He'll always have Corzine.

No surprise to you and me, but apparently this comes as quite a shock to the Huffington Post.  Paul Blumenthal reports that Democrats sputter that Wall Street never had it so good, but perhaps the investors in the world of finance might know a bad stock when they see it.  Obama has been outraised in [...]

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"Not even a good junk bond."

We already know that the Obama administration’s stimulus-funded subsidies of green-energy firms have been rather poor investments. Solyndra, after all, collapsed while taking over half a billion dollars in taxpayer money with it, after the Department of Energy illegally subordinated taxpayer risk for later investors — mainly an Obama bundler from 2008, George Kaiser.  CBS [...]

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1. More Investigations over use of Fabricated Foreclosure Documents
2. Daily Finance | Big Banks Tell N.J. Courts to Stop Bugging Them About Foreclosure Documents
3. KABOOM | Reuters SPECIAL REPORT: Banks Still Robo-signing, Filing Doubtful Foreclosure Documents

1. Banking on Broken Promises | HAMP, Loan Mods & Lies
2. When Denying Loan Mods, Loan Servicers Often Wrongly Blame Investors
3. Loan Mod Lies | Were You Forced to Waive Your Rights to Get Help?

Kaiser roll.

Color me shocked, shocked at this revelation from yesterday’s Washington Post.  Politically-connected investors influencing government subsidies?  Inconceivable! Meant to create jobs and cut reliance on foreign oil, Obama’s green-technology program was infused with politics at every level, The Washington Post found in an analysis of thousands of memos, company records and internal ­e-mails. Political considerations were raised [...]

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1. 2004 GAO Report | Federal and State Agencies Face Challenges in Combating Predatory Lending
2. Housing Death Spiral | LPS’ Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached
3. Foreclosure Crisis: Common Ground Between Investors and Homeowners

1. 2004 GAO Report | Federal and State Agencies Face Challenges in Combating Predatory Lending
2. Housing Death Spiral | LPS’ Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached
3. Foreclosure Crisis: Common Ground Between Investors and Homeowners

1. U.S. SECURITIES COMMISSION v CITIGROUP GLOBAL MARKETS INC | $285 Million Citi Settlement With SEC Rejected by Judge Jed Rakoff
2. SEC Investigating Citigroup Mortgage Deal
3. Matt Taibbi | Finally, a Judge Stands up to Wall Street

1. SEC Charges Former IndyMac Executives With Securities Fraud
2. Report | WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse
3. AFR Letter to Congress RE H.R.1315 That Would Handcuff Consumer Financial Protection Bureau and Give Discredited Banking Regulators Vast Power to Block Needed Protections

1. Fraudclosure | Bondi: Don’t Cut Homeowners’ Mortgage Principal
2. Principal reduction plan for struggling homeowners could be part of settlement between lenders and states
3. Daily Finance | Will Homeowners Benefit from Mortgage Mess Settlement?

Desperation.

I picked on the Washington Post’s reporting earlier today, so let’s give them some credit for digging into the Solyndra mess and finding a disturbing new twist.  As the solar-tech company began to collapse, the Department of Energy had ample warning of the unfolding disaster.  Did they take steps to protect taxpayer funds?  Not only [...]

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1. $8.5 Billion | Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims
2. Fraudclosure | Mortgage Review Urged at Bank of America
3. Federal Reserve issues enforcement actions related to deficient practices in residential mortgage loan servicing and foreclosure processing

WHAT’S THE DEAL WITH INVESTORS?  WHO ARE THEY?
ARE THEY LOSING MONEY ON FORECLOSURES?

What do the investors think about all these foreclosures?

What’s the relationship like between investors and servicers?

Do investors want to modify loans?

Do investors ever stop servicers from approving loan modifications?

Why don’t investors get more involved in this mess?

IF YOU’VE ASKED THESE QUESTIONS, HERE’S YOUR CHANCE TO GET ANSWERS!

Attorney Talcott Franklin knows mortgage-backed securities inside and out.  He should… his firm, Talcott Franklin P.C. whose main offices are in Dallas, in dollar terms represents more than half of all the investors in mortgage-backed securities on the planet.  Tal’s the co-author of the “Mortgage and Asset-backed Securities Litigation Handbook,” and he’s a very experienced and highly sophisticated litigator.

What makes Tal a pleasure to talk to, however, is that he makes a very complex subject very easy to understand… in fact, every time I talk to him, I feel like come away smarter.  Actually, the very first time Tal and I spoke, it was very clear that we couldn’t be more in-sync as to our views on the economy… where it’s headed and why.

Tal sees the foreclosure crisis essentially the same way I do, which I found interesting right from the start because he represents the other side of the foreclosure coin… the investor side.  And because of his knowledge and perspective you’re going to find listening to what he has to say absolutely fascinating.

You know how servicers are always saying “the investor says no,” when they want to deny a loan modification… well, Tal explains why that simply isn’t true.  And he walks us through the securitization process in a way that you’re likely to remember forever.  And you’ll learn all sorts of other things you did not know.  I’m telling you, you’re going to love spending an hour with Talcott Franklin on this, A Mandelman Matters Podcast.

The podcast is available in two versions… MP4 and MP3.  The MP4 version includes a couple of slides that show diagrams of the basic securitization process, but the MP4 format may not play on some computers.  The MP3 version is audio only, and should play on most any computer.  Most listeners will have no trouble following along either way.

So, turn up the volume on your speakers, and click the MP4 or MP3 version.  I loved recoding this podcast.  If you want to know more about the foreclosure crisis, you’re about to learn from an expert on the other side of the foreclosures, the investor side… it doesn’t get any better than this!

CLICK HERE TO PLAY THE ENHANCED MP4 VERSION

… INCLUDES SLIDES ON SECURITIZATION

OR

CLICK HERE TO PLAY THE MP3 VERSION

Mandelman out.

As I sat down to watch Bethany McLean, the financial reporter that broke the ENRON story, appearing on PBS’ NOW with David Brancaccio, talk about the $18 billion in bonuses that Wall Street’s New York executives paid themselves in 2008 while we watched the U.S. and global financial markets literally melt down, I wasn’t expecting to enjoy myself. I was hoping, I suppose, to be educated in some way as to how these financial geniuses think.

Obama called the $18 billion in bonuses… “shameful”.

Brancaccio opened the interview by saying something about how Wall Street must now realize that they’ve “lost the great war and it’s time to do things completely differently”. Bethany laughed, and it was not a staged, pre-planned laugh… she laughed without meaning to, involuntarily. Then she said something that I’m not going to laugh about.

“I don’t think so. I don’t think there’s been a real come to Jesus moment on the Street yet.” She was just shy of chuckling as she spoke.

Brancaccio replied: “Even with all we’ve been through? Even with the great collapse of 2008 and 209?” And Bethany replied, but quite seriously now:

“I think there is still the attitude that it is the fault of American borrowers for borrowing beyond their means, for homeowners for moving into homes they couldn’t afford, and all Wall Street did was package this stuff up and sell it to investors around the world… that they are the least of the villains, rather than the greatest of the villains.”

Further, she said that the feeling on Wall Street is: “that we’re smarter than you so we’re entitled to make a lot more money than the rest of you.” She said that the people at Merrill Lynch, who were paid untold zillions in at the end of 2008, as they were being taken over by Bank of America, believe that it was just a few people at Merrill that created the problems and that you still have to pay people what they were promised.

By this point I was feeling lightheaded.

Bethany then pointed out that there’s a “real gap” between how Wall Street sees it and the rest of the country sees it. That the American people wonder how they can be taking taxpayer dollars and paying out exorbitant bonuses, while Wall Street says that they promised people this compensation and that they must be paid as a result… or they’ll leave.

Is that right? They’ll leave if we don’t pay them? Well, Holy Mother of God… DON’T PAY THEM!

Now… dizzy… when will this end. Maybe watching this wasn’t a good idea…

Bethany said that the argument that people will leave might not hold the same weight it once did, because the number of jobs on Wall Street has been cut by more than half. She said that maybe the upper echelon would leave and if they couldn’t find another job, they’ve been paid enough to just go to the beach for a couple of years…

My mid was now reeling… the light in the room seemed to be fading in and out… which beach? Which beach? WHICH GOD DAMN BEACH?

Brancaccio asked about whether these Wall Street types recognized that bonuses are usually paid on profits, but that profits are “radically down,” and Bethany replied that they don’t. She said that there’s a widespread belief that “it wasn’t my fault, so I’m still owed mine.”

Then she pointed out that the justification Wall Street firms have provided in past years when defending the large bonuses being paid out each year is to look at the profits being made. But, she explained, when you look at the write-downs on assets these firms have taken over the past year or two having completely decimated the profits of the last so many years, the reality is that the profits were illusory… they were never there to begin with… just over valued assets sitting on the books. So, as she put it, “people have already collected millions of dollars that in a strictly economic sense, they weren’t entitled to.”

Damn, is it hot in here? Mind if I open a window?

Brancaccio had a stupid half grin on his face as he segued into his next question about how one news story was reported in two different ways… blah, blah, blah… Apparently, Reuters reported that Wall Street bonuses had dropped the most they’d dropped in 30 years. While the New York Times, looking at the same data, reported “The 6th Largest Bonuses in History in 2008 for Wall Street,” or something very close to that.

Brancaccio then astutely pointed out that 2008 did not produce the sixth largest profits in history, which cleared up a lot of confusion for me, how about you?

Bethany commented that she thought the two different ways of reporting the same data on the bonuses was a good analogy to how Wall Street feels versus how we on Main Street America feel… and then she said, “And to answer your initial question, no… I don’t think Wall Street understands how much Main Street holds them to blame.”

Alright look… the next person that refers to me as “Main Street,” I’m knocking out. You’re the one that’s Main Street, betch. I’m Upper Westside. Or maybe Soho… the Villaige… Central Park East. Take that Main Street rap down the road, you backpacker ho.

Oh dear, I’m sorry about that. I can’t believe I said that out loud?

Citing the stock back-dating scandals that went on just after ENRON, Bethany continued, saying that the same mindset that existed before ENRON still existed today: “That we’re executives and are therefore entitled to money that really belongs to the shareholders.”

Brancaccio, his countenance now looking its most concerned, then asked the all-important question as far as he was concerned: “Will we be able to stop it from happening again?” He went on to say something about how wonderfully transparent Treasury Secretary Tim Geithner has promised to be and how that would help.

I held my laptop out of the way as I threw up on my shoes.

Bethany said she doesn’t have a lot of faith in regulations as far as having the ability to stop future problems, and she points out that Sarbanes-Oxley was supposed to stop the problems in 2003, but that today’s problems had nothing to do with Sarbanes, calling Sarbanes, “completely irrelevant”. She said that regulations are akin to the Maginot Line, which in case you don’t remember your WWII history, did a fine job keeping Germany from invading France.

Then Bethany said that she thought the central problem was “incentives”. I started to pass out… she said that as long as incentives are provided for short-term performance, people will do whatever it takes to achieve that short-term performance and that there’s no “claw-back,” even when that performance is shown just a year or two later to be illusory.

She thinks that’s the biggest problem. Those damn short-term incentives.

Bethany then said that Americans wouldn’t have stood for the government coming out during the boom and saying okay it’s overheated, we’re going to cool things down a bit. So, she thinks “there’s a little hypocrisy there on the part of Main Street, as well.”

I slapped myself across the face as hard as I could.

When I came back, she was explaining that if banks wanted to find out the price of their toxic assets, since nobody knows, they could sell them right now to private investors, but then the losses would be real. And she said the real question is: “Who should bear the brunt of this risk, should it be taxpayers, should it be equity holders, should it be bond holders?

My stomach started to ache… I don’t think I can go on much longer…

Then the two of them went into a discussion about the advantages of nationalizing banks. Brancaccio was saying that the critics of nationalization, which coincidently are the CEOs of the banks themselves, argue that the if the government owned the banks they’d be under political pressure not to do things like put people out of their homes when they didn’t pay their mortgage. Brancaccio asked: “So, is that such a bad thing?”

And she replied that it was a tricky question.

I inadvertently pulled out a good size clump of my own hair.

When Bethany was asked about the banks and the idea of selling the toxic assets to “the bad bank,” she had this to say:

“It doesn’t change the need to determine the actual price of the toxic assets, because the banks will have to sell them to the bad bank. If the government buys the toxic assets at a price where the taxpayers would actually make money on them in the long run, then you’re going to cause a severe hole in the balance sheets of financial institutions… that’s going to mean that the banks will need more capital to fill that gaping hole. If the government buys the toxic assets at a price that keeps the financial institutions whole, keeps the balance sheets intact… then taxpayers are going to have to bear the losses on the toxic assets.”

Be careful… if you read that last paragraph again, your eyes could start to bleed, and you’d land yourself in the hospital for a week. Just say no… no good cam come of it.

Bethany went on to talk about how so many people are guilty in creating this crisis that no one is going to go to jail, as in Jeff Skilling and Andy Fastow of ENRON fame. She thinks the Wall Street executives were wrong, the borrowers were wrong… the sub-prime lenders were wrong. And that it’s hard to pull one person out of that crowd and punish them, because it was tricky question as to whether they did something unethical, as opposed to illegal.

Many experts say that the banks will likely need $2-$4 trillion more from the taxpayers, before this is over. And to top it all off, Bethany said she thought the idea of loan modifications was yet another… tricky question.

At that, I dropped my laptop on the tile floor and went for a walk.

Just don’t, okay? I don’t want to talk about it.

Please don’t assume that this article is only about Spain, and therefore not one you should read.

A little over a week ago, Jose´María Roldán, the Bank of Spain’s Director General of Banking Regulation, gave a presentation in London to investors that the New York Times described as “surprisingly frank.”  Apparently, Spain’s banks are not doing very well at all, and Roldán was there to tell those in attendance that the country’s central bank forecasts that the situation is going to worsen going forward.

It’s interesting because, according to Roldán, the cause of the pain in Spain, has nothing to do with Greek or Irish bonds, as one might have guessed, rather it’s because “with Spain’s economy weak, and home prices falling, bad loans are growing,” explains Floyd Norris of the Times.

I don’t want to get too far off track here, but that sounds eerily familiar to me… it’s spooky.  Where the heck have I heard of that same sort of thing going on… a weak economy and falling home prices causing more loans to default… and the country’s banks going under as a result?  Let me just think for a moment…

Nope… can’t place it, especially that last part about banks getting in trouble as a result.  I seem to recall something about a weak economy, falling home prices and increasing loan defaults, but banks getting in trouble as a result… why, that doesn’t seem to fit in at all.  Oh well, maybe it was the plot of a movie I watched recently, or something like that.  Let’s get back to Spain…

Roldán told investors that land prices in his country, adjusted for inflation, have now fallen 30 percent, and Spanish home prices have dropped roughly 22 percent, since their high water mark back in 2007.  He also said that Spain’s central bank expects further declines in the years ahead.

The Central Bank’s “baseline scenario” shows that land prices will ultimately fall to about half of their peak in 2007, but the bank’s “adverse scenario” shows that the decline in process could be a whole lot worse.

I have to tell you that I like how Spain operates in terms of its economic forecasting.  They’ve got a “baseline scenario,” which shows that things are going to get worse, but they also have an “adverse scenario,” which shows that the baseline might paint too optimistic a picture of what’s to come.  On the other hand, here in the U.S. it seems that we only put out a “baseless scenario,” which never comes close to materializing, and we don’t even consider anything more “adverse.”

Maybe people in Spain are more mature than we are in America and therefore Spain’s government feels they can be told the truth.  It’s fascinating though, don’t you think?  Okay, sorry… let’s get back to our story…

The reason the New York Times called Roldán’s latest presentation to investors “surprisingly frank,” is that last February, when he gave a similar presentation, home prices in Spain were down by about 18 percent from their 2007 peak, and yet he argued that the declines were merely “cyclical downturns,” as had occurred in the past, and that prices would soon be rising once again.

Here’s another aspect of Spain’s banking crisis that I found remarkable to say the least.

According to the story in the Times, Spain doesn’t have “irresponsible homeowners” that are causing the residential mortgage loans to default, like we do here in the good old U.S.A.  In Spain, lending to homeowners was far more prudent, so the story goes, and as a result, Spanish banks are not being left holding large amounts of bad loans as the country’s residential mortgages increasingly go into default.

(Look, if that last paragraph is making you feel a little lightheaded, or you’re starting to break out in hives, just let it go, okay?  Of course, it makes no sense whatsoever, but who am I to question the venerable New York Times.  Just take a deep breath and lets press on…)

In Spain, it’s not the “irresponsible borrowers” that are causing the problem, instead it’s Spain’s “irresponsible real estate developers and construction companies” that are at the root of all economic evil.  Sí, es verdad.

Apparently, as land prices went higher and higher between 2003 and 2007, Spain’s banks became more and more eager to push out loans to developers and construction companies, and as of the middle of this year, 17 percent of the loans made to Spanish real estate developers and construction companies were considered “doubtful,” which is the term favored by the country’s central bank.  And not only that, but the percentage of doubtful loans has been increasing fast, which coincides with the declining residential real estate values.

I still can’t get over how familiar the facts of this story sound to me… why is that darn it… it’s driving me crazy, like when I can’t remember who played the Professor on Gilligan’s Island, or something like that.  (It’s Russell Johnson, by the way… that useless fact I have no trouble remembering.  Where I’m supposed to be this afternoon at three, I have no idea.)  Okay, sorry… it’s just that it’s nagging at me… never mind… let’s get back to it…

The story in the Times went on to explain that when the financial crisis hit in 2008, it seemed that Spanish banks were in better shape than most, primarily because of stricter regulations that prevented them from making the same mistakes that other banks had made, but as it turns out, Spain’s banks were heavily exposed to the real estate market, and now they’ve got trouble… with a capital ‘T’ and that rhymes with ‘P’ and that stands for “pool de hipotecas,” which is Spanish for “mortgage pool.”

So far, the Bank of Spain has forced the country’s troubled banks to merge, brought in new and improved management, and as of the end of this month, will have put in about 26 billion euros to recapitalize the banks, although the chief Southern European economist at Barclay’s Capital says that Spain’s banks will need closer to $50 billion before they are on solid ground again.

Of course, Spain’s banks are still sailing around in a boat with a hole in its bottom, so it’s hard to say how much they will ultimately need to remain afloat.  Loans secured by raw land and by construction that were made during the real estate bubble continue to default and as they do the losses are destroying the balance sheets of Spanish banks.

It seems that real estate developers took out the loans to build offices, stores and new homes, and now that the economic situation has worsened, demand has evaporated and Spain’s irresponsible developers are finding themselves unable to repay their loans.  And not only that, but with unemployment in Spain now above 20 percent, there are other corporate loans that are also showing signs of “doubtfulness,” I suppose the Spaniards might say, and wouldn’t you know it, car loans and other loans made to individuals aren’t doing all that well either.

Why, who would have ever thunk it?  Go figure.

Spain is still taking some misplaced comfort in the fact that only 2.5 percent of its mortgage loans appear to be in danger of default… today.  That’s about where we were in 2008, so I see no reason to worry about that statistic becoming more of a problem, especially when you consider that all mortgages in Spain are variable rate loans… we might call them ARMs… so, as long as interest rates never go up, there’ll be no need for refinancing and everything should be muy bueno.

It is worth noting that Spain does have a couple of advantages not shared by the U.S. as related to the mortgage markets.  For one thing, Spain has almost no home equity loans so most people still have equity… today at least.  When someone loses his or her job, they can still sell their home, assuming the new buyer can get a loan from one of Spain’s troubled banks, that is.

I wonder what will happen in the next few years as more loans default and the condition of Spain’s banks deteriorates further.  You don’t suppose that will mean fewer loans and tighter credit, which will reduce the demand for residential property, and which in turn will put downward pressure on housing prices thus forcing more and more Spaniards underwater as far as their mortgages are concerned?

And once underwater, is it possible that when someone in Spain loses a job, they could find themselves unable to sell and in foreclosure?  And do you think that foreclosures will put even more downward pressure on housing prices, thus forcing even more homeowners in Spain underwater?

Nah, none of that will happen.  Geeze, Mandelman… where do you get this stuff?  You’re such a downer.

The other positive difference Spain has in its corner is that its banks didn’t engage in the securitization schemes our Wall Street bankers did.  Spanish banks didn’t just originate the loans in order to bundle them up to be sold as AAA rated bonds to investors.  So, when the loans go bad, Spain’s banks take the losses, but at least they don’t have to worry about having leveraged themselves 30 or 40 to one.  If a bank in Spain looses $100k, at least all they loose is the $100k, instead of the three or four million that U.S. banks lose when they have a $100k loan go bad.
Norris’ wrapped up his story in the Times with the following paragraphs, which I think are worth reprinting word for word:

“The Bank of Spain has said it is emphasizing transparency in seeking to fix the banking system, and that it is willing to be flexible as conditions change. Its openness may be winning over investors. No one likes to hear bad news, but it is reassuring to believe that the news is accurate, rather than sugar-coated.

Here, here!  Here’s to accurate news.  May we one day experience some here in the United States.

I have not seen other banking regulators distributing charts forecasting the biggest problem facing their banks was likely to get significantly worse, as the Bank of Spain did this week.

No, you have not, Mr. Norris.  And you know why that is, right?  Because U.S. Treasury Secretary Tim Geithner prefers a slightly different strategy than the one being implemented here… he believes that in light of the worst financial crisis since the Great Depression, the only decent thing to do is to deceive us.

It has been more common for regulators to seek to weaken accounting rules, on the theory that it will help confidence if banks seem to be strong, regardless of the facts. That is an attitude that has backfired, particularly after the European stress tests chose to assume that all sovereign debt was safe.

Yes, and it does cause one to ponder where else such a strategy has been employed… on steroids… and is therefore highly likely to soon backfire, doesn’t it?  I mean, here’s some key learning to hang onto for life… when you hear that a plan being implemented is being referred to as “extend and pretend,” unless it involves only five year-olds… hit the pause button and see if things shouldn’t be reconsidered.  I’m just thinking out loud over here…

Rather than denigrate markets as being foolishly negative — as some other European officials have done recently — Mr. Roldán cited market trends, including the rising cost of credit-default swaps on the banks, as evidence of the problems confronting them.

All hail the honest banker!  Yes, last February he was every bit as full of beans as the rest of them, but as of a couple weeks back, the man who regulates Spain’s banking system has broken with the pack.  All hail the honest banker!

It is a refreshing attitude in a bank regulator. When, and if, Mr. Roldán ever starts to say the worst is over, it will be a lot easier to believe him.”

Funny how that works, isn’t it?  Perhaps Tim Geithner’s mom never read him the story of “The Boy Who Cried Wolf.”  I know it made a big impression on me as a child.  Geithner, on the other hand, if he was in fact read the story, seems to have entirely missed its point.

Okay, so now that we’ve covered what’s happening in Spain… I have a minute to try to remember why this story sounds so darn familiar to me.  Let’s see… here’s a recap of what’s going on in Spain…

There was a real estate bubble between 2003 and 2007… check.

It popped in 2008, when the financial crisis began in earnest… check.

Unemployment started rising, and is now over 20%… check.

Land has fallen in value by 30 percent, homes by 22 percent… and it is acknowledged by Spain’s central bank that both have farther to fall… check.

Only 2.5 percent of residential mortgages are currently in default, but as credit constricts and home prices continue their descent, more and more homeowners will find themselves underwater… foreclosures will begin… check.

The banks made loans to “irresponsible real estate developers and construction companies” that now cannot be repaid, and the number of such loans in default is growing, as are defaults on car and other consumer loans… check.

The government is forcing some bank mergers, and pumping funds into the troubled banks to recapitalize them.  Oh yeah, they’re also replacing bank management at the same time, although that’s not something I’ve seen done in our country… check.

Wait… I’ve got it.  It is a movie I saw recently.  No, I’m kidding…. I’m a kidder… I kid.

It’s a mirror image of us, but as seen though a country that is choosing not to extend and pretend… not to fabricate a recovery out of thin air, the same way the Fed generates our GDP of late.

So, what about the discrepancies… answer me this:

How come as Spain’s economy worsens, unemployment rises, property values fall, and “irresponsible developers,” among others, cause loan defaults to steadily increase… those same things have a negative impact on the country’s banks.

But when the very same things happen in the United States, our banks appear impervious to such forces… they don’t lend, but they still only thrive… becoming more profitable and awarding larger bonuses year after year, while they ignore entirely a generation that will never trust them again?

The answer is… someone is not telling us the truth about our financial institutions, because the same forces in play must have a similar impact.  The fundamental tenets of economics don’t know from geopolitical borders.

There are two obvious differences between our handling of the crisis and Spain’s.  One is that when they recapitalized their banks, they replaced bank management.  We did nothing of the kind.  I wonder if that could be playing a role in how well we’re not doing in the United States.

Ya’ think?

The other difference is that Spain is hanging the irresponsible jacket, not on homeowners, but on real estate developers, so if they do punish one group at all, they’ll be punishing a much smaller group than that of the American homeowner.

We, on the other hand, are continuing to blame and therefore punish the very people we need to transform our recession into recovery… the American homeowner… the millions of consumers whose spending has always been something like 70 percent of our economic growth… and yet we continue to bankrupt our middle class by the hundreds of thousands, under the guise that their irresponsible behavior is what caused our economic collapse.

Spain is facing essentially the same economic conditions that we are, albeit on a smaller scale, and with certain advantages, and disadvantages… but it’s a similar situation, as I hope you now see.  So, maybe we should start blaming “irresponsible real estate developers,” instead of our homeowners, whose crime at most… if there is one at all… was wanting a nice place to live.

Isn’t it time we stopped blaming our neighbors for a crisis that continues to destroy the world’s economy, or if we’re going to continue blaming our homeowners, shouldn’t we at least start blaming them for what’s wrong with Spain too?

Mandelman out.

Do you understand why it’s so incredibly important that we produce the documentary about the foreclosure crisis?  Because far too many in this country still don’t know we’re having a crisis, and until we all understand the situation, we won’t take steps to solve it.

I speak with people about the crisis every day, and half don’t even know what’s going on.  Help me to tell the story in documentary form, so more people can join the fight to stop the crisis that is tearing apart our nation, and destroying any hopes for economic recovery.  It doesn’t matter how much, but please donate today.  Even if all you can afford is $1… take the time to click the button below and sign on help produce the communications tool that can help stop this crisis from being ignored.

I'm testifying before the Senate Banking Committee on Tuesday about the role of the government guarantee in housing finance (a/k/a wtf do we do with Fannie and Freddie). My testimony is here. I expect it will manage to piss off people left, right, and center, but that's the nature of this GSE reform debate. 

I'm not thrilled with the prospect of a government guarantee, but I just don't think that there's sufficient the market demand for credit risk on U.S. mortgages for a non-guaranteed system to function. Do we really think that $6 trillion dollars of interest risk investors are suddenly going to decide they want credit risk as well?

Realistically, if it gets hairy enough, the government will bail out the system, Dodd-Frank, Tea Party, and all that jazz aside. We'll keep chanting no more bailouts until we do the next bailout. (Remember the War to End All Wars?) That means that it's better to have an explicit guarantee and price for it.  

Put differently, the choice we face is not guarantee or no guarantee. That's just a false dichotomy. The choice instead is between an explicit and an implicit guarantee. The implicit guarantee is a guarantee of moral hazard. The government will bail, but won't price for it. The explicit one certainly has its own problems, but at least it means we are being candid about the risks the government is assuming and trying to price for them and structure the guarantee to mitigate the risk that it will be used.   

The Nevada AG is looking to reopen the 2008 AG settlement with BoA:  the AG alleges rampant and immediate non-compliance with the settlement.  The NYT coverage missed what is arguably the bigger story:  the Nevada AG came out and alleged a securitization fail.  The NY AG moved in this direction in his BNYM settlement action intervention, but was a little more oblique on that point. The Nevada AG minced no words: 

Bank of America misrepresented, both in communications with Nevada consumers and in documents they recorded and filed, that they had authority to foreclose upon consumers' homes as servicer for the trusts that held these mortgages.  Defendants knew (and were on notice) that they had never properly transferred [text redacted] these mortgage to those trusts, failing to deliver properly endorsed or assigned mortgage notes as required by the relevant legal contracts and state law. Because the trusts never became holders of these mortgages, Defendants lacked authority to collect or foreclose on their behalf and never should have represented they could.   

See also paragraphs 53 and 137-149. Amazing how the federal regulators missed all of this. Realize that it's been less than a year since the robosigning scandal broke and the chain of title issues started getting some attention. I expect we will see a lot more action on this front over the next year. Prosecutors, investors, and consumer attorneys are getting a lot more savvy about these issues, and it's getting harder and harder for the banks to dance around the problem.      

From the Senate Report:

“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets,” said Levin. “High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.  Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them.  Rampant conflicts of interest are the threads that run through every chapter of this sordid story.”

Full Forbes Story

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From the Senate Report:

“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets,” said Levin. “High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.  Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them.  Rampant conflicts of interest are the threads that run through every chapter of this sordid story.”

Full Forbes Story

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Last week, Felix Salmon stopped me in my tracks by running a headline that said that Bank of America doesn’t “believe in treating borrowers fairly.”

What?  Hold on… now that’s being a bit harsh, don’t you think?

Look, it’s been over three months since I ran the story about how BofA broke into a home they didn’t own and stole the ashes of the owner’s deceased husband, among other things… and a full year since they foreclosed on, emptied out, and placed a lock-box on the Florida home that was free, clear, and previously mortgaged by Wells Fargo.  And I’m almost positive that an entire week has gone by without a new lawsuit being filed against the giant ghost-bank, although on this last point I’ll concede, I may be wrong.

I mean, can’t BofA catch a break anywhere?  They’ve been behaving so well for a long time, at least in BofA years.  In BofA years, a week without a lawsuit is like 5 regular human years, right?

So, I start reading the story and come to find out that Felix is reporting that Bank of America is setting up and transferring roughly half of 14 million mortgages into a “bad bank,” and I figure that means that there will now be two BofAs, and one will be called the “Bad Bank” and the other, I would have to assume, will be called the “Worse Bank.”

My wife and her Mom do both bank at BofA, and I’m kind of hoping that their accounts get split between the two BofAs.  That way, when I ask her where she had to go today, she could answer by saying: “Oh, I had to go from Bad to Worse.”  (LOL, I crack myself up sometimes.)

Anyway, Felix was explaining what FBR analyst Paul Miller, had said in a Bloomberg article as to the reason behind the good/bad split, which was: “to get investors focus on the good” and as “a way to talk about good things and ignore the bad.”

See, these are the kinds of things that make me afraid of the world around me… like, now I don’t want to even leave my house.  Does stuff like this work on “investors?”  What… are the “investors” he speaks of like four years old?  I’m asking because that was about the last age that I could have pulled something like that on our daughter and expected it to work.

Salmon says that BofA is essentially doing two things:

1. Trying to “sweep” bad loans under some kind of carpet.
2. Step up its pushback against the proposed mortgage-servicing settlement.

Now, although I have to admit that I personally don’t read him often, or actually… ever, I’ve been told that Felix Salmon is a real smart guy, and I’ve been meaning to find his column for some time, so I tend to believe him here.  So, that’s all a mega-bank has to do to get investors to stop focusing on roughly half of 14 million “bad” mortgages… announce to Bloomberg that they’re putting them into a “bad bank.”

Doesn’t that scare you?  Don’t these investors ever read Bloomberg?  I would have thought that they did, at least on occasion.  So, why would transferring almost half of 14 million “bad loans” to “bad bank” trick them into forgetting about those 6.7 million “bad loans?”  If this plan works… I’ll likely never recover.

Some guy named Terry Laughlin is said to be running “bad bank,” I assume CEO Brian Moynihan will continue to run “worse bank,” or maybe it’s the other way around, but no matter… they’re both BofA, so whatever.  Apparently, Laughlin was giving some sort of presentation last week, and talking about how his new “bad bank” will focus on granting loan modifications to delinquent customers.  According to Bloomberg, Laughlin said that “as borrowers default, we’ll evaluate them for a loan modification.”

See, now I would have said that would make them “Good Bank,” not “bad bank,” but that just shows you how out-of-touch I am with what’s going on in this country today.

I feel completely turned around on this issue… I thought that for the last few weeks, Geithner, and a whole bunch of other politicos had been saying that granting loan modifications was a good thing… stopping foreclosures… also good.  But it’s only done by “bad bank,” apparently.  So, I guess that bad is now good.

Ok, fine… so, just tell me, so I don’t hurt myself… is “up” also “down” and cold also hot?  What about “in” also being “out”?  You do what you want, but I’m not leaving my study until someone sends me a new set of instructions.

Now, as far as stepping up their “push-back against the proposed mortgage-servicing settlement,” Felix says that the settlement does “quite explicitly does include loan modifications for borrowers who aren’t in default.”

Okay, so I see the problem here… that means that “worse bank” is going to have to do loan modifications too, but all the loan modification personnel will be working over at “bad bank.”  So, big deal… send the loan mod work across the street, from “worse” to “bad,” as it were… the customers should be happy about going from “worse” to “bad,” no?  I know I would be, or at least I always have been in the past.

Felix references a point from the settlement proposal that the bankers are fighting about, part II.K.8, (document shown below), that says:

“Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.

According to Felix:

“This is something BofA hates — because it opens the door to underwater borrowers who are making timely payments being able to get a loan modification and thereby reduce the value of the loan. And BofA CEO Brian Moynihan is on the warpath against it, saying that such a system would be unfair to borrowers who don’t get their loans modified.

Is that what that paragraph does?  So what, it opens the door… big deal.  The door’s been open at BofA for several years now, and when the bank wants it to be revolving, it’s revolving.  And when they want it shut, well… let’s just say that you had better get your fingers out of the way and leave it at that.

Felix also quotes Georgetown Law professor, Adam Levitin, who I think agrees with me about the whole “open door” policy thing.  Levitin says that there’s nothing in the proposed settlement that forces BofA to do anything unfair… like BofA needs permission to do anything like that… LOL.  He says:

“BofA is encouraged to draw up its own set of standards and then apply them to all of its borrowers in a consistent manner.”

Well, I can certainly see how that “consistent” thing would be at least irksome to BofA’s CEO… that’s for sure.  That would require BofA to be working with a concept entirely foreign to the organization.  I mean, shunning consistency is part of BofA’s culture.  It’s like asking Apple employees to “Think the Same”.

Felix says that the only reason BofA is fighting back against the settlement proposal is that if either of the banks, from “bad” to “worse,” were to behave “according to the settlement’s guidelines, it (they) would lose some of that $35 billion to $40 billion a year that Moynihan reckons it should be able to make going forwards.”

Felix also says that he’s not aware of any bank “in the history of the world” that’s ever made $40 billion in a single year… and he says he doesn’t think any bank ever should make that much in a year.  I actually agree with that, pretty much… except for Goldman Sachs, of course… I mean, our nation’s future is in their hands, after all, and I don’t think we should even start talking about limiting them in any way.

For one thing you don’t bite the hand that feeds you, and for another, if they even get wind of this kind of talk, they’re likely to punish us in some significant way.  Remember the collapse of the Ruble in 1998, and the bailout of Long-Term Capital Management?  Yeah, well I heard that was done in response to Brooksley Born’s regulate-the-derivatives shenanigans back in ’94.  I’m telling you, let’s not mess with Goldman… God’s work, if you recall… and he didn’t look like he was joking to me.

(Felix also offers a unique exception to the Federal Reserve, but I don’t think he has too much to worry about there.  Unless Bernanke just keeps printing money while keeping all of the secret garbage assets on their books at their stated values that banks have been able to use as collateral for loans these past few years, we’ll be lucky if we see the Fed truly makes money again in my lifetime.)

The rest of the banks, however, I agree with Felix… they don’t need to be making $40 billion a year… especially when most people’s experience with them goes from “bad to worse” pretty darn fast.  Of course, that was under the leadership, and I use that term extremely loosely… of Kenny “The Acquirer” Lewis.

Felix ends by pointing out: “Bank of America is far too big to fail, and as such it benefits greatly from an implicit government guarantee. The least it can do in return is treat its borrowers fairly,” and that’s another point that I have to say I don’t agree with in the least.

The least BofA can do is to treat borrowers fairly?  That’s just not a true statement.  I’d say, the MOST they can do is treat borrowers fairly… the least they can do… well, I hope we’ve already seen the least they can do, but every time I think that about one of the banks, they seem to rush right out and show me that they can do even less.

Mandelman out.

27 Page Settlement