December 2nd, 2011
Econintersect: Nicholas Kristof wrote an Op-Ed column Wednesday, November 30 in The New York Times. In that column he does get around to an opinion, but the important parts of the column are news items. One most notable is the mea culpa of James Theckston, a former JP Morgan Chase (NYSE:JPM) bank executive who worked in the mortgage branch of the firm (Chase Home Finance) where he was a regional vice president in South Florida. Kristof says that at the end of the housing bubble, in 2007, the bank was "shoveling money" at home borrowers. (Click on cartoon for larger image.)
Here is some of what Kristof wrote (with quotes from Theckston), emphasis added by Econintersect:
“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”
“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.
Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.
“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”
“Especially when mortgages were securitized and sold off to investors,” he said, “senior bankers turned a blind eye to shortcuts.”
“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”
Other things that Theckston revealed included:
- Commissions were seven times higher from subprime loans, rather than prime mortgages. So mortgage bankers looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.
- His corporate award in 2006 recognized his success in increasing high-risk loans.
- The high risk loans were made disproportionately to minorities, which senior executives tried frantically to cover up.
Kristof concludes that the process that ensued from the financial crisis involved a basic unfairness of rescuing the bankers, their shareholders and creditors while turning a “cold shoulder” to some of the “most vulnerable and least sophisticated people in America.”
There have been other items published expressing opinions that disagree with some of Kristof’s conclusions. For one, Kristof wrote, regarding the trillions the Fed used to rescue banks that were otherwise insolvent:
The Federal Reserve action isn’t a scandal, and arguably it’s a triumph. The Fed did everything imaginable to avert a financial catastrophe — and succeeded. The money was repaid.
Economics blogger Steve Waldman characterized the action of the banks during and following the rescue as fraud. Waldman says that the government “triumph,” as Kristof called it (yes, he did say "arguably"), was a transfer of weak assets from the banks hands to the taxpayer to the benefit of the banks and their stakeholders. Specifically, Waldman said this:
We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.
Waldman says that the net of what has happened is that $3 - $4 trillion has been gained by banks and their stakeholders by adding that amount to the federal debt.
There are those who have argued that actions of the banks, including the highest executive levels, constituted criminal fraud and should be prosecuted. A notable voice in this group belongs to William K. Black (a GEI contributor), one of the nation’s leading experts on white collar crime. Black, now a professor at the University of Missouri Kansas City, was a leading member of the legal team that obtained more than 1,000 convictions of top executives in the Savings & Loan scandal of the late 1980s and early 1990s.
Black has written that the government has been guilty of systematically ignoring fraud and this constitutes a continuing systemic risk. Black agrees with Theckston’s assessment that “bankers were far more culpable” in the issuance of fraudulent mortgages, and described his own assessment in the article “Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability.” In a TV interview about six months ago, Black called what has happened in the wake of the crisis as bailing out fraud.
Finally, a number of readers have been discussing (by e-mail) an article from Smithsonian.com, The Man Who Busted the ‘Banksters’. The man is Ferdinand Pecora who conducted the famous commission hearings that have come to bear his name. He acted as the chief counsel to the U.S. Senate Committee on Banking and Currency. Although his name is associated with the Roosevelt era, he was actually appointed near the end of the Hoover administration.
Immediate results of the Pecora Commission hearings were the passage of the act establishing the SEC (Securities and Exchange Commission) and the Glass-Steagall Act, which separated investment banking from deposit/commercial banking, including the establishment of the FDIC (Federal Deposit Insurance Corporation).
The hearings were quite contentious, not the polite affair that was the FCIC (Financial Crisis Inquiry Commission) headed by Philip Angelides whose members could not agree on a final report due to political dissention. Yves Smith of Naked Capitalism reported that insiders from the FCIC staff said that because of the politics of those named to the commission the FCIC was set up to fail.
The Pecora commission, on the other hand, was no polite gathering. The term "bankster" resulted from the procedings and the nation's most powerful banker, JP Morgan, called Pecora a "dirty little wop" and one who "bore the manners of a prosecuting attorney who is trying a horse thief."
It was reported that members of the FCIC forwarded prosecution recommendations to federal authorities but no action has been taken eleven months later.
What would Pecora have done with this line-up?
Two brief excerpts from the Smithsonian article:
- By investigating Wall Street business practices and calling bankers in to testify, Ferdinand Pecora exposed Americans to a world they had no clue existed. And once he did, public outrage led to the reforms that the lords of finance had, until his hearings, been able to stave off.
- In 1939, Pecora published Wall Street Under Oath, which offered a dire warning. “Under the surface of the governmental regulation, the same forces that produced the riotous speculative excesses of the ‘wild bull market’ of 1929 still give evidences of their existence and influence.… It cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.”
In recent years the SEC has been weakened by lack of funding and encouragement “not to interfere with the free market system” by some political powers. The Glass-Steagall Act was repealed under President Clinton in 1999.
Following those actions, history has run its predictable course, if you believe the 1939 quote from Pecora.
Hat tips to Roger Erickson and Russell Huntley.