Archive for the ‘Foreclosures’ Category

Bluster Under Fire at JPMorgan Chase

Thursday, January 24th, 2013

Most chief executives use the World Economic Forum in Davos, Switzerland as an opportunity to solidify their relationships with other members of the global power elite. Jamie Dimon of JPMorgan Chase treats it as an occasion to strike back at critics. At the 2011 gathering he said he was sick of “this constant refrain—bankers, bankers, bankers.” This year he has been at it again, declaring that “we’re doing the right thing,” while regulators are “trying to do too much, too fast.”

What makes Dimon’s bluster all the more ridiculous is that it comes only a short time after he and other top executives at JPMorgan were reprimanded by a report produced by their own colleagues at the bank. The internal investigation was prompted by the ongoing scandal surrounding more than $6 billion in losses the bank experienced as the result of aggressive trading by its unit in London led by an individual nicknamed the London Whale.

For a document of this kind, the report is pretty blunt. It notes that during a conference call with analysts at an early stage of the controversy Dimon had agreed with a characterization of the matter as a “tempest in a teapot.” It goes on to accuse the bank’s chief investment office (CIO) of poor judgment and execution while alleging that the trading program in question had “inconsistent priorities” and “poorly conceived” strategies. The bank did not, the report says, “ensure that the controls and oversight of CIO evolved commensurately with the increased complexity and risks” of its activity. Such failings were behind the recent decision by the JPMorgan board to cut Dimon’s compensation in half.

Actually, the internal report and the pay cut are not the worst of Dimon’s problems. A variety of federal agencies are doing their own investigations of the trading losses, and it is likely that the bank will face civil if not criminal charges.

All this does not come as a surprise. JPMorgan—which represents the consolidation of several of the most powerful New York and Chicago money center banks as well as the investment house founded by the legendary financier and robber baron J.P. Morgan—has a long history of aggressive business practices, including ones that cross the line into outright misconduct.

For example, the bank was charged with abetting the accounting fraud perpetrated by Enron, and in 2003 it had to pay $135 million to settle SEC charges. Two years later, the bank agreed to pay $2.2 billion to settle a suit brought by Enron shareholders. That same year, it agreed to pay $2 billion to settle a suit related to its role in underwriting bonds for a company, WorldCom, at the center of another accounting scandal.

In 2003, JPMorgan’s securities arm was part of a $1.4 billion settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities; its share was $80 million. In 2006 it agreed to pay $425 million to settle a lawsuit charging that its securities operation misled investors during the dot com boom of the 1990s.

During the financial meltdown in 2008, federal regulators got JPMorgan to take over two failing institutions—investment house Bear Stearns and mortgage lender Washington Mutual—that brought with them a variety of legal problems stemming from their reckless practices.

For example, in 2010 the Federal Deposit Insurance Corporation announced that Washington Mutual and JPMorgan had agreed to settle claims relating to the bank’s failure. The agency did not cite the size of the settlement, but it was later reported to be about $6 billion. The following year, WaMu agreed to pay $105 million to settle an investor lawsuit relating to its collapse. Three former WaMu executives later agreed to pay $64 million to settle with the FDIC, but most of the money was to be paid from insurance policies the bank had purchased for them.

In 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that Bear Stearns had fraudulently misled investors in the sale of residential mortgage-backed securities.  The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

JP Morgan has also faced legal travails of its own making. In 2009 the SEC announced that J.P. Morgan Securities would pay a penalty of $25 million, make a payment of $75 million to Jefferson County, Alabama and forfeit more than $647 million in claimed termination fees to settle charges that the firm and two of its former managing directors engaged in an illegal payment scheme to win municipal bond business from the county.

In 2011 JPMorgan found itself at the center of a controversy over improper foreclosures and excessive interest rates in connection with home loan customers who were members of the military. The bank agreed to pay $56 million to settle charges of having violated the Servicemembers Civil Relief Act.

Also in 2011, the SEC announced that JPMorgan would pay $153.6 million to settle allegations that in 2007 it misled investors in a complex mortgage securities transaction. The following month, the SEC said that J.P. Morgan Securities would pay $51.2 million to settle charges of fraudulently rigging municipal bond reinvestment transactions in 31 states. The agreement was part of a $228 million settlement the firm reached with a group of federal regulators and state attorneys general.

Documents made public in a lawsuit against JPMorgan by a court-appointed trustee in the Bernard Madoff Ponzi scheme case suggested that senior executives of the bank had developed doubts about the legitimacy of Madoff’s investment activities but continued to do business with him. The lawsuit was later dismissed.

JPMorgan was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In April 2012 the Commodity Futures Trading Commission imposed a penalty of $20 million on JPMorgan for failing to segregate customer accounts being handled on behalf of Lehman Brothers prior to that firm’s collapse.

In July 2012 JPMorgan agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers. And in January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses.

One journalist in Davos reported that Dimon was wearing FBI cufflinks. Given this track record, FBI handcuffs might be more appropriate attire.

Note:  This piece draws on my new Corporate Rap Sheet on JPMorgan Chase, which can be found here.

Bank of America Returns to the Scene of the Crime

Friday, January 18th, 2013

BofAHome buyers beware: Bank of America is returning to the home loan market. According to the Wall Street Journal, BofA is “girding for a new run at the U.S. mortgage business.”

It apparently wants to reclaim a share of the fat profits that rivals such as Wells Fargo have been enjoying from a mortgage refinancing boom sparked by low interest rates. Those profits are particularly tantalizing given the other recent news about BofA: it reported a 63 percent decline in fourth-quarter net income.

Ironically, that plunge in earnings was caused by BofA’s previous screw-ups in none other than the mortgage market, specifically the billions of dollars it has had to pay Fannie Mae to settle charges that it sold the housing finance agency large quantities of faulty mortgage loans it had originated.

In the most recent settlement with Fannie earlier this month, BofA agreed to pay $10.3 billion while also agreeing to sell off about 20 percent of its loan servicing business. The New York Times front page article on the settlement was headlined: “Big Bank Extends Retreat from Mortgages.”

If two major newspapers are to be believed, in the course of just one week BofA went from retreat to advance. By all rights, BofA should not be allowed to perform this about-face.

BofA, including two companies it acquired in 2008, has done so much harm in both the mortgage market and the mortgage-backed securities market, that banishment would be the most appropriate punishment.

Let’s look back at the record. In July 2008 BofA completed the acquisition of the giant mortgage lender Countrywide Financial, which was becoming notorious for pushing borrowers, especially minority customers, into predatory loans and was growing weaker from the large number of those loans that were going into default. Later that year, amid the financial meltdown, BofA was pressured to take over the teetering investment house Merrill Lynch.

Merrill came with a checkered history. In 1998 it had to pay $400 million to settle charges that it helped push Orange County, California into bankruptcy four years earlier with reckless investment advice. In 2002 it agreed to pay $100 million to settle charges that its analysts skewed their advice to promote the firm’s investment banking business. In 2003 it paid $80 million to settle allegations relating to dealings with Enron. In an early indicator of the problem of toxic assets, Merrill announced an $8 billion write-down in 2007. Its mortgage-related losses would climb to more than $45 billion.

BofA participated in the federal government’s Troubled Assets Relief Program (TARP), initially receiving $25 billion and then another $20 billion in assistance to help it absorb Merrill, which reported a loss of more than $15 billion in the fourth quarter of 2008. In 2009 BofA agreed to pay $33 million to settle SEC charges that it misled investors about more than $5 billion in bonuses that were being paid to Merrill employees at the time of the firm’s acquisition. In 2010 the SEC announced a new $150 million settlement with BofA concerning the bank’s failure to disclose Merrill’s “extraordinary losses.”

In 2011 BofA agreed to pay $315 million to settle a class-action suit alleging that Merrill had deceived investors when selling mortgage-backed securities. The following year, court filings in a shareholder lawsuit against BofA provided more documentation that bank executives knew in 2008 that the Merrill acquisition would depress BofA earnings for years to come but failed to provide that information to shareholders. In 2012 BofA announced that it would pay $2.43 billion to settle the litigation.

The Countrywide acquisition also came back to haunt BofA. In 2010 it agreed to pay $108 million to settle federal charges that Countrywide’s loan-servicing operations had deceived homeowners who were behind on their payments into paying wildly inflated fees. Four months later, Countrywide founder Angelo Mozilo reached a $67.5 million settlement of civil fraud charges brought by the SEC. As part of an indemnification agreement Mozilo had with Countrywide, BofA paid $20 million of the settlement amount.

In May 2011 BofA reached a $20 million settlement of Justice Department charges that Countrywide had wrongfully foreclosed on active duty members of the armed forces without first obtaining required court orders. And in December 2011 BofA agreed to pay $335 million to settle charges that Countrywide had discriminated against minority customers by charging them higher fees and interest rates during the housing boom. In mid-2012 the Wall Street Journal reported that “people close to the bank” estimated that Countrywide had cost BofA more than $40 billion in real estate losses, legal expenses and settlements with state and federal agencies.

BofA faced its own charges as well. In 2010 it agreed to pay a total of $137.3 million in restitution to federal and state agencies for the participation of its securities unit in a conspiracy to rig bids in the municipal bond derivatives market. In 2011 BofA agreed to pay $2.8 billion to Fannie Mae and Freddie Mac to settle charges that it sold faulty loans to the housing finance agencies.

BofA was one of five large mortgage servicers that in early 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. Six months later, an independent monitor set up to oversee the settlement reported that BofA had not yet completed any modifications of first-lien mortgages or any refinancings.

Earlier this month, BofA was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses. Finally, as noted above, BofA agreed to pay $10.3 billion in a new settlement with Fannie Mae.

BofA claims that it has cleaned up its act, but it is difficult to believe that a bank so closely identified with predatory lending and investor deception has truly changed its ways.

 

Note: This piece draws from my new Corporate Rap Sheet on Bank of America, which can be found here.

Jack Lew’s Citigroup Baggage

Thursday, January 10th, 2013

LewFor the past four years, the presence of Timothy Geithner as Secretary of the Treasury has been a blight on the Obama Administration.

In keeping with his weak performance as president of the Federal Reserve Bank of New York, Geithner has allowed Wall Street culprits to enjoy lavish assistance from taxpayers as they avoid any serious consequences for having brought on the financial crisis from which the country is still trying to recover.

Now that Geithner is departing, Obama had a chance to take Treasury in a new direction. His choice of White House chief of staff Jack Lew for the post is not a good sign. As a deficit hawk, Lew will reinforce the president’s regrettable inclination to take seriously the wrong-headed notion that the country has a spending problem.

Yet perhaps even more troubling is Lew’s background, particularly the fact that he is a veteran of one of the leading financial-sector miscreants: Citigroup. Unfortunately, it is not unusual for presidents to turn to Wall Street for their Treasury secretaries. Ronald Reagan brought in Don Regan from Merrill Lynch; Bill Clinton got Robert Rubin from Goldman Sachs; and George W. Bush turned to Goldman again when he chose Hank Paulson to be his third Treasury head. The difference is that Lew is the first Wall Street veteran to be chosen for Treasury since the financial meltdown of 2008 exposed the pernicious behavior of the giant banks.

While Lew is not a Wall Street lifer and is not coming straight from the private sector, his time at the bank (2006-2009) was not long ago. Moreover, he was personally involved in some of Citi’s dubious practices. In 2010 the Huffington Post reported that when Lew served as chief financial officer of Citi’s Alternative Investments operation his portfolio included investments put together by hedge fund manager John Paulson that made a killing by correctly betting that the housing market would tank. This was the same Paulson who helped Goldman Sachs put together a similar notorious deal that led to SEC charges and a $550 million settlement.

Actually, Lew’s dealings with Paulson are just the beginning of why it wrong for Obama to be selecting a veteran of Citigroup to such an important position in his administration. It is well known that Citi was bailed out by the federal government to the tune of $45 billion while also getting loss protection for some $300 billion in toxic assets. What some may have forgotten is the absolutely abysmal track record of Citi before and after the bailout, including the following:

It was the merger of Citibank and Travelers Group—technically illegal when it was announced in 1998—that played a key role in bringing about the disastrous policy of financial deregulation.

Citi gave a boost to predatory lending and subprime mortgages when it purchased Associates First Capital. In 2001 Citi had to pay $215 million to settle charges brought by the Federal Trade Commission in connection with Associates’ abusive practices.

In the wake of revelations that it helped Enron conceal its massive accounting fraud, Citi had to pay $2 billion to settle lawsuits brought by Enron investors. It later paid another $2.65 billion to settle lawsuits brought by investors in WorldCom, another perpetrator of accounting fraud, alleging that Citi failed to perform due diligence when underwriting the company’s bonds.

In 2010 the SEC announced that Citi would pay a $75 million penalty to settle allegations that it misled investors about its exposure to subprime mortgage-related assets. The following year, Citi paid $285 million to the SEC to settle charges that it defrauded investors in a $1 billion collateralized debt obligation tied to the U.S. housing market.

The settlement amount in the latter SEC case, which was far below the $700 million in losses suffered by the defrauded investors, was roundly criticized by the federal judge, Jed Rakoff, who was overseeing the case. Judge Rakoff also challenged the SEC’s willingness to let Citi get off without admitting guilt in the matter, calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest.” He rejected the settlement, but the SEC filed an appeal, which is not yet fully resolved.

Citi was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. That same month, U.S. attorney’s office in Manhattan announced that Citi would pay $158 million to settle charges that its mortgage unit fraudulently misled the federal government into insuring thousands of risky home loans. In August 2012 Citi agreed to pay $590 million to settle lawsuits charging that it deceived investors by concealing the extent of its exposure to toxic subprime debt. And just this month, Citi was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.

Lew, of course, was not personally responsible for all these offenses, but his association with this rogue bank is strong enough to disqualify him from a top economic policy position.

Note: This history draws from my new Corporate Rap Sheet on Citigroup, which was just posted here.

A Cost of Doing Dirty Business

Thursday, February 9th, 2012

The Justice Department’s announcement of a $26 billion federal-state legal settlement with the country’s five largest mortgage servicers is filled with words like “unprecedented,” “landmark” and “historic.” It claims that the deal “provides substantial financial relief to homeowners and establishes significant new homeowner protections for the future.”

All of this hyperbolic language cannot disguise the fact that the settlement is just the latest in a series of efforts by the Obama Administration to give the appearance of being tough on corporate misconduct while actually letting the malefactors off easily. It is disappointing that so many state attorneys general gave into pressure to go along with the deal.

The $17 billion of the total that the servicers will be required to spend on direct relief (mortgage balance reductions and cash payments) will aid only a fraction of the homeowners victimized by abusive mortgage and foreclosure practices. Like earlier efforts by the Administration to deal with the housing debacle, it will do nothing for most of those who have been dispossessed in one of the most egregious cases of corporate lawlessness this country has ever seen.

The size of the settlement pool is meager in connection with the $200 billion multi-state tobacco settlement of 1998, for instance, and it will not present much of a financial burden for the five big servicers. Those companies—Bank of America, Citigroup, J.P. Morgan Chase, Wells Fargo and Ally Financial (formerly GMAC)—have combined assets of about $8 trillion. In other words, they are being asked to give up only about one-third of one percent of their total resources to resolve a crisis that has left so many with no resources at all.

Actually, the impact on the banks is even smaller than the absolute numbers would suggest. Many of the home loans that will be adjusted have already been written down in value by the financial institutions, so they are not really conceding anything. Meanwhile, those who have lost their homes to foreclosure will receive pitiful payments of about $2,000 each. There may be other pitfalls in the fine print of the settlement, which as of this writing has not yet been posted on the website created to publicize the deal.

The one good thing that can be said about the settlement is that, thanks to the insistence of New York Attorney General Eric Schneiderman, it does not release the banks from culpability for all mortgage-related offenses, and it allows the state AGs to continue pursuing any criminal charges. This leaves the door open for cases such as the one taking place in Missouri, in which a foreclosure servicing company called DocX is being charged with forgery. Yet it remains to be seen how aggressive federal and state agencies will be in pursuing such cases if the settlement gives the impression that the book has been closed on foreclosure abuses.

That impression was reinforced by the announcements of bank regulators such as the Federal Reserve and the Office of the Comptroller of the Currency that they have reached their own settlements with mortgage servicers.

Foreclosure abuses did not simply force people out of their homes in an unjust way. They exposed the imbalance of power between individuals and giant corporations when it comes to the application of the law. Capitalism is supposed to be based on the sanctity of contracts and the clear identification of ownership rights. Revelations that financial institutions were able to carry out foreclosures based on shoddy documentation, robo-signing and the like showed that, when it comes to the rule of law, not everyone is playing by the same rules.

Housing and Urban Development Secretary Shaun Donovan would have us believe that the settlement “forces the banks to clean up their acts and fix the problems uncovered during our investigations.” It can just as easily be said that the deal signals to large financial institutions that they can go on mistreating their customers and that the worst consequence would be modest financial penalties that can be written off as a cost of doing dirty business.