Source: The Big Picture
Columbia Economist Dr. Jeffrey Sachs speaks candidly about corruption in the United States: from Washington DC and Wall Street, including the entire financial/banking system
Source: The Big Picture
Financial Institutions and Consumer Protection April 11, 2013
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION met in OPEN SESSION to conduct a hearing entitled “Outsourcing Accountability? Examining the Role of Independent Consultants”. The witnesses on Panel II were: Mr. Konrad Alt, Managing Director, Promontory Financial Group, LLC; and Mr. James F. Flanagan, Leader, U.S. Financial Services Practice, Pricewaterhouse Coopers LLP. Subcommittee Member Senator Elizabeth Warren (D-MA) Questions Panelists.
hat tip Manal Mehta
Transcript after the jump
11 Senator Warren. Thank you very much, Mr. Chairman. You know, I am going to ask you some questions about numbers and how this review was designed, but I never want to forget in this that the particular instance we are talking about here involved four million families, and it involved people who lost their homes, whose lives were turned upside down, people who did not sleep, people who had to tell their children that they were going to have to change schools. This is a terrible process that we have gone through. And the whole point of this review was to bring some justice, to give these families some compensation for what happened, to try to help them, but also to identify the wrongdoing and hold the financial institutions that broke the law accountable. So that was the whole idea behind this. And now the OCC and the Federal Reserve have announced a settlement, and the OCC has described this as it is based, at least in part, on a 6.5 percent error rate. I think I said earlier it was in their press release. I think that actually was a statement from the head of the OCC. But that means this is all the families are going to get from the regulators who were supposed to be looking out for them, the regulators who were supposed to be watching that this never happened in the first place, and the regulators who were supposed to conduct the investigation afterwards to make sure that these families were taken care of and that the banks were held accountable. So the questions I have are around how accurate the OCC and Federal Reserve settlement is. Does it really identify the law breaking that went on and appropriately hold these banks accountable? So I am really asking the question, have the families been protected or have the banks been protected? So I want to go back to one that I asked in the first panel, just to make sure I have got this right, and that is, I understand that you looked at about 100,000 files of the 700,000 or so that were initially collected for you. That is a subset of the four million families for which the review was designated. So you looked at about 13 percent of the files that came to you, about two percent of the overall. And as I understand it, you just looked at the files as they came to you. So I just want to ask this question again. Mr. Alt, did you look at a random sample so that you could draw an inference about what had happened to all four million people?
8 Mr. Alt. Senator, our sampling methodology was designed to include extensive random sampling and we were seeking to obtain results at a high level of statistical confidence.
12 Senator Warren. That is right. And so when the work that you were doing was halted, had you completed a random sample of the four million families who were under review?
15 Mr. Alt. No, Senator, we had not.
16 Senator Warren. All right. And I understand that you were not the ones who halted this process, that the OCC and the Fed halted this process. But I want to be clear about that. Does that mean, then, that what you found tells us whether or not the illegal practices of the banks occurred in one percent of the cases or occurred in 90 percent of the cases?
23 Mr. Alt. Senator, we were not in a position to conclude that based on the results at the time of the settlement.
1 Senator Warren. All right. Thank you for clearing that up, Mr. Alt. I appreciate it. I have another question, again, about what you were asked to do by the Federal Reserve and the OCC. Whenever something–you have to code these cases, basically. You have got to read these cases–I know they were very complicated–and, in fact, decide what box they belong in. Was there illegal activity? Did it cause someone to lose a home? No illegal activity, that sort of thing, all the way through. And it is a fairly complicated process. So it is pretty standard when you are putting something together like this that you worry about whether or not the person doing the evaluation gets it right. Your judgment call might be different from his judgment call. Shoot, you might have a lazy examiner, right, who says, yeah, it is all just great, and passes them all through. So the way we deal with that is you take some number of those cases and they are slotted in to be coded a second time and then there is a comparison between the first time and the second time and you figure out what the error rate is that your own evaluators are putting into it. So the first question I have is what did the OCC and the Fed require of you in terms of this sort of double-coding to figure out the error rate? Mr. Alt?
25 Mr. Alt. Senator, we built in processes exactly as you describe into our methodology and we presented them to the OCC, and I infer that they were satisfied because they accepted them. But that was not their express requirement. Perhaps they would have required it if we had not built them in ourselves.
6 Senator Warren. That is all right. So what was your rate of double-coding?
8 Mr. Alt. I do not know that I could give you an overall rate. We could perhaps obtain that. It—
10 Senator Warren. So, let me ask it a different way. What was your error rate?
12 Mr. Alt. It changed over time and it depended on which files we were looking at. There were–I mean, we were reporting error rates to ourselves weekly, so we monitored that all the time.
16 Senator Warren. Can you give me an idea of what your error rate was?
18 Mr. Alt. Uh–
19 Senator Warren. What was the range?
20 Mr. Alt. Senator, I really–I do not think I could do that off the top of my head. I would have to go and perform that research. I would be happy to look into it for you.
23 Senator Warren. All right. And was the error rate coming down over time?
25 Mr. Alt. I believe it was, yes.
1 Senator Warren. All right. So I would like to know about the error rate.
3 Mr. Flanagan, the same question for you.
4 Mr. Flanagan. So, specific to the error rate, unlike the prior comments about being able to disclose to you the fee information, the error rate information, we believe we are not allowed to disclose at this point in time by the terms of the engagement letters that we have signed.
9 Senator Warren. You cannot tell me whether you had an error rate of one percent or 90 percent?
11 Mr. Flanagan. That is my understanding, is that at this point, we are not able to do that.
13 Senator Warren. Mr. Ryan?
14 Mr. Ryan. We are under the same confidentiality provisions. What I will tell you is that the error rate that has been reported in the media for our work is mischaracterized.
18 Senator Warren. All right. I think I will stop there, Mr. Chairman, since it is clear that we do not have the information we need to determine the numbers on which the OCC has based–and the Fed–has based this settlement. Thank you.
23 Senator Brown. Thank you, Senator Warren. We will do a second round.
5 Senator Warren. Thank you. So, I just want to take a look at the Independent Foreclosure Review payment agreement details. I think you have probably all seen this one-page agreement that lists all of the things that the banks did wrong and then boxes for how many people fall into each category and how much money they are going to be paid. Is that right? Have you all seen this?
13 Mr. Ryan. Yes.
14 Senator Warren. And this was put out–who put this out? Mr. Flanagan?
16 Mr. Flanagan. [Shaking head.]
17 Senator Warren. I think this was put out by the OCC and the Federal Reserve, is that right–
19 Mr. Ryan. Yes.
20 Senator Warren. –as a part of the settlement details. So I just want to ask you about this. It has some pretty amazing categories here. The first category is about service members who were protected by Federal law whose homes were unlawfully foreclosed. It has got people who were current on their payments whose homes were foreclosed. It has got people who were performing all of the requirements under a modification who lost their homes to foreclosure. And it tells how many people fall into each category and how much money the people in that category will receive. And it ultimately resolves what will happen to 3,949,896 families. So the question I have is, having resolved this nearly four million families, who put the people, the families, into each of these boxes Is that what your firms did? Mr. Ryan?
11 Mr. Ryan. No, Senator, we did not.
12 Senator Warren. So who put them in?
13 Mr. Ryan. Well, I am not sure how that schedule was prepared. I saw it for the first time yesterday.
15 Senator Warren. Mr. Flanagan?
16 Mr. Flanagan. Same response. We were not involved in the accumulation of that information.
18 Senator Warren. Mr. Alt?
19 Mr. Alt. Senator, I have seen this schedule, but I am not familiar with the basis for its preparation.
21 Senator Warren. So let me understand this. You ran the Independent Reviews, right? That is what you got paid to do. And yet I presume the only one left is the banks must have put them in these boxes, and you made no independent review of their going into these boxes? You were not asked to do that? Mr. Alt?
2 Mr. Alt. No, Senator, we were not asked to do that.
3 Senator Warren. Mr. Flanagan?
4 Mr. Flanagan. No, we were not.
5 Senator Warren. Mr. Ryan?
6 Mr. Ryan. We were not, Senator.
7 Senator Warren. So that leaves us with the banks that broke the law were then the banks that decided how many people lost their homes because of their law breaking, and as a result, how many people would collect money in each of these categories. Is that right, Mr. Alt?
12 Mr. Alt. Senator, as I said, I am not familiar with the basis for the schedule—
14 Senator Warren. But there is no, so far as you know, no independent review of the banks’ analysis of how many families broke the law. You looked at 100,000 cases and the banks have now put four million people into categories and resolved, finally, how much they will get from this review by the OCC and by the Federal Reserve, is that right? Mr. Ryan?
21 Mr. Ryan. Senator, my understanding was the banks were supposed to put this together and the OCC was going to look at it, but I do not know exactly what transpired.
24 Senator Warren. All right. But you made no independent review of this, were not asked to make any independent review of this.
2 Mr. Ryan. We did not.
3 Senator Warren. Mr. Flanagan?
4 Mr. Flanagan. PWC was not involved in the settlement or the preparation of that schedule.
6 Senator Warren. All right. Mr. Alt?
7 Mr. Alt. Same answer, Senator. We were not involved.
8 Senator Warren. All right. I just wanted to make sure, because it appears that the people who broke the law are the same people now who have determined who will be compensated from that law breaking. I just find this one amazing. Thank you. Thank you for your help.
13 Mr. Chairman, I do not have any other questions.
14 Senator Brown. Thank you, Senator Warren.
Source: The Big Picture
From a longstanding Housing analyst:
After reading Gretchen Morganson’s article on the front page of the business section last week (“Note to New S.E.C. Chief: The Clock Is Ticking“) we are confronted with a massive potential legacy loan fraud at SunTrust Bank against Fannie Mae — it seems to me that this is very similar to the $3 billion in potential damage awards in the Countrywide case… U.S. v. Bank of America/Countrywide, et al
I spoke with a veteran loan originator with knowledge of the SunTrust Agency“Shortcut” (great name!) loan program told me it was one of SunTrusts’ top selling loans during the bubble years and sold exclusively to Fannie Mae. The fraud occurred from circa 2005 to 2008, as SunTrust retail loan officers, wholesale account executives, and approved mortgage brokers routinely “laddering” income and asset inputs into the SunTrust “Fannie Mae custom DU” loan approval system in order to achieve the “Shortcut” finding, which then prevented SunTrust loan underwriters from doing proper due-diligence.
These loans were in fact “Alt-A” loans — your traditional low doc loans, with missing income and spotty asset verification such as tax-returns, w-2′s, pay stubs, bank statements etc — but originated using much more lenient fully documented loan guidelines and interest rates and sold to Fannie Mae as “full-doc”.
Bottom line: Agency “Shortcut” loan programs, exclusively originated by SunTrust, made loan underwriters impotent in their due-diligence; these Alt-A loans that should have carried higher interest rates and been originated using more stringent guidelines; were sold to Fannie Mae as premium full-documented loans, and have resulted in abnormally high default and loss rates relative to true “fully documented” loans.
All of these were top items in the $3 BILLION “Countrywide Hustle” case announced last October.
The big difference, however, between the Countrywide “Hustle” and the SunTrust “Shortcut” fraud is that the “Hustle” concerned only $6 billion in origination. The “SunTrust Shortcut” originations — per Gretchen Morganson’s article — were “$10s of billions of dollars” perhaps making it the largest whole loan fraud in the history of the mortgage and housing crisis.
Source: The Big Picture
We Can’t Just Look Forward … We Have to Admit What Went Wrong
Yesterday, a bi-partisan panel – co-chaired by the former undersecretary of homeland security under President George W. Bush, former Republican congressman from Arkansas and NRA consultant (Asa Hutchinson) and former Democratic congressman and U.S. ambassador to Mexico (James Jones) – released a 577-page report on torture after 2 years of study.
Other luminaries on the panel include:
Former FBI Director William Sessions
3-star general Claudia J. Kennedy
Retired Brigadier General David Irvine
Former Under Secretary of State for Political Affairs, Ambassador and Representative to the United Nations, and U.S. ambassador to the Russian Federation, India, Israel, El Salvador, Nigeria, and the Hashemite Kingdom of Jordan Thomas Pickering
The panel concluded:
“Torture occurred in many instances and across a wide range of theaters”
There is “no firm or persuasive evidence” that the use of such techniques yielded “significant information of value”
“The nation’s highest officials bear some responsibility for allowing and contributing to the spread of torture”
“Publicly acknowledging this grave error, however belatedly, may mitigate some of those consequences and help undo some of the damage to our reputation at home and abroad”
The panel also found:
The use of torture has “no justification” and “damaged the standing of our nation, reduced our capacity to convey moral censure when necessary and potentially increased the danger to U.S. military personnel taken captive”
“As long as the debate continues, so too does the possibility that the United States could again engage in torture”
The Obama administration’s keeping the details of rendition and torture from the public “cannot continue to be justified on the basis of national security”, and it should stop blocking lawsuits by former detainees on the basis of claiming “state secrets”
At a press conference at the National Press Club in Washington, co-chair Hutchinson said:
We found that U.S. personnel, in many instances, used interrogation techniques on detainees that constitute torture. American personnel conducted an even larger number of interrogations that involved cruel, inhumane or degrading treatment. Both categories of actions violate U.S. laws and international treaty obligations.
This conclusion is not based upon our own personal impressions, but rather is grounded in a thorough and detailed examination of what constitutes torture from a historical and legal context. We looked at court cases and determined that the treatment of detainees, in many instances, met the standards the courts have determined as constituting torture. But in addition, you look at the United States State Department, in its annual country reports on human rights practices, has characterized many of the techniques used against detainees in U.S. custody in the post-9/11 environment—the State Department has characterized the same treatment as torture, abuse or cruel treatment when those techniques were employed by foreign governments. The CIA recognized this in an internal review and acknowledged that many of the interrogation techniques it employed were inconsistent with the public policy positions the United States has taken regarding human rights. The United States is understandably subject to criticism when it criticizes another nation for engaging in torture and then justifies the same conduct under national security arguments.
There are those that defend the techniques of—like waterboarding, stress positions and sleep deprivation, because there was the Office of Legal Counsel, which issued a decision approving of their use because they define them as not being torture. Those opinions have since been repudiated by legal experts and the OLC itself. And even in its opinion, it relied not only on a very narrow legal definition of torture, but also on factual representations about how the techniques would be implemented, that later proved inaccurate. This is important context as to how the opinion came about, but also as to how policy makers relied upon it.
Based upon a thorough review of the available public record, we determined that, in application, torture was used against detainees in many instances and across a wide range of theaters.
And while our report is critical of the approval of interrogation techniques that ultimately led to U.S. personnel engaging in torture of detainees, the investigation was not an undertaking of partisan fault finding. Our conclusions about responsibility should be taken very simply as an effort to understand what happened at many levels of the U.S. policy making. There is no way of knowing how the government would have responded if a Democrat administration were in power at the time of the attacks. Indeed, our report is equally critical of the rendition-to-torture program, which began under President Clinton. And we question several actions of the current administration, as well. It should be noted that many of the corrective actions that—were first undertaken during the Bush administration, as well.
But the task force did conclude that the nation’s highest officials, after the 9/11 attack, approved actions for CIA and Defense personnel based upon legal guidance that has since been repudiated. The most important decision may have been to declare the Geneva Convention did not apply to al-Qaeda and Taliban captives in Afghanistan or Guantánamo. The administration never specified what rules would apply instead. The task force believes that U.S. defense intelligence professionals and servicemembers in harm’s way need absolutely clear orders on the treatment of detainees, requiring at a minimum compliance with Common Article 3 of the Geneva Convention. This was not done. Civilian leaders and military commanders have an affirmative responsibility to assure that their subordinates comply with the laws of war. President Obama has committed to observe the Geneva Conventions through an executive order, but a future president could change it by the stroke of a pen.
The task force believes it is important to recognize that—that is—that to say torture is ineffective does not require a demonstration that it never works. A person subjected to torture might well divulge useful information. Nor does the fact that it may sometimes yield legitimate information justify its use. What values do America stand for? That’s the ultimate question. But in addition to the very real legal and moral objections to its use, torture often produces false information, and it is difficult and time-consuming for interrogators and analysts to distinguish what may be true and usable from that which is false and misleading. Also, conventional, lawful interrogation methods have proven to be successful whenever the United States uses them throughout history—and I have seen this in law enforcement, as well. We’ve seen no evidence in the public record that the traditional means of interrogation would not have yielded the necessary intelligence following the attacks of 9/11.
Retired Brigadier General David Irvine, a former strategic intelligence officer and Army instructor in prisoner interrogation said:
Public record strongly suggests that there was no useful information gained from going to the dark side that saved the hundreds of thousands or tens of thousands of lives that have been claimed. There are many instances in that public record to support the notion that we have been badly misled by false confessions that have been derived from brutal interrogations. And unfortunately, it is a fact that people—people will just say whatever they think needs to be said if the pain becomes more than they can bear. Other people are so immune to pain that they will die before they will reveal what an interrogator may wish to know.
I’ll just say, in conclusion, that in 2001 the United States had had a great deal of experience with tactical and strategic interrogations. We had been very successful over a long period of time in learning how to do this and do it very, very well. Unfortunately, when the policies were developed that led us to the dark side, many of those who were involved in formulating those policies had no experience with interrogation, had no experience with law enforcement, had no experience with the military, in how these matters are approached. One of the most successful FBI interrogators prior to 2001 was a guy named Joe Navarro. And Joe is noted for having said—and he was probably one of the handful of strategic interrogators qualified to interrogate and debrief a high-value al-Qaeda prisoner. But Joe said, “I only need three things. If you’ll give me three things, I will get whatever someone has to say, and I will do it without breaking the law. First of all, I need a quiet room. Second, I want to know what the rules are, because I don’t want to get in trouble. And third, I need enough time to become that person’s best and only friend. And if you give me those three conditions, I will get whatever that person has to say, and I will get it effectively and quickly and safely and within the terms of the law.” So, we can do it well when we want to. We need to do more, looking at our history, to remind us what worked and why it worked, and not resort to what may seem at the time to be expedient, clever or necessary.
Indeed, top American military and intelligence interrogation experts from both sides of the aisle have conclusively proven the following 10 facts about torture:
1. Torture is not a partisan issue
2. Waterboarding is torture
3. Torture decreases our national security
4. Torture can not break hardened terrorists
5. Torture is not necessary even in a “ticking time bomb” situation
6. The specific type of torture used by the U.S. was never aimed at producing actionable intelligence … but was instead aimed at producing false confessions
7. Torture did not help to get Bin Laden
8. Torture did not provide valuable details regarding 9/11
9. Many innocent people were tortured
10. America still allows torture
Source: The Big Picture
Mike Konczal, fellow at the Roosevelt Institute and contributor to Bloomberg View, talks with Bloomberg Law’s Lee Pacchia about how the implementation of the financial reform laws in Dodd-Frank have been hampered by a series of adverse court decisions. Konczal contends that these decisions are not only a setback for proponents of reforming the financial industry, but also have a chilling effect on future efforts by regulators and lawmakers. At the same time, however, Konczal feels that these courthouse victories could end up harming the finance industry. “If it looks like the law is unable to do what it needs to you will see reformers come back with much harsher provisions…that the banks successful avoided the first time around,” he says.
Bloomberg Law April 11, 2013
Source: The Big Picture
Congressman Grayson Asks for an Investigation into Federal Reserve’s FOMC leak
The Federal Reserve’s Open Market Committee released its recent minutes 24 hours early to a handful of big banks, private equity firms and other insiders.
Congressman Alan Grayson wrote the following letter to the Chairman of the Committee on Oversight and Government Reform (Darryl Issa) today:
I respectfully request an *investigation of the Federal Reserve leak of the Federal Open Market Committee (FOMC) minutes on April 9 and 10, 2013. According to Bloomberg News, the list of individuals who received the information included staff at Barclays PLC, BB&T Corp., BNP Paribas SA, Capital One Financial Corp., Fifth Third Bancorp, HSBC Holdings PLC, Nomura Holdings Inc., PNC Financial Services Group Inc., Regions Financial Corp., U.S. Bancorp, UBS AG and Wells Fargo & Co.
I have long been concerned about the Federal Reserve’s management of sensitive market-moving information. One example of blatant information “asymmetry” is the five-year lag before FOMC meeting transcripts are released to the public. As the Huffington Post reported in 2012, “Many of those people have since left the central bank and gone to work in the financial industry, taking with them privileged information about the Fed’s thinking that is still closed to the public.” [Here's the HuffPost article.] This includes Susan Bies, who is now a board member at Bank of America; Laurence Meyer, who founded Macroeconomic Advisors; and Brian Madigan, who is now at Barclays.
Some relevant questions to consider during your investigation include:
1) Who specifically received this information early?
2) Did any insider trading result from this leak?
3) Did Goldman Sachs release a note encouraging clients to short gold [see this and this; Goldman's note says: "We recommend initiating a short COMEX gold position ...."] right after receiving the leak information, due to the leak itself? Who else might have profited from the early release of this information?
4) What are the internal control procedures in place for the Federal Reserve to manage sensitive market-moving information? How did these procedures fail?
5) Why does the Federal Reserve continue to withhold the transcripts of FOMC meetings secret for five years, when there are many people who have been present at those meetings who have moved on to private sector employment within that blackout period?
Nobel prize winning economist Joseph Stiglitz agrees, saying that the World Bank would view any country which had a banking structure like the Fed as being corrupt and untrustworthy.
The non-partisan Government Accountability Office calls the Fed corrupt and riddled with conflicts of interest, and that insiders can get very rich by stay close to the Fed.
We noted last year:
Let’s start by looking at what information was revealed in response to the previous, watered-down version of Ron Paul’s Fed audit bill:
The Fed gave huge bailouts to foreign banks, including Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria, Korea and Mexico
The Fed bailed out hedge funds, McDonald’s and Harley-Davidson
The Fed threw money at “several billionaires and tens of multi-millionaires”, including Christy Mack, the wife of Morgan Stanley’s John Mack, billionaire businessman H. Wayne Huizenga, and Michael Dell, co-founder of Dell Computer, hedge fund manager John Paulson and private equity honcho J. Christopher Flowers ***
As Senator Sanders noted last October:
A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.
“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.
The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”
The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.
The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.
[T]here are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.
(Indeed, the Fed routinely allows favored bankers to make billions of dollars from inside information.)
Source: The Big Picture
Medicinal marijuana markets: Weed goes legit
Source: The Big Picture
Insider trading still allowed for Congress critters and government employees:
Source: The Big Picture