I do not agree with him on a lot of political issues, but here is some great commentary from Whitney Tilson:

I’m dedicating this entire email to articles and commentary on the financial industry, which I believe ran amok over the past decade or two.  I don’t think the abuses are isolated.  Rather, I’m convinced that it’s SYSTEMIC for financial institutions to prey on their unsophisticated (or certainly less sophisticated) customers.  As I was thinking of examples, I realized that I’m having trouble thinking of ANY type of consumer loan or financial product in which there ISN’T widespread abuse.  Mortgages, credit cards, debit cards, student loans, auto loans, check cashers, pawn shops – ALL OF IT!!!  Yes, there’s been some progress since the crash, but not nearly enough – and let’s be clear exactly why: the financial industry has hired an army of lobbyists (I recall reading three for every member of Congress) and spread around an ocean of cash to keep things just the way they are, sadly to great effect, thanks to the gutless weasels in Congress.  (In previous emails I’ve sent around Joe Nocera’s columns on what happened to Elizabeth Warren and the Consumer Financial Protection Bureau – see www.nytimes.com/2011/03/19/business/economy/19nocera.html and www.nytimes.com/2011/07/23/opinion/23nocera.html.)
1) Two pieces of incredible journalism recently.  Here’s the first, by Bloomberg, which reveals that during the financial crisis the Fed pumped $7.77 TRILLION into banks – yes, ELEVEN TIMES the TARP program’s $700B and more than HALF of U.S. GDP, at 0.01% interest! – allowing them to earn as much as $13 BILLION in profits.  Yet NOBODY knew about this, until Bloomberg filed a Freedom of Information Act, which – SURPRISE! – the banks fought to the Supreme Court (and, fortunately, lost).  Hey, if I were them, I’d want to keep this secret too!  It might mess up their lobbying in Congress, rooted in the fiction that they were sound and healthy during the crisis and no additional regulation is needed.

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

Let me be clear: the Fed did the right thing, providing liquidity during a crisis that nearly triggered the second coming of the Great Depression.  What I object to is that the Fed and the banks kept this secret AFTER the crisis had passed, in particular while Congress debated the Dodd-Frank Act.  This is the part of the article that really infuriates me:

Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.

It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.

“The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.”

The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.

Protecting TARP

TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.

“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.

Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.

No Clue

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.

Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs.

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Moral Hazard

Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.

If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.

Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.

“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.

Getting Bigger

Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.

2) Here’s the NYT Gretchen Morgenson’s take:

Some may see all this as ancient history or as ho-hum disclosures that confirm what everybody already knew — that our banks were on the precipice and that only hundreds of billions of dollars could save them. The Fed says that the money it lent in these programs was paid back without generating any losses.

But the information is revealing nonetheless. The fact is, investors didn’t know how dire the situation was at these institutions. At the same time that these banks were privately thronging the teller windows at the Fed, some of their executives were publicly espousing their firms’ financial solidity.

During the first three months of 2009, for example, when Citigroup’s Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company’s performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed “the strength of Citi’s franchise.”

Citi’s earnings release didn’t detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.

These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.

The rules are found in a section of the S.E.C.’s Codification of Financial Reporting Policies titled “Effects of Federal Financial Assistance Upon Operations.” They state that if any types of federal financial assistance have “materially affected or are reasonably likely to have a future material effect upon financial condition or results of operations, the management discussion and analysis should provide disclosure of the nature, amounts and effects of such assistance.”

Given these rules, Mr. Turner said: “I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks’ operating results. The borrowings had to have an impact on their liquidity and earnings, but I don’t ever recall anybody saying ‘we borrowed a bunch of money from the Fed at zero percent interest.’ ”

3) Here’s Jon Stewart’s hilarious, spot-on take:www.thedailyshow.com/watch/thu-december-1-2011/america-s-next-tarp-model.  Best line: “The U.S. government lent money to the banks at zero percent and then borrowed it back at 3%.  It’s the world’s worst loan shark!”
4) The second incredible piece of journalism is this 60 Minutes segment from last weekend, in which it profiles whistle-blowers at Countrywide and Citigroup who identified and told their superiors about rampant fraud – and were fired for their trouble (full transcript below and you can watch the video at: www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street).  Worst of all, the Justice Department appears to be doing little:

It’s been three years since the financial crisis crippled the American economy, and much to the consternation of the general public and the demonstrators on Wall Street, there has not been a single prosecution of a high-ranking Wall Street executive or major financial firm even though fraud and financial misrepresentations played a significant role in the meltdown. We wanted to know why, so nine months ago we began looking for cases that might have prosecutorial merit. Tonight you’ll hear about two of them. We begin with a woman named Eileen Foster, a senior executive at Countrywide Financial, one of the epicenters of the crisis.

Steve Kroft: Do you believe that there are people at Countrywide who belong behind bars?

Eileen Foster: Yes.

Kroft: Do you want to give me their names?

Foster: No.

Kroft: Would you give their names to a grand jury if you were asked?

Foster: Yes.

But Eileen Foster has never been asked – and never spoken to the Justice Department – even though she was Countrywide’s executive vice president in charge of fraud investigations. At the height of the housing bubble, Countrywide Financial was the largest mortgage lender in the country and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud.

It was Foster’s job to monitor and investigate allegations of fraud against Countrywide employees and make sure they were reported to the board of directors and the Treasury Department.

Kroft: How much fraud was there at Countrywide?

Foster: From what I saw, the types of things I saw, it was– it appeared systemic. It, it wasn’t just one individual or two or three individuals, it was branches of individuals, it was regions of individuals.

Kroft: What you seem to be saying was it was just a way of doing business?

Foster: Yes.

…Foster: How many people can they– can they buy off? They just pay for it. They commit the crime and they buy their way out of it. And just do it over and over and over again. I wanted them to have some sleepless nights thinkin’ about what they would say to a federal investigator and worry about being exposed and being held accountable for committing a crime.

Eileen Foster spent three years trying to clear her name. This fall she finally won a federal whistleblower complaint against Bank of America for wrongful termination and was awarded nearly a million dollars in back pay and benefits.

All of this raises several questions. Why has the Justice Department failed to go after mortgage fraud inside Countrywide? There has not been a single prosecution. Even more puzzling is the Justice Department’s reluctance to employ one of its most powerful legal weapons against Countrywide’s top executives. It’s called the Sarbanes Oxley Act of 2002.

It was overwhelmingly passed by Congress and signed by President Bush following the last big round of corporate scandals involving Enron, Tyco and Worldcom. It was supposed to restore confidence in American corporations and financial markets.

The Sarbanes Oxley Act imposed strict rules for corporate governance, requiring chief executive officers and chief financial officers to certify under oath that their financial statements are accurate and that they have established an effective set of internal controls to insure that all relevant information reaches investors. Knowingly signing a false statement is a criminal offense punishable with up to five years in prison.

Frank Partnoy is a highly regarded securities lawyer, a professor at the University of San Diego Law School and an expert on Sarbanes Oxley.

Frank Partnoy: The idea was to have a criminal statute in place that would make CEOs and CFOs think twice, think three times before they signed their names attesting to the accuracy of financial statements or the viability of internal controls.

Kroft: And this law has not been used at all in the financial crisis.

Partnoy: It hasn’t been used to go after Wall Street. It hasn’t been used for these kinds of cases at all.

Kroft: Why not?

Partnoy: I don’t know. I don’t have a good answer to that question. I hope that it will be used. I think there clearly are instances where CEOs and CFOs– signed financial statements that said there were adequate controls and there weren’t adequate controls. But I can’t explain why it hasn’t been used yet.

We told Partnoy about Eileen Foster’s allegations of widespread mortgage fraud at Countrywide and efforts to prevent the information from reaching her, the federal government and the board of directors in violation of the company’s internal controls.

Kroft: I mean, that’s a deliberate circumvention, right?

Partnoy: It certainly sounds like it. And it certainly sounds like a good place to start a criminal investigation. Usually when the federal government hears about facts like this, they would start an investigation and they would try to move up the organization to try to figure out whether this information got up to senior officers, and why it wasn’t disclosed to the public.

5) Here’s the other side of the story – but I’m not buying it:

A former top U.S. official in charge of investigating the financial crisis said the government has concluded that many inquiries of wrongdoing by financial executives can’t succeed as criminal prosecutions.

“There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases” said David Cardona, who was a deputy assistant director at the Federal Bureau of Investigation until he left last month for a job at the Securities and Exchange Commission. The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he said.

In an interview shortly before his move, Mr. Cardona said a three-year slog through probes at large mortgage lenders and securities firms had led federal officials to conclude the U.S. government’s best strategy in many cases is to pursue only civil charges. While defendants avoid the possibility of prison in such cases, they carry a lower burden of proof.

Mr. Cardona said Monday that his new duties in the SEC’s regional office in Miami are a “logical progression” after more than 25 years at the FBI, where he often worked closely with SEC officials. Mr. Cardona said his move wasn’t the result of frustration with the number of prosecutions stemming from the crisis.

6) Jesse Eisinger on a few lone voices in the industry with the courage to speak out against the abuses in it:

Then I realized something odd: I have conversations like this as a matter of routine. I can’t go a week without speaking to a hedge fund manager or analyst or even a banker who registers somewhere on the Wall Street Derangement Scale.

That should be a great relief: Some of them are just like us! Just because you are deranged doesn’t mean you are irrational, after all. Wall Street is already occupied — from within.

The insiders have a critique similar to that of the outsiders. The financial industry has strayed far from being an intermediary between companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and exacerbating inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

And I won’t pretend this is a widespread view in finance — or even a large minority. You don’t hear this from the executives running the big Wall Street firms; you don’t hear it from the average trader or investment banker. From them, we get self-pity. For every one of the secret Occupy Wall Street sympathizers, there are probably 15 others like Kenneth G. Langone, who, like downtrodden people before him, is trying to reclaim and embrace a pejorative, “fat cat.”

The critics are more often found on the periphery, running hedge funds or working at independent research shops. They are retired, either voluntarily or not. They are low-level executives who haven’t made scrambling up the corporate hierarchy their sole ambition in life. Perhaps their independent status removes the intellectual handcuffs that come with ungodly bonuses. Or perhaps they are able to see Big Money’s flaws because they have to compete with the bigger banks for dollars.

Are these “Wall Streeters”? To civilians, they work on the Street. Bankers at the bulge-bracket firms wouldn’t think they are. But that doesn’t mean they don’t count. They know the financial business intimately.

Sadly, almost none of these closeted occupier-sympathizers go public. But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority owned by the French bank Crédit Agricole, has done just that. In his book “Exile on Wall Street” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses. Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.

Mr. Mayo is particularly outraged over compensation for bank executives. Excessive compensation “sends a signal that you take what you get and take it however you can,” he told me. “That sends another signal to outsiders that the system is rigged. I truly wish the protestors didn’t have a leg to stand on, but the unfortunate truth is that they do.”

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model.

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

7) Here’s Nick Kristof’s op ed in the NYT on the mortgage industry, which preyed on pretty much everyone during the bubble, but especially on the poor and minorities (I’m so sick of people placing the bulk of the blame of homeowners, so this was my favorite line: “Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.”):

If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.

As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.

“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”

“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.

Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.

“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.

“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.

Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.

…Yet what is scandalous is the basic unfairness of what has transpired. The federal government rescued highly paid bankers from their reckless decisions. It protected bank shareholders and creditors. But it mostly turned a cold shoulder to some of the most vulnerable and least sophisticated people in America. Last year alone, banks seized more than one million homes.

Sure, some programs exist to help borrowers in trouble, but not nearly enough. We still haven’t taken such basic steps as allowing bankruptcy judges to modify the terms of a mortgage on a primary home. Legislation to address that has gotten nowhere.

My daughter and I are reading Steinbeck’s “Grapes of Wrath” aloud to each other, and those Depression-era injustices seem so familiar today. That’s why the Occupy movement resonates so deeply: When the federal government goes all-out to rescue errant bankers, and stiffs homeowners, that’s not just bad economics. It’s also wrong.

 

8) Speaking of predatory abuses, this really takes the cake: hounding grieving widows to pay debts that aren’t theirs!  There ought to be a national law that prevents ANY calls or letters to ANYONE unless the lender has a LEGAL claim to be repaid!

After Linda Long’s husband died of colon cancer last year, the phone calls poured in.

The 68-year-old retired office worker says she got as many as 10 calls a day from a debt-collection firm asking for $16,651.52 that her husband, Millard, had racked up on a Bank of America Corp. credit card.

An employee at West Asset Management in Omaha, Neb., explained that she wasn’t legally obliged to pay, according to a recording of the November call reviewed by The Wall Street Journal. Then he veered into a discussion about how she could “get this taken off your plate.”

Mrs. Long, of Cape Coral, Fla., told the debt collector she had “lost everything.” She had sold the couple’s motor home to help cover medical bills and funeral costs. All that was left, she said, was $2,000 in life-insurance proceeds.

“I can give you that,” she said when asked for the money, “anything just to get this off of my head.”

When you die, your debts usually die with you. Surviving family members rarely have a legal obligation to pay unless they co-signed a loan, such as a mortgage or credit card. That leaves lenders in the lurch.

But debt collectors have found a way to help lenders get their money anyway. Working on behalf of financial giants from Bank of America and Capital One Financial Corp. to Discover Financial Services and Citigroup Inc., collection firms target survivors who might agree to pay at least part of what the dead person owed.

9) This scam is a little more subtle: insurers make every effort to determine when someone has died when they’re paying money out when the person is alive, but make NO EFFORT to determine when someone has died when they’re on the hook to make a life insurance payment:

Under standard industry practice, insurance contracts require beneficiaries to inform insurers of a death, and claims are then paid. But, under this approach, tens of thousands of customers appear to be losing out on proceeds, and they are believed to be families with smaller policies who don’t have lawyers or financial advisers keeping track of money matters.

In New York, the average payment was $6,575, data show.

Insurers say they are behaving lawfully, but the regulatory task force and some state attorneys general, including in New York, have been examining whether enforcement action is needed.

These probes generally are focused around concerns that many big insurers for years have routinely used a Social Security death database when doing so has been beneficial to their business, such as to cut off retirement-income checks. But they haven’t used the same database to ensure payouts to life-insurance policyholders’ beneficiaries, the authorities say.