Monday, September 15, 2014

DOJ Abuse, Law Suits, and Bank Low Income Lending


US Government Slanders


Fairholme Capital Management--of Bruce Berkowitz and “third amendment” law suit fame-- announced last week that it has hired Tim Howard, former Fannie CFO, as a consultant to assist their law firm, Coopers and Kirk, to help analyze the thousands of documents which the firm has gathered and will gather during “discovery,” a process approved by the Court (Judge Margaret Sweeney).


Most people know that Tim—who before joining Fannie cut his financial services teeth at a major west coast bank--for 20 years held a series of upwardly responsible senior management positions for Fannie, eventually overseeing the company’s debt, credit, and securities operations.

While with Fannie, Tim traveled the world discussing the company and its debt and mortgage backed securities operations with foreign central banks, financial analysts, media, etc. Fannie often employed him to go to the Hill to meet with congressional staff and he was the primary creator of Fannie’s first risk based capital model working with Paul Volcker--following Volcker’s Fed stint when he joined Jim Wolfenson’s NYC firm--who studied it, tore it apart, made some acceptable changes, and then blessed it.

Howard also was the primary lead with all company dealings with the US Treasury during its many challenges to Fannie (and Freddie). 

Bottom line, Tim is very, very financial matters smart.   

They Got You Then and Now We Want to Jump on You, Too…….

In 2004, the Bush Administration operatives drove from office Tim, Fannie’s CEO Frank Raines, and Treasurer Leanne Spencer  using spurious charges of “securities violations,” which later got rejected by a federal court, but not before the Bush ideologues succeeded and the Fannie execs were forced to resign. 

Tim wrote a book about that episode, called, “The Mortgage Wars, which was well received and contained a lot of revelations about regulatory incompetence and sleazy political behavior. 

Latest insult, because Tim protested his innocence, wrote a book, and blamed regulators, the Department of Justice last week, formally opposed Howard’s retention to scan the “discovery” files which Coopers and Kirk will generate, because DoJ doesn't trust his integrity and claims he might use whatever information he reviews to trade in GSE securities or blab to somebody about the FHFA’s and Treasury’s tawdry recorded dirty laundry. 
By extension, Howard is subject to Judge Sweeney's  same prohibitive disclosure rules as everyone else from Fairholme or their lawyers who see discovered documents.

Shame on you Uncle Sam, go ahead and balk because Howard is tall and lanky, born in California, likes classical music, is a lousy dancer, or drives a fast car, but don’t spin and perpetuate lies, sully his character, honesty and reputation by suggesting he—alone of the dozens of plaintiffs officials, lawyers and others looking at government materials—can’t be trusted and would use what he reviews for personal or narrow ideological gain.

The institutional antecedent of the Federal Housing Finance Agency, which is the subject of many of the current legal challenges, is the group which started the Howard and Fannie colleagues witch hunt in 2004 (although none of that is part of the Fairholme suit).

This level of government BS and legal obfuscating was predictable but—IMO--not for the reason that you might think or the explanation to which many will leap. 

Come Let’s Stroll…

Today it is Tim Howard, tomorrow it will be something else.
I think this Administration is slow walking all of the procedures, throwing up obstacles, trying to play a four corners defense to run the clock and hope that any decision forthcoming favoring the plaintiffs—which I think is likely—occurs after the Obama Administration is out of Washington.

Yes, that’s two years from now plus a few months, but a lower court’s decision which gets appealed could linger before SCOTUS for years, unless this SCOTUS wants to make a statement on behalf of the investors.

I’ve repeatedly said that I have no idea how broad a decision Judge Sweeney might render, but it is possible that her decision could affect the structure and ownership of the companies and not merely be a large cash award.

I assume Howard’s fate is in the hands of Judge Sweeney. I hope she will see through this transparent government assault. 

Related Thoughts 

A friend and blog reader wrote to me about the above issues, discovery, and the fact that FHFA produced very small independent paper trail, suggesting it did little on its own during the early conservatorship years between 2008 and 2012, but acted merely as a Treasury puppet. 

He observed, “Ten years ago, there was zero evidence to establish any accounting violation by Fannie, which is why OFHEO (FHFA’s predecessor the Office of Financial Enterprise Oversight) persisted in concealing records that showed how the accusers lied.  Today, there is zero evidence to show how FHFA (Federal Housing Finance Agency) acted on behalf of the GSEs, independent of Treasury’s agenda, which is why they desperately want to avoid handing over the documents that they have. And why they (the government) persists in maligning Tim.”

As this same longtime observer noted, “The FHFA –which is very exposed--should be very, very afraid of Tim Howard.”

For a discussion of the Fairholme and related cases, see the article below by Law professor Richard Epstein, who works for the plaintiffs and has written extensively about the “Third Amendment” or “takings” cases. 


WH/Bank Lenders Meet Next Week

Writing in the Wall Street Journal (see link below), John Carney opined that the big banks—fearing federal  requests to take back or compensate for faulty loans-- will be loath to produce loans that met less stringent but still applicable FHFA-imposed F&F housing goals.

Carney, relying on bank sources, said the financial institutions won’t originate loans they which may not meet their internal credit/risk objectives, and which they otherwise wouldn’t hold on their books, but could be securitized with F&F and sold to investors.

A flip retort might be, “If you don’t want your naked pictures showing up on the Internet, don’t pose for them...”  

Ooops, wrong subject.

Mortgage buybacks. “If you don’t want Fannie and Freddie—and their regulator—to ask you to buyback bad loans,  underwrite the loans properly in the first place and don’t place ourselves at risk, after signing a contract not to scam, and then try passing off garbage loans for inclusion in F&F mortgage backed securities (MBS).”

That’s the only time lenders run afoul of the F&F (and FHFA) rules.

Next Wednesday, unless it gets cancelled, the White House (likely not Mr. Obama) will meet with represents of the nation largest banks to discuss how they might expand their lending to lower income American families who have not been well service in recent environment, which seems to serve only superior credits (high FICO scores, plenty of cash for down payments, as well no character or legal “dings”).

Now what will do at this meeting to incent the banks, except to ask the banks to step up and while offering them continued Administration support for CorkerWarnerJohnsonCrapo and whatever legislative iterations come from same? 

What will the bank lenders seek from the Obama Admin? 

Ooh, Ooh, We Have a List 

A few weeks ago the Financial Services Roundtable had a list of 16 pages worth of things on the regulatory and legislative fronts it wanted. The Mortgage Bankers Association, a few days ago, had a similar inventory which, surprise, surprise, was the MBA’s legislative wish list.

But, tell me why do the banks need more incentives and bribes to do what they are supposed to do, by virtue of our laws and their existing charters?

Today, the banks are financially fat, reasonably happy, and still enjoy record profits, possibly with less money than they’ve made in the past from mortgage lending with F&F (although it varies with institution), but still doing quite well with their total revenue pursuits.

Instead of mortgaging the ranch (pun intended), the White House should lean on the banks just to do more.

“Fear” of Buybacks?


Banks claim they are worried about F&F forcing them to “buy back” too many loans and the costs of that GSE option.

But those buyback demands, which have shrunk rapidly over the past several months, were for loans the banks underwrote improperly and on which the lenders made mistakes.

So, once again, I expect the banks will respond with non-reciprocal “asks” and seek additional federal guarantees, new federal “bennies,” regulatory “look the other ways,” and then, maybe, just maybe, consider some non-substantive loosening of their internal credit and income standards a bit.

I heard this same story in 1992 when F&F first were given housing goals because the bank, mortgage bank, and S&L lenders—then, far more numerous and far less concentrated—didn’t want or like to do business with poor people, minorities color, or those with flawed credit histories. 

The government was impotent in forcing banks to do the right thing and used Fannie Mae and Freddie Mac to do Uncle’s job.

What goes around comes around.

The banks haven’t changed, just their excuses.

Knowing the banks true agenda--give us Mo, Mo--I’m surprised, for next week’s meeting, the banks aren’t arguing over the shape of the table (for those of you old enough to remember the Vietnam “Paris peace negotiations.”)

One last thought—for this week—on the WH meeting and its goals.

Do you think anyone downtown ever makes the connection between the WH’s ongoing campaign against Fannie and Freddie and the issues over which you are ringing your hands, crawling to the banks, and asking to parlay?

“You betchum, Red Ryder!” (Sorry another historical allusion, meaning “Yes Sir.”)

If the Obama White House just could “Come to Jesus” on the GSE issues and quit poking F&F, insisting on their demise, maybe the housing social, political, and financial concerns--over which some in the Admin fondle their worry beads and hold meetings with avaricious bankers--could ameliorate sooner than otherwise.


Mike Stegman and Senator Corker (R-Tenn.)

Both the WH (Stegman) and Sen. Bob Corker, this past week, cited the CBO study, which I mentioned in the last blog, as justifying passage of the CWJC legislation.

Let me repeat, it was a crap study, which relied on disparate accounting standard applied to the GSEs and then separately to the new FMIC, the proposed insurance corporation created in the legislation.

CBO had no real analysis of possible (and likely) dramatic market changes, cost increases—which most everyone predicts— further lender concentration, implementation delays, and unanswered question about what if the needed private capital ($500 Billion) doesn’t show up. Those reviews likely would foul up their cute analysis and news story.

It was a cheap headline for the CWJ advocates and nothing more. 

Syria and IS/ISIL/ISIS? 

Mr. President, pinpoint is nice. But, shouldn’t it at least be a bit easier to carpet bomb those former Syrian Air Force bases—possibly blowing up some valuable assets still on them, thereby denying them to the ISIS--now that you’ve decided to destroy those terrorists?

Thank you for following this blog's “Middle East Game Plan,” speaking and acting tough and rounding up regional sovereign support to pursue your military objectives.

But, can you expedite things a bit?  What do your and your commanders think ISIS is doing while you are holding press conferences to announce your intentions?

You still have time to polish your legacy. (Just don’t trust the Russians.)


What Others Are Saying?


Were Sarah Palin and husband Todd at the party, with Todd getting his nose bloodied in a punchout, as some sources have reported? Those gosh darn GOP VP candidates!

“No” you say and stop treating them like trailer trash. OK, but if they don’t want their naked pictures on the Internet……

“Do you know who I am?” (Sarah supposedly screamed at party goers.)


Maloni, 9-15-2014


Anonymous said...

If Judge Sweeney wants to check out Tim Howard, she should talk to her colleague, Judge Richard Leon, who considered all the "evidence" used by OFHEO to impugn Howard.

"In sum, plaintiffs offer no evidence from which a reasonable juror could conclude that any of Howard’s statements concerning Fannie Mae’s accounting practices or internal controls were made with an intent to deceive, or were otherwise made without any reasonable basis," wrote Leon, who ruled in favor of summary judgement exonerating Howard, in no small part because of "the overwhelming evidence of Howard's good faith"

Matt Hill said...

I hope the big man upstairs doesn't strike me down for this, but regardless of anyone's religious beliefs, the only way I can describe this senseless government behavior is that it's a modern day crucifixion of Gses

Bill Maloni said...

Matt Hill, I just heard gongs from the sky..hide!

Bill Maloni said...

Anon--Thus speakeath the court!

Matt Hill said...

Thanks Bill, I have made a promise to turn a new leaf and become a much better person if he can just correct this one injustice to the American people.

Bill Maloni said...

Matt--You're a great person, with good instincts (you read the blog, right?); it's the thosae assholes who are wrong!

Anonymous said...

Mr. Maloni. The DOJ's defense is simply opinion based on air. It is unthinkable that a U.S. Judge will not be able to see through the government's fog.

May I ask you to expand on this thought of yours? "but it is possible that her decision could affect the structure and ownership of the companies"

How could the structure and ownership may be altered by the judge? In which ways?

Bill Maloni said...

Anon--I've written about this before, with this brief background.

I am not a lawyer but I tried to ask many lawyers questions about the parameters of Judge Sweeney's final decision (which most likely will get appealed no matter which side she supports).

The lawyers who have responded to me don't seem to have a consensus position on what limits Judge Sweeney might have.

But one element of the attorneys claims that if she believes the investors have really been screwed, her financial award could cause the government to consider negotiating with the plaintiffs its 79% F&F ownership in some grand bargain.

Don't get too excited over this possibility, it is total speculation and likely extreme at that.

My advice is to read as much of Epstein's writing (his most recent linked in this week's blog)--and there are several--and see what he says about possible awards for the plaintiffs. He is consulting for the plaintiffs, but he has been the most dogmatic writing about how wrong the Treasury/FHFA actions were.

BTW, if you do find something which suggests limits on Sweeney's decision, please share it with me/us.

Anonymous said...

Hack attack?:

Anonymous said...

Bill, for many years I have been trying to understand the mortgage crisis and economic collapse of 2008. I have read many books and articles, watched several documentaries. I have religiously read your blog along with Tim Howard's book, but there is something that is puzzling me about this urgent and necessary reform problem.

There are millions of people that got hurt badly from the 2008 mortgage crisis, yet there is a big deceitful lie spreading across this country masquerading the truth on what needs to be done in preventing another crisis.

What is troubling is the fact there are some that benefited handsomely from this crisis that were betting on a crisis. This fact has been completely disregarded by our lawmakers. We hear nothing in regard to directing laws at derivatives and credit default swaps but instead focus on how to get the business back into the hands of private label securitization institutions that helped orchestrate this train wreck back in 2008.

It is disgusting to hear people like Corker, Warner and Crapo talk about this crisis and blame the GSEs with their dishonest rhetoric. And the court theatrics and delays, that appear to almost to be a big stall so they can buy enough time to get lawmakers to pass a bill to get rid of the GSEs once and for all.

It is sad to watch this slow destruction, a controlled and purposeful wind down and dismantling until powerless. It reminds me of a how certain snakes kill their prey. The people behind this should never be trusted, ever.

Bill Maloni said...

I agree, but someone has to stand tall and blow the whistle in a way that it is easy for the public to understand.

The Obama Admin doesn't have the cahones, for bizarre reasons they buy into it.

The big guys making the money just keep making it and campaign underwrite the guys who might but won't blow the whistles because they don't want to lose the cash.

Some forces--pursuing their own self interests, but that's OK, too--managed to combine and stop, for the time being, the CWJC bill.

My hope, is, if there continues to be this Mexican standoff on the Hill, maybe F&F fair and consumer friendly operations can generate enough supporters so that a variation of the GSEs going forward becomes the consensus view.
Again, I am with you, but--fro both of us--it's a lot easier to describe the problem than to find a solution.

A strong and well respected President would help, but who knows when we can get one of those?

Try and ask yourself--forgetting about political preference--what individual in the nation, no matter what they are doing today, would you want as our next President and why?

It is a frustrating and humbling exercise.

Anonymous said...

Bill, did you know that banks aren't lending money for second home properties under 50,000? I was shocked to learn this. It was described to me by my realtor that there is not enough money to be made in these loans. so the lending institutions are punting. To me this will frustrate people into thinking that Fannie Mae and Freddie Mac are linked to this and that we need legislation to get rid of them. What are your thoughts?

Bill Maloni said...

Anon--There are many things the banks are doing--including still enjoying huge earnings--which occur under their own self-imposed risk standards (mentioned in the blog liberally).

Part of tomorrow's WH meeting is an "ask" to the banks to suddenly do more, which I believe the banks will ignore unless given plenty of incentives, emoluments, and regulatory relief, plus the WH bowing to CWJC.

While there is plenty of blame for most in Washington on this count, the GOP, primarily, and then the bank regulators (who cheerlead for the financial institutions) are most to blame for protecting "the big."