Yesterday afternoon while listening to the radio program Those Were the Days, a regular program produced here in Chicago on which they re-play old radio programs, I heard the following exchange in an episode of The Chase and Sanborn Hour:
Bergen: Young man, to what do you attribute your stupidity?
Mortimer: I read election predictions.
The more things change.
The Patient Protection and Affordable Care Act, the healthcare reform bill enacted into law earlier this year, continues to have its effects on the cost of healthcare. In Connecticut
The state’s largest insurer has been approved to raise health premium rates by 41 percent to 47 percent for some of its policies sold to individual buyers, in the largest price hikes yet seen in Connecticut since the adoption of national health care reform.
For all of its individual market plans, Anthem Blue Cross and Blue Shield has received approval to raise rates by at least 19 percent — including a range of 30 percent to 44 percent for the brand of plans in the individual market that was most popular in 2009, Century Preferred.
The reason for the increases is the new federal health reform mandates, according to Anthem and the state Department of Insurance, which is defending its approval against charges by Attorney General Richard Blumenthal. Those reforms took effect Sept. 23.
[…]
“There is not one person in the state of Connecticut who will see an increase in their current premiums based on what the department approved for Anthem and Aetna,” Sullivan said last week in response to Blumenthal’s letter. “The rates that were filed and approved reflect the current cost to deliver care and the impact of more comprehensive benefit designs required under the federal healthcare reform law. If the attorney general wants to complain to someone, he should be complaining to Congress.
The first half of 2010 was spent struggling over a healthcare reform bill and now we need healthcare reform more than ever.
If you’ve got twenty minutes or so to spare I recommend that you read Joseph Tauke’s mammoth 5,600 word indictment of the mortgage industry at Daily Caller. It provides chapter and verse on the massive irregularities in how foreclosures have been handled by the industry and is quite clearly making the case that the infractions have been systematic rather than incidental. Here’s a snippet:
Americans have stopped believing. The attorneys general of every single state just opened a joint investigation into foreclosure fraud. As long as 50 is still a bigger number than 23, the problems aren’t contained. And banks are finally starting to react to the disbelief. The CEO of JP Morgan Chase, one of the founding members of MERS, has told CNBC that the bank has stopped naming the system as a plaintiff to foreclose. He actually said that JP Morgan had stopped naming it two years ago. The foreclosures that relied upon the information MERS holds, however, didn’t stop. Coincidentally, JP Morgan bumped up the reserves it was holding for “litigation and repurchase,†referring to events that would require buying back mortgages that had been mistakenly sold off. The Association of Financial Guaranty Insurers recently told Bank of America to prepare to be hit by lawsuits which will force it to buy back between $10 and $20 billion worth of mortgages. Similar numbers would apply to other nationwide banks. Bank of America’s entire federal bailout, before it purchased Merrill Lynch and needed additional funding, was worth $25 billion.
I don’t honestly know the truth of this matter. What we are seeing may simply be a reflection of the modern reality that the financial system has grown beyond the capacity of the legal system to control. The truth has relatively little to do with the importance of the story. It’s political dynamite. Some, for example John Carney at CNBC, think that the Congress will act in lame duck session to indemnify the banks against the consequences of their own mistakes:
Bank of America’s recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I’m pretty sure that is not going to happen.
Why not?
Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there’s an easy fix available that won’t cost taxpayers a dime.
Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010†that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.
Others, like Stan Collender, think that’s unlikely:
I seriously doubt there would be 10 votes out of the 535 in the House and Senate in favor of another bank bailout bill. Actually, I’m not sure it would even make it out of committee in either house.
while yet others, like Felix Salmon, think that the very idea of Congress doing so is frankly looney:
Given that any indication of friendliness towards banks constitutes political suicide right now, I’d guess that the banks’ litigation risk is higher than it has ever been.
That’s why the upcoming lame duck session is the key to this story. First, absent some action by Congress (maybe even regardless of action by Congress) these suits will go forward. The mere fact of their going forward will be trouble for the banks. And having to buy back tens or hundreds of billions of dollars in mortages will almost certainly produce another financial crisis. Second, lame duck sessions can be very empowering. Political suicide is not nearly the threat for dead men walking that it is for politicians with a future. They can vote their hearts. Where are their hearts?
Maybe retiring Congressmen will look towards prospects of future employment in the financial sector, reminiscent of the shrewd steward in Luke 16.
Or Congressmen may well have have been sincere in their acerbic comments about the banks over the last couple of years. I’m guessing that Stan Collender is right: there isn’t much appetite for another bank bailout at this point. The president’s veto of HR3808 (the bill, snuck through the Congress in the dark of night, that would have given the green light to the “robo-signing” that’s been called into question) suggests to me which way the wind is blowing. I can’t imagine the Obama Administration making an impassioned plea for another round of clemency for misbehaving bankers, at least not without exacting a pound of flesh.
While I’m on the subject let me be the first to predict: 2011 and 2012 will see a number of powerful, senior Democratic politicians announce their retirements. Should provide for an even more interesting 2012 general election.
The events of the next year or so should make for good political theater. It would be much more entertaining if you didn’t actually have to live through it.
I am increasingly becoming convinced that one of the problems we’re facing these days is simple innumeracy on the part of lawmakers, jurists, and journalists. When you hear about a multi-million dollar fine for some sort of illegal activity it sounds like a lot of money. However, if the proceeds being earned through the illegal activity were measured in the billions or tens of billions of dollars a multi-million dollar fine isn’t even a slap on the wrist. It’s barely a rounding error.
The difference between something being a real penalty and, presumably, a deterrent and something just being an acceptable cost of doing business is one of scale. Are guys who don’t know the difference between a million and a billion (let alone a trillion) capable of identifying the right scale?
Or, as a wise man once said “what’s twenty quid to the bloody Midland Bank?”
I have a question about what’s being referred to as the “mortgage morass”, ”foreclosure crisis”, and “Foreclosure-Gate”. It’s being reported that the reason for some of the bad practices was to save a $35 filing fee. Here’s my question. If the filing fee being referred to is a fee when a mortgage changes hands, i.e. from one holder to another, would the entire MBS fiasco have even possible if the various institutions had followed the letter of the law?
As I understand things during the process millions of mortgages changed hands thousands or even tens of thousands of times and, presumably, would have incurred a fee at each exchange. Would the recordkeeping costs and processing fees have eaten up any possible profits?
I must say I am becoming increasingly concerned about the unfolding story of slipshod, sloppy, and, possibly, fraudulent practices in the processing of foreclosures that is being referred to by some as “foreclosure gate”. Dan Indiviglio at The Atlantic explains the worst-case scenario:
Basically, when creating a MBS [ed. mortgage-backed security], the bank who originally provides the mortgages to borrowers sells those mortgages to a trust through a legal process called a “true sale.” The trust then sells bonds to investors, which are secured by those mortgages. Due to sloppiness, that true sale may never have been legally executed in most cases.
Why is this so bad? The investors who hold that MBS might be able to claim that the bonds they hold were not created properly, contracts were breached, and the bank that originated the mortgages needs to buy back the bonds. This, of course, would require many billions of dollars in capital in excess of that banks have lying around. And remember these aren’t pretty bonds. They are mostly toxic and full of losses. Those losses would then be passed on to the banks.
What might be the outcome?
If this problem turns out to be real, and the worst-case scenario that Rosner imagines come to be, then it’s hard to see how the government could fix it simply without tramping over contract law. Instead, more aggressive approached would be required.
For example, it could recapitalize the banks through a sort of TARP II so they could afford to repurchases these bonds. Another possibility might be to get Fannie and Freddie involved and having them buy the MBS from these investors instead, which would cause the GSEs to incur more big losses. Finally, the Fed could get involved, perhaps by purchasing those MBS as part of a new quantitative easing effort — a sort of two-birds with one stone approach. Of course, losses would again likely result — this time for the Fed. In all scenarios, taxpayers would ultimately suffer.
Consider:
In short following a near-death experience the banks apparently carried right alone with exceedingly risky or outright illegal behaviors. Could there be stronger proof positive of the moral hazard that was created in the actions taken by the federal government from 2007 through the present?
If yet another bailout is required, the banks will have demonstrated that they are incapable of looking after their own affairs properly. As the New York Times says in its editorial on the mess this morning:
The banks that got us into this mess can’t be trusted to get us out of it.
And to quote a Swedish bank official in 1992 at the time of Sweden’s financial crisis “the public will not support a plan if you leave the former shareholders with anything#148;.
The “N word” of my title is nationalization. If the foreclosure mess induces another federal bailout of banks, that won’t be nearly enough. The banks should be nationalized and handled as Sweden handled its banks. Sweden now has a private, reasonably stable banking system. This contrasts with Japan, whose model we have largely been emulating. Further, where applicable civil and criminal prosecutions should take place under Sarbanes-Oxley and the Racketeer Influenced and Corrupt Organizations Act. Incompetents and miscreants should not be allowed to abscond with the proceeds of their misdeeds.
Update
Tigerhawk wonders where the heck the auditors were in all of this and points to the entire fiasco as proof that Sarbanes-Oxley is not only ineffective but counter-productive. I am as unhappy with Sarb-Ox as the next guy but we’re going to need to prosecute a few more CEOs to encourage the others. Clealry, saving their rear-ends isn’t cutting it.
Update 2
Megan McArdle articulates some of my concerns:
Take the investors in these mortgage bonds. Most of these securities have clauses that allow investors to force the banks to take back loans in the case of fraud. When did the fraud start? You can expect to see that extensively legislated [ed. I presume she means “litigated” here]–and I doubt that many of the originators have the capital to withstand a mass wave of such loan repatriations, especially since you can expect that they’ll only be forced to take the bad ones. This is going to be an expensive mess for the courts to sort out, could lead to another wave of bank failures, and doesn’t have any obvious legislative fix.
I have seen estimates of Bank of America alone’s exposure in this arena as being from tens of billions to hundreds of billions of dollars. Combine this with the amounts that the other large banks may be on the hook for and you’re starting to talk about real money.
Update 3
Barry Ritholtz outlines the problems that the foreclosure mess reveals. Here are his remarks in bullet form without elaboration.
to which I would add that the uncertainty that’s being produced will further depress spending at least at the margins. Do read the whole thing.
The Sun-Times is reporting that, due to a spelling error on some ballots, Green Party gubernatorial candidate Rich Whitney is being presented to some voters as “Rich Whitey”:
SPRINGFIELD — The last name of Green Party gubernatorial candidate Rich Whitney is misspelled as “Whitey” on electronic-voting machines in nearly two dozen wards — about half in predominantly African-American areas — and election officials said Wednesday the problem cannot be corrected by Election Day.
The misspelling turned up on touch-screen machines in 23 wards overall. Whitney’s name is spelled correctly on the machines’ initial screens showing all of the candidates’ names, but it is misspelled on review screens that later show a voter his or her choices, said Jim Allen, spokesman for the Chicago Board of Elections.
No word on whether this will help or hurt his candidacy.
I’m struggling to figure out who I’m going to vote for on election day in November. For senator it’s no problem. I simply won’t vote for Alexi Giannoulias. Full stop. I’m voting for Kirk for Senate.
Governor is harder. I’ve met Pat Quinn, had lunch with him (as in at a table at Manny’s) and I think he’s a decent bloke. I’m also concerned that he’s sort of Peter Principled out as governor. I don’t know enough about Bill Brady. His determination to solve Illinois’s fiscal problems without tax increases troubles me. I don’t think it can be done.
And I’m concerned that the instincts of somebody who’s in the home construction business won’t be right to handle the problems we have today in the state.
Further, I’m genuinely uncertain whether a Republican or Democrat would be better able to handle the problems we’ve got. To deal with the problems you’re going to have to stand up against key Democratic constituencies, viz. public employees’ union. I think the odds are pretty good that even with given the nationwide wave Democrats will continue to control the Illinois state legislature. And I’ve been concerned about the mental health of the Illinois Republican Party ever since they ran Alan Keyes against Barack Obama for Senate.
Based simply on my own personal knowledge I’d vote for Quinn. Maybe somebody can help me out on this one.
I don’t even know who’s running against Mike Quigley in the Illinois 5th Congressional District. Is he running unopposed?
I haven’t written about the mess that’s unfolding in the scandal about banks’ slapdash, improper, and likely illegal handling of mortgage foreclosures. Yves Smith has been hammering this story.
I find myself in agreement with Barry Ritholtz:
If you have been in any way personally harmed by the illegal actions of any bank, law firm, process server, or loan servicing agency, you MUST file criminal charges.
If your home was broken into by a firm to change the locks illegally, that is breaking and entering, and conspiracy. If the wrong bank filed a foreclosure action, if the wrong house was foreclosed upon, its time to go criminal prosecution route.
Go to the local police department, fill out the requisite forms. Then go to your District Attorney’s Office or County Prosecutor’s office, and ask to speak to someone in charge. Tell them you want to prosecute. You can also contact your state Attorney General about the same. Follow up with written letters, that you send you your local newspaper and the NYT, WSJ, USA Today.
The open question is how many legitimate claims this will result in vs. how many nuisance suits. I don’t honestly know or have any feel for how many people who were up-to-date in the payments on their homes have been foreclosed on illegally. I strongly suspect that the preponderance of problems are technical violations in the sense that proper foreclosures were improperly executed to save time or money or just because the volume they were handling had risen so suddenly they were unable to handle them properly.
However, this should go farther to disabuse people of the notion that just because you work in finance you must be one of the smartest guys in the room. You might be. I have no doubt that some of the smartest, hardest working people in the country work in finance.
Or you might be a burger-flipper. You can’t tell by the nameplate.
I’m not sure what the correct adjective to use to describe the situation of having rescued the banks only to have them overwhelmed by a deluge of lawsuits. Ironic? Poetic? Futile?
Arrogance is a variety of pride and pride is numbered among the deadly sins for a reason. To this amateur’s eye it looks as though the same arrogance that lead investment bankers to believe that horrifically risky financial instruments were safe (or even to believe that they could understand them) has lead to bungling the foreclosure process in who knows how many cases?
While I’m on the subject of GM and Chrysler, I’d like to put in a word for why I think that their bailouts and the bank bailouts that are being hailed as great triumphs, averting another Great Depression, etc. are egregious failures.
We have enormous over-capacity in auto production, financial services, and home construction in the United States. That over-capacity poses a problem: billions in resources are held essentially unusable as long as that over-capacity is preserved. Consequently, no policy that does not include a substantial, controlled reduction in these sectors can be deemed a success however popular it might be or whatever else it might achieve.
The last and present administrations’ policies WRT auto production (Chrysler and GM bailouts;“Cash for Clunkers”), financial services (TARPs I and II, HAMP, etc.), and home construction (first-time homebuyers subsidy, just to name one) have at best been delaying actions. What are they waiting for? Re-election? The next administration to hand off the problems to?
