Tuesday, August 13, 2013

This is So Depressing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

  "Easing of Mortgage Curb Weighed," July 23, 2013, Wall Street Journal

"Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation. The plan, which hasn't been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago.... 'My sense is that Washington has lost its political will for serious reform of the securitization market,' said Sheila Bair, who served as FDIC chairman until 2011.

"In addition to the Fed and the FDIC, other agencies involved in drafting the rules include the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Department of Housing and Urban Development, and the Federal Housing Finance Agency.

"Americans Gambling on Rates With Most ARMs Since 2008," July 24, 2013, Bloomberg,

"Jung Lim plans to offset the cost of rising mortgage rates by using an adjustable-rate loan to buy a home for his expanding family....Lim, 38, whose wife is expecting a second child in December, is leaving a two-bedroom condo in Los Angeles's Hancock Park to buy a four-bedroom house in the city's Sherman Oaks neighborhood for $1.12 million. His lender offered him a rate for an adjustable mortgage that is about a percentage point cheaper than a fixed loan.

"In the second year of the U.S. housing recovery, the loans that helped trigger the housing bust are making a comeback. Applications in late June rose to the highest level since 2008 after the Federal Reserve sent fixed rates surging by signaling it may curtail bond buying credited with pushing borrowing costs to the cheapest on record. The average 30-year fixed-rate mortgage jumped 1.2 percentage points in mid-July from May to the highest level in two years, adding about $200 a month to payments on a $300,000 mortgage.

 "'When you give unqualified buyers a rate they won't be able to afford based solely on the presumption that home prices will always go up, it's not going to end well,' said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage website."

"A Hands-Off Policy on Mortgage Loans," July 14, 2005 by Edmund L. Andrews, New York Times

"For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.... First they issued new 'guidance' to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest only [mortgages] and 'liar's loans' that require no proof of a borrower's income. The impact so far? Almost nil."

"Loose Reins on Galloping Loans," July 15, 2005 by Edmund L. Andrews, New York Times

It has become easier "to get these loans than...two months ago." Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation [FDIC] explained: "We don't want to stifle financial innovation. We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation."

 "Housing Boom Echoes in All Corners of the City," August 4, 2005, by Jennifer Steinhauer, New York Times

"[N]ew homes are going up faster now than they have in more than 30 years....Large tracts of Queens, once home to factories and power plants, are being readied for apartment complexes."

Christopher Wood, October 2005, CLSA, Greed & fear

"[T]he Office of Inspector General of the Department of Housing & Urban Development reported to Congress in October 2004 that it had 450 open criminal single-family investigations related to fraud claims covered by federal mortgage insurance, while arrests have increased by 800% over the past four years."

Wood: "Wall Street is now encumbered with layers of compliance clutter.... As the obsessive focus has grown on 'insider traders' and the like, it remains ludicrous that there is so little regulatory focus on sales practices in residential property."

L.A. Times Housing Blog, under a story about California house prices being down 35% year-over-year, June 8, 2008

"I'm loving all this. I sold a bunch of idiots big, big, ARM's. I knew exactly how to appeal to their big ego's. Got big commissions and have no guilt. Many losers I got loans for are now losing their houses. Ask me baby, do I care! Hey, I just wanna fill my bag, screw you." Posted by: Cheri Ratino

"In Reversal, Fed Approves Plan to Curb Risky Lending," December 19, 2007, by Edmund L. Andrews, New York Times

The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit. Skip to next paragraphThe new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising. Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation. "Unfair and deceptive acts and practices hurt not just borrowers and their families," said Ben S. Bernanke, chairman of the Federal Reserve, "but entire communities, and, indeed, the economy as a whole."

"A Crisis Long Foretold," December 17, 2007, Editorial, New York Times,

 "An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess - mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system - are rooted in the willful failure of federal regulators to heed numerous warnings. The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan's insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense. In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed "by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower." Yet, the Fed did nothing as junk lending proliferated - including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of "unfair" and "deceptive" to warrant action.

"The Fed has also disappointed since the current chairman, Ben Bernanke, took over in early 2006. It was not until the end of June 2007 - after the damage was done - that the Fed and other federal regulators issued official subprime guidance. On Tuesday, the Fed issued another set of proposals.... [T]he proposal is weaker than earlier Fed guidance.

"The Office of the Comptroller of the Currency, for example, blocked states from investigating local affiliates of national banks for abusive lending. If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession. This crisis didn't appear unexpectedly. And it won't go quickly away. Congress and the next administration will have a lot of work ahead to clean up the subprime mess - once and for all."

Ben S. Bernanke, November 1, 2006 "Community Development Financial Institutions: Promoting Economic Growth and Opportunity," At the Opportunity Finance Network's Annual Conference, Washington, D.C.:

"In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime.... [T]he expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent."

Ben S. Bernanke, May 17, 2007 "The Subprime Mortgage Meltdown," at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois:

"[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Ben S. Bernanke, April 4, 2013, "Financial and Economic Education," at the 13th Annual Redefining Investment Strategy Education (Rise) Forum, Dayton, Ohio (via video)

"Hello. I'm Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System.... Among the lessons of the recent financial crisis is the need for virtually everyone - both young and old - to acquire a basic knowledge of finance and economics."

 Ben S. Bernanke, May 10, 2013, "Monitoring the Financial System," at the 49th Annual conference on Bank Structure and Competition sponsored by the federal Reserve Bank of Chicago, Chicago, Illinois

"Not since the Great Depression have we seen such extensive changes in financial regulation as those codified in the Dodd-Frank Wall Street Reform..." 

"The step-up in our monitoring is motivated importantly by a shift in financial regulation and supervision toward a more macroprudential, or systemic, approach..."


"Ongoing monitoring of the financial system is vital to the macroprudential approach to regulation. Systemic risks can only be defused if they are first identified. That said, it is reasonable to ask whether systemic risks can in fact be reliably identified in advance; after all, neither the Federal Reserve nor economists in general predicted the past crisis."

Then get rid of Bernanke and the rest of the economists! Every taxi driver, florist, and zen counselor saw years in advance the biggest, best advertised, most anticipated, bubble to burst in the history of the world.

Ben S. Bernanke, Testimony Before the Financial Crisis Inquiry Commission, November 17, 2009 ***CONFIDENTIAL*** (Don't tell a soul.)


CHAIRMAN BERNANKE: "[S]hould monetary policy be used to try to knock down bubbles or not? Just for the record, my view is that it can be a backup, but that the first line of defense ought to be supervision/regulation."  

CHAIRMAN BERNANKE: "[U]nder the heading "too big to fail," you're going to look at that, I'm sure, in great deal. You know, why did the firms become so big? Why did they become so interconnected?"

CHAIRMAN BERNANKE: "We are, to some extent, culpable for not doing the subprime mortgage regulation."


CHAIRMAN BERNANKE: "So financial innovation we all thought was a great thing -- or maybe we didn't think it, but most people thought it was a great thing. But it obviously had a downside, which like any other invention, it can blow up if it hasn't been safety-tested sufficiently. And that clearly turned out to be an issue in the consumer level, for example. You know, there was a lot of -- there are a lot of people who argued that subprime mortgages were a big innovation, that they allowed  people who couldn't otherwise afford homes, to get homes; and, you know, it was a wonderful thing. So clearly, you know, people didn't understand the vulnerability of, say, 3/27 ARMs to a downturn in house prices, for example."



Ben S. Bernanke, July 17, 2013, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, Washington D.C.


"Housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy. Rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully."



"Quicken Pitches ARMs as Borrowers Balk at Higher Rates," August 9, 2013, Bloomberg


"Quicken Loans Inc., the online home lender that jumped last year to No. 3 in U.S. originations, is pitching more adjustable mortgages as rising rates put an end to the refinancing boom. About 20 percent of Quicken applications are for adjustable rates, up from 5 percent earlier this year.... Nationally, rates on 30-year fixed mortgages have climbed to 4.4 percent, from a near-record low 3.35 percent in early May.... That gap is where Quicken sees an opportunity..... [T]his week [Quicken] was offering 5-year ARMs at 2.88 percent and 30-year fixed loans for 4.25 percent, according to its website. The pitch for the ARMs, which it calls "Amazing 5 Mortgages," was anchored in the center of the lender's home page."

Thursday, August 1, 2013

David Boies v. Citizen Ben S. Bernanke

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

           A splendid opportunity is in the offing, though it is premature to expect the earth to quake. As background, Hank Greenberg, former chairman of AIG, is suing the United States. The case itself is not the subject here. Starr International Company, in which Greenberg is housing his lawsuit, was the largest shareholder in AIG on September 16, 2008, the day when the U.S. government "seized control of AIG" (quoting from the September 17, 2008, Wall Street Journal).

            Federal Reserve Chairman Ben S. Bernanke played a central role in the seizure. He was subpoenaed to testify (in STARR INTERNATIONAL COMPANY, INC., v. UNITED STATES) on its behalf and on behalf of a class of others similarly situated plaintiffs.

            Bernanke ducked the deposition. The UNITED STATES (the Department of Justice) argued the "deposition would interfere with Mr. Bernanke's important duties in managing the nation's economy and fiscal policy." [My underlining - FJS]

Before returning to this jarring admission from America's National Socialist headquarters, Judge Thomas Wheeler's anger v. the UNITED STATES is offered as background.

A Bloomberg headline on May 17, 2013: "AIG Judge Asks if U.S. Scared Board from Starr Lawsuit." The curious judge was Thomas Wheeler, who expressed "concern" that the U.S. scared off American International Group from joining a lawsuit by Maurice "Hank" Greenberg, its former chairman, challenging the insurer's 2008 federal bailout." Wheeler had a "lingering concern" that a "request by AIG and the government to dismiss [Hank] Greenberg's lawsuit" was a product of the government "intimidating" the "AIG directors who took their seats during the bailout."  

Such a judge, glued athwartship v. the UNITED STATES' attempt to arrogate his courtroom, was unlikely to let the Federal Reserve chairman skip town. And he didn't. In the United States Court of Federal Claims, No. 11 - 779C (Filed: July 29, 2013), Judge Wheeler wrote: "The Court is persuaded that Mr. Bernanke is a key witness in this case, and that his testimony will be highly relevant to the issues presented. Because of Mr. Bernanke's personal involvement in the decision-making process to bail out AIG, it is improbable that Plaintiff would be able to obtain the same testimony or evidence from other persons or sources.... Indeed, the Court cannot fathom having to decide this multi-billion dollar claim without the testimony of such a key government decision-maker.... Defendant [the UNITED STATES' Department of Justice - FJS] contends that Plaintiff should be required to pursue other avenues of discovery first before seeking Mr. Bernanke's testimony. In its July 23, 2013 reply, Defendant also asserts that a deposition would interfere with Mr. Bernanke's important duties in managing the nation's economy and fiscal policy." [My underlining: Note "cannot fathom" - Judge Wheeler is ripping mad - FJS]

Defendant's motion for a protective order is DENIED.

                                                      IT IS SO ORDERED
                                          s/Thomas C. Wheeler
                                          THOMAS C. WHEELER
There is so much that is wrong with all of this: The Federal Reserve chairman, 1 - managing the economy and, 2 - running fiscal policy. Leaving aside his eternal bumbling, the Federal Reserve chairman is a bureaucrat with no authority to do either. Fiscal policy is for Congress. Bernanke should be planted in front of a congressional inquiry at this very moment, to explain himself. The Justice Department wrote the "too busy" plea to Judge Wheeler. Instead, it should read what it wrote and draw up charges against the Federal Reserve Chairman. Reading through Judge Wheeler's comments on May 17, 2013, and July 29, 2013, the Justice Department is guilty of obstructing Starr International's case against the UNITED STATES.

Why might that be? Probably because of the central charge: the UNITED STATES exceeded its authority by commandeering AIG without compensation to anyone. If the UNITED STATES is found guilty by the courts, it "should" (it is unwise to say "will" regarding legal decisions and precedent anymore) place restrictions on the government's gargantuan appetite for whatever it wants to control.

The UNITED STATES may also be attempting to preclude an open investigation that will show how Federal Reserve Chairman Ben S. Bernanke, Secretary of the Treasury Henry Paulson and New York Federal Reserve President Timothy Geithner mishandled the 2008 financial crisis. This is not a secret. Books by Sheila Bair and David Stockman, as well as the Financial Crisis Inquiry Report (by the FCIC) have already done so. Yet, the media continues to report how we "must thank Bernanke (or the others) for saving us from a nuclear winter." These advocates have avoided the evidence.

A segment of Bernanke's ignorance was discussed in "The Professor Who did NOT Save the World." In summary: "Those who held insurance policies with AIG or its subsidiaries never bore risk of non-payment."

Bernanke still had no understanding of AIG's structure a year later when he testified before the Financial Crisis Inquiry Commission. The professor did no homework. Lack of preparation by Bernanke is no longer even surprising. His various testimony is shot through with errors.

The FCIC transcript quotes Bernanke on page 28 and 29: "The reason AIG was set up the way it was originally, the financial products division ["Financial products division" was the profit center that sold CDS - FJS], which did the CDS, attached itself precisely because it was a large, highly-rated insurance company with lots of assets. Therefore it could sell CDS without what would otherwise be sufficient capitalization and protections because the counterparties would know that this was a highly rated firm with lots and lots of assets. It was precisely because of that reason when [AIG] financial products [division] had to sell - had to come up with the collateral - and was facing a run on its positions, that the Fed - that there existed the collateral, the assets that the Fed could lend against." [My italics - FJS]

This is all wrong.

The two dopes, that would be former Fed Chairman Greenspan and Bernanke, have never been cornered by the various Congressional and Senatorial Committees. Retired Congressman Ron Paul was a persistent irritant  to the Fed chairmen but he was not a lawyer and not equipped with a good court room attorney's ability to make mincemeat of a fumbling witness. Starr International Company is represented by David Boies, who, if he is at all worthy of his reputation, will twist Bernanke (presumably, he is also questioning Paulson and Geithner) into a pretzel of incomprehensibility. The favorable disposition of Judge Wheeler is wind at his back. Should Boies need any help in how to question the head of the Fed, please send him this way.