The Black Financial and Fraud Report: Agency Says No to Mortgage Relief
Bill Black: The Director of the FHFA says no to Obama on proposal that Fanny and Freddie forgive
portions of mortgage when house is âunder waterâ - August 1, 12
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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.On Tuesday, the director of the Federal Housing Finance Agency said that agency, which is essentially running Fannie and Freddie, the big mortgage companies, said that they would not reduce mortgages for houses that are underwater. The idea of that policy, which according to The Financial Times was a centerpiece of Obama and one of his last levers of policy he could do to (what they say) restart a stumbling economy, would be to reduce the mortgages by the amount they're underwater. In other words, the houses are worth less than the mortgage. This was meant to be a stimulus program. Well, as The Financial Times says, that policy is now crippled.Now joining us to talk about what this is all about and some other stories is Bill Black with this edition of The Black Financial Report. Bill's an associate professor of economics and law at the University of MissouriâKansas City. He's a white-collar criminologist, a former financial regulator, and author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.WILLIAM K. BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.JAY: So what do you make of this decision? And what is an alternative if this agency isn't going to move?BLACK: Well, the decision was expected. In other words, this is the safe bureaucratic course where they're not going to be criticized. As the agency's own study found, it's not a bad idea. In other words, they could often recover more if they were to reduce the principal, and it would be very good for the overall economy, which would be very good for Fannie and Freddie, because Fannie and Freddie's greatest problem is the overall economy, which is depressing any recovery in home prices, and as long as there's no recovery in home prices, Fannie and Freddie will have staggering losses. So it's a really bad decision made for the worst of bureaucratic instincts.JAY: Now, apparently the Obama administration is opposing this decision. Tim Geithner wrote a letter to this director of the agency saying that they made a mistake, they should review it again. But this agency is independent. They don't have to do what the administration wants.BLACK: That's right. Until recently it was run by, first, one of George Bush's oldest friends from prep school days, and then the hand-picked guy of George Bush's best buddy. So this is an agency that has been distinctly independent through its existence during the Obama years.JAY: So Edward DeMarco, who's heading that agency, he was a Bush appointment.BLACK: That's correct. He was, again, the deputy of one of George W. Bush's oldest buddies, and the Republicans blocked the appointment of a nominee from the Obama administration who was considered to be one of the top people in the entire industry. He'd come out of the North Carolina state ranks, and North Carolina is one of those places that really deserves a lot of praise for trying to stop the predatory lenders.JAY: And how political, then, do you think, is this decision if he's a Bush appointment, which means, I would assume, he's Republican? I haven't researched that, but I'm assuming. Is there some politics happening here?BLACK: Actually, I doubt it. I think that it's simply the technocratic, bureaucratic answer that you're going to get less criticism if you go this route. And so I think that's why they did it. As I said, I think it is really bad economics, bad policy from their own standpoint of Fannie and Freddie. Now, undoubtedly it's terrible politics from the Obama administration's standpoint.JAY: And what alternative does the Obama administration have? Some people have suggested perhaps the Fed could do something like this in terms of pressuring the big banks. I guess that wouldn't affect Fannie and Freddie mortgages so much, but a lot of these mortgages are also held by big banks. Is there some policy alternative there?BLACK: There's probably no effective alternative. Obama, of course, could use the bully pulpit and urge the largest banks to do this, urge them to come together and create a plan. If they were to do that, that would pressure Fannie and Freddie to do the same thing. But I really can't see the big banks answering the call of the Obama administration in helping to get it reelected.No, their chance to do something about this was in the massive foreclosure litigation. Remember when the largest banks engaged in massive foreclosure fraud to the tune of 10,000 times a month, you know, more than 100,000 times a year, and they were sued by many of the state attorney generals? And, unfortunately, the Obama administration pressured the states to enter into a very weak settlement. This is when the Obama administration was completely in bed with the big banks. And so they didn't get as part of that settlement anything really significant in reducing the principal amount of the debt. There are some programs, but they're trivial compared to the scope of the problem.JAY: And that's the time they had some leverage. Okay, Bill, what else you got for us this week on The Black Financial Report?BLACK: Well, we have the good old war on the regulators, and we have in The Wall Street Journal a suggestion that we should eliminate bank examiners and that we should rely instead on simply data provided by the banks, because information provided by the banks is, and I'm quoting, "hard data." And the implication is it must be true and reliable.Now, we've just gone through a financial crisis in which all of that supposed hard data was in fact overwhelmingly false, overwhelmingly false in a particular direction: to overstate asset values, which is overstating profits, which leads to massive bonuses for the people who create the financial reports and the models. So this is absolutely insane.JAY: Who's making this suggestion?BLACK: Well, this latest suggestion isâit's a Wall Street Journal editor, and the Wall Street Journal editorial page, as people probably know, it's just lunatic-level of anti anything regulatory. But the dangerous thing is it quotes Tarullo (and Tarullo is an Obamaâin fact, he was the first Obama appointee to the Federal Reserve), with Tarullo saying, yeah, we really got to cut back on this emphasis on the examiners and get to relying on hard data and talking about the supposed success of the stress test.Well, the stress tests were a farce. The stress testsâback to Fannie and Freddie, which you just mentioned, Fannie and Freddie passed their stress tests just weeks before they failed, and those stress tests were consistently referred to as a nuclear winter scenario, in other words, beyond anything anyone could ever possibly imagineâof course except reality. And AIG passed the stress tests just before; Lehman Brothers did and Bear Stearns did and the Irish banks did and the Spanish banks did and the Icelandic banks did weeks or months before they failed catastrophically. So the stress tests in Europe deliberately told the banks, do not consider your risk on sovereign debt, which was the biggest risk they faced, and the stress tests in the United States deliberately told the banks not to mark down their assets to what they're really worth, which of course was their biggest risk as well.JAY: So getting rid of bank examiners as a proposal, does that have any legs, or just is noise from The Wall Street Journal?BLACK: Well, it has legs if that's what one of the principal Obama appointees at the Federal Reserve bank and the board of governors of the Federal Reserve thinks should be happening.What people need to remember is that Bernanke, tired of getting advice from supervisors that he didn't like, which was 'cause that advice said the biggest banks are cheats and crooks, they went crackers on their supervisors as opposed to the cheats and crooks. And so roughly three years ago, Bernanke put an economist in charge of all supervision at the Federal Reserve, and that guy was a failed economist who had urged deregulation of credit default swaps, which helped produce the disaster. And now Bernanke has appointed a successor who is another failed economist who got all of his tests wrong.So the Federal Reserve is really dangerous, because they're the ones who purportedly are going to take the lead on systemic risk, which is the new big buzz phrase, and they're appointing the worst conceivable people for the jobs, using the worst conceivable techniques, modeling and econometrics, which always get the worst possible answer when there is substantial fraud or a financial bubble.JAY: Alright. Thanks for joining us, Bill.BLACK: Thank you.JAY: And thank you for joining us on The Real News Network.
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