Relevant and even prescient commentary on news, politics and the economy.

Is the $8.5 billion Foreclose and Fraud Settlement Enough of a Penalty?

by run75411

Update: Besides not prosecuting particulars who promulgated much of 2008, what makes this settlement bad is letting banks off the hook:

“In the settlement announced Monday between the Federal Reserve, the Comptroller of the Currency and ten of the largest banks and other mortgage providers, the government gives up the right to prosecute banks for past wrongful foreclosures. In exchange, the banks part with another $8.5 billion, of which $5.2 billion is for loan modifications and $3.3 billion is for people whose mortgages were wrongfully foreclosed.

It’s a pittance. With 3.8 million homeowners covered by the settlement, that works out to less than $2,000 per homeowner.” http://prospect.org/article/banks-win-againThe Banks Win Again”

$2,000 per homeowner in many cases might be two months of a mortgage payment. The settlement hardly qualifies as major.
Is the $8.5 billion Foreclose and Fraud Settlement Enough of a Penalty?

Are The Federal Reserve and the OCC acting in good faith in letting banks off the hook for their past predatory lending practices? Yves Smith at Naked Capitalism labels it a sellout at the expense of mortgage holders: $8.5 billion Foreclosure Fraud Settlement: Yet Another Loss for Homeowners Touted as a Victory.

When compared to TARP and other programs created to save TBTF and STBB (soon to be banks) plus the trillions pumped into the economy as a result the failures of banks and Wall Street, the $8.5 billion does seem paltry in comparison. Rather than taking the lead and closely auditing the review of wrongfully foreclosed mortgages and past practices, the OCC once again lets banks off the hook by giving them the ability to independently review both issues. Haven’t we come this way before? Banks will not do it or will be selective in what they choose to disclose. Besides the history of banks failing to act in good faith, there is also a history of government agencies and branches failure to provide consumer protection.

It appears the dogs causing much of this debacle are kicking back their hind legs in an attempt to hide the droppings left behind because of their failures. Frankly, it is amazing the OCC is still in that mode of protecting thrifts and national banks, which caused much of the issue in the last decade after they were identified as the culprits who failed to regulate. For those who may not be familiar with the OCC’s lack of supervision, I would offer Columbia’s “The Audit” as a refresher: Let Sleeping Dogs Lie.

To finalize and give strength to the OCC limited supervision (2007) of National banks and thrifts, SCOTUS over ruled states attempting to fill the void in regulating predatory bank lending practices. In a 5-3 ruling, SCOTUS tied the hands of states which attempted to regulate banks supervised by OCC. Michigan was joined by numerous states in an effort to control predatory bank lending.( Banks Win Shield From State Regulation at High Court)

A mixed bag of conservative and liberal justices ruled on Watters vs Wachovia Bank in the same manner as over turning State Usury Laws in Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp in 1978. SCOTUS cited the National Banking Act to give the OCC the capability to regulate national banks and thrifts over turn state regulations. . The irony is Congress moving quickly to repeal Glass Steagall and change the National Banking Act to allow Citibank to merge with Travelers Insurance; but, Congress saw no need to act to allow states to continue the regulation of national banks. Both actions by SCOTUS and the failure of Congress to pass new legislation have contributed much to the issues we have today. Always look to the money . . .

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Inadequate monitoring

The Washington Post carried a story on a Senate hearing on money laundering, one example being HSBC. The criticism was aimed at the OCC regulators who failed to pursue the issue.  Also notice the fuss is over a foreign bank.

The U.S. affiliate of global banking giant HSBC was for years a haven for foreign money laundering, drug-trafficking money and potential terrorist financing activities, largely because of the bank’s woefully inadequate monitoring practices, according to a 340-page Senate report scheduled for release Tuesday. 

The report chastises the bank’s primary U.S. regulator, the Office of the Comptroller of the Currency, for failing to take more aggressive enforcement measures against the bank after the OCC became aware of illicit activities.

Please save us from a Senate that cut the budget for an agency, and specifically for its enforcement arm by the head of the agency (mainly John Dugan’s watch), and who vigorously pushed deregulation and  federalization over state rules concerning consumers…and then wonders out loud why the ‘bad’ guys aren’t dealt justice.

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What Works About the FDIC?

reads Ezra Klein and Matt Yglesias (between the two of them they have more years than I do).

Klein thinks the FDIC works well. Yglesias notes that it keeps eating banks every Friday and has doubts about the quality of its prudential regulation. I will argue that the FDIC has more of an incentive to make banks prudent than the SEC, the Fed, the Treasury or the comptroller of the currency.

The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.

Robert Waldmann

The SEC and the comptroller don’t put their own money on the line. They regulate but they don’t bail out. Failures mean they have more egg on their face but no less cash on hand. The Treasury has broad responsibilities and has to explain economic policy to Congress in any case. The FED can just print all the money it wants. The FDIC is independent so long as it stays within its means.

This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.

See the secret is to have an intertemporal budget constraint. That tends to cause forward looking behavior.

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OCC non-regulation keeps momentum going for Citi bank

rdan

Seeking Alpha’s Matthew Goldstein notes that the OCC is continuing the last decade of regulatory non-action.

The OCC, in its quarterly derivatives report, routinely notes that the Big Four “have the resources needed to be able to operate this business in a safe and sound manner.”

In other words, the biggest banks are best suited to handle all these derivatives contracts because they’ve been doing it for so long.

But it’s this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It’s the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.

So it’s particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase — the leader in this category — fell by $1.2 trillion, to $79.9 trillion.

It’s hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.

The OCC report is here with accompanying charts. Notice John [Bloody Effing] Dugan still heads the agency. [edited, links added — klh]

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What about the OCC ruling?

by divorced one like Bush

The OCC is: Office of the Comptroller of the Currency

The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the Comptroller , who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation.

The OCC’s activities are predicated on four objectives that support the OCC’s mission to ensure a stable and competitive national banking system. The four objectives are:

To ensure the safety and soundness of the national banking system.
To foster competition by allowing banks to offer new products and services.
To improve the efficiency and effectiveness of OCC supervision, including reducing regulatory burden.
To ensure fair and equal access to financial services for all Americans.

Out of the 4 statements and I count 9 items, I think they only have achieved two items:
…allowing banks to offer new products and services
…including reducing regulatory burden.

Funding?

The OCC does not receive any appropriations from Congress. Instead, its operations are funded primarily by assessments on national banks. National banks pay for their examinations, and they pay for the OCC’s processing of their corporate applications. The OCC also receives revenue from its investment income, primarily from U.S. Treasury securities.

Ring a bell?
If yes, you are probably thinking about the one that got Elliot Spitzer and the other 48 AG’s pissed off. That one certainly needs to be reversed. Infact, the AG is going before the Supremes on the 25th. There is a push to get Obama et al to change this ruling.

WASHINGTON, D.C. –
For the past four years, the OCC has been championing deregulatory and minimal standards against states that have been trying to enact higher standards for banks and their operating subsidiaries. When states tried to monitor mortgage lending and protect consumers, the OCC invited national banks to contact the agency, which then wrote letters to banks and state banking agencies asserting that states had no authority to do so. The OCC also sided with national banks in the courts, writing amicus briefs arguing that state monitoring and enforcement in a variety of areas did not apply, and that only the OCC could investigate and enforce laws against nationally chartered banks.
After the Second Circuit Court sided with the OCC, the Attorneys General of all 50 states urged the Supreme Court to take up the case and reverse the appeals court decision. The Supreme Court agreed and, on March 25, the U.S. must file its brief in the case on behalf of the OCC, an agency under the Treasury Department.

With all the talk about re-regulating why have we not heard boo from Obama et al about changing this. I mean, he changed with a simple pen other bad positions from the last administration that are not related at all to the #1 issue of world wide economic collapse. What could be more simple and basic to steps to be taken to resolving this crisis than undoing the OCC ruling? Why is Obama leaving this OCC issue to chance when the Supremes already ruled in favor of Wachovia against Michigan?

This included the case decided by the U.S. Supreme Court last year against Michigan, in which the OCC sided with Wachovia Bank and argued that state mortgage lending laws and oversight could not apply to a national bank’s operating subsidiary.

Just read this article from 2005 about the issue to see what the pro-OCC crowd was thinking.

Ok, it wasn’t that ruling you were thinking of. Maybe you were thinking about the OCC ruling letting banks be realtors and real estate developers? I would understand, it was a 2006 ruling making it a little more fresh in the mind. Needless to say, the National Association of Realtors was not happy.

The OCC decisions permit U.S. national banks to engage in the business of real estate development by developing and operating a luxury hotel; financing, developing, operating and leasing space in a mixed use building (including developing residential condominiums for sale). They need only argue that a small portion of the project is needed for bank premises or that a part of the project is needed to make the rest economically feasible. They may also hold a 70 percent equity stake in a windmill business, qualifying for special tax credits. Three national banks were given the green light to engage in these business activities.

Well there goes the green powered economy Obama wants.

But there was another ruling from the OCC that I’m thinking of. A ruling that requires Obama to undo a Clinton era position from 1996. And, funny thing it had an entire industry all bent out of shape that today would not be recognized as completely and entirely distinct from the banks; the insurance industry.

Office of the Comptroller of the Currency; bank subsidiaries may sell insurance
WASHINGTON — Insurance groups are vowing to do everything possible to block a new ruling by the Office of the Comptroller of the Currency that could allow national banks to form operating subsidiaries that sell and underwrite insurance.

Gary Hughes, vice president and chief counsel with the Washington-based American Council of Life Insurance, said his preliminary analysis suggests two possible levels of attack.

First, Mr. Hughes said, insurers could charge that Comptroller Eugene Ludwig does not have the power to adopt the ruling. Second, he said, insurers could say that even if the ruling is lawful, insurance underwriting is not incidental to banking and thus …

Are you seeing a pattern here? No? How about this 2002 ruling:

A recent ruling by the Office of the Comptroller of the Currency eased fears of marketers in the credit card industry about any possible new rules that could have hampered telemarketing of debt suspension and cancellation agreements.
In addition, the OCC declined to consider the agreements a type of insurance product. Doing so would have taken the agreements out of the hands of federal regulators and into the jurisdiction of the states, opening the possibility that they would be subject to 50 different state laws.

The OCC also ruled that marketers could provide consumers with short-form disclosures at the time of closing an agreement provided that they mail a long-form disclosure brochure afterward. The new rules take effect in June 2003.

How did the OCC get to do this? Guess!

Congress granted the OCC the authority to regulate credit card marketers when it passed the Gramm-Leach-Bliley Act in 1999. In 2000, the office published a notice of proposed rulemaking stating that it was considering changes regarding debt suspension and cancellation agreements.

I know we are all thinking the bad guys have been the prior Treasury, Fed and AG. But I gotta tell you, looking at these OCC actions, the OCC seems to be the real Ace under the table and NO ONE IS TALKING ABOUT THEM! Hell, they get their money from fees charged to the industry they regulate. And recently we heard that a part of their directorship duties, the FDIC, hasn’t been collecting the insurance premiums. Though that was do to congress I guess. I mean, no influence from the industry here (cough, cough, choking, choking).

I just can’t resist closing with this statement about why the fees were not collected. They (as in congress, bankers, financiers) really believed in the free lunch money from money theories.

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.”

Yeah, just like your 401K huh?

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OCC and Model Validation Part 2

FIRE reports:

“The securities industry is an economic powerhouse that continues to strengthen the U.S. economy,” said Securities Industry Association President Marc Lackritz. “SIA data shows that last year alone, we raised a record $3.2 trillion of capital for American business and nearly $14 trillion over the past five, underscoring our substantial contribution to overall growth in the U.S. economy.”

Also fatbear in comments earlier offers this link by Paul Krugman on the OCC and Office for Thrift Supervision.

Just go read Krugman from right before Xmas last year:
Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.
Also in attendance were representatives of financial industry trade associations, which had been lobbying for deregulation. As far as I can tell from press reports, there were no representatives of consumer interests on the scene.
Two months after that event the Office of the Comptroller of the Currency, one of the tree-shears-wielding agencies, moved to exempt national banks from state regulations that protect consumers against predatory lending. If, say, New York State wanted to protect its own residents — well, sorry, that wasn’t allowed.
One thing to remember is the the state subsidiaries of the national banks, many of the them state based mortgage companies, were also exempt from state regulation.

Another thing to remember is the lack of resources to even monitor the new market, as Consumers Union points out.

Even if the OCC had a desire to effectively regulate the consumer practices of national banks, it lacks the resources to do so. According to the OCC’s own statistics, there are about 2,200 nationally chartered banks, with total assets of $3.5 trillion. The entire staff of the OCC is less than 3,000, which is less than one person per $1 billion in bank assets. Even if the OCC did vigorously develop new consumer protection regulations, which it does not, the OCC does not have enough staff to detect and prevent problems for consumers at big and small nationally chartered banks throughout the U.S. is the resources of the agency as they took on added responsibilities…”

The GAO weighed in rather obliquely on the issue.

We shall see how it all shakes out, but remember, do not exclude externalities, which our economic models exclude from serious price adjusting. But that is a different story for 19th century philosophy. It just means we do not even try to validate the model in the 21st century. Whatever happened to innovation in economic philosophy?

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OCC and Model Validation Part 1

Comptroller Dugan Underscores Bank Responsibility for Model Validation

WASHINGTON Feb. 3, 2006 – Comptroller of the Currency John C. Dugan said today that responsibility for validating the models banks use to manage credit risk and other critical activities lies first and foremost with the institution itself.

“Just as good management requires this kind of attention to one critical component of your success—your people—model validation takes on the same importance as part of sound management, as models become more central to the success of your organizations,” Mr. Dugan said in a speech at the OCC’s “Workshop on Validation of Credit Rating and Scoring Models.” “Organizations using these models need to be as sure as they can that models work as intended—that is, that the models are valid—much as they need to know that key people are doing their jobs.”

Comptroller Dugan said that regulators have the responsibility to establish clear expectations around model validation for the institutions they supervise, and then to ensure through the supervisory process that banks are meeting those expectations.

“This view—that banks validate, and supervisors supervise—is the OCC view of model validation, one we express consistently through our guidance and our supervisory processes,” Mr. Dugan said. “But it is also a view shared by many other regulators, and a view that is becoming ever more prevalent as we share practices with our colleagues around the world.”

The Comptroller said he has been particularly impressed with the work done by the OCC’s Risk Analysis Division, which brings the knowledge and perspective of economists to the agency’s supervisory work.

“Whether it’s shifting through economic and industry trends to spot emerging issues that the OCC needs to stay on top of, or evaluating the economic impact of policy proposals, or—as with this conference—addressing issues raised by banks’ use of quantitative models, the OCC’s economists bring a dimension to our supervisory work that is irreplaceable,” Mr. Dugan said.
“I’ve become increasingly proud of their capabilities and the contributions they make to our supervision of banks, which with nearly $6 trillion in assets engage increasingly in the kind of complex activities that require more sophisticated supervision.”

The interests of banks and regulators in validation do coincide in that both want models to work well, Mr. Dugan told the 400 modelers, regulators, economists, and other experts in attendance. However, because regulators have different objectives and legal responsibilities from the private interests of banks, conflicting views occasionally occur about what should be done on modeling and validation, he said.

“When that happens—when the occasional but inevitable conflicts arise—we work very hard with our banks to reach an appropriate solution that works, consistent with our statutory responsibility to the public,” Comptroller Dugan said.

Mr. Dugan said that the OCC is keenly aware that individual banks are different and require different supervisory approaches to meet the same objectives and that supervision can’t be “one size fits all.” A smaller, less complex bank needs a different supervisory approach than a diversified, multi-billion dollar organization, he noted.

“When it comes to supervision of banks’ use of models, at the OCC we believe that success requires recognition of the priority, and then seamless integration into the mainstream of bank supervision,” Comptroller Dugan said. “Recognition of the priority begins at the top, and that includes me.”

OCC examiners draw on the advice of staff quantitative experts when they assess how a bank uses any quantitative model, the importance of that model within the business process, and the controls that surround and govern its use, he said. “It’s a partnership, and one that works well.”

“Ultimately, the bottom-line judgment regarding the use of models and how they affect the condition and soundness of the bank rests where we firmly believe it should—in the hands of the examiners—but that judgment will have been the result of close collaboration between the examiners and the OCC’s quantitative modeling experts,” Comptroller Dugan said.

Mr. Dugan said that the new Basel II capital framework will add greater importance to sound validation practices. Validation is likely to be an essential factor ensuring that models and other parts of banks’ internal processes used for Basel II meet the requirements for capital calculations, he said.

Comptroller Dugan cautioned that no model is perfect. Every model relies on some key assumptions, reflecting a simplified view of the real world that never matches those assumptions perfectly. That’s why model results can’t be blindly accepted as “the answer” on capital adequacy or anything else for that matter, he said.

“Models don’t build themselves, and they don’t validate themselves,” Mr. Dugan said. “Validation is done by people, people who exercise judgment, judgment that can be good or can be bad. This is part of the process, and will always be part of the process.”

“If I can leave you with one primary thought, it’s that when your business depends on these models, good validation has to be viewed as part of sound management and good corporate governance,” Mr. Dugan concluded. “And without good governance and management, we don’t have a prayer of having sound banks.”

(italics and bolding are mine)

Good call, Mr. Dugan. If I remember the novel by Ayn Rand correctly, what happens to bad managers?

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OCC links

The Office of Currency Control has a website to explore.

National bank subsidiaries monitored by OCC tend to be mortgage companies. The link is to the long list of matching trade names to the correct national bank, and in which state the subsidiary operates.

The Securities Exchange Commission has a listing of proposed rule changes by the OCC in 2008 at the link.

A generic regulation search engine is at this link.

OCC Watch is not current, but other sites will be researched.

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OCC watch

This site dedicated to OCC watching offers a little background for us in the changes being made with banking rules.

In January, 2004 the OCC issued two related and sweeping rules, one preempting nearly all state and local consumer laws (the “preemption rule”) [69 Fed. Reg. 1904 (2004)] and the other restricting nearly all enforcement powers of state regulators and attorneys general (the “visitorial powers rule.”) [69 Fed. Reg. 1895 (2004)] over national banks, and incredibly, their state-licensed operating subsidiaries, which are not banks.

The issuance of the OCC rules has sparked a bi-partisan storm of protest from state legislatures, state financial regulators and state attorneys general. The attorneys general particularly criticized the OCC’outrageous characterization that the “National Bank Act protect[s] national banks from potential state hostility…” Calling the states “hostile” does not advance any legitimate argument. See the OCC Watch Coalition Partner Links page for more information.

Even the normally complacent House Financial Services Committee has weighed in. In addition to holding OCC oversight hearings, it has passed a bi-partisan budget resolution on a vote of 34-28 stating that the OCC action “may represent an unprecedented expansion of Federal preemption authority” and “comes without congressional authorization, and without a corresponding increase in budget resources for the agency.” The committee also pointed out that without a budget increase, the OCC cannot really expect its modest staff of 40 consumer complaint specialists and approximately 100 examiners to both continue their own work and also take over much of the work of an estimated 700 state consumer enforcers and examiners. “In the area of abusive mortgage lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 in response to consumer complaints, which resulted in 4,035 enforcement actions”.

Two points to be made:
1. The size of the department makes regulation moot given the responsibilities.
2. The national bank is not subject to state regulations, but also the state subsidiaries of that bank.

Since the trend is not new but was accelerated since after 2000, would state regulation have been able to help with the bank situation? Is the lack of staff with huge increases in responsibility another way to lessen regulatory effectiveness? Was that the intent? And how does that square with the press release by the OCC here?

Step by step information to be had….there are two lists compare. Perhaps a call to each state AG could obtain more information. If you call in CA, make sure to mention cactus’s problem.

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Spitzer and the OCC – Who you gonna call?

OCC press release

WASHINGTON Feb. 14, 2008 — Comptroller of the Currency John C. Dugan issued the following statement today, responding to comments from New York Governor Eliot Spitzer:
Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.
However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders. That’s just plain wrong.
The OCC extensively regulates the activities of national banks, including mortgage lending. The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank. As a result, predatory mortgage lenders have avoided national banks like the plague. The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system. And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.
Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems. The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them. It defies logic to argue that preemption was an impediment. National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards. The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

If a little worried while everyone passes the buck so to speak, you might want to go here to check on who is in your wallet!

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