The Department of Treasury’s abject failure to keep its promises regarding the 2008 financial crisis is at least partially to blame for the weakness of the recovery; most notably its failure to scale back the size and complexity of Wall St. banks and its promise to use part of TARP to “preserve homeownership.” The Home Affordable Modification Program has brought scant improvement to the beleaguered housing sector, with fewer than 800,000 ongoing permanent modifications as of March 31, 2012; a number that is growing at the snail’s pace of just 12,000 per month.
Treasury took, by all accounts, a timid step toward holding the mortgage servicers liable In June 2011 for the extensive misbehavior in the program by pledging to withhold the incentive payments to three of the largest banks: Wells Fargo Co., Bank of America Corp., and JPMorgan Chase until they came into compliance with HAMP programs regulations.
Epic Failure of Treasury Department
In practice however, the Treasury Department couldn’t even keep this meek obligation. Although Wells Fargo had improved its performance and was awarded all of its withheld incentive payments, Bank of America and JPMorgan Chase never met the baseline minimum. Espite this epic failure, as part of a broader settlement in March 2012, after the robo-signing disgrace, Treasury released all of the withheld payments, totaling more than $170 million. Consequently, the government hasn’t held any company or bank responsible for the widespread abuses of HAMP applicants, nor does it appear they ever will at this point.
In return for what was presented as a $25 billion payout, the banks received broad immunity from future civil cases arising out of their pervasive use of forged, fraudulent or completely fabricated documents to foreclose on homeowners.
Sure, the banner number sounds inspiring, yet the banks only had to cough up $1.5 billion to provide a paltry $2,000 to each borrower wrongfully foreclosed upon and a few billion to provide for borrower refinancing.
The remaining $17 billion, however, won’t involve payouts of money, but will be met in the form of the banks receiving “credits” for pre-determined activities. Part of the larger number includes $7 billion that will be “earned” for everyday tasks related to the housing crisis. These activities include:
- Bulldozing worthless houses
- Donating homes to charity
- Agreeing not to pursue deficiency judgments against homeowners
- Not seeking to force a homeowner to pay the difference between the balance of the loan at the time of foreclosure and what is recovered by the bank.
The remaining $10 billion in credits are hypothetically to be pieced together through principal reductions on “underwater” mortgages, but that doesn’t mean that the banks will be taking $10 billion in losses. Of course not. The settlement granted them fractional credit for reducing the principal on loans that they service but don’t own, such as those contained in mortgage- backed securities. Moreover, they can earn even more “credits” toward the settlement through taxpayer-funded HAMP modifications.
Consequently, the settlement will again involve money flowing from taxpayers to the banks.
Another declaration that accompanied the settlement was the formation of a working group under the Justice Department’s Financial Fraud Enforcement Task Force to inspect toxic mortgage practices. This arose out of the political fallout from the government’s failure to bring any significant criminal cases related to the financial crisis. With the statute of limitations fast approaching for much of the conduct that essentially enabled, if not caused the crisis, it seems increasingly unlikely that any criminal cases will ever occur.
I think it is more than fair to ask why more haven’t been pursued. The president, Attorney General Eric Holder, and Treasury Secretary Timothy Geithner have all answered this question by suggesting that it was greed and bad judgment, not criminal conduct that contributed to the crisis. The answer more likely lies with the Justice Department’s lack of acumen and the tentativeness that set in after it lost a high-profile case against two Bear Stearns Cos. hedge- fund executives in 2009. In any event, it seems unlikely that an 11th-hour task force will result in a increase of arrests of responsible banksters.
It is clear that the criminal-justice system has proved ill equipped or simply unwilling to address the financial crisis. For that, we needed effective regulatory reform.
Surprise! Taxpayer Gets Shafter Again
Instead, we got the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Due to greedy and emboldened Republicans and timid Democrats. Never a great bill, Dodd-Frank has only gotten weaker over the past year. The top banks are 20+ percent larger than they were before the crisis. They now hold more than $8.5 trillion in assets, or the equivalent of 56 percent of gross domestic product…that is up from 43 percent just five years ago. The risk in our banking system is extraordinarily concentrated in these banks, which now control 52 percent of all industry assets. There is broad acknowledgment that Dodd-Frank hasn’t solved any of the problems it was meant to address ( the power and influence of banks deemed “too big to fail”), and the Republican Party wants to strip away what precious little is left of it.
Even more importantly, the financial markets continue to bet that the government will once again come to the big banks’ rescue if needed. Despite failure after failure for the Euro Zone members to effectively deal with their own financial crisis (one that could drag America’s economy into Great Depression territory), creditors still give the largest banks more favorable terms than their smaller counterparts. These amount to direct subsidies for those banks that are already deemed too big to fail ! Moreover, it incentivizes others to attempt similar malfeasance. The major banks are still given better credit ratings based on the assumption that they will be bailed out if the unthinkable happens again.
As a result, the market misrepresentations that flow from the belief that another bailout would occur have gotten worse. By failing to alter this perception, Dodd-Frank has unintentionally laid the foundation for the next financial crisis.
Although there have been calls to break up the biggest banks, the Financial Stability Oversight Council has taken no indicative action to limit their size or power. Even fundamental steps such as forming and applying new rules has been delayed time and again. Two-thirds of Dodd- Frank’s rulemaking deadlines have passed as of May 1, 2012.
In the 1970s a Chiffon Margarine commercial illustrated the dire consequences of trying to “fool Mother Nature”. In some regards, the politicians, banksters and bank regulators have decided to temp fate; or Mother Nature as it were.
For instance, one of the best protections against future bailouts is to ensure that banks have adequate capital reserves to absorb potential losses. Although Dodd-Frank mandated higher capital levels to be set by the regulators for the largest banks, they still haven’t officially done so. Worse, the Federal Reserve authorized 15 of the 19 largest bank holding companies to drain their capital through cash payouts in the form of dividends to their shareholders. The fact is, these actions benefit only the banks’ senior executives. It allows those who own large amounts of stock to receive their risk-free payments, while increasing the risk to taxpayers that the banks will once again have to be rescued in the event of a financial bump in the road…like a crisis with the euro.
The banks have also set about weakening with paltry rules existed in Dodd-Frank, especially with respect to the Volcker rule, which is supposed to forbid banks from making risky proprietary bets that could lead to large losses and eventual bailouts. The final version carved-out exceptions that created huge loopholes.
For example, in April 2012, Bloomberg News reported that JPMorgan Chase had moved some of its soon-to-be banned trading operations overseas into its London-based Treasury unit, branding a multi-hundred-billion-dollar trading position in synthetic credit derivatives as a “hedge.”
Legitimate hedging was one of the hard-fought exemptions to the Volcker rule won by the banks, intended to permit them to minimize risk by allowing them to offset specific risks from positions that may remain in their portfolios. But JPMorgan’s supposed Treasury “hedges” appeared profit-driven and were so large that they moved markets. Of course, after the warnings that JPMorgan’s positions were potentially destabilizing, the bank’s chief executive officer, Jamie Dimon, claimed such concerns were a “tempest in a teapot.”
JPMorgan recently disclosed that the trade had cost it at least $5.8 billion.
Senator Carl Levin, a Michigan Democrat, warned that some at “Treasury are willing to weaken the law.” The Fed’s authorization of the largest banks to release capital should be a clear message. We may be in imminent danger of quickly returning to the pre-crisis status quo of inadequately capitalized banks that take outsized risks while being mollycoddled by weakened regulations.
TARP-Did it or Didn’t It Work?
As the November Presidential election approaches, The Treasury Department’s victorious assertion of TARP’s success has picked up steam, focusing largely on the reduction in anticipated losses. While it is good news that the program’s losses will be far less than originally anticipated, Treasury’s projections don’t include, or make reference to, others where Treasury failed through changes in Internal Revenue Service rules.
The mistakes by Treasury have produced widespread anger that may bring about the only hope for meaningful reform. But Americans have become so absorbed with just getting through each day with no good economic news on the horizon that many simply do not care who’s to blame.
But they should care or it will happen again….and sooner if Mitt Romney has his way as President.
- Americans should be fed up with failures by both Republicans and Democrats to prosecute those that caused the 2008 crisis.
- They should be disgusted by the politicians and regulators who doled out tax dollars to the banks without insisting that they be prosecuted or at the very least accountable and unemployed.
- The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will probably do so again.
Only with sufficient outrage by a more knowledgeable electorate can we expect to enact the necessary laws to clean up our financial and political systems and to liberate them from the corrupting grasp of traders and megabanks that prosper at the expense of 99% of the rest of America.