See No Evil - A
Constitutional Crisis?
(An abundance of evidence, but no perpetrators)
(opinion/commentary)
The segment by Scott Pelley on 60-Minutes
last night (February 15th, 2009) focused on an insider, a sub-prime
mortgage salesman named Paul Bishop, for World Savings, a
California
financial institution which racked up a huge portfolio of sub-prime
loans. The segment is well worth watching (several times, since the
details don't really sink in from just one viewing). The crux of this
report is clear: standard operating procedure at World Savings
appears
to have been the avoidance of rigorous qualification of the ability of
the sub-prime borrowers to make their payments, including in one
instance advising a borrower to use the last stated income of her (now
dead) husband on the loan application. Then, after making thousands of
such loans worth many billions of dollars, the owners sold the company
to Wachovia Bank in 2006 for $25-Billion, keeping $2.3-Billion
for
themselves.
In the 60-Minutes segment, Pelley refers to newspaper accounts which
were published prior to the sale of World Savings to Wachovia
in which Herb Sandler, one of the principals, responded to growing
worries in the financial community about the risk posed by the
sub-prime mortgage industry. I decided to see if I could track down
those news accounts on-line, and sure-enough, I found this story in the
Wall Street Journal dated July 27, 2005, which describes the unraveling
of several large companies which went on to become spectacular
failures: Countrywide, Washington Mutual, and Indymac, as well
as Mr. Sandler's company, which was at that time operating as Golden
West Financial. In the story, Mr. Sandler describes the practices
on the part of these other
companies, that Mr. Bishop alleges took place at Mr. Sandler's own
company as well, and the objective financial information appears to
support Mr. Bishop's allegations, at least later on when Golden
West Financial became World Savings. If you read the
details of the story as reported by the WSJ's columnist, Jesse
Eisinger, it appears that Mr. Sandler made a good faith effort to make
accurate reports to shareholders back in 2005, but as the competition
heated up, and competitors marketing tactics became more onerous, he
may have given in to the pressure and at least allowed them to prevail
at World Savings.
note: an excerpt of the story may be found (here)
from the original story (online:
http://online.wsj.com/article/0,,SB112242597021496913,00.html?mod).
What is more astounding, as I have continued to sift through the
"e-paper trail" (readily available to all of us via Google), the
evidence of a pattern of deliberate misrepresentation and fraud is
everywhere, even as early as 2003 in some reporting. And yet no one in
Congress, the White House, or in our regulatory agencies, saw fit to
call attention to it, much less do anything about it. Even now, after
the fact, I have yet to hear a reasonable explanation as to why the
Department of Justice is not investigating a much wider range of
individuals over a much longer period of time. This did not happen over
night, and no one seems willing to explain why fraud, and obvious
fiduciary misconduct should go unpunished. The inertia of business
as usual seems so strong, that an attempt by Senator Dodd to
require Wall Street executives to give back some of the $18-Billion in
bonuses that may have come from
government bailout funds in 2008 has been criticized as
unfair.
In just about every case, when objective observers attempt to zero
in specific cases of fraud, or fiduciary misconduct, there are always
readily available responses which sound plausible, depending upon the
perspective of the person answering the question. Most compelling in
the CBS investigative report is a reference by Scott Pelley to a
conversation he says he had with former executives at World Savings,
who told him that they had investigated Bishop's allegations of
predatory lending practices, and found them to be groundless:
The losses from the Pick-A-Payment (World
Savings) portfolio are now estimated at $36 billion. Wachovia
was so
badly wounded, it was acquired by Wells Fargo with the help of a
taxpayer bailout.
"We have talked to some former executives of the bank who tell us that
they listened to your complaints, they investigated your complaints,
and they found that there was nothing to them," Pelley told Bishop.
"Are they employed today?" Bishop asked.
"No," Pelley said.
"Surprise. They lost their job. The bank went bust. They took down the
fourth largest bank in the country with them. But there was no
problem," Bishop replied
This report by CBS News, while based largely on
anecdotal evidence, reinforces a common thread no matter where one
begins looking for an explanation as to how our economy became so
damaged, and how so many people managed to extract so many billions of
dollars from it, while that work was in progress. How, one wonders,
could such huge losses accrue while a relative handful of individuals
were becoming so wealthy, without federal regulators, and indeed
without members of Congress and the Executive branch taking notice? The
answer, it seems, is always the same: everyone has an explanation for
what they did and why they did it. Everyone who should have taken
action has a plausible explanation why they
failed to act, or the actions they took were ineffective. In short, plausible
deniability, seems to be the antidote to any attempt to hold anyone
responsible for the carnage. And there are so many people who own a
share of the responsibility, no one is eager to
criticize anyone else's excuse, particularly members of Congress.
In April of 2007, Senator Obama and Senator
Durbin, both of Illinois, introduced a bill in the Senate (s.1222) aka:
The Stop Fraud Act
which would have imposed strict
regulations on sub-prime mortgage lenders. Among those provisions were
requirements for pre-loan counseling and disclosures, limitations on
the amount of commissions mortgage brokers and agents were allowed to
receive (relative to the variable potential returns of the adjustable
rate mortgages), and in particular, provisions which would have
required lenders to provide written documentation that they had
verified via 3rd parties the ability of the borrower to make the
payments on the loans.
Here is an excerpt from Senate bill S.1222, which describes conditions
under which a bankruptcy court may nullify the obligation of a borrower
to repay a sub-prime mortgage. In effect, this language establishes
specific requirements of sub-prime mortgage lenders to enforce the
mortgage contract:
(3) HOME LOAN CONTRACT- A
home loan
contract described in paragraph (1) is a contract that--
(A) does not include a fully-disclosed statement by
the lender that the lending institution or the authorized
representative or agent of such institution has evaluated and affirmed
the ability of the individual to repay the loan based upon, at minimum,
the maximum monthly payments that could be due during the first 7 years
of the loan term, which shall be calculated with reference to the
maximum interest rate allowable under the loan being offered based on a
fully amortizing repayment schedule, taking into account negative
amortization and escrows for taxes and insurance;
(B) does not contain a statement, the format of which
shall be determined by the Secretary of Housing and Urban Development,
with a plain language summary providing the borrower with a calculation
of--
(i) the maximum monthly required minimum
payment the borrower could face under the terms of the loan for each of
the first 10 years of the loan in order to keep the loan in good
standing, or if the borrower is receiving more than 1 loan, the same
information for each loan separately and for the total of all of the
loans together; and
(ii) how much it would cost the borrower to pay
off the loan at the end of each of the first 10 years if the borrower
makes the minimum required payments to keep the loan in good standing;
(C) was underwritten based only on the stated
income
of the individual, without third-party verification of all sources of
income and assets of the individual, including by an examination of the
individual's tax returns, payroll receipts, bank records, or other
reliable documentation; or
(D) includes loan prepayment penalties that are
applicable for prepayments made beyond 2 years after the loan
origination date, beyond the initial interest rate adjustment period
stated in such contract, or whichever is less.
The entire text of S.1222 may be found (here),
as well as links to the full legislative history of the bill at the
Library of Congress website (here).
This bill was not the only bill of it's kind which had been introduced
in 2007, and there had been earlier attempts to enact legislation as
well, including a February, 2006 version of the "Stop Fraud Act"
introduced by Senators Obama and Durbin. Neither it's predecessor in
2006, or the 2007 version ever came to a vote, and I wonder if the
frustration of his attempt to do something about this problem may have
contributed to Freshman Senator Obama's decision to take the risky step
of running for President?
Amidst all the
finger pointing that went on during the last election, particularly
between the two Presidential candidates, both of whom were Senators,
and who's parties (at different times) held a majority in both houses
of Congress, one fact stands out: the risks and deteriorating
circumstances we have come to refer to as the "sub-prime mortgage
crisis" were well-known, and highly visible to the United States
Congress, at least as early as 2005, and yet, as far as I have been
able to determine, not one of these measures ever
came to a vote.
Conversely, both parties seemed quite capable of passing
legislation which enabled the problem in the first place. In 1999-2000,
a bi-partisan coalition of both parties knowingly
passed legislation enabling companies "Too Big To
Fail", and repealed regulatory strictures (some dating back to 1932)
which would have prevented
the un-regulated sale of derivative securities and insurance contracts.
Most of these bills were signed by Bill Clinton during his last two
years in office. At that time, both parties were well aware that in so
doing, they had left unresolved key issues of regulatory
responsibility, issues which were supposed to have been worked out as
part of the proposed Commodities Reauthorization Act (CRA). However,
for some reason, the Congress was unable to resolve these issues in
time to protect the American public from the regulatory void which had
been opened in 2000. The CRA was finally passed in May of 2008, after 8
years of debate, and when finally passed, the revised regulations were
buried in a Farm bill.
As a voter, it seems to me these facts raise a disturbing question: Do
our representatives in Congress introduce legislation for the purpose
of protecting our interests, and preventing exploitation of loopholes
in existing law by the private sector? Or, is their real
purpose a means of going on record as
having tried to protect the public interest, while quietly
allowing most of them to remain in legislative limbo indefinitely, so
none of them is required to take a formal stand on the issues?
When we take into account the anecdotal evidence that CBS News
investigations have turned up, and which are readily available on-line,
and we examine the
objective record of the actions, and the inactions of our Congress, it
becomes harder and harder to believe that our present economic
crisis was the product of unfortunate miscalculations by members of the
financial community, or that our representatives in Congress were
caught unaware of what was taking place over a period of nearly 8
years, during which time literally thousands of people in the private
sector had gone on record as to the existence of a clear and present
danger, and numerous of the most powerful leaders in our Congress are
on record as having identified various aspects of this calamity
in the making.
Even as late as April of 2007, when Senators Obama and Durbin
introduced S.1222 to the 110th Congress (a Congress controlled by their
own party), passage of this specific legislation, even under threat of
veto by President Bush, would have served to elevate public awareness
of the growing danger. Had they done so, 18 months of continuing
damage, along with 18 months of continuous plunder by highly
compensated Wall Street financial executives might at least have been
mitigated to some degree. Measures we are only now beginning to take to
restrain future abuses of this kind, might have been taken earlier, and
the consequences for our economy rendered less severe.
I find the proposition that sophisticated financial executives, who's
primary business purpose was the sale of sub-prime mortgages, simply
didn't comprehend the risks they were taking or the fraudulent nature
of practices they engaged in, to be an empirical oxymoron, used to
cover up a deliberate pattern of fiduciary misconduct, which, if
investigated by our Justice Department, would likely lead to
criminal prosecutions and convictions for many of them. That raises an
even more troubling question:
Has the essential divide between
the Constitutional obligations of our representatives in
Congress, and members of the Executive branch, been effectively
breached over a period of many years, during which the financial
requirements of remaining in office have effectively destroyed the
checks and balances upon which the legitimacy of our democracy depends?
Had I been elected President on November 4th,
2008, and based on just the (so far) limited amount of objective
evidence I have been able to uncover, I believe I would take the
position that our Constitution has been seriously compromised, and that
it required immediate and decisive
action in defense of the Union, just as Abraham Lincoln found himself
compelled to do in 1861. Unfortunately, the threats President Obama
faces now are far
more abstract, and therefore more insidious than those Lincoln
confronted.
There has been, and will be no overt attack such as the one launched
against Fort Sumter on April 12th, 1861. However, I doubt there is
anyone who would minimize the economic peril we face, and the
necessity that whatever measures we take in response, do not enlarge on
the
damage already done. If our federal government has been corrupted, and
is indeed systemically compromised by corrupt relationships between
public officials and
influential members of the private sector, how can our President hope
to meet that economic challenge without first insuring the legitimacy
of the government itself? How can we trust that the legislation passed
by this Congress, and the promises of oversight made by the Congress
and the Executive branch will produce a different outcome to the one
these same people have wrought while in office up to this point?
Business as usual, the conventional wisdom, and the ability of our
mass-media to reduce almost any crisis to the level of a talking point,
creates a stark challenge for President Obama. With all the
Constitutional and statutory authorities at his command, it is his
moral authority which is tested most by the circumstances we face. In
the
end, it is only his to decide.
(site under construction)