One has to wonder, given this testimony to be given today by Paul Volcker:
The challenge is not to paper over or tinker around the edges of the broken system. We need to minimize the danger that the uncertainties and risks inherent in the functioning of a market-based financial system do not again jeopardize the functioning and foundation of our economy.
Actually, the challenge is to lock up the malefactors, liars and thieves, of which there have been and are many.
What would be the bank robbery rate were there no penalty for robbing banks? You need look no further than the so-called "regulatory framework" for the source of the problem - The Federal Reserve Act, the enabling legislation for the OTS and OCC, "Prompt Corrective Action" - all of these are great-sounding laws but none of them contain the critical clause in any law if you expect people to follow it: an "or else."
I particularly welcome the strong reaffirmation of one long-standing principle – the separation of banking from commerce – that has long characterized the American approach toward financial regulation.
Reaffirmation? Where?
The repeal of Glass-Steagall dropped the last pretense of any such thing - a law that had been wantonly and notoriously violated by the merger of Citibank and Travelers and which was clearly unlawful at the time it was contemplated and entered into. Instead of swiftly applying a boot to the head of both Boards of Directors and the Chairmen of both firms the law was instead changed to make retroactively legal that which was a blatant violation of United States Law.
As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets.
Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. So should in my view a heavy volume of proprietary trading with its inherent risks. Some trading, it is reasonably argued, is necessary as part of a full service customer relationship. The distinction between "proprietary" and "customer-related" may be cloudy at the border. But surely by the active use of capital requirements and the exercise of supervisory authority, appropriate restraint can be maintained.
Right.
But left unsaid is that "participation" in these fancy instruments inherently lead to intentional obfuscation and even fraud.
Witness IndyMac Bank. We now know for a fact (because the OTS OIG office said so) that one of the OTS officials in active conspiracy with the bank back-dated deposits to make them appear more sound and secure than they were.
This resulted in a huge loss to the FDIC's deposit insurance fund when they subsequently failed.
Nobody was prosecuted for this - even though bank fraud is a felony, and so is, post-SarBox, issuing known-false accounting statements.
But this was not just an "abstract" problem for the deposit insurance fund and bank regulation. There were hundreds if not thousands of people who lost huge amounts of money in IndyMac, as they were over deposit insurance limits when the bank failed.
ALL OF THEIR UNINSURED FUNDS ARE GONE, and many of those individuals and businesses made those deposits after the fraud occurred - that is, but for the fraud they would not have lost their money as the bank would have been closed before they made the deposits.
This is not an isolated incident; Bloomberg noted yesterday:
“The examiners should have seen a lot of this coming,” said Gerard Cassidy, an analyst with Portland, Maine-based RBC Capital Markets, an investment bank owned by Royal Bank of Canada. “I shake my head when I look at some of these failures and ask, ‘Where were the regulators?’ We’re paying a lot more than we would if they had acted sooner.”
They failed to act because they have been effectively bribed, whether through actual money or whether through a revolving-door policy and lack of enforceable sanction in their enabling laws for willful blindness is not important. The outcome is the important factor, and there the evidence is beyond question. But back to Mr. Volcker:
Quite simply, it is the Federal Reserve that has (surely should have) the independence from political pressures, the prestige and the essential qualifications of experience to serve as overseer of the financial system.
The problem with Mr. Volcker's endorsement of The Fed as a continued systemic monitor and regulator is that The Fed has intentionally ignored outrageously predatory behavior, risk-hiding, loss-hiding and even UNLAWFUL activity by some of the banks and financial institutions under its supervision, including but not limited to IndyMac's deposit backdating.
It is not possible to make a logical argument for extending supervisory authority to an organization that has shown a repeated pattern of willful misconduct, has resisted audits of its activity and has in fact made bald threats to Congress in regard to statements of their intent to exercise their Constitutionally-granted authority to execute those audits in discharge of their responsibility toward the monetary supply.
The bottom line is that our regulatory system not only has failed it continues to fail, and this is no accident. These failures are intentional acts promulgated by those in Congress and other agencies such as The Federal Reserve that have written laws in such a fashion that they are mere suggestions.
Time has shown that in practice these alleged "laws" are notoriously and openly ignored at any time powerful people decide they would like to ignore them, and this willful thumbing of one's nose to the law extends to the present day. We have financial institutions that are intentionally hiding bad assets on their books at entirely-fictional values, and nearly 100 banks have failed with their books in this state. Not one indictment for accounting or bank fraud has been brought in connection with these falsehoods.
Since almost-literally every failed banking institution thus far has disclosed losses that are dramatically beyond the "zero remaining capital" line, prior to which the FDIC should have acted, it is only reasonable to assume that every remaining bank in the system is likewise carrying some amount of underwater securities at unrealistic and fictional values. They have survived to this point only due to the Federal Government's willingness to not only turn a blind eye to blatant and outrageous false statements of "value" in these securities but due to direct and indirect subsidizations in addition to enable them to "meet" the cash-flow requirements that these securities would otherwise demand.
This in turn has resulted in consumers being faced with 20, 25, even 30% interest rates on credit cards while Fed Funds stands at 0%, effectively forcing those who are carrying balances to subsidize the fraudulent accounting that has infested our banking system.
No reform will have meaning until and unless all can trust a balance sheet. This means the end of off-balance-sheet accounting, the end of fictional claims of asset value and the end of willful blindness within our regulatory structure.
It is my assertion that the only meaningful method to enforce such strictures is to guarantee that every regulatory pronouncement and law have a strict "or else" clause imposing criminal sanction for violations, and that when imprisonment would be called for in a statute for a personal actor, when a corporation is the violator the sanction be extended to the corporation as a suspension of the firm's corporate charter for a like term of years as would be imposed on a person.
It has been proved through decades of sociological study that only the certainty of punishment deters crime. Today there is no punishment at all for violating most of the regulatory code allegedly imposed on the financial system as there is no "or else" clause in essentially any of these regulations.
This must change.
READ THIS CONgress: THIS IS ONE OF THE GUYS WHO WAS DOING FORENSICS ON THE S&L CRISIS - AND WHO KEATING ALLEGEDLY THREATENED WITH DEATH FOR DOING SO!
From "Washington's Blog", reprinted in full:
William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City, and the former head S&L regulator, has written the following fantastic new proposal concerning the giant, insolvent banks. Posted/reprinted with Professor Black's permission.
William K. Black
Associate Professor of Economics and Law
University of Missouri – Kansas City
blackw@umkc.edu
September 10, 2009
The Obama administration is continuing the Bush administration policy of refusing to comply with the Prompt Corrective Action (PCA) law. Both administrations twisted a deeply flawed doctrine – “too big to fail” – into a policy enshrining crony capitalism. Historically, “too big to fail” was a misnomer – large, insolvent banks and S&Ls were placed in receivership and their “risk capital” (shareholders and subordinated debtholders) received nothing. That treatment is fair, minimizes the costs to the taxpayers, and minimizes “moral hazard.” “Too big to fail” meant only that they were not placed in liquidating receiverships (akin to a Chapter 7 “liquidating” bankruptcy). In this crisis, however, regulators have twisted the term into immunity. Massive insolvent banks are not placed in receivership, their senior managers are left in place, and the taxpayers secretly subsidize their risk capital. This policy is indefensible. It is also unlawful. It violates the Prompt Corrective Action law. If it is continued it will cause future crises and recurrent scandals. On October 16, 2006, Chairman Bernanke delivered a speech explaining why regulators must not allow banks with inadequate capital to remain open. http://federalreserve.gov/newsevents/speech/bernanke20061016a.htmCapital regulation is the cornerstone of bank regulators' efforts to maintain a safe and sound banking system, a critical element of overall financial stability. For example, supervisory policies regarding prompt corrective action are linked to a bank's leverage and risk-based capital ratios. Moreover, a strong capital base significantly reduces the moral hazard risks associated with the extension of the federal safety net.
The Treasury has fundamentally mischaracterized the nature of institutions it deems “too big to fail.” These institutions are not massive because greater size brings efficiency. They are massive because size brings market and political power. Their size makes them inefficient and dangerous.
Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy. They are not national assets. A bank that is too big to fail is too big to operate safely and too big to regulate. It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.” They are ticking time bombs – except that many of them have already exploded.
We need to comply with the Prompt Corrective Action law. Any institution that the administration deems “too big to fail” should be placed on a public list of “systemically dangerous institutions” (SDIs). SDIs should be subject to regulatory and tax incentives to shrink to a size where they are no longer too big to fail, manage, and regulate. No single financial entity should be permitted to become, or remain, so large that it poses a systemic risk.
SDIs should:
1. Not be permitted to acquire other firms
2. Not be permitted to grow
3. Be subject to a premium federal corporate income tax rate that increases with asset size
4. Be subject to comprehensive federal and state regulation, including:
a. Annual, full-scope examinations by their primary federal regulator
b. Annual examination by the systemic risk regulator
c. Annual tax audits by the IRS
d. An annual forensic (anti-fraud) audit by a firm chosen by their primary federal regulator
e. An annual audit by a firm chosen by their primary federal regulator
f. SEC review of every securities filing
5. A prohibition on any stock buy-backs
6. Limits on dividends
7. A requirement to follow “best practices” on executive compensation as specified by their primary federal regulator
8. A prohibition against growth and a requirement for phased shrinkage
9. A ban (which becomes effective in 18 months) on having an equity interest in any affiliate that is headquartered in or doing business in any tax haven (designated by the IRS) or engaging in any transaction with an entity located in any tax haven
10. A ban on lobbying any governmental entity
11. Consolidation of all affiliates, including SIVs, so that the SDI could not evade leverage or capital requirements
12. Leverage limits
13. Increased capital requirements
14. A ban on the purchase, sale, or guarantee of any new OTC financial derivative
15. A ban on all new speculative investments
16. A ban on so-called “dynamic hedging”
17. A requirement to file criminal referrals meeting the standards set by the FBI
18. A requirement to establish “hot lines” encouraging whistleblowing
19. The appointment of public interest directors on the BPSR’s board of directors
20. The appointment by the primary federal regulator of an ombudsman as a senior officer of the SDI with the mission to function like an Inspector General
TO CONGRESS: WAKE UP!
Jingle mail, Jingle Mail, Jingle all the way.....
This borrower couldn't pay and thus stopped doing so. This should generate a "NOD" (Notice of Default) and ultimately lead to foreclosure, right? It should result in an impaired asset which might be sold to some other company (at a discount), right?
It got sold all right - right at the "120 day" late point where Wells counts a loan as "defaulted."
But look at who it got sold to..... (click for a larger copy)
Yes, Wells bought the loan from.... itself?
Yep.
I have the original purchase documentation on the mortgage from July 21st 2008, when it was bought (by Wells in Frederick MD) from the original funding company in Tempe AZ.
Now, when the borrower defaults, Wells buys the loan from itself?
For what purpose?
The obvious questions that arise are:
- Is this loan "suddenly new and thus not yet non-performing" after playing this shell game? And if so, how many more "performing" loans does Wells have now that they haven't been "non-paying" for at least 90 days (having "just been acquired")?
- Was it sold at Par?
- Was this accounted for as a "true sale" when it was in fact "sold" from and to the same company in a different office location?
You don't think there might be a little shell game going on here do you?
Doesn't anyone remember that the S&Ls did this same sort of crap (with the twist that in many cases they colluded with each other to shuffle them around between institutions) as they swirled the bowl?
Inquiring minds want to know the answers to the above three questions, and if we had honest regulators they'd be demanding answers to those questions too.
Here's the first of what I expect to be several articles showing the sort of game-playing that the banks have played to generate "excuses" to impose penalty rates on consumer credit cards.
Here's Payment Coupon #1 and Payment Coupon #2, both with the personal information blacked out (Click for larger copies):
Notice the important difference? No?
There is one.
Let me zoom in for you:
Now do you see it?
The digits in the PO Box number were re-arranged.
This doesn't change the post office where the mail is received.
What it does result in is the consumer's payment being "lost" for a few extra days if you don't catch it - enough time to make you "late", which then generates an immediate penalty rate, as the person who sent this to me asserts occurred.
And by the way, these two coupons (and a third one) were sent to me as one image from one person, with all three of them laying on a table of some sort (it's clearly wood.) These are not coming from different people!
If you print your checks using a program like Quicken there is a VERY high probability that you will miss this change, and if you use check envelopes where the check has the address printed on it (as many people, myself included, do), guess what happens?
You go from "ordinary" interest rates to the dreaded 30% rate, a reported late on your credit report (thereby preventing you from getting a decent balance transfer deal) and the bank of course refuses ANY responsibility for this act.
Yes, I know, they include a payment coupon and envelope. Not everyone gets trapped by this sort of game. But it doesn't take "everyone" - if even 5% of customers do get screwed by this sort of game of subterfuge then they win (huge) and you lose.
Banks do change where payments are processed on a somewhat-routine basis - that's business. But this sort of change certainly doesn't look like a change in actual receipt or processing location - rather, its the sort of change that a bank makes for the explicit purpose of playing "gotcha."
And "gotcha" they did, for at least one consumer who reported to me that they were given the present of an "instant and permanent" penalty rate because their payment was "late".
Fair?
You decide.
I can't verify the truth of the sequence of events, of course. I'm not the person in question. I've received dozens of anecdotes since asking a few days ago but few concrete examples that looked good enough to print. This one was and is, but whether there are or were other circumstances related to the change in interest rates, who knows. I can only show you what I was sent and let you draw your own conclusions.
My judgment is that banks that do this sort of thing, if proved, should lose their banking licenses and be prosecuted for consumer fraud and intentionally-deceptive business practices.
This is a big fat nothingburger....
We recognize that regulatory capital requirements are only one tool among many that supervisors should use. Activity restrictions, constraints on credit concentrations and liquidity risk, underwriting standards, market discipline, and supervision of risk management and corporate governance practices, among other things, are all indispensable elements of a robust program of oversight for banking firms. But capital requirements have long been and will remain a principal regulatory tool used by supervisors to promote the safety and stability of the banking system.
A principal lesson of the recent crisis is that stronger, higher capital requirements for banking firms are absolutely essential. At the same time, we recognize that stricter capital requirements for banking firms are not without cost. Stricter capital requirements generally will reduce the amount of financial intermediation and may limit credit availability. The objective in designing a regulatory capital regime should be to maximize the prospects for financial stability without unduly curtailing credit availability, financial innovation, economic growth, or the ability of banking firms to attract private investment.
In other words, we'll keep letting people lend out money without any security, either in the form of capital or collateral, waving our arms and claiming that "it will all be ok" when there is no evidence to support that assertion.
Until that changes there has been no reform and no real impact on risk.
Mark-to-market accounting for all assets, and a ban on all off-balance-sheet and other similar games is essential for the stability of individual banking institutions and ultimately the system.
Forcing banks to hold one dollar of capital for each dollar of unsecured lending, where that capital must be immediately liquid (that is, cash on deposit or very short-term Treasuries such as the 4-week bill that can be turned into cash with no penalty within four weeks), is the definition of sound lending.
What is "unsecured" lending? It is all money out on loan that is not secured by the net present value of collateral, less rehabilitation and sale expenses.
It really is that simple, and yet this regulatory stance is the only way you can know with any degree of certainty that the banks, and ultimately the banking system, is solvent and can perform its job of credit intermediation in the economy.
The "Wall Street Wizards" refuse to discuss this as does Treasury. The reason is obvious and clear: They know that once the debate turns to this topic they lose control of the spin machine, as the math is inescapable and once the people get their arms around the concept they will demand accountability - to this standard.
Everyone talks about how "credit is constrained." The reason it is constrained is that we do not have a regulatory regime that demands that unsecured lending be backed with capital, and as a consequence the response to expected (or known!) shortfalls between capital and loans out is to lie and bury the evidence, hoping that you can earn enough somewhere else to get out of the hole.
Only a regulatory regime that demands dollar-for-dollar capital be held against unsecured lending prevents this sort of fraudulent "hot potato" accounting treatment, forcing institutions to hold leverage to a reasonable level and to raise capital at the first sign of trouble rather than trying to "pretend and extend", hoping not to run out of rope and have the cashflow monster get them.
We will never have true stability in our financial institutions until this is addressed - no matter how many "magic tricks" Treasury, Congress and Wall Street perform.
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