Jul222014
Some criminal bank executives should go to jail
Punishing shareholders with corporate fines does little to deter bad behavior among corporate executives. Some of them need to go to jail.
If I had to narrow my list down to the people most responsible for the housing bubble, Anthony Mozilo would be near the top of the list.
The Option ARM loan was the primary loan product that inflated the housing bubble. Using negative amortization and teaser interest rates, people were able to borrow more than twice the amount than they could afford with a conventional 30-year fixed-rate amortizing mortgage. Once the Option ARM imploded and lending retreated to conventional mortgages, prices needed to fall significantly to rebalance affordability. The Option ARM was the Ponzi virus that caused the debilitating financial disease that inflated the housing bubble and created the current economic morass still plaguing the country.
The only person perhaps more responsible for the housing bubble is Alan Greenspan. If he hadn’t let the Ponzi virus out of its vial, and if he didn’t allow unregulated insurance “swaps” to encourage dumb money to flow into what they thought were riskless transactions, the air that inflated the housing bubble would not have found its way into Option ARM loans being peddled by Mozilo. Greenspan and Mozilo are my nominees for the fools most responsible for the housing bubble.
Alan Greenspan was clueless, incompetent, and philosophically blinded to the mess he created. What’s arguably worse about Mozilo is that he recognized that he released a monster and did nothing about it. Anthony Mozilo should go to jail, but the road to that end is a difficult one for prosecutors.
Most corporate executives have contracts that require the corporation to pay their legal defense bills for anything they do while running the corporation. While they also have “bad boy” clauses that release the corporation if the executive does anything criminal, getting a conviction is extremely difficult, and the corporation will pay the bills if the executive is not convicted. It’s a farce, and it’s hurting America.
Punish the Executives, Not Just the Banks
Posted by James Surowiecki, July 15, 2014
When a company finds itself seven billion dollars poorer, it’s normally a big deal.
(See: How many billion must the TBTF banks pay for their malfeasance?)
Yet when the Justice Department announced Monday that Citigroup had agreed to pay seven billion dollars (four billion of which will be in hard cash, and most of the rest in what are called “soft dollars”—mortgage modifications, financing of rental housing) to settle charges relating to its marketing of bad mortgages, the general reaction was muted, to say the least. Citigroup’s stock, buoyed by its announcement of better earnings, actually ended the day higher. And while the Justice Department trumpeted the fact that this was the biggest cash penalty ever levied against a company, it’d be hard to find anyone who felt that the deal was going to have any impact on Wall Street’s behavior in the future.
Why would it change behavior? The people committing these acts are not being punished, and the shareholders are treated as whipping boys.
There’s a simple reason for that: punishing institutions, rather than individuals, doesn’t get at the root of the problem. Bank shareholders (who are the ones effectively paying the fine) certainly deserve blame for tolerating—and, in some cases, arguably encouraging—banks’ risky and dubious lending practices during the housing bubble. But Citigroup shareholders were already harshly punished by the market in the wake of the housing crash: at one point, Citigroup’s stock was down ninety-eight per cent from its all-time high, and today it’s still more than eighty per cent below its 2007 peak. If that didn’t teach shareholders to be more cautious about investing in big banks, it’s hard to see how this fine will do it.
More to the point, if you really want to punish and, perhaps more important, deter bad corporate acts, you have to penalize the individuals who committed them.
This concept seems like something we all learn in kindergarten, and it shouldn’t need to be stated, but since these executives are getting away with it, we need to be reminded that these men knowingly did bad things that hurt other people purely for personal gain.
Instead, at least so far, the people who made the decisions to securitize and market loans that they knew were almost certain to go bad have gone untouched. Set aside the question of criminal prosecution. They haven’t even been forced to give up their bonuses or the salaries they got as a reward for putting together these ridiculous, and often corrupt, deals. They’ve been able to keep gains that were, by any measure, ill-gotten.
Punishing individuals is especially important in the case of Wall Street, because one of the biggest problems in the run-up to the housing bubble was that individual traders and executives were incentivized to engage in behavior that was incredibly lucrative for them (since their bonuses were pegged to short-term performance) but incredibly destructive to their companies. This was the basic logic behind what they called “I’ll be gone, you’ll be gone” loans, where people were willing to do deals that they knew were likely to blow up, because they figured that by the time the deals went bad, they themselves would have moved on (while pocketing hefty bonuses in the meantime). You can certainly fault Citigroup and the other Wall Street banks for setting up these kinds of incentive structures, and for creating a business climate in which shady behavior was encouraged. But while the banks themselves did incredibly badly during the financial crisis, plenty of Wall Street employees (including plenty of bank C.E.O.s) did incredibly well. And the fact that they’ve kept the money they made doesn’t exactly send the right message.
Again, isn’t this common sense? Do we no longer have a moral compass in this country? Is doing business a matter of seeing what you can get away with?
It’s true that over the past few years banks have tried to do a better job of making sure that the interests of companies and employees are aligned, so that contracts are now more likely to have things like clawback provisions (where ill-gotten bonuses have to be paid back). But the reality is that short-term incentives are still incredibly powerful on Wall Street, and there are always going to be people on the Street (which is the ideological center, after all, of eat-what-you-kill capitalism) who put their own interests ahead of those of the company—or, needless to say, of their customers. So it’s naïve to think that a settlement that touches no individual is going to have any deterrent effect going forward. Institutional accountability is important. But holding people accountable is ultimately the only way to bring about real change on Wall Street.
With the current state of our political system, any change is unlikely. Financial interests own our Congress with the huge donations, and the populace is distracted by bread and circuses and keeping up with the Kardashians, so they really don’t care. Perhaps if the excesses get even more out of control, political pressure will build for Congress to do something meaningful, but in the short term, it’s business as usual on Wall Street.
[listing mls=”OC14153971″]
Apparently juries now see loan modifications as an entitlement.
California loanowner obtains $16.2M jury award
A Superior Court jury in California has awarded $16.2 million in damages to a Sacramento-area homeowner who said that PHH Mortgage Solutions, based in Mount Laurel, botched his loan modification and nearly cost him his house.
Lawyers for Phillip Linza said the award included $514,000 in compensatory damages and $15.7 million in punitive damages.
PHH is the sixth-largest originator of residential mortgages and the eighth-largest mortgage servicer, as well as South Jersey’s fifth-largest employer.
Dico Akseraylian, the firm’s vice president, said Monday that the servicer believed the verdict was not supported by the facts presented in the case or by applicable law, and that the jury award “is grossly disproportionate to any alleged damages.”
PHH “has taken steps to seek further judicial review of the case and verdict,” he said, adding that “we take our responsibilities to borrowers seriously and remain committed to meeting all of our obligations as a servicer.”
Philadelphia bankruptcy lawyer Stephen M. Dunne said he considered the award “a wee bit excessive, but the point of punitive damages is to end rampant behavior that fails to go unchecked.”
A typical jury award would be $15,000 to $100,000, assuming the borrower could prove fraud on the part of the lender, Dunne said.
Colmar-based bankruptcy lawyer William D. Schroeder Jr. said the size of the award was likely an expression of “the jury’s anger” against the system.
One of Linza’s lawyers, Jon Lee Oldenburg of the United Law Center in Roseville, Calif., said PHH’s “arrogance was something the jury focused on.”
I usually don’t agree with Barney Frank, but he is correct in pointing out that Dodd-Frank has prevented the customary proliferation of toxic mortgage products that inflate housing bubbles.
Mr. Frank goes back to Washington
Frank and former senator Christopher Dodd, who co-sponsored the Dodd-Frank Act, also appeared on CNBC on Monday, marking the Act’s fourth anniversary.
Both men spoke of the success of the legislation in reforming the financial system of the U.S.
“The point (of the legislation) was to bring stability to it, to modernize our regulatory system so that you could have a 21st-century system, get us out of the shadow banking system, try and provide additional capital requirements, some liquidity that was needed terribly, finding oversight for a lot of the activities that were occurring, deal with derivatives in transparency, have a consumer protection bureau that would give consumers of financial services a chance to have grievances addressed,” Dodd said.
“Those are all part of the bill that are making significant, I think, contributions to the process.”
But Dodd added “we’re still paying the price for the financial crisis.”
Frank, sporting a beard these days, said that significant changes have been made in mortgage lending since the passage of Dodd-Frank. “The kind of terrible mortgage loans…the abuse of mortgage loans that hurt consumers, hurt financial institutions, and hurt the economy…we outlawed them and they haven’t been made since then,” he said. “There have been some very real accomplishments.”
Frank lamented that the QRM proposal regarding risk retention is being watered down to match the QM standards. Although I welcome even greater complexity as a direct beneficiary, I’m not so sure the current QRM proposal is so bad. It will further entrench the QM standard for nearly all mortgage loans. This is good for:
1) borrowers who won’t be able to borrow beyond their means;
2) prospective home buyers who won’t see idiots stretching their finances pushing prices further and further; and
3) the safety and soundness of the mortgage banking system.
Republicans oppose Dodd-Frank, largely because big financial interests don’t want to comply with it, but their latest attack on it sounds like they believe the legislation didn’t go far enough. They malign it for failing to end too-big-to-fail, which is a legitimate criticism, but the only solution is even more legislation that is more burdensome that Dodd-Frank.
Republicans Release Report Assessing Dodd-Frank
Congressional Republicans, on the four-year anniversary of the Dodd-Frank Act, fired out at the controversial legislation, saying that the act’s purported purpose to end the government’s “too big to fail” policy has itself failed.
On Monday, the House Financial Services Committee released a 100-page report titled “Failing to End ‘Too Big to Fail:’ An Assessment of the Dodd-Frank Act Four Years Later,” which asserts that the act perpetuates a dangerous policy of bailing out lenders that fleece American taxpayers, under the presumption that not bailing them out would make matters far worse. GOP leaders say that Dodd-Frank was supposed to put an end to this perspective, but instead makes sure it continues.
“In no way, shape or form does the Dodd-Frank Act end ‘too big to fail,’” said Jeb Hensarling (R-Texas), chairman of the committee. “Instead, Dodd-Frank actually enshrines ‘too big to fail’ into law.”
The report calls the Financial Stability Oversight Council, created to manage the administration of Dodd-Frank, “unwieldy,” and states that the FSOC has failed to live up to its statutory mission to identify and mitigate systemic risk. The report also says that while the Office of Financial Research has made some progress in its mission to collect financial data to identify systemic risks, its progress has been hampered by poor data collection efforts that risk “imposing substantial costs in return for speculative benefits.”
More to the point of its title, the report asserts that proponents of Dodd-Frank have never offered an adequate, concrete explanation of how the orderly liquidation authority ‒‒ which provides a process to quickly and efficiently liquidate a large, complex financial company that is close to failing ‒‒ would actually end bailouts. The FDIC’s strategy for implementing “single point of entry” provisions outlined in Title II of Dodd-Frank is, according to Republicans “a recipe for future AIG-style bailouts.”
“Contrary to the claims of its proponents, Dodd-Frank leaves taxpayers exposed to the costs of resolving large, complex financial institutions,” the report states. Hensarling says that Dodd-Frank “misses some obvious problems and creates new ones,” especially where government-sponsored enterprises such as Fannie Mae and Freddie Mac are concerned. “Firms designated as ‘financial market utilities under Dodd-Frank,” the report states, are the next generation of GSEs.”
Moreover, Republicans charge, regulatory requirements imposed under Dodd-Frank create compliance burdens that distort the free market by making it harder for small-to-medium-sized financial institutions to compete with larger firms, further entrenching “too big to fail.”
While Republicans on the Financial Services Committee plan to introduce legislation “to repeal Dodd-Frank’s bailout fund and take other steps to end ‘too big to fail’ once and for all,” according to Hensarling, the act’s latter architect, Barney Frank, former Massachusetts Representative and FSC chairman, will testify at a congressional hearing on Wednesday to assess the impact of the Dodd-Frank Act four years later.
Republicans are doubtlessly less than enthusiastic about what Frank may have to say and make no effort to hide their distaste for what they consider a cumbersome piece of legislation. “Rather than institute market discipline and a clear rules-based regime, four years later,” said Oversight and Investigations Subcommittee Chairman Patrick McHenry, “Dodd-Frank’s failed policies have only worsened the risks within the financial system and recklessly handed financial regulators a blank check for taxpayer-funded bailouts.”
The E-mails from Redfin reporting price drops for the zips I monitor seemed to have been increasing recently. Turns out, it isn’t just my imagination…
Last year, the percentage of properties listed with a price cut topped out @ 31% in October. We reached that level this year last month:
http://www.zillow.com/local-info/CA-Los-Angeles-Metro-home-value/r_394806/#metric=mt%3D6%26dt%3D1%26tp%3D5%26rt%3D6%26r%3D394806%252C12447%252C46298%252C16764%26el%3D0
1 in 3 current listings have had a price cut, and the percentage is going up rapidly. Where will this top out this year?
These price cuts are even more impressive given we’re in the spring/ summer season and the seasonal nature of home buying.
+1
I have to say the list prices are mainly WTF prices so of course they have to come down or they will sit. If supply goes up and they still list a lot of WTF prices than it actually showing strength from the sellers. But buyers won’t budge so we’re in a stand off.
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Not really.
OC listing prices have dropped 4 out of the last 5 weeks. It is July.
Does the trajectory of price declines in the chart I linked look more like a standoff, or more like a liftoff?
Whenever the anger toward Wall Street starts to wane, I find it remarkably helpful to pull up articles and data from the 2006 heyday.
This was the compensation for the guy, who almost single-handedly destroyed the US financial system:
http://www.forbes.com/lists/2006/12/7G33.html
Of course the dude received another $113 million from the sale of Countrywide. He is most certainly on a beach someplace, cell phone off, drinking mai tai’s and getting a not fake tan.
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/11/AR2008011103673.html
Apparently, 9 years later, everything Mozilo did was legitimate, above board and compliant with federal and state laws?
What exactly should Mozilo be charged with? Last I checked, having a repulsive orange tan wasn’t a crime in America.
Fraud. And conspiracy to commit fraud come to mind…
The problem is proving elements of the cause of action. It’s probably easier to prove a dog-bite case, than it is to prove that Mozilo had sufficient knowledge and control of his enterprise to be responsible for the lies told by his mortgage brokers. Of course there is always the argument that he should have known, through reasonable investigation, of the activities of those in his employ.
If we are going to hold dog owners responsible for the harmful actions of their pets, why wouldn’t we hold bank executives responsible for the illegal actions of people they employ? Especially when the bank executives are profiting from those illegal actions? There is probably enough case law to cobble together a valid basis for holding Mozilo liable for his ill-earned profits even absent a specific criminal statute.
There is ample evidence that Countrywide employees falsified loan applications to get loans approved – loans that were later sold to investors. The problem is proving that Mozilo knew about this practice. Even if he didn’t direct them to falsify the applications, his knowledge and failure to report the illegal actions, in combination with profiting from his silence would be enough for a conviction, I think.
From Black’s Law Dictionary: “Fraud. …Anything calculated to deceive, whether by a single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by speech or silence, word of mouth, or look or gesture.
There is no doubt that Countrywide employees engaged in false representations as to the quality of the loans. To the point where it was part of the culture. How do you prove this? Like any other criminal organization, you start at the bottom by prosecuting the mortgage brokers and offer immunity to roll the little fish to turn state’s evidence against the big fish.
Why didn’t this happen? Broom meet rug.
http://thecaucus.blogs.nytimes.com/2012/07/05/members-of-congress-received-preferential-treatment-on-loans-from-countrywide/
http://www.nytimes.com/2011/02/26/business/economy/26nocera.html
It would be a very difficult case especially with so much time having past. When it comes to financial crimes the problem is the people who clearly understand what is going on are usually the ones making millions. It’s hard to find a cop with the type of required background who is willing to work for such a small paycheck and understands the system enough to solve the case.
“criminal bank executives” – Isn’t that redundant?
some expert opinion, you don’t even know his name…
It doesn’t have to be anyone specific; it just needs to be somebody. There’s a wide variety of criminal banking executives to chose from. If this were China, they would have publicly executed some of them by now.
[…] list of evil0doers and nefarious characters of the housing bubble includes famous names like Anthony Mozilo, David J. Stern, and not-so-famous names like David Sparks, Michael T. Pines, Brent Arthur Wilson, […]