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On Bilking The Sophisticated, Or, Check It Out: We’re Suing Banks! September 6, 2011

Filed under: Economics — fakeconsultant @ 9:54 pm
Tags: , , , , , , ,

I took a break to enjoy the holiday, as I’m sure many of you did, but my inbox kept busy, and on Friday came a doozy, courtesy of the Washington Post.

You remember that little bit of a banking crisis we had a couple of years back, where banks around the world might have possibly, maybe, just a little, conspired in a giant scheme to package toxic mortgage loans into Grade A, investment-ready securities instruments, which then blew up in everyone’s faces to the tune of a whole lot of taxpayer bailouts?

Well all of a sudden, it looks like an agency of the Federal Government is looking to do something about it, in a real big way.

Last Friday the Federal Housing Finance Agency (FHFA) announced they’re suing 17 firms (I’ll give you a list, bit it’s pretty much all the usual suspects); depending on who you ask the Feds are seeking an amount as high as $200 billion.

As Joe Biden would say, it’s a big…well, it’s a big deal, anyway, and that’s why we’re starting the new week with this one.

“An artist is only answerable to himself. He promises nothing to the centuries to come save his own works. He stands caution only for himself. He dies childless. He has been his own king, his own priest, and his own god.”

–Charles Baudelaire, as quoted in the book Cezanné and Beyond, edited by Joseph J Rishel and Katherine Sachs

So what do we know?

As we said, on Friday the Washington Post and others reported that there were a series of lawsuits filed by the FHFA in their capacity as Conservator of the assets of Fannie Mae and Freddy Mac against darn near everyone.

The FHFA is alleging, to make a long story short, that everyone involved misled Fannie Mae or Freddy Mac (the “Entities”, in the words of the lawsuits), to some extent, and that the misleading involved making representations to the Entities about the various metrics related to what Fanny and Freddy were buying from these banks.

For example, it’s alleged that when certain banks sold batches of mortgage loans to the Entities, they lied about how many of the owners were actually living in the homes; that makes a difference when you’re trying to figure out how likely a borrower is to pay back a loan.

It appears that a defense the banks will offer is that Fannie and Freddy were “sophisticated investors” who should have known the risks buried in the batches of loans they were buying (and they were sophisticated investors: they bought, literally, trillions of dollars worth of loans) – but if it can be proven that the banks were lying about what was in the loan packages, that defense might not do so well in front of a jury.

Everyone involved” includes Bank of America (B of A), Citigroup, JP Morgan Chase, Countrywide (which means B of A is actually being sued twice), Deutsche Bank, Credit Suisse, the UK’s HSBC and Barclays Banks, France’s Société Générale, the Royal Bank of Scotland, Nomura Securities (representing Japan), and GE and GM (GE Capital is a surprisingly large and varied business; GM got in the banking business to finance auto sales, and you may today know them as Ally Bank).

Of course, Wall Street is also part of “everyone”; that’s why the list also includes Goldman Sachs, Morgan Stanley, and Merrill Lynch (which means, thanks to acquisitions, that B of A is actually getting sued three times). The City of Memphis also proudly makes the list, thanks to First Horizon.

Some notable names not on the list? Key Bank and Wells Fargo, who seem to have escaped action so far; there’s also UBS (Union Bank of Switzerland), who was already served with a similar lawsuit in July.

It is difficult to determine exactly how much money is involved, as various sources disagree, but we know that Deutsche Bank is being sued for about $14 billion, all by itself. (B of A is being sued, all told, for a bit over $50 billion; they’ve already paid out more than $12 billion this year to settle another similar claim.)

Felix Salmon, at the Seeking Alpha website, has created a chart that seeks to measure who is in the most trouble here; by his measure JP Morgan Chase is far and away at the top of the list…except that the current incarnation of B of A represents three of the top eight spots on his list, which suggests the FHFA is targeting them for the most recovery. (Salmon used the number of individual defendants, how many pages were in the lawsuit, and whether the suits seek punitive damages as his yardsticks; from there he calculated a score that makes up his rankings.)

All this had to happen right now, it appears, because a statute of limitations is in play; the WaPo reports that a failure to file the suits would have meant the FHFA would have lost the ability to recover those monies. (It’s also reported that pre-lawsuit negotiations were stalling, and those negotiations will presumably continue, with a series of impending court dates to help, shall we say, sharpen the focus.)

Now that is pretty much all the story I have for you today on this one – except for a bit of a “discuss amongst yourselves” to finish things up:

It has been suggested that the FHFA is in an inherently conflicted position in all these cases. That’s because the agency is acting as both the regulator of these banks and the “victim” as we seek any monies that may be due from any fraud.

So what would be a better situation?

Should the FHFA continue to regulate the banks they’re suing as a victim, or should another regulator be put in place…or should another Conservator be appointed, leaving the FHFA as “just a regulator”, and not a victim?

It’s a question worth about $200 billion, more or less – and even in these times, that’s still a lot of your money.

 

On Slicing Pies, Or, Mystery Fees Cause Retirement “Money Spill” June 19, 2010

It’s part two of our “Netroots Nation Goes To Vegas Piano Bar Extravaganza”, and in keeping with tradition that means we are again taking a story request.

This time we won’t be talking about energy security or “climate security”; instead, we’ll discuss retirement security, keeping your money for yourself instead of paying it out in “mystery fees”, and how one of the “usual suspects” is at it again.

And if all that wasn’t enough…we also have pie.

And when the Pye was open’d
The birds began to sing,
And was not this a dainty dish
To set before the King!

–Charles Lamb, writing to Miss Sarah James, April, 1829

So here’s what’s going on: about 50 million Americans have one of those 401(k) retirement plans.

The concept behind these plans is that you put money into an investment account of some sort, and the money accumulates, tax-free, until you withdraw it after you retire.

These accounts are “managed” by financial services firms, who collect fees for the service.

Lots of fees, for all kinds of services.

The problem is that not all of these fees are fully disclosed to investors. In fact, it’s legal for an investment firm to deduct some amount of money out of the mutual fund that you’ve put your money into…and not tell you how much they took.

Part of the House’s vision of financial reform legislation requires the managers of these monies to fully disclose, up front, before you invest, and on every statement afterward, what fees are being collected; an amendment before the Senate would remove this protection—and here’s where the “usual suspects” part comes in: we have this amendment thanks to our good friend…wait for it…Senator Max “I love healthcare reform—as long as those healthcare industry checks keep coming in” Baucus, he of the Senate Finance Committee.

The US Department of Labor says that you could lose as much as 28% of your money, over time, to these hidden fees, and that’s a pretty big slice out of your retirement pie.

To illustrate the point Congressman George Miller, chair of the House Committee on Education and Labor (following the requisite press conference) dispatched his minions to deliver 72% of an apple pie to each member of the Senate Finance Committee Wednesday, as you can see in this video, courtesy of Mr. Miller’s office:

What about the other 28%?

That was replaced with a big red wedge that reads “Wall Street’s Cut of Your 401(k) Pie” before the pies were boxed up…and it was actually a nice presentation, if I may say so myself.

So exactly who got the pies?

With no effort made to change the names for the protection of the innocent, here’s a list of the members of Senate Finance, along with their States and affiliations:

Max Baucus (Oy, Vey!-MT)
Jeff Bingaman (Big-Time Lobbyist Wife-NM)
Jim Bunning (Nutty-KY)
Maria Cantwell (Used to be Rich-WA)
Thomas Carper (Once Accused of Designing a Regulatory Deathstar-DE)
Kent Conrad (Countrywide VIP Home Mortgage Program Participant-ND)
John Cornyn (Compensating…-TX)
Mike Crapo (Big-Time Lobbyist Daughter-ID)
John Ensign (“Wanna Donate To My Legal Defense Fund?”-NV)
Mike Enzi (One of Those C Street Guys-WY)
Chuck Grassley (Against Healthcare Reform…Until He Was For It-IA)
Orrin Hatch (Supports Drug Testing For Unemployment Benefits-UT)
John Kerry (John Kerry Walks Into A Bar, The Horse Says “Hey: Why The Long Face?”-MA)
Jon Kyl (Wants Joe Arpaio to Enforce Immigration Law-AZ)
Blanche Lincoln (Damn Near Fired-AR)
Robert Menendez (Never Convicted-NJ)
Bill Nelson (Had His Own “Flight Suit” Moment-FL)
Pat Roberts (Is America’s Phone Tapped?-KS)
John D. Rockefeller IV (Actually Wanted a Public Option-WV)
Charles Schumer (Will Go Upstate-NY)
Olympia Snowe (Always the “Possible Republican Vote”-ME)
Debbie Stabenow (Can’t Live With ‘Em…-MI)
Ron Wyden (Geek-OR)

This is another one of those stories where getting ahold of one or more of these Senators, in the next few days, could matter quite a bit if it’s your pie that’s at stake…and even if it isn’t, why should fund managers get to charge “mystery fees” to anybody?

So get to it, now, because if you do, you may be able to afford more ice cream to go with your pie later.

WARNING – Blatant Self-Promotion Ahead: It’s Netroots Nation time once again, and the fine folks at Freedom To Marry have chosen me as a finalist for their Blog 4 Equality contest. If I am one of the chosen, it’s off to Vegas…in July. You can vote for that Don Davis guy here, which is my “in person” name, once every 24 hours, so vote early and often. Voting ends June 25th. Thanks very much, and we now return you to your regular programming.