-- larger by far than they were before the bailout-- are back to many of their old tricks.

...In the wake of the bailout, the biggest banks are bigger than ever. Twenty years ago the ten largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent. And the biggest four have a larger market share than ever-- so large, in fact, they’ve almost surely been colluding. How else to explain their apparent coordination on charging debit card fees?

The banks aren’t even fulfilling their fiduciary duties to investors. Last summer, after Groupon selected Goldman Sachs, Morgan Stanley, and Credit Suisse to underwrite its initial public offering, the trio valued it at a generous $30 billion. Subsequent accounting and disclosure problems showed this estimate to be absurdly high. Did the banks care? Not a wit. The higher the valuation, the fatter their fees.

Just last week Citigroup settled charges (without admitting or denying guilt) that it defrauded investors by selling them a package of mortgage-backed securities rife with mortgages it knew were likely to default, but didn’t disclose the hazard. It then bet against the package for its own benefit-- earning fees of $34 million and net profits of at least $126 million. So what’s Citi paying to settle this outrage? A mere $285 million. Its CEO at time (Charles Prince) doesn’t pay a dime.

I doubt the President will be condemning the Street’s antics, or calling for a resurrection of Glass-Steagall and a breakup of the biggest banks. Democrats are still too dependent on the Street’s campaign money.

That’s too bad. You don’t have to be an occupier of Wall Street to conclude the Street is still out of control. And that’s dangerous for all of us.