This secret congressional testimony was surreptitiously transcribed and delivered anonymously to me by a high-level government employee who had recently been foreclosed by Cerberus Servicing Systems, a little known, but highly aggressive foreclosure company. Cerbrus’ namesake is the mythical three-headed dog, guarding the gates of Hell, preventing those who enter from ever leaving. Cerberus Servicing goes after those borrowers the Big Banks wants to teach a “lesson” to, since it requires a uniquely demonic set of skills. Cerberus’ trademark tactic is to pretend to be interested in assisting homeowners to modify their loans, using platitudes such as “We Care” and “We’re Here to Help,” while simultaneously commencing a foreclosure against them. Cerberus personnel are known for their perverse enjoyment of intentionally losing a homeowner’s modification paperwork and then ignoring their pleas to postpone the foreclosure sale so they can re-send their loan mod documents a 4th or 5th time. PCQ
Chair: “Good morning. If everyone is here, let’s get started. As you know, this hearing is not open to the public. We are seeking answers into the causes of the credit, housing and foreclosure crises which is only now abating after six years.
Sworn testimony will be taken. Hearing transcripts will be prepared but not released to the media or members of the public. They will be held under court-imposed seal and are not subject to FOIA requests, since this proceeding is still in its earliest investigative stages. Those testifying have been granted limited immunity from prosecution, so they do not have the right to invoke your Fifth Amendment privilege. However, since all witnesses are accompanied by their attorneys – whom they are free to confer with before answering any question. Accordingly, we expect honest and forthright testimony. No evasion, equivocation, or dissembling; in short, don’t sound like a politician.
Questions have been prepared by the Committee’s Chief Counsel, and acting as Chair of this Committee, I will read them. I reserve the right to ask follow-up questions, if appropriate. Our first witness is from the banking and servicing industry. Please state your name and employment position for the record.”
B.L. Zebub: “My name is B.L. Zebub and I am the CEO of Belial Bank. We are the largest bank in the country, as measured by hubris.”
Chair: “We need your full name. What do the initials “B” and “L” stand for?”
B.L. Zebub: “Sir, that is my full name. The letters are not initials. My full legal name is ‘B.L. Zebub.'”
Chair: “Mr. B.L. Zebub, please provide us with your opinion as to the chief causes of the credit, housing and foreclosure crises, as you seem them.”
B.L. Zebub: “Mr. Chairman, all crises flow from a single cause. Greed, pure, unmitigated, unrelenting, greed.”
Chair: “It’s refreshing to hear such an honest answer. And why do you feel that it was the Big Banks’ greed that caused these crises?”
B.L. Zebub: “Mr. Chair, you misunderstand me. I am referring to greed on the part of borrowers. They insisted that we give them loans everyone knew they couldn’t afford, with no documentation, no proof of income, and terms that would have made a bookie blush. Not only did they force us to make these loans, but investors forced us to package them into securities and sell them these toxic brews. We knew they were risky, but the ratings agencies like S&P, said ‘Noooooo. We’ll rate them as ‘investment grade,’ and you must go along with the ruse.’ So you see, sir, the Big Banks were the hapless victims in all this. We were the one group that was entirely without fault in all of this. Our hands and our consciences are clean. It’s the press and the public that has made us the ‘fall guy.'”
Chair: “Hmmmm. Interesting take. This is an entirely new twist. Let me follow up with you on that. So, how was it that the consumers ‘forced’ you to ignore your own standard underwriting procedures? Did they hold a gun to your head? Did they threaten to go to the authorities if you didn’t make them these loans that were doomed to fail?”
B.L. Zebub: “Well….” (pause, thinking)
Chair: “Mr. B.L. Zebub, did you understand my question”?
B.L. Zebub: “Yes. If you please, I’d like to confer with my attorney.” (Conferring, snickers heard.) “Mr. Chair, let me put it this way. Perhaps it was not just “greed.” It was also “moral hazard.” Borrowers knew they had no downside risk, since they figured that if they couldn’t afford the loans we were giving them, they could just refinance them or sell the home. They believed that even though they couldn’t afford these toxic loans, they could surf away on the wave of appreciation. If they refinanced in a year, they could pull their profit out and just use the money for other things. Or if they sold the home, they could pull out the profit and be dollars ahead of the game. Housing became an ATM for these folks. This is the moral hazard I was referring to – there were no consequences for taking the risks inherent in the loan.”
Chair: “Mr. B.L. Zebub, wasn’t the real reason borrowers believed all this claptrap was because you and the other Big Banks told them that? Wasn’t it the banking industry that created, fostered, and promoted the moral hazard you now blame on consumers? I remember well some of your television and radio promotions; even offering to lend 20% more than the house was worth. No up front fees. No muss, no fuss. You made it appear so simple. If Geico hadn’t invented the caveman first, the banking industry would have. And speaking of ‘moral hazard’ – that is, engaging in risky conduct since there is no downside – wasn’t it you folks who packaged and sold these loans to unsuspecting investors? You got immediately repaid by the investors, so you repeated the same flim-flam all over again. You even bet against these investments using credit default swaps, while you were telling your investors that they were ‘investment grade.’ So you made money when you sold these loans to unsuspecting investors and then made even more money on your bets when they failed. How does that ‘moral hazard’ differ from the ‘moral hazard’ you’re blaming on your borrowers?”
B.L. Zebub: “Mr. Chair, I need to confer with my attorney.” (Conferring. More snickers.) “Well, actually, we went to great lengths in all of our disclosures to plainly set out the risks. We complied with all applicable laws. We have a right to take borrowers at their word, when they tell us they can afford the loan – and investors when they tell us they fully understand the risks. If a hairdresser says she can afford a $500,000 home, who are we to question it? If a janitor tells us he makes $150,000 a year should we call him a ‘liar’? If, after reading our prospectus, a big municipal fund buys our securities, who are we to tell them they’re not sophisticated enough to understand it?”
Chair: “Mr. B.L. Zebub, you don’t have to call people ‘liars’ or ‘stupid’ – but you don’t have to make loans to clearly unqualified borrowers, or sell the securities to investors who rely upon your prospectuses. In other words, you always had a choice. You had the ability to deny a loan. You had the ability to make clear to investors that many of these loans had been hand-picked losers. You were the chief architects of the products that have become the agents of this country’s financial crisis.
If you wanted a borrower’s qualifications vetted, all you needed to do was ask. But if you don’t ask, so the borrowers won’t tell. You had the ability to set the rules, and you set none. Same for the investors; you and the rating agencies were in bed together. They instructed you how to pad the toxic tranches with enough prime loans to get bogus investment grade ratings. You did what they said, and sold the securities as spun gold, when they were really just hay. The agencies needed your business and you needed their ratings. They were nothing more than willing shills, and you knew it. I’m correct, aren’t I, Mr. B. L. Zebub?”
B.L. Zebub: (Conferring with counsel) “I have immunity on my answers, right?”
Chair: “Mr. B.L. Zebub, you have immunity only for the truth. You’ll be charged with perjury if you lie. You do understand the difference between the truth and a lie, don’t you?”
B.L. Zebub: “Is this a trick question? If I say ‘Yes’ it could be that I’m lying. And if I say ‘No’ it’s possible I’m actually telling you the truth. You see, we in the banking business have trouble with questions like these, since they rely upon a black and white moral code. Big Banks subscribe to a different set of ethical rules than those prescribed for the little people – such as the folks we lend money to. It’s called ‘moral relativism’ and it means there is no such thing as right and wrong, good or bad, truth or falsity. Rather, time, culture, and circumstance dictate right from wrong.
So assume – hypothetically, of course – that we knew our loans would go bad; and we knew our borrowers couldn’t foresee or appreciate the risk. Assume that we knew investors were relying on our shills, the rating agencies to tell them they were buying spun gold. In reality, we had no moral duty to any of these folks, the borrowers or the investors. Our duty was to our stockholders, and we fulfilled our duty in spades. We made them billions!
I’d like to refer to a 2006 CNN Money article entitled “Why Bank Stocks are Cash Machines.” According to the author, bank stocks were a sure bet. Here’s what he said:
Now let’s get back to the payoff for investors. You’re starting with a 3.6 percent dividend. It’s rising at almost 10 percent a year. Those increases should far outstrip inflation. So in 2012, you’ll be receiving 6.8 percent, not 3.6 percent, on your original investment, and the payouts will ratchet upward from there.
But wait – there’s even more! The dividend payments are just part of your return. If earnings per share keep rising at 9.5 percent annually, the banks’ stock prices will increase at the same rate (assuming the relatively low price/earnings multiples remain constant). Your returns should start in the 13 percent range – the 3.5 percent current dividend plus a 9.5 percent capital gain. But in seven years, thanks to the ever-growing dividend, that number should surpass 15 percent.
So you see, Mr. Chairman, we did a great job for our shareholders, and it was them, not the little borrowers or gullible investors we owed any duties to. The big pension funds that bought our toxic brew of subprime and overrated securities – they were Big Boys – I believe the term given by the Securities and Exchange Commission is “sophisticated investors“. They had their own fund managers to read the prospectuses and make their own investment decisions. They had a first amendment right to their ‘opinions’ – even if they were wrong.
So from a relativistic point of view, we did the right thing. We have nothing to be ashamed of. In the eyes of our shareholders, we were wildly successful. We can’t be held responsible for the fact that our business is a zero-sum game, and that when we win, someone else loses.
So getting back to your question about the truth and falsity; the Big Banks view the world in shades of gray. There is no black and white, right and wrong, good or bad. The morality of an act depends upon time, place and circumstance. And viewed from the perspective of the Big Banks, we not only did nothing wrong – we did everything right. The credit and housing crisis were just the collateral damage that occurred as we fulfilled our duties to our stockholders.”
Chair: “Let the record reflect that Mr. B.L. Zebub and his attorney are high-fiving each other….”
Vice Chair: “Mr. Chair, may I ask the witness a few questions?”
Chair: “Please proceed.”
Vice Chair: “Thank you. Mr. B.L. Bebub, according to a quick check on the Internet, it appears that your share price was approximately $46.00 in January 2006. Today, it is approximately $6.50. So from where I sit, taking the long view you seem to advocate, your leadership of Belial Bank over the last six years drove its stock price and market share into the ground. Your view that you served your shareholders in 2006 appears to have cost them billions today, not to mention the reputational damage your bank has suffered. Don’t you think you owe your shareholders an apology? Is it possible that betting on Mammon was a bad wager?”
B.L. Zebub: “Well, that’s where you’re wrong. Serving Mammon has been very profitable for many in our industry. Again, we at Belial Bank take the relativistic view. While it is true that ultimately shareholders suffered, but certainly the top executives didn’t. When the banking industry received $200 billion from the American taxpayers, our top executives did very well indeed. For example, Goldman Sachs earned $2.3 billion in 2008, received $10 billion in TARP funding, and paid out $4.8 billion in bonuses that year – more than twice their net income. Morgan Stanley earned $1.7 billion in 2008, received $10 billion in TARP money, and paid out $4.475 billion in bonuses! JPMorgan Chase earned $5.6 billion in 2008, received $25 billion under TARP, yet paid out $8.69 billion in bonuses. In every case, bonuses exceed annual revenues! Not a bad day’s work for the top executives.
Sure, some cynics might say that after taking advantage of American borrowers, misleading American investors, and ultimately costing American taxpayers billions of dollars, Big Banks have much to apologize for. But we don’t see it that way. Again, thanks to our alma mater, the School of Moral Relativism, we did very well, as did our friends, families, lobbyists and the politicians in our pockets, like Barney Frank. As in life, business is a zero-sum game. One group wins, the other loses. We were on the winning side because we were able to sell something people wanted. Barnum was right in more ways than one.”
Vice Chair: “Barnum? Do you mean P.T. Barnum, the circus pitchman? What does P.T Barnum have to do with Big Banks and the financial crisis?”
B.L. Zebub: “It was P.T. Barnum that coined the famous phrase, ‘There’s a sucker born every minute’. We in the banking industry subscribe to the same premise; and it has served us well over the years.”