Yves SmithThursday, February 9, 2012
http://www.nakedcapitalism.com/2012/02/the-top-twelve-reasons-why-you-should-hate-the-mortgage-settlement.html
As readers may know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.
The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they’ll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.
The various news services are touting this pact at the biggest multi-state settlement since the tobacco deal in 1998. While narrowly accurate, this deal is bush league by comparison even though the underlying abuses in both cases have had devastating consequences.
The tobacco agreement was pegged as being worth nearly $250 billion over the first 25 years. Adjust that for inflation, and the disparity is even bigger. That shows you the difference in outcomes between a case where the prosecutors have solid evidence backing their charges, versus one where everyone know a lot of bad stuff happened, but no one has come close to marshaling the evidence.
The mortgage settlement terms have not been released, but more of the details have been leaked:
1. The total for the top five servicers is now touted as $26 billion (annoyingly, the FT is calling it “nearly $40 billion”), but of that, roughly $17 billion is credits for principal modifications, which as we pointed out earlier, can and almost assuredly will come largely from mortgages owned by investors. $3 billion is for refis, and only $5 billion will be in the form of hard cash payments, including $1500 to $2000 per borrower foreclosed on between September 2008 and December 2011.
Banks will be required to modify second liens that sit behind firsts “at least” pari passu, which in practice will mean at most pari passu. So this guarantees banks will also focus on borrowers where they do not have second lien exposure, and this also makes the settlement less helpful to struggling homeowners, since borrowers with both second and first liens default at much higher rates than those without second mortgages. Per the Journal:
“It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.
The Times is also subdued:
Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.
2. Schneiderman’s MERS suit survives, and he can add more banks as defendants. It isn’t clear what became of the Biden and Coakley MERS suits, but Biden sounded pretty adamant in past media presentations on preserving that.
3. Nevada’s and Arizona’s suits against Countrywide for violating its past consent decree on mortgage servicing has, in a new Orwellianism, been “folded into” the settlement.
4. The five big players in the settlement have already set aside reserves sufficient for this deal.
Here are the top twelve reasons why this deal stinks:
1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.
2. That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.
3. That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie putbacks to the major banks have been running at that level each quarter.
4. That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.
5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theater.
6. The past history of servicer consent decrees shows the servicers all fail to comply. Why? Servicer records and systems are terrible in the best of times, and their systems and fee structures aren’t set up to handle much in the way of delinquencies. As Tom Adams has pointed out in earlier posts, servicer behavior is predictable when their portfolios are hit with a high level of delinquencies and defaults: they cheat in all sorts of ways to reduce their losses.
7. The cave-in Nevada and Arizona on the Countrywide settlement suit is a special gift for Bank of America, who is by far the worst offender in the chain of title disaster (since, according to sworn testimony of its own employee in Kemp v. Countrywide, Countrywide failed to comply with trust delivery requirements). This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.
8. If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges.
9. There is plenty of evidence of widespread abuses that appear not to be on the attorney generals’ or media’s radar, such as servicer driven foreclosures and looting of investors’ funds via impermissible and inflated charges. While no serious probe was undertaken, even the limited or peripheral investigations show massive failures (60% of documents had errors in AGs/Fed’s pathetically small sample). Similarly, the US Trustee’s office found widespread evidence of significant servicer errors in bankruptcy-related filings, such as inflated and bogus fees, and even substantial, completely made up charges. Yet the services and banks will suffer no real consequences for these abuses.
10. A deal on robosiginging serves to cover up the much deeper chain of title problem. And don’t get too excited about the New York, Massachusetts, and Delaware MERS suits. They put pressure on banks to clean up this monstrous mess only if the AGs go through to trial and get tough penalties. The banks will want to settle their way out of that too. And even if these cases do go to trial and produce significant victories for the AGs, they still do not address the problem of failures to transfer notes correctly.
11. Don’t bet on a deus ex machina in terms of the new Federal foreclosure task force to improve this picture much. If you think Schneiderman, as a co-chairman who already has a full time day job in New York, is going to outfox a bunch of DC insiders who are part of the problem, I have a bridge I’d like to sell to you.
12. We’ll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Investors in mortgage-backed securities, who know that services have been screwing them for years, will be hung out to dry and will likely never return to a private MBS market, since the problems won’t ever be fixed. This settlement has not only revealed the residential mortgage market to be too big to fail, but puts it on long term, perhaps permanent, government life support.
As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.
Showing posts with label Banks. Show all posts
Showing posts with label Banks. Show all posts
Wednesday, February 29, 2012
Volcker defends ban on proprietary trading in comments to regulators
Former Fed Chair Volcker defends ban on proprietary trading in comments to regulators
February 13, 2012http://www.washingtonpost.com/business/industries/former-fed-chair-volcker-defends-ban-on-proprietary-trading-in-comments-to-regulators/2012/02/13/gIQArIwVBR_story.html
WASHINGTON — Former Federal Reserve Chairman Paul Volcker on Monday issued a broad defense of a federal rule bearing his name that would prohibit banks from trading for their own profit.
Commercial banks backed by government deposit insurance shouldn’t be able to engage in speculative trading, Volcker said in a letter supporting the so-called Volcker rule.
“Proprietary trading is not an essential commercial bank service that justifies taxpayer support,” he wrote.
The letter was sent to the five regulatory agencies that have approved a draft version of the rule, including the Federal Reserve and the Securities and Exchange Commission.
The rule is expected to be finalized by summer. Banks will then have until July 2014 to comply.
Congress directed regulators to draft the rule under the 2010 financial overhaul. It was a response to bets banks had placed on mortgage-backed securities, which hastened the financial crisis and led to taxpayer-funded bailouts.
Wall Street executives have opposed the rule. They say it would limit trading on behalf of customers and put them at a disadvantage with non-U.S. banks, which aren’t subject to the ban.
Banks, financial services trade groups and individuals have submitted hundreds of comments in opposition. Monday was the deadline for comments.
Tim Ryan, a lobbyist for the securities industry, called the rule “unworkable” and said it will slow economic growth.
The industry says the rule will reduce trading volumes, or the “liquidity” of stocks, bonds and other instruments. Banks won’t be able to trade with their own money and will likely cut back on trading for their customers to avoid running afoul of the rule. Lower trading will reduce demand for stocks and other securities, cutting into their prices.
Members of Congress from both parties have echoed the industry’s criticism. About 120 members of the House signed a letter asking regulators to drop the current proposal and draft an entirely new rule.
Volcker disagreed. He noted that excessive liquidity can increase risk by encouraging more trading.
“The restrictions... are not at all likely to have an effect on liquidity inconsistent with the public interest,” Volcker wrote.
Regarding the industry’s concerns about competition from overseas, Volcker wrote that they seem “superficial at best.” The rule’s bar on trading could make U.S. banks more appealing to many customers, he wrote.
Volcker indicated that small banks should be subject to less scrutiny under the rule. The vast majority of proprietary trading is done by a handful of large banks, he noted.
“At the end of the day, I feel confident that the restrictions imposed by the ‘Volcker Rule’ can be reasonably and effectively administered,” he wrote.
February 13, 2012http://www.washingtonpost.com/business/industries/former-fed-chair-volcker-defends-ban-on-proprietary-trading-in-comments-to-regulators/2012/02/13/gIQArIwVBR_story.html
WASHINGTON — Former Federal Reserve Chairman Paul Volcker on Monday issued a broad defense of a federal rule bearing his name that would prohibit banks from trading for their own profit.
Commercial banks backed by government deposit insurance shouldn’t be able to engage in speculative trading, Volcker said in a letter supporting the so-called Volcker rule.
“Proprietary trading is not an essential commercial bank service that justifies taxpayer support,” he wrote.
The letter was sent to the five regulatory agencies that have approved a draft version of the rule, including the Federal Reserve and the Securities and Exchange Commission.
The rule is expected to be finalized by summer. Banks will then have until July 2014 to comply.
Congress directed regulators to draft the rule under the 2010 financial overhaul. It was a response to bets banks had placed on mortgage-backed securities, which hastened the financial crisis and led to taxpayer-funded bailouts.
Wall Street executives have opposed the rule. They say it would limit trading on behalf of customers and put them at a disadvantage with non-U.S. banks, which aren’t subject to the ban.
Banks, financial services trade groups and individuals have submitted hundreds of comments in opposition. Monday was the deadline for comments.
Tim Ryan, a lobbyist for the securities industry, called the rule “unworkable” and said it will slow economic growth.
The industry says the rule will reduce trading volumes, or the “liquidity” of stocks, bonds and other instruments. Banks won’t be able to trade with their own money and will likely cut back on trading for their customers to avoid running afoul of the rule. Lower trading will reduce demand for stocks and other securities, cutting into their prices.
Members of Congress from both parties have echoed the industry’s criticism. About 120 members of the House signed a letter asking regulators to drop the current proposal and draft an entirely new rule.
Volcker disagreed. He noted that excessive liquidity can increase risk by encouraging more trading.
“The restrictions... are not at all likely to have an effect on liquidity inconsistent with the public interest,” Volcker wrote.
Regarding the industry’s concerns about competition from overseas, Volcker wrote that they seem “superficial at best.” The rule’s bar on trading could make U.S. banks more appealing to many customers, he wrote.
Volcker indicated that small banks should be subject to less scrutiny under the rule. The vast majority of proprietary trading is done by a handful of large banks, he noted.
“At the end of the day, I feel confident that the restrictions imposed by the ‘Volcker Rule’ can be reasonably and effectively administered,” he wrote.
Monday, January 30, 2012
Occupy the Neighborhood
How Counties Can Use Land Banks and Eminent Domain Ellen Brown, Truthout
Saturday 14 January 2012
http://truth-out.org/occupy-neighborhood/1326472096
An electronic database called MERS (Mortgage Electronic Registration Systems) has created defects in the chain of title to over half the homes in America. Counties have been cheated out of millions of dollars in recording fees, and their title records are in hopeless disarray. Meanwhile, foreclosed and abandoned homes are blighting neighborhoods. Straightening out the records and restoring the homes to occupancy is clearly in the public interest, and the burden is on local government to do it. But how? New legal developments are presenting some innovative alternatives.
John O'Brien is register of deeds for Southern Essex County, Massachusetts. He is mad as hell and he isn't going to take it anymore. He calls his land registry a "crime scene." A formal forensic audit of the properties for which he is responsible found that:
•Only 16 percent of the mortgage assignments were valid.
•Twenty-seven percent of the invalid assignments were fraudulent, 35 percent were "robo-signed" and 10 percent violated the Massachusetts Mortgage Fraud Statute.
•The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60 percent).
•There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.
At the root of the problem is that title has been recorded in the name of a private entity called MERS as a mere placeholder for the true owners. The owners are a faceless, changing pool of investors owning indeterminate portions of sliced and diced securitized properties. Their identities have been so well hidden that their claims to title are now in doubt. According to the auditor:
What this means is that ... the institutions - including many pension funds - that purchased these mortgages don't actually own them....
The March of the Attorneys General
John O'Brien was thrilled when Massachusetts Attorney General Martha Coakley went to court in December against MERS and five major banks - Bank of America Corp., JPMorgan Chase, Wells Fargo, Citigroup and GMAC. Coakley says banks have "undermined our public land record system through the use of MERS."
Other attorneys general are also bringing lawsuits. Delaware Attorney General Beau Biden is going after MERS in a suit seeking $10,000 per violation. "Since at least the 1600s," he says, "real property rights have been a cornerstone of our society. MERS has raised serious questions about who owns what in America."
Biden's lawsuit alleges that MERS violated Delaware's Deceptive Trade Practices Act by:
•Hiding the true mortgage owner and removing that information from the public land records.
•Creating a systemically important, yet inherently unreliable, mortgage database that created confusion and inappropriate assignments and foreclosures of mortgages.
•Operating MERS through its members' employees, whom MERS confusingly appoints as its corporate officers so that they may act on MERS' behalf.
•Failing to ensure the proper transfer of mortgage loan documentation to the securitization trusts, which may have resulted in the failure of securitizations to own the loans upon which they claimed to foreclose.
This last allegation - that there are fatal defects in the loan documentation - may be even more conclusive than the MERS defect in establishing a break in the chain of title to securitized properties. Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be "static." Mortgages can't be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements. The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS, but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.
Courts Are Taking Notice
The title issues are so complicated that judges themselves have been slow to catch on, but they are increasingly waking up and taking notice. In some cases, the judge is not even waiting for the borrowers to raise lack of standing as a defense. In two cases decided in New York in December, the banks lost although their motions were either unopposed or the homeowner did not show up, and in one, there was actually a default. No matter, said the court; the bank simply did not have standing to foreclose.
In Citigroup v. Smith, 2011 NY Slip Op 52236 (U) (December 13, 2011), the mortgage document acknowledged that MERS was not the lender, but was "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." The court held that since MERS was not a party to the underlying note, when it assigned the mortgage to plaintiff Citigroup there was no assignment of the note; and "a transfer of [a] mortgage without the debt is a nullity and no interest is acquired by it."
Failure to comply with the terms of the loan documents can make an even stronger case for dismissal. In Horace v. LaSalle, Circuit Court of Russell County, Alabama, 57-CV-2008-000362.00 (March 30, 2011), the court permanently enjoined the bank (now part of Bank of America) from foreclosing on the plaintiff's home, stating:
[T]he court is surprised to the point of astonishment that the defendant trust (LaSalle Bank National Association) did not comply with New York Law in attempting to obtain assignment of plaintiff Horace's note and mortgage....
[P]laintiff's motion for summary judgment is granted to the extent that defendant trust ... is permanently enjoined from foreclosing on the property....
Relief for Counties: Land Banks and Eminent Domain
The legal tide is turning against MERS and the banks, giving rise to some interesting possibilities for relief at the county level. Local governments have the power of eminent domain: they can seize real or personal property if (a) they can show that doing so is in the public interest, and (b) the owner is compensated at fair market value.
The public interest part is easy to show. In a 20-page booklet titled "Revitalizing Foreclosed Properties with Land Banks," the US Department of Housing and Urban Development (HUD) observes:
The volume of foreclosures has become a significant problem, not only to local economies, but also to the aesthetics of neighborhoods and property values therein. At the same time, middle- to low-income families continue to be priced out of the housing market while suitable housing units remain vacant.
The booklet goes on to describe an alternative being pursued by some communities:
To ameliorate the negative effects of foreclosures, some communities are creating public entities - known as land banks - to return these properties to productive reuse while simultaneously addressing the need for affordable housing.
States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky and Maryland. HUD notes that the federal government encourages and supports these efforts. But states can still face obstacles to acquiring and restoring the properties, including a lack of funds and difficulties clearing title.
Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture. These homes could be acquired by eminent domain both free of cost and free of adverse claims to title. The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain. The burden of proof would then transfer to the bank or trust claiming title. If the claimant could not prove title, the county would take the property, clear title and either work out a fair settlement with the occupants or restore the home for rent or sale.
Even if the properties were acquired without charge, counties might lack the funds to restore them. Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank. In a series titled "A Solution to the Foreclosure Crisis," Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly owned bank, on the model of the state-owned Bank of North Dakota. The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do. This credit could then be used not just to finance property redevelopment, but for other county needs, again on the model of the Bank of North Dakota. For a fuller discussion of publicly owned banks, see http://PublicBankingInstitute.org.
Sauvante adds that the use of eminent domain is often viewed negatively by homeowners. To overcome this prejudice, the county could exercise eminent domain on the mortgage contract rather than on title to the property. (The power of eminent domain applies both to real and to personal property rights.) Title would then remain with the homeowner. The county would just have a secured interest in the property, putting it in the shoes of the bank. It could renegotiate reasonable terms with the homeowner, something banks have been either unwilling or unable to do, since they have to get all the investor-owners to agree, a difficult task; and they have little incentive to negotiate when they can make more money on fees and credit-default-swaps on contracts that go into default.
Settling With the Investors
What about the rights of the investors who bought the securities allegedly backed by the foreclosed homes? The banks selling these collateralized debt obligations represented that they were protected with credit-default-swaps. The investors' remedy is against the counterparties to those bets - or against the banks that sold them a bill of goods.
Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case. Banks and servicers can earn more when the homes are bulldozed - something that is happening in some counties - than from a sale or workout at a loss. Not only is more earned on credit-default-swaps and fees, but bulldozed homes tell no tales. Garfield maintains that fully a third of the investors' money has gone into middleman profits rather than into real estate purchases and "with a complete loss no one asks for an accounting."
Not only homes and neighborhoods, but 400 years of property law are being destroyed by banker and investor greed. As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society. Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system. This can be righted only by holding the 1 percent to the same set of laws as are applied to the 99 percent. Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer, that an assignment must bear the signatures required by local law and that forging signatures gives rise to an actionable claim for fraud.
The neoliberal model that says banks can govern themselves has failed. It is up to county government to restore the rule of law and repair the economic distress wrought behind the smokescreen of MERS. New tools at the county's disposal - including eminent domain, land banks and publicly owned banks - can facilitate this local rebirth.
This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.
Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. She is also chairman of the Public Banking Institute.
Saturday 14 January 2012
http://truth-out.org/occupy-neighborhood/1326472096
An electronic database called MERS (Mortgage Electronic Registration Systems) has created defects in the chain of title to over half the homes in America. Counties have been cheated out of millions of dollars in recording fees, and their title records are in hopeless disarray. Meanwhile, foreclosed and abandoned homes are blighting neighborhoods. Straightening out the records and restoring the homes to occupancy is clearly in the public interest, and the burden is on local government to do it. But how? New legal developments are presenting some innovative alternatives.
John O'Brien is register of deeds for Southern Essex County, Massachusetts. He is mad as hell and he isn't going to take it anymore. He calls his land registry a "crime scene." A formal forensic audit of the properties for which he is responsible found that:
•Only 16 percent of the mortgage assignments were valid.
•Twenty-seven percent of the invalid assignments were fraudulent, 35 percent were "robo-signed" and 10 percent violated the Massachusetts Mortgage Fraud Statute.
•The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60 percent).
•There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.
At the root of the problem is that title has been recorded in the name of a private entity called MERS as a mere placeholder for the true owners. The owners are a faceless, changing pool of investors owning indeterminate portions of sliced and diced securitized properties. Their identities have been so well hidden that their claims to title are now in doubt. According to the auditor:
What this means is that ... the institutions - including many pension funds - that purchased these mortgages don't actually own them....
The March of the Attorneys General
John O'Brien was thrilled when Massachusetts Attorney General Martha Coakley went to court in December against MERS and five major banks - Bank of America Corp., JPMorgan Chase, Wells Fargo, Citigroup and GMAC. Coakley says banks have "undermined our public land record system through the use of MERS."
Other attorneys general are also bringing lawsuits. Delaware Attorney General Beau Biden is going after MERS in a suit seeking $10,000 per violation. "Since at least the 1600s," he says, "real property rights have been a cornerstone of our society. MERS has raised serious questions about who owns what in America."
Biden's lawsuit alleges that MERS violated Delaware's Deceptive Trade Practices Act by:
•Hiding the true mortgage owner and removing that information from the public land records.
•Creating a systemically important, yet inherently unreliable, mortgage database that created confusion and inappropriate assignments and foreclosures of mortgages.
•Operating MERS through its members' employees, whom MERS confusingly appoints as its corporate officers so that they may act on MERS' behalf.
•Failing to ensure the proper transfer of mortgage loan documentation to the securitization trusts, which may have resulted in the failure of securitizations to own the loans upon which they claimed to foreclose.
This last allegation - that there are fatal defects in the loan documentation - may be even more conclusive than the MERS defect in establishing a break in the chain of title to securitized properties. Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be "static." Mortgages can't be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid. Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements. The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS, but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.
Courts Are Taking Notice
The title issues are so complicated that judges themselves have been slow to catch on, but they are increasingly waking up and taking notice. In some cases, the judge is not even waiting for the borrowers to raise lack of standing as a defense. In two cases decided in New York in December, the banks lost although their motions were either unopposed or the homeowner did not show up, and in one, there was actually a default. No matter, said the court; the bank simply did not have standing to foreclose.
In Citigroup v. Smith, 2011 NY Slip Op 52236 (U) (December 13, 2011), the mortgage document acknowledged that MERS was not the lender, but was "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." The court held that since MERS was not a party to the underlying note, when it assigned the mortgage to plaintiff Citigroup there was no assignment of the note; and "a transfer of [a] mortgage without the debt is a nullity and no interest is acquired by it."
Failure to comply with the terms of the loan documents can make an even stronger case for dismissal. In Horace v. LaSalle, Circuit Court of Russell County, Alabama, 57-CV-2008-000362.00 (March 30, 2011), the court permanently enjoined the bank (now part of Bank of America) from foreclosing on the plaintiff's home, stating:
[T]he court is surprised to the point of astonishment that the defendant trust (LaSalle Bank National Association) did not comply with New York Law in attempting to obtain assignment of plaintiff Horace's note and mortgage....
[P]laintiff's motion for summary judgment is granted to the extent that defendant trust ... is permanently enjoined from foreclosing on the property....
Relief for Counties: Land Banks and Eminent Domain
The legal tide is turning against MERS and the banks, giving rise to some interesting possibilities for relief at the county level. Local governments have the power of eminent domain: they can seize real or personal property if (a) they can show that doing so is in the public interest, and (b) the owner is compensated at fair market value.
The public interest part is easy to show. In a 20-page booklet titled "Revitalizing Foreclosed Properties with Land Banks," the US Department of Housing and Urban Development (HUD) observes:
The volume of foreclosures has become a significant problem, not only to local economies, but also to the aesthetics of neighborhoods and property values therein. At the same time, middle- to low-income families continue to be priced out of the housing market while suitable housing units remain vacant.
The booklet goes on to describe an alternative being pursued by some communities:
To ameliorate the negative effects of foreclosures, some communities are creating public entities - known as land banks - to return these properties to productive reuse while simultaneously addressing the need for affordable housing.
States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky and Maryland. HUD notes that the federal government encourages and supports these efforts. But states can still face obstacles to acquiring and restoring the properties, including a lack of funds and difficulties clearing title.
Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture. These homes could be acquired by eminent domain both free of cost and free of adverse claims to title. The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain. The burden of proof would then transfer to the bank or trust claiming title. If the claimant could not prove title, the county would take the property, clear title and either work out a fair settlement with the occupants or restore the home for rent or sale.
Even if the properties were acquired without charge, counties might lack the funds to restore them. Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank. In a series titled "A Solution to the Foreclosure Crisis," Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly owned bank, on the model of the state-owned Bank of North Dakota. The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do. This credit could then be used not just to finance property redevelopment, but for other county needs, again on the model of the Bank of North Dakota. For a fuller discussion of publicly owned banks, see http://PublicBankingInstitute.org.
Sauvante adds that the use of eminent domain is often viewed negatively by homeowners. To overcome this prejudice, the county could exercise eminent domain on the mortgage contract rather than on title to the property. (The power of eminent domain applies both to real and to personal property rights.) Title would then remain with the homeowner. The county would just have a secured interest in the property, putting it in the shoes of the bank. It could renegotiate reasonable terms with the homeowner, something banks have been either unwilling or unable to do, since they have to get all the investor-owners to agree, a difficult task; and they have little incentive to negotiate when they can make more money on fees and credit-default-swaps on contracts that go into default.
Settling With the Investors
What about the rights of the investors who bought the securities allegedly backed by the foreclosed homes? The banks selling these collateralized debt obligations represented that they were protected with credit-default-swaps. The investors' remedy is against the counterparties to those bets - or against the banks that sold them a bill of goods.
Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case. Banks and servicers can earn more when the homes are bulldozed - something that is happening in some counties - than from a sale or workout at a loss. Not only is more earned on credit-default-swaps and fees, but bulldozed homes tell no tales. Garfield maintains that fully a third of the investors' money has gone into middleman profits rather than into real estate purchases and "with a complete loss no one asks for an accounting."
Not only homes and neighborhoods, but 400 years of property law are being destroyed by banker and investor greed. As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society. Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system. This can be righted only by holding the 1 percent to the same set of laws as are applied to the 99 percent. Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer, that an assignment must bear the signatures required by local law and that forging signatures gives rise to an actionable claim for fraud.
The neoliberal model that says banks can govern themselves has failed. It is up to county government to restore the rule of law and repair the economic distress wrought behind the smokescreen of MERS. New tools at the county's disposal - including eminent domain, land banks and publicly owned banks - can facilitate this local rebirth.
This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.
Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. She is also chairman of the Public Banking Institute.
Thursday, January 5, 2012
Privatizing Money
Thu, 22 Dec 2011
Alan Grayson
alangrayson@graysonforcongress.com
WHAT THE EUROPEAN BANKS GOT FOR CHRISTMAS.
Yesterday, the European Central Bank (ECB) announced that it will hand out $645,000,000,000 in three-year loans to European banks. Which the ECB printed out of thin air, like Monopoly money! The interest rate will be one percent per year.
The ECB will not be lending this money to the Government of Greece, even though that government is running a budget deficit of just under 10% of GDP – and the Greek GDP dropped by 5% this year. The Government of Greece is now paying 37% per year on its ten-year bonds, when it can borrow anything at all.
The ECB will not be lending this money to the people of Spain, even though official unemployment in Spain is now at 23%. Spain’s Economy Minister said recently that “Spain faces its deepest recession in half a century.” Tough luck; their Christmas tree has nothing under it.
And when the European banks get this $645 billion, to whom will the banks be lending? Anybody, or nobody. No strings attached. They can borrow from the ECB at 1%, lend it back to the German Government at 2%, lock in that profit, and take the next three years off.
I just have one question.
Why?
The world continues to face the greatest economic crisis since the Great Depression. Unemployment throughout Europe is over ten percent. Entire national governments are on the verge of going broke. Why would anyone think that THE THING THAT WE HAVE TO DO RIGHT NOW is to hand out $645 billion in more funny money to the banks? In Europe or anywhere else?
The ECB is a public institution. How can it possibly justify yet another bailout for selfish private interests, while the public is sent straight to hell?
If a Martian were to land in Paris today, and just read the headlines of the newspapers today, he could reach only one conclusion. That there has been a coup in Europe, the banks are now in charge, and they’re grabbing everything that they can get their hands on.
Mark my words: at some point, people are just not going to take it anymore.
Courage,
Alan Grayson
P.S. On a more positive note, a very sizable number of you answered the call on Tuesday. In less than three hours, you helped us to meet our $500,000 fundraising goal for the quarter. To all those who helped, thank you. To anyone who didn’t, it’s not too late; you can still click that Contribute button below. And to everyone, from Aaron to Zuzzana, Happy Holidays.
Paid for and Authorized by the Committee to Elect Alan Grayson
8419 Oak Park Road, Orlando, FL 32819
Alan Grayson
alangrayson@graysonforcongress.com
WHAT THE EUROPEAN BANKS GOT FOR CHRISTMAS.
Yesterday, the European Central Bank (ECB) announced that it will hand out $645,000,000,000 in three-year loans to European banks. Which the ECB printed out of thin air, like Monopoly money! The interest rate will be one percent per year.
The ECB will not be lending this money to the Government of Greece, even though that government is running a budget deficit of just under 10% of GDP – and the Greek GDP dropped by 5% this year. The Government of Greece is now paying 37% per year on its ten-year bonds, when it can borrow anything at all.
The ECB will not be lending this money to the people of Spain, even though official unemployment in Spain is now at 23%. Spain’s Economy Minister said recently that “Spain faces its deepest recession in half a century.” Tough luck; their Christmas tree has nothing under it.
And when the European banks get this $645 billion, to whom will the banks be lending? Anybody, or nobody. No strings attached. They can borrow from the ECB at 1%, lend it back to the German Government at 2%, lock in that profit, and take the next three years off.
I just have one question.
Why?
The world continues to face the greatest economic crisis since the Great Depression. Unemployment throughout Europe is over ten percent. Entire national governments are on the verge of going broke. Why would anyone think that THE THING THAT WE HAVE TO DO RIGHT NOW is to hand out $645 billion in more funny money to the banks? In Europe or anywhere else?
The ECB is a public institution. How can it possibly justify yet another bailout for selfish private interests, while the public is sent straight to hell?
If a Martian were to land in Paris today, and just read the headlines of the newspapers today, he could reach only one conclusion. That there has been a coup in Europe, the banks are now in charge, and they’re grabbing everything that they can get their hands on.
Mark my words: at some point, people are just not going to take it anymore.
Courage,
Alan Grayson
P.S. On a more positive note, a very sizable number of you answered the call on Tuesday. In less than three hours, you helped us to meet our $500,000 fundraising goal for the quarter. To all those who helped, thank you. To anyone who didn’t, it’s not too late; you can still click that Contribute button below. And to everyone, from Aaron to Zuzzana, Happy Holidays.
Paid for and Authorized by the Committee to Elect Alan Grayson
8419 Oak Park Road, Orlando, FL 32819
Friday, December 23, 2011
Occupy’s next frontier: Foreclosed homes
A campaign to defend families from evictions and protest foreclosure fraud launches next week
Justin Elliott
Wednesday, Nov 30, 2011
http://www.salon.com/2011/11/30/occupys_next_frontier_foreclosed_homes
Occupy Wall Street is promising a “big day of action” Dec. 6 that will focus on the foreclosure crisis and protest “fraudulent lending practices,” “corrupt securitization,” and illegal evictions by banks.
The day will mark the beginning of an Occupy Our Homes campaign that organizers hope will energize the movement as it moves indoors as well as bring the injustices of the economic crisis into sharp relief.
Many of the details aren’t yet public, but protesters in 20 cities are expected to take part in the day of action next Tuesday. We’ve already seen eviction defenses at foreclosed properties around the country as well as takeovers of vacant properties for homeless families. Occupy Our Homes organizer Abby Clark tells me protesters are planning to “mic-check” (i.e., disrupt) foreclosure auctions as well as launch some new home occupations.
“This is a shift from protesting Wall Street fraud to taking action on behalf of people who were harmed by it. It brings the movement into the neighborhoods and gives people a sense of what’s really at stake,” said Max Berger, one of the Occupy Our Homes organizers and a member of Occupy Wall Street’s movement-building working group.
The backdrop for all this is a new study suggesting the foreclosure crisis is only half over, with 4 million homes in some stage of foreclosure. Meanwhile, reports of illegal or questionable behavior by banks and mortgage lenders continue to stream in.
Like many of the Occupy actions that have focused on specific policy questions, this one is being organized by established progressive and labor-affiliated groups along with their allies in the movement. Among the allied groups listed on Occupy Our Homes’ website, for example, are the New Bottom Line and New York Communities for Change. On the Occupy Wall Street side of things, members of the direct action working group and the movement-building group in New York have been involved in the project.
Occupy Our Homes’ website (which was registered by a former SEIU official staffer) has the trappings of a slick professional campaign, with videos featuring the stories of families facing foreclosures and a pledge visitors are encouraged to sign stating:
… that until the banks do their part to help homeowners and to fix the economy, by writing down mortgage principal to current home values, I will:
•I will support homeowners resisting wrongful foreclosure evictions.
•I will resist any attempt by the bank to take my home.
•If they come to foreclose, I will not go.
A network of groups organized as Take Back the Land has been doing eviction defenses and related actions around the country for five years, according to organizer Max Rameau.
“Now with this Occupy movement ramping up, I think we have a significant chance to keep large numbers of people in their home,” Rameau told Democracy Now earlier this month. “[The goal is to] not only force the banks to allow the family to stay in the home. But also then force policy changes that would help thousands of other people for whom we’re not doing eviction defenses.”
We saw a similar dynamic in the preexisting campaign to extend the millionaire’s tax in New York, which has benefited from new energy and a new banner offered by the Occupy movement.
Will the new Occupy push on foreclosures pick up any steam? I’ll be covering whatever happens on Dec. 6, so stay tuned to find out.
Justin Elliott is a Salon reporter. Reach him by email at jelliott@salon.com and follow him on Twitter @ElliottJustin
Justin Elliott
Wednesday, Nov 30, 2011
http://www.salon.com/2011/11/30/occupys_next_frontier_foreclosed_homes
Occupy Wall Street is promising a “big day of action” Dec. 6 that will focus on the foreclosure crisis and protest “fraudulent lending practices,” “corrupt securitization,” and illegal evictions by banks.
The day will mark the beginning of an Occupy Our Homes campaign that organizers hope will energize the movement as it moves indoors as well as bring the injustices of the economic crisis into sharp relief.
Many of the details aren’t yet public, but protesters in 20 cities are expected to take part in the day of action next Tuesday. We’ve already seen eviction defenses at foreclosed properties around the country as well as takeovers of vacant properties for homeless families. Occupy Our Homes organizer Abby Clark tells me protesters are planning to “mic-check” (i.e., disrupt) foreclosure auctions as well as launch some new home occupations.
“This is a shift from protesting Wall Street fraud to taking action on behalf of people who were harmed by it. It brings the movement into the neighborhoods and gives people a sense of what’s really at stake,” said Max Berger, one of the Occupy Our Homes organizers and a member of Occupy Wall Street’s movement-building working group.
The backdrop for all this is a new study suggesting the foreclosure crisis is only half over, with 4 million homes in some stage of foreclosure. Meanwhile, reports of illegal or questionable behavior by banks and mortgage lenders continue to stream in.
Like many of the Occupy actions that have focused on specific policy questions, this one is being organized by established progressive and labor-affiliated groups along with their allies in the movement. Among the allied groups listed on Occupy Our Homes’ website, for example, are the New Bottom Line and New York Communities for Change. On the Occupy Wall Street side of things, members of the direct action working group and the movement-building group in New York have been involved in the project.
Occupy Our Homes’ website (which was registered by a former SEIU official staffer) has the trappings of a slick professional campaign, with videos featuring the stories of families facing foreclosures and a pledge visitors are encouraged to sign stating:
… that until the banks do their part to help homeowners and to fix the economy, by writing down mortgage principal to current home values, I will:
•I will support homeowners resisting wrongful foreclosure evictions.
•I will resist any attempt by the bank to take my home.
•If they come to foreclose, I will not go.
A network of groups organized as Take Back the Land has been doing eviction defenses and related actions around the country for five years, according to organizer Max Rameau.
“Now with this Occupy movement ramping up, I think we have a significant chance to keep large numbers of people in their home,” Rameau told Democracy Now earlier this month. “[The goal is to] not only force the banks to allow the family to stay in the home. But also then force policy changes that would help thousands of other people for whom we’re not doing eviction defenses.”
We saw a similar dynamic in the preexisting campaign to extend the millionaire’s tax in New York, which has benefited from new energy and a new banner offered by the Occupy movement.
Will the new Occupy push on foreclosures pick up any steam? I’ll be covering whatever happens on Dec. 6, so stay tuned to find out.
Justin Elliott is a Salon reporter. Reach him by email at jelliott@salon.com and follow him on Twitter @ElliottJustin
Economic Doomsday Quote of the Week
"The world is watching Europe, waiting upon a solution. It’s not just the euro that’s at stake. If the euro fails, so too does the 27-nation European Union. Bank lending would freeze, stock markets would likely crash, and Europe’s economies would follow. Nations in the euro-zone would see their economic output decline, though temporarily, by as much as 50%, according to UBS forecasters. That economic meltdown would then spread to the U.S. and Asia, who would find themselves caught up in the credit freeze while their exports to Europe would collapse."
Source:
http://finance.yahoo.com/news/Euro-Finance-Ministers-wscheats-3060132077.html
Thanks to NaturalNews.com for the tipoff
Source:
http://finance.yahoo.com/news/Euro-Finance-Ministers-wscheats-3060132077.html
Thanks to NaturalNews.com for the tipoff
Bail-out Bombshell
Fed "Emergency" Bank Rescue Totaled $29 Trillion Over Three Years
J. Andrew Felkerson, AlterNet
Posted on December 15, 2011
http://www.alternet.org/story/153462/bail-out_bombshell%3A_fed_%22emergency%22_bank_rescue_totaled_%2429_trillion_over_three_years
Speculation about the the Fed’s actions during the financial crisis has made headlines on and off again over the last several years. The latest drama occurred on November 27 when Bloomberg published an article, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress," which gives an account of the news agency’s struggle to bring to light the details of the Fed’s emergency programs. Bloomberg throws out some very large numbers, revealing that as of March 2009, the Fed lent, spent, or committed $7.77 trillion worth of aid to the financial system and that banks used the low interest rates charged on these loans to make an estimated $13 billion in income.
On December 6, the Fed struck back, issuing a four page unsigned memo intended to correct recent “egregious errors and mistakes” found in various reports of its emergency lending facilities. The Fed argues that the “total credit outstanding under liquidity programs was never more than about $1.5 trillion.” While Bloomberg wasn’t mentioned explicitly in the Fed memo, it was fairly clear to whom the response was directed. The following day Bloomberg defended its reporting, and the Wall Street Journal’s David Wessel came to the Fed’s defense, characterizing Bloomberg’s methodology as a “great story,” but ultimately not “true.”
All this may sound like controversy, but it’s little more than a tempest in a teacup.
Here’s the hurricane: In reality, no less than $29.616 trillion is the total emergency assistance provided by the Fed to foreign and domestic entities during the Global Financial Crisis. Let’s repeat that: $29 trillion. This astounding number is over twice U.S. gross domestic product, the nominal value of all goods and services produced for the year 2010. This is the total of the bailout as calculated by Nicola Matthews and myself as part of the Ford Foundation project, A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis. We will be presenting the results of our analysis in a series of papers published by the Levy Economics Institute, the first of which, “29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,” is already available here.
The results we have calculated are presented below, and it is important to note that the totals are cumulative and in billions of U.S. dollars. (The numbers in parentheses indicate amounts still outstanding as of November 10, 2011).
Facility Total Percent of Total
Term Auction Facility $3,818.41 12.89%
Central Bank Liquidity Swaps 10,057.4 (1.96) 33.96
Single Tranche Open Market Operations 855 2.89
Term Securities Lending Facility and Term Options Program 2,005.7 6.77
Bear Stearns Bridge Loan 12.9 0.04
Maiden Lane I 28.82 (12.98) 0.10
Primary Dealer Credit Facility 8,950.99 30.22
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 217.45 0.73
Commercial Paper Funding Facility 737.07 2.49
Term Asset-Backed Securities Loan Facility 71.09 (10.57) 0.24
Agency Mortgage-Backed Security Purchase Program 1,850.14 (849.26) 6.25
AIG Revolving Credit Facility 140.316 0.47
AIG Securities Borrowing Facility 802.316 2.71
Maiden Lane II 19.5 (9.33) 0.07
Maiden Lane III 24.3 (18.15) 0.08
AIA/ ALICO (AIG) 25 0.08
Totals $29,616.4 100.0%
I want to be clear. These are the totals of Fed lending and asset purchases actually undertaken since the bail-out began. There is no double-counting. And we do not include any credit facilities created by the Fed unless they were actually used. These figures accurately reflect the cumulative totals over the approximately three years actually used by the Fed to prop-up domestic and international banks, shadow banks, central banks, and even some non-financial institutions.
The programs above constitute the crisis prevention machinery rolled out by the Fed to combat the worst financial panic since 1929. All the programs above were designed and implemented to target domestic financial and nonfinancial corporations or foreign central banks or markets, or both. Only one of the facilities, the Term Auction Facility, can be viewed as being consistent with the Fed’s mandate to protect the commercial banking system from systemic failure. The rest are the result of the increasing relevance of the “shadow banking” to our economy—and of the Fed’s attempt to rescue the shadow banking sector.
Shadow banks are highly leveraged financial institutions that perform functions historically relegated to the commercial banking system. It is important to note that these financial concerns do not have access to the conventional means of Fed support. Nor were they ever really regulated or supervised by the Fed. They engaged in extremely risky behavior that in large part led to the global financial crisis. And when it hit, the Fed spent and lent $29 trillion, much of it devoted to rescuing the shadow banking system.
Thus, we see a host of unconventional programs designed to aid these institutions rather than the Fed’s traditional patrons. The information used to calculate the totals above is freely available (thanks in large part to the valiant efforts of a group of lawmakers led by Senator Bernie Sanders) as the result of an amendment inserted into the Dodd Frank bill. Moreover, this information has been freely available since December 10, 2010 on the Fed’s website.
So why didn’t someone else already put the data together in this way?
Obviously, $29 trillion is much bigger than the previous estimates of $7.77 trillion (Bloomberg) or $1.5 trillion (the Fed and the Wall Street Journal). An in-depth account of each of the facilities above is a rather lengthy process as the Levy working paper attests; therefore we will only lay out the reason for the difference between the Bloomberg and Fed numbers. So, how is it that we arrive at such a number? The main difference in our analysis is the variables we identify as essential in understanding the Fed’s response. In our paper we report three measures that we view as essential to capturing the size and magnitude of the bailout. Each of the three measures deals exclusively with programs put into place by the Fed that transcend its conventional lender of last resort function. That is, we only include the emergency facilities the Fed created. We agree with the Fed that only facilities which were actually made operational should be considered in any account of the Fed’s actions. But we take the side of Bloomberg regarding the general lack of transparency by the Fed—the Fed fought tooth and nail to keep the details of its programs secret.
At any given moment inspection of the amount owed to the Fed resulting from nonconventional lender of last resort actions provides a reasonable account of what the Fed was doing in the period leading up to that time. However, looking at this number over time and in the context of the weekly amount lent provides insight into how the Fed’s efforts evolved over the run of the crisis. These two approaches to measurement (a “stock” or outstanding balance and a “flow” or cumulated amount spent and lent weekly) only provide us with details regarding the scope of the Fed’s bailout. To get a clear picture we need some account of the magnitude. We believe that this is captured by looking at the cumulative totals of all programs.
Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions”. Therefore it is essential to have a LOLR. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we know to do this is by summing each instance--which results in a cumulative total of over $29 trillion dollars.
A figure as large as $29.616 trillion should not be taken lightly, but focus on the specific magnitude of the figure diverts our attention from a larger issue that is at stake: how should the LOLR responsibility to be discharged in the future? With unemployment remaining persistently high and millions continuing to lose their homes to foreclosure as the result of lost income from a poor economy or outright fraud in the mortgage lending and foreclosure process, it becomes increasingly difficult to justify the ability of a single institution staffed by unelected officials to carry out such a targeted commitment of the obligations of the United States citizenry. Thanks to the actions of Senator Sanders and other individuals possessing the temerity to question the authority of the Fed we now have access to much of the data regarding what the Fed did during the recent crisis.
But we still need to go through the data from the past three years of bail-outs to answer the following questions: Who got funds from the Fed? How much did they get? And why did they get them? The Fed has not adequately explained why its emergency lending and asset purchases went on for so long and accumulated to such a large number.
J. Andrew Felkerson is a Interdisciplinary PhD student at the University of Missouri- Kansas City
J. Andrew Felkerson, AlterNet
Posted on December 15, 2011
http://www.alternet.org/story/153462/bail-out_bombshell%3A_fed_%22emergency%22_bank_rescue_totaled_%2429_trillion_over_three_years
Speculation about the the Fed’s actions during the financial crisis has made headlines on and off again over the last several years. The latest drama occurred on November 27 when Bloomberg published an article, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress," which gives an account of the news agency’s struggle to bring to light the details of the Fed’s emergency programs. Bloomberg throws out some very large numbers, revealing that as of March 2009, the Fed lent, spent, or committed $7.77 trillion worth of aid to the financial system and that banks used the low interest rates charged on these loans to make an estimated $13 billion in income.
On December 6, the Fed struck back, issuing a four page unsigned memo intended to correct recent “egregious errors and mistakes” found in various reports of its emergency lending facilities. The Fed argues that the “total credit outstanding under liquidity programs was never more than about $1.5 trillion.” While Bloomberg wasn’t mentioned explicitly in the Fed memo, it was fairly clear to whom the response was directed. The following day Bloomberg defended its reporting, and the Wall Street Journal’s David Wessel came to the Fed’s defense, characterizing Bloomberg’s methodology as a “great story,” but ultimately not “true.”
All this may sound like controversy, but it’s little more than a tempest in a teacup.
Here’s the hurricane: In reality, no less than $29.616 trillion is the total emergency assistance provided by the Fed to foreign and domestic entities during the Global Financial Crisis. Let’s repeat that: $29 trillion. This astounding number is over twice U.S. gross domestic product, the nominal value of all goods and services produced for the year 2010. This is the total of the bailout as calculated by Nicola Matthews and myself as part of the Ford Foundation project, A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis. We will be presenting the results of our analysis in a series of papers published by the Levy Economics Institute, the first of which, “29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,” is already available here.
The results we have calculated are presented below, and it is important to note that the totals are cumulative and in billions of U.S. dollars. (The numbers in parentheses indicate amounts still outstanding as of November 10, 2011).
Facility Total Percent of Total
Term Auction Facility $3,818.41 12.89%
Central Bank Liquidity Swaps 10,057.4 (1.96) 33.96
Single Tranche Open Market Operations 855 2.89
Term Securities Lending Facility and Term Options Program 2,005.7 6.77
Bear Stearns Bridge Loan 12.9 0.04
Maiden Lane I 28.82 (12.98) 0.10
Primary Dealer Credit Facility 8,950.99 30.22
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 217.45 0.73
Commercial Paper Funding Facility 737.07 2.49
Term Asset-Backed Securities Loan Facility 71.09 (10.57) 0.24
Agency Mortgage-Backed Security Purchase Program 1,850.14 (849.26) 6.25
AIG Revolving Credit Facility 140.316 0.47
AIG Securities Borrowing Facility 802.316 2.71
Maiden Lane II 19.5 (9.33) 0.07
Maiden Lane III 24.3 (18.15) 0.08
AIA/ ALICO (AIG) 25 0.08
Totals $29,616.4 100.0%
I want to be clear. These are the totals of Fed lending and asset purchases actually undertaken since the bail-out began. There is no double-counting. And we do not include any credit facilities created by the Fed unless they were actually used. These figures accurately reflect the cumulative totals over the approximately three years actually used by the Fed to prop-up domestic and international banks, shadow banks, central banks, and even some non-financial institutions.
The programs above constitute the crisis prevention machinery rolled out by the Fed to combat the worst financial panic since 1929. All the programs above were designed and implemented to target domestic financial and nonfinancial corporations or foreign central banks or markets, or both. Only one of the facilities, the Term Auction Facility, can be viewed as being consistent with the Fed’s mandate to protect the commercial banking system from systemic failure. The rest are the result of the increasing relevance of the “shadow banking” to our economy—and of the Fed’s attempt to rescue the shadow banking sector.
Shadow banks are highly leveraged financial institutions that perform functions historically relegated to the commercial banking system. It is important to note that these financial concerns do not have access to the conventional means of Fed support. Nor were they ever really regulated or supervised by the Fed. They engaged in extremely risky behavior that in large part led to the global financial crisis. And when it hit, the Fed spent and lent $29 trillion, much of it devoted to rescuing the shadow banking system.
Thus, we see a host of unconventional programs designed to aid these institutions rather than the Fed’s traditional patrons. The information used to calculate the totals above is freely available (thanks in large part to the valiant efforts of a group of lawmakers led by Senator Bernie Sanders) as the result of an amendment inserted into the Dodd Frank bill. Moreover, this information has been freely available since December 10, 2010 on the Fed’s website.
So why didn’t someone else already put the data together in this way?
Obviously, $29 trillion is much bigger than the previous estimates of $7.77 trillion (Bloomberg) or $1.5 trillion (the Fed and the Wall Street Journal). An in-depth account of each of the facilities above is a rather lengthy process as the Levy working paper attests; therefore we will only lay out the reason for the difference between the Bloomberg and Fed numbers. So, how is it that we arrive at such a number? The main difference in our analysis is the variables we identify as essential in understanding the Fed’s response. In our paper we report three measures that we view as essential to capturing the size and magnitude of the bailout. Each of the three measures deals exclusively with programs put into place by the Fed that transcend its conventional lender of last resort function. That is, we only include the emergency facilities the Fed created. We agree with the Fed that only facilities which were actually made operational should be considered in any account of the Fed’s actions. But we take the side of Bloomberg regarding the general lack of transparency by the Fed—the Fed fought tooth and nail to keep the details of its programs secret.
At any given moment inspection of the amount owed to the Fed resulting from nonconventional lender of last resort actions provides a reasonable account of what the Fed was doing in the period leading up to that time. However, looking at this number over time and in the context of the weekly amount lent provides insight into how the Fed’s efforts evolved over the run of the crisis. These two approaches to measurement (a “stock” or outstanding balance and a “flow” or cumulated amount spent and lent weekly) only provide us with details regarding the scope of the Fed’s bailout. To get a clear picture we need some account of the magnitude. We believe that this is captured by looking at the cumulative totals of all programs.
Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions”. Therefore it is essential to have a LOLR. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we know to do this is by summing each instance--which results in a cumulative total of over $29 trillion dollars.
A figure as large as $29.616 trillion should not be taken lightly, but focus on the specific magnitude of the figure diverts our attention from a larger issue that is at stake: how should the LOLR responsibility to be discharged in the future? With unemployment remaining persistently high and millions continuing to lose their homes to foreclosure as the result of lost income from a poor economy or outright fraud in the mortgage lending and foreclosure process, it becomes increasingly difficult to justify the ability of a single institution staffed by unelected officials to carry out such a targeted commitment of the obligations of the United States citizenry. Thanks to the actions of Senator Sanders and other individuals possessing the temerity to question the authority of the Fed we now have access to much of the data regarding what the Fed did during the recent crisis.
But we still need to go through the data from the past three years of bail-outs to answer the following questions: Who got funds from the Fed? How much did they get? And why did they get them? The Fed has not adequately explained why its emergency lending and asset purchases went on for so long and accumulated to such a large number.
J. Andrew Felkerson is a Interdisciplinary PhD student at the University of Missouri- Kansas City
Thursday, December 1, 2011
10 Biggest Banks Could Lose $185 Billion In Deposits Next Year
10 Biggest Banks Could Lose $185 Billion In Deposits Next Year As Customers Move Their Money Pat Garofalo on Nov 21, 2011
http://thinkprogress.org/economy/2011/11/21/373191/banks-185-billion-deposits-loss
During “Bank Transfer Day” earlier this month, 40,000 Americans moved their money from the nation’s biggest banks to credit unions, voicing their distaste with the action’s of America’s financial behemoths. About 650,000 Americans joined credit unions in October, which is more people than in all of 2010 combined. According to cg42, a consulting firm that does work for the biggest banks, “the nation’s 10 biggest banks could stand to lose as much as $185 billion in deposits in the next year due to customer defections.” Of the banks, “Bank of America is the most vulnerable and could lose up to 10% of its customers and $42 billion in consumer deposits in the next year.”
http://thinkprogress.org/economy/2011/11/21/373191/banks-185-billion-deposits-loss
During “Bank Transfer Day” earlier this month, 40,000 Americans moved their money from the nation’s biggest banks to credit unions, voicing their distaste with the action’s of America’s financial behemoths. About 650,000 Americans joined credit unions in October, which is more people than in all of 2010 combined. According to cg42, a consulting firm that does work for the biggest banks, “the nation’s 10 biggest banks could stand to lose as much as $185 billion in deposits in the next year due to customer defections.” Of the banks, “Bank of America is the most vulnerable and could lose up to 10% of its customers and $42 billion in consumer deposits in the next year.”
Friday, November 18, 2011
Big Banks Plead with Customers Not to Move Their Money
November 9, 2011
http://www.washingtonsblog.com/2011/11/big-banks-plead-with-customers-not-to-move-their-money.html
Yes, The Big Banks DO Care If We Move Our Money
650,000 customers moved $4.5 billion dollars out of the big banks and into smaller banks and credit unions in the last month.
But there is a myth making the rounds that the big banks don’t really care if we move our money. For example, one line of reasoning is that no matter how many people move their money, the Fed and Treasury will just bail out the giants again.
But many anecdotes show that the too big to fails do, in fact, care.
Initially, of course, if the big banks really didn’t care, they wouldn’t have prevented protesters from closing their accounts.
NBC notes that – in response to inquiries regarding how many people have moved their money – Bank of America refused to provide figures, and instead sent the following defensive email:
“Bank of America continues to be a great place for customers to manage their everyday finances and achieve their savings goals,” [Colleen Haggerty, a spokeswoman for Bank of America's Southern California operations] said in an email. “We offer customers more choice and convenience, including industry-leading fraud protection, access to thousands of banking centers and ATMs, and the best online and mobile banking, which allow customers to bank on their terms 24/7.”
A writer noted at Daily Kos:
At Wells Fargo, my sister walked up to the teller and politely asked to close her account. The teller said, “No problem.” She pulled up her account and saw the balance and told her that due to the amount she had to speak with the branch manager. The branch manager came out. He was probably 30 years old and was very arrogant. He asked my sister why she wanted to close her account and my sister told him she thought Wells Fargo was part of the problem with the economy. He went thru some talking points about why she shouldn’t move her money, but my sister didn’t back down. When he asked her where she was going she told him that she would be banking at the North Carolina State Employees Credit Union. She isn’t a state employee, but anyone can join if you are related to a state employee. It turns out her husband is. Anyway, the bankster told her “You’ll be back. Credit unions can’t provide the services you need.” We’ll see about that. She withdrew over $200k from Wells Fargo.
Next we went to Bank of America. I closed my last account with hardly any questions asked. Of course, I had taken most of my money out so there wasn’t much left to take. My sister on the other hand had a large balance in multiple accounts. They actually refused to cut her a check for the full amounts. They only gave her 1/3 of her money and told her she’d have to come back to withdraw the rest. They claimed they were only allowed to make checks for a certain amount, and that they had no authority to cut additional checks on the same day. Stupid BofA. She had her check in hand and politely told off the branch manager when he told her she had to come back another day or two to withdraw the rest.
At BofA, we weren’t the only ones closing accounts. There was a line of people. Most had small accounts because they weren’t even being challenged, but she actually had to wait in line to speak with a branch manager.
At SunTrust, the branch manager went off his rocker. He just kept asking her “is there anything I can do or anything I can say to change your mind?” He asked probably twenty times. He even offered to have the market executive meet with her and hear out her concerns. She told him she wasn’t interested. He really looked nervous about it.
And a writer at Daily Bail pointed out:
I went in, asked to speak with a banker and was seated in an office. When the young associate came in and asked the purpose of my visit, I handed her my ATM card and requested that she tell me the balance. When she did, I then asked for a cashiers check in that amount. That’s when things got wonky. She froze, stumbled over her words and asked why I needed that amount (It was not a small sum). This gave me an opportunity to explain that although I personally would not be affected by their new fees I know plenty of friends and family that would feel the pain. In solidarity with them, I wished to close the account and move on. She unwittingly suggested that if I just use my debit card once a month then there would be no fee. That was good for a belly laugh from me, then I again requested the balance to be issued to me in the form of a cashier’s check. She then told me that there would be a $10 fee for this service. Another laugh. I guess it didn’t sink in when I told her that I was fee adverse. There was an easy work-around anyway – I requested the cash. That finished my time with this associate banker as the amount I was requesting was “well past” her daily limit for withdrawals. I asked if there would be an issue with securing the cash and she said “I honestly don’t know if we have that here” and walked out to get the branch manager.
The manager was pleasant enough and very direct. After introducing herself she flat out asked “What can we do to change your mind?” “We don’t want to see you go” she emphasized. This opened a door for me to further explain my decision to leave the bank and why I was doing it. Amazingly, it did not fall on deaf ears. She indicated that understood where I was coming from and actually showed genuine surprise at some of the facts I provided her about the less than consumer friendly policies and machinations of her employer. She did make some feeble counter-arguments and repeatedly asked me if I would change my mind (with a hint of desperation!). I stood firm and by the end of our conversation she asked if I would be willing to put it all in writing so she could send it up the chain.
She shared that management is nervous, they are seeing money leaking out of the bank and realize that they have made mistakes…. They are also aware of the growing momentum behind the November 5th move your money movement.
Management is aware that people are angry (how could they not be!) and have put an ear to the ground.
Hundreds of similar stories are being told all over America.
Even though the government may keep throwing money at the dinosaurs, the Basel regulations do have some capital requirements, and so the big banks need to bring in some actual deposits to fund their casino gambling.
Moreover, if too many depositors leave, the illusion that the big banks are serving the American public will be burst, and a critical mass of consciousness will occur, so that the banks’ questioned control over the American political and financial systems will start to be questioned.
So moving our money is an effective step towards reclaiming America.
http://www.washingtonsblog.com/2011/11/big-banks-plead-with-customers-not-to-move-their-money.html
Yes, The Big Banks DO Care If We Move Our Money
650,000 customers moved $4.5 billion dollars out of the big banks and into smaller banks and credit unions in the last month.
But there is a myth making the rounds that the big banks don’t really care if we move our money. For example, one line of reasoning is that no matter how many people move their money, the Fed and Treasury will just bail out the giants again.
But many anecdotes show that the too big to fails do, in fact, care.
Initially, of course, if the big banks really didn’t care, they wouldn’t have prevented protesters from closing their accounts.
NBC notes that – in response to inquiries regarding how many people have moved their money – Bank of America refused to provide figures, and instead sent the following defensive email:
“Bank of America continues to be a great place for customers to manage their everyday finances and achieve their savings goals,” [Colleen Haggerty, a spokeswoman for Bank of America's Southern California operations] said in an email. “We offer customers more choice and convenience, including industry-leading fraud protection, access to thousands of banking centers and ATMs, and the best online and mobile banking, which allow customers to bank on their terms 24/7.”
A writer noted at Daily Kos:
At Wells Fargo, my sister walked up to the teller and politely asked to close her account. The teller said, “No problem.” She pulled up her account and saw the balance and told her that due to the amount she had to speak with the branch manager. The branch manager came out. He was probably 30 years old and was very arrogant. He asked my sister why she wanted to close her account and my sister told him she thought Wells Fargo was part of the problem with the economy. He went thru some talking points about why she shouldn’t move her money, but my sister didn’t back down. When he asked her where she was going she told him that she would be banking at the North Carolina State Employees Credit Union. She isn’t a state employee, but anyone can join if you are related to a state employee. It turns out her husband is. Anyway, the bankster told her “You’ll be back. Credit unions can’t provide the services you need.” We’ll see about that. She withdrew over $200k from Wells Fargo.
Next we went to Bank of America. I closed my last account with hardly any questions asked. Of course, I had taken most of my money out so there wasn’t much left to take. My sister on the other hand had a large balance in multiple accounts. They actually refused to cut her a check for the full amounts. They only gave her 1/3 of her money and told her she’d have to come back to withdraw the rest. They claimed they were only allowed to make checks for a certain amount, and that they had no authority to cut additional checks on the same day. Stupid BofA. She had her check in hand and politely told off the branch manager when he told her she had to come back another day or two to withdraw the rest.
At BofA, we weren’t the only ones closing accounts. There was a line of people. Most had small accounts because they weren’t even being challenged, but she actually had to wait in line to speak with a branch manager.
At SunTrust, the branch manager went off his rocker. He just kept asking her “is there anything I can do or anything I can say to change your mind?” He asked probably twenty times. He even offered to have the market executive meet with her and hear out her concerns. She told him she wasn’t interested. He really looked nervous about it.
And a writer at Daily Bail pointed out:
I went in, asked to speak with a banker and was seated in an office. When the young associate came in and asked the purpose of my visit, I handed her my ATM card and requested that she tell me the balance. When she did, I then asked for a cashiers check in that amount. That’s when things got wonky. She froze, stumbled over her words and asked why I needed that amount (It was not a small sum). This gave me an opportunity to explain that although I personally would not be affected by their new fees I know plenty of friends and family that would feel the pain. In solidarity with them, I wished to close the account and move on. She unwittingly suggested that if I just use my debit card once a month then there would be no fee. That was good for a belly laugh from me, then I again requested the balance to be issued to me in the form of a cashier’s check. She then told me that there would be a $10 fee for this service. Another laugh. I guess it didn’t sink in when I told her that I was fee adverse. There was an easy work-around anyway – I requested the cash. That finished my time with this associate banker as the amount I was requesting was “well past” her daily limit for withdrawals. I asked if there would be an issue with securing the cash and she said “I honestly don’t know if we have that here” and walked out to get the branch manager.
The manager was pleasant enough and very direct. After introducing herself she flat out asked “What can we do to change your mind?” “We don’t want to see you go” she emphasized. This opened a door for me to further explain my decision to leave the bank and why I was doing it. Amazingly, it did not fall on deaf ears. She indicated that understood where I was coming from and actually showed genuine surprise at some of the facts I provided her about the less than consumer friendly policies and machinations of her employer. She did make some feeble counter-arguments and repeatedly asked me if I would change my mind (with a hint of desperation!). I stood firm and by the end of our conversation she asked if I would be willing to put it all in writing so she could send it up the chain.
She shared that management is nervous, they are seeing money leaking out of the bank and realize that they have made mistakes…. They are also aware of the growing momentum behind the November 5th move your money movement.
Management is aware that people are angry (how could they not be!) and have put an ear to the ground.
Hundreds of similar stories are being told all over America.
Even though the government may keep throwing money at the dinosaurs, the Basel regulations do have some capital requirements, and so the big banks need to bring in some actual deposits to fund their casino gambling.
Moreover, if too many depositors leave, the illusion that the big banks are serving the American public will be burst, and a critical mass of consciousness will occur, so that the banks’ questioned control over the American political and financial systems will start to be questioned.
So moving our money is an effective step towards reclaiming America.
Sunday, October 16, 2011
Banks Foreclosure Solution
From PublicRadio.org:
The great flaw in the American housing market right now is pretty fundamental: too much supply, not enough demand. There are just way too many foreclosed and abandoned properties out there, which is making everything else tougher to sell.
So since they haven't been able to drive any new demand, some banks are doing the completely rational -- if kind of unbelievable -- thing and cutting their supply. In states like Ohio, banks are finding it's cheaper to tear houses down than to try and sell them...
Banks demolish foreclosed homes, raise eyebrows
Jeff Tyler
Thursday, October 13, 2011
http://marketplace.publicradio.org/display/web/2011/10/13/pm-banks-demolish-foreclosed-homes-raise-eyebrows
The great flaw in the American housing market right now is pretty fundamental: too much supply, not enough demand. There are just way too many foreclosed and abandoned properties out there, which is making everything else tougher to sell.
So since they haven't been able to drive any new demand, some banks are doing the completely rational -- if kind of unbelievable -- thing and cutting their supply. In states like Ohio, banks are finding it's cheaper to tear houses down than to try and sell them...
Banks demolish foreclosed homes, raise eyebrows
Jeff Tyler
Thursday, October 13, 2011
http://marketplace.publicradio.org/display/web/2011/10/13/pm-banks-demolish-foreclosed-homes-raise-eyebrows
Saturday, October 15, 2011
How Is Credit Created?
From WashingtonsBlog.com:
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth...
Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.
This angle of the banking system has actually been discussed for many years by leading experts:
“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.”
- 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics”
“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith
“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.“
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report
“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman
Indeed, the Fed is pushing to eliminate all reserve requirements. If banks can lend without having any reserves, then agreeing to extend credit obviously comes before having the reserves...
We Don’t Need the Giant Banks To Do It
If private banks can create credit out of thin air – without actually having excess reserves – then the government could do so as well. In other words, if banks don’t need to have extra money lying around before they can make loans, then states and local governments don’t either...
Moreover, as the Congressional Research Service confirms, the government has been loaning vast sums to the biggest banks at practically no interest, and then borrowing the money back from the banks at much higher interest.
Why do we need to spend huge sums of money to have the banks loans our own money back to us?
Indeed, a new report from Demos – a non-partisan public policy organization – in conjunction with the Center for State Innovation, issued a report in April looking at the potential for “partnership banks” across the country, including 11 states already considering such legislation...
Partnership Banks can raise revenue for states without raising taxes, and increase loans to small businesses precisely when Wall Street banks have cut back on lending and raised public borrowing costs. A Partnership Bank would act as a “banker’s bank” to in-state community banks and provide the state government with both banking services at fair terms and an annual multi-million dollar dividend.
If modeled on the successful Bank of North Dakota, Partnership Banks in other states would:
* Create new jobs and spur economic growth. Partnership Banks are participation lenders, meaning they partner—never compete—with local banks to drive lending through local banks to small businesses. If Washington State had a fully-operational Partnership Bank capitalized at $100 million during the Great Recession, it would have supported $2.6 billion in new lending and helped to create 8,212 new small business jobs. A proposed Oregon bank could help community banks expand lending by $1.3 billion and help small business create 5,391 new Oregon jobs in its first three to five years. All of this would be accom- plished at a profit, which Partnership Banks should share with the state.
* Generate new revenues for states directly, through annual bank dividend payments, and indirectly by creating jobs and spurring local economic growth…
* Lower debt costs for local governments. Like the Bank of North Dakota, Partnership Banks can get access to low-cost funds from the regional Federal Home Loan Banks. The banks can pass savings on to local governments when they buy debt for infrastructure investments. The banks can also provide Letters of Credit for tax-exempt bonds at lower interest rates.
* Strengthen local banks even out credit cycles, and preserve real competition in local credit markets. There have been no bank failures in North Dakota during the financial crisis. BND’s charter is clear that its goal is to “be helpful to and to assist in the development of [North Dakota banks]… and not, in any manner, to destroy or to be harmful to existing financial institutions.” By purchasing local bank stock, partnering with them on large loans and providing other sup- port, Partnership Banks would strengthen small banks in an era when federal policy encourages bank consolidation.
* Build up small businesses. Surveys by the Main Street Alliance in Oregon and Washington show at least 75 percent support among small business owners. In markets increasingly dominated by large corporations and the banks that fund them, Partnership Banks would increase lending capabilities at the smaller banks that provide the majority of small business loans in America.
These various proposals would “move general revenue deposits out of the Wall Street banks that dominate the banking business today, and use them to capitalize a new local public structure with a mission to grow the local economy.”
Let’s Give the Giant Banks Some Competition
Some people are understandably skeptical of state banks. Specifically, they don’t trust state politicians to exercise fiscal constraint, or they think that states with their own public banks would spend money on frivolous projects.
I understand and respect both concerns.
But as financial writer Yves Smith notes, state banks – even if imperfect – would at least give some competition to the too big to fails which have driven our economy into a ditch, and which are state-supported anyway:
The most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks...
Before readers argue that this is tantamount to socialism, that would be better than what we have now. As we noted in an earlier post “Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?“:
Big finance has an unlimited credit line with governments around the globe. “Most subsidized industry in the world” is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.
The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.
Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended…
So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.
Right now, we have much of the banking sector operating so as to privatize gains and socialize losses. We might as well socialize the gains, as North Dakota does...
The Giant Banks Are ALREADY State-Sponsored … So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies?
June 13, 2011
http://www.washingtonsblog.com/2011/06/the-giant-banks-are-already-state-sponsored-so-why-not-create-public-banks-to-at-least-share-the-gains-help-out-main-street-and-grow-our-local-economies.html
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth...
Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.
This angle of the banking system has actually been discussed for many years by leading experts:
“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.”
- 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics”
“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith
“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.“
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report
“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman
Indeed, the Fed is pushing to eliminate all reserve requirements. If banks can lend without having any reserves, then agreeing to extend credit obviously comes before having the reserves...
We Don’t Need the Giant Banks To Do It
If private banks can create credit out of thin air – without actually having excess reserves – then the government could do so as well. In other words, if banks don’t need to have extra money lying around before they can make loans, then states and local governments don’t either...
Moreover, as the Congressional Research Service confirms, the government has been loaning vast sums to the biggest banks at practically no interest, and then borrowing the money back from the banks at much higher interest.
Why do we need to spend huge sums of money to have the banks loans our own money back to us?
Indeed, a new report from Demos – a non-partisan public policy organization – in conjunction with the Center for State Innovation, issued a report in April looking at the potential for “partnership banks” across the country, including 11 states already considering such legislation...
Partnership Banks can raise revenue for states without raising taxes, and increase loans to small businesses precisely when Wall Street banks have cut back on lending and raised public borrowing costs. A Partnership Bank would act as a “banker’s bank” to in-state community banks and provide the state government with both banking services at fair terms and an annual multi-million dollar dividend.
If modeled on the successful Bank of North Dakota, Partnership Banks in other states would:
* Create new jobs and spur economic growth. Partnership Banks are participation lenders, meaning they partner—never compete—with local banks to drive lending through local banks to small businesses. If Washington State had a fully-operational Partnership Bank capitalized at $100 million during the Great Recession, it would have supported $2.6 billion in new lending and helped to create 8,212 new small business jobs. A proposed Oregon bank could help community banks expand lending by $1.3 billion and help small business create 5,391 new Oregon jobs in its first three to five years. All of this would be accom- plished at a profit, which Partnership Banks should share with the state.
* Generate new revenues for states directly, through annual bank dividend payments, and indirectly by creating jobs and spurring local economic growth…
* Lower debt costs for local governments. Like the Bank of North Dakota, Partnership Banks can get access to low-cost funds from the regional Federal Home Loan Banks. The banks can pass savings on to local governments when they buy debt for infrastructure investments. The banks can also provide Letters of Credit for tax-exempt bonds at lower interest rates.
* Strengthen local banks even out credit cycles, and preserve real competition in local credit markets. There have been no bank failures in North Dakota during the financial crisis. BND’s charter is clear that its goal is to “be helpful to and to assist in the development of [North Dakota banks]… and not, in any manner, to destroy or to be harmful to existing financial institutions.” By purchasing local bank stock, partnering with them on large loans and providing other sup- port, Partnership Banks would strengthen small banks in an era when federal policy encourages bank consolidation.
* Build up small businesses. Surveys by the Main Street Alliance in Oregon and Washington show at least 75 percent support among small business owners. In markets increasingly dominated by large corporations and the banks that fund them, Partnership Banks would increase lending capabilities at the smaller banks that provide the majority of small business loans in America.
These various proposals would “move general revenue deposits out of the Wall Street banks that dominate the banking business today, and use them to capitalize a new local public structure with a mission to grow the local economy.”
Let’s Give the Giant Banks Some Competition
Some people are understandably skeptical of state banks. Specifically, they don’t trust state politicians to exercise fiscal constraint, or they think that states with their own public banks would spend money on frivolous projects.
I understand and respect both concerns.
But as financial writer Yves Smith notes, state banks – even if imperfect – would at least give some competition to the too big to fails which have driven our economy into a ditch, and which are state-supported anyway:
The most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks...
Before readers argue that this is tantamount to socialism, that would be better than what we have now. As we noted in an earlier post “Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?“:
Big finance has an unlimited credit line with governments around the globe. “Most subsidized industry in the world” is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.
The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.
Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended…
So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.
Right now, we have much of the banking sector operating so as to privatize gains and socialize losses. We might as well socialize the gains, as North Dakota does...
The Giant Banks Are ALREADY State-Sponsored … So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies?
June 13, 2011
http://www.washingtonsblog.com/2011/06/the-giant-banks-are-already-state-sponsored-so-why-not-create-public-banks-to-at-least-share-the-gains-help-out-main-street-and-grow-our-local-economies.html
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