In a 2020 Reuters article (here), authors Ann Saphir and Lindsay Dunsmuir note that the Federal largesse of trillions of dollars currently being spent to address the inevitable fallout from sidelining millions of employees and businesses is far different from 2005 – 2009 when the financial and real estate markets fell into the abyss, causing the Great Recession.

Back then, the government, the press, and many in the public, measured deservedness for bailout funds by the metric of “moral hazard” – i.e. whether giving financial assistance to certain groups would be viewed and encouraging “bad behavior”.

For example with the advent of “no-doc loans” and “liar loans”, borrowers were able to qualify for home loans priced far beyond their ability to repay.  At the time, the lenders and mortgage brokers were able to convince borrowers to “bite off more than they could chew” because if they got into trouble, they could either refinance the home, or resell it. Of course, this advice was based upon the theory that real estate does not go down in value.

But in 2007+ that is exactly what happened. Values tanked, thus resulting in borrowers being unable (a) to refinance – because they had no equity, and (b) to resell – because they were “underwater” i.e. their mortgage exceeded the value of the depreciated home. When that occurred, it meant that to convey title, the seller had to bring money to the closing table. This is what came to be known as “negative equity”. Thus, entered the era of the short sale.

So when the Great Recession hit, federal bailout funds were not available to borrowers who had engaged in “moral hazards” i.e. they had fudged their numbers to lenders (or were viewed as having done so), and ended up with a home that could not be refinanced or resold.  To make matters worse, banks were now chastened, and having seen the light, immediately began to raise their lending requirements to a point that few folks could qualify.

In the end, however, it appears that the yardstick of “moral hazard” was never really applied to the Big Banks, even though they were patently culpable by disregarding common sense underwriting and instead making loans to anyone who could fog a mirror.

The reason for the frivolous lending was simple; lenders sold their loans into the private secondary market, where investors, hungry for higher returns, bought these securities as if they were spun gold. So the Big Banks no longer cared about the financial bona fides of their borrowers, since they no longer carried the loans – borrower defaults became someone else’s problem.  And the rating bureaus, like Moodys and S&P, became enablers in the ruse, by telling investors they were buying “investment grade” products, when they weren’t. See articles here and here.

And what became of the Big Banks who created this Ponzi Scheme?  Well, the political decision was made that “moral hazard” would have to take a backseat to financial stability. In other words, the perps were bailed out for the good of the country.

But today, the picture is far different.  The only fault that can be assigned to the travails of the American people is an errant virus, and it is wreaking havoc to consumers and businesses alike.

It remains to be seen whether Main Street will receive the same help from the government as Wall Street. Unfortunately, even though “moral hazard” is absent this time, the calculus ultimately remains the same: The loss of a Big Bank may still be viewed as more worthy of a bailout than the neighborhood Mom & Pop grocery.  ~Phil

It’s been said that few things are as good or bad as they are first made out to be. However, the mainstream media, never fearful of hyperbole, usually writes as if the glass is half empty…and getting worse; e.g. selling fear under the guise of rhetorical questions, such as whether Jeff Sessions’ rescission of the Cole Memo will spell the death of the cannabis industry? No, the sky is not falling. Continue reading “Sessions Memo Trumps Cole Memo”

banks being banks“INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.”  ~ Goldman Sachs Business Principles (here)

As many folks know from news reports following the aftermath of the financial crisis, Goldman Sachs was the poster child for Big Bank shenanigans.  Its rap sheet, which is laid out in lurid detail here, is, in the vernacular, “as long as your arm.”

Deserving of particular attention is the “Abacus” scam.   Abacus was the name of the junk investment Goldman sold its customers, while at the same time, disparaging it internally and betting against its success. Guess who made out like a bandit on that one?  Goldman, don’tcha know?  They were compensated when they packaged and sold the investment, and again when they shorted it.

You see, Goldman neglected to disclose to their Abacus investors that the hand-picked junk was selected by another client, John Paulson, who was making a $1B bet against that investment.  It was a sort of “reverse cherry-picking” selection process. Abacus was doomed to fail, and Goldman, who created it, got paid twice. Senator Carl Levin, Chairman of the Senate Committee investigating the financial crisis [perhaps the best resourced and comprehensive governmental report to date – PCQ], called Goldman’s actions “deceptive and immoral.”

According to a Reuters 2010 article (Factbox: How Goldman’s ABACUS Deal Worked) the SEC’s complaint laid out the scam as follows:

1) Hedge fund manager John Paulson tells Goldman Sachs in late 2006 he wants to bet against risky subprime mortgages using derivatives. The risky mortgage bonds that Paulson wanted to short were essentially subprime home loans that had been repackaged into bonds. The bonds were rated “BBB,” meaning that as the home loans defaulted, these bonds would be among the first to feel the pain.

2) Goldman Sachs knows that German bank IKB would potentially buy the exposure that Paulson was looking to short. But IKB would only do so if the mortgage securities were selected by an outsider.

3) Goldman Sachs knows that not every asset manager would be willing to work with Paulson, according to the complaint. In January 2007, Goldman approaches ACA Management LLC, a unit of a bond insurer.

ACA agrees to be the manager in a deal, and to help select the securities for the deal with Paulson. In January and February 2007, Paulson and ACA work on the portfolio, coming to an agreement in late February.

Goldman never tells ACA or other investors that Paulson is shorting the securities, and ACA believes that Paulson in fact wanted to own some of the riskiest parts of the securities, according to the complaint.

Goldman’s marketing materials for the deal never mention Paulson’s having shorted more than $1 billion of securities. Goldman receives about $15 million in fees.

Almost everyone who touched the scam lost except Goldman and Paulson.

Goldman paid $550 million to the Securities and Exchange Commission for this little stunt; but did not have to admit wrongdoing.

So it was with some puzzlement that I read the following article in the Wall Street Journal, titled “Goldman Firing About 20 Junior Staffers for Cheating on Tests.” Huh? I would think the cheaters would have been promoted, not fired.

Here’s the story, which is even more revealing: First, it seems these “tests” are little more than quizzes. They are about an hour long; they are not pass-fail; they don’t appear to be career determinants; and don’t seem to be much more than routine exercises, testing employee familiarity with policy and practice, and with little long-term consequence. In short, one has to ask: “Was it worth cheating over?”

After all, these “junior staffers” were not idiots in an industry where there were no barriers to entry. According to an October 16, 2015 Industry Insider post here:

For that analyst class, the investment-banking giant had more than 43,000 candidates apply for 1,900 analyst positions. The bank accepted 4% of them, making it harder to get a job at Goldman than to be accepted to Harvard University.

Interestingly, peer reaction to the firings seems slightly sympathetic to the cheaters. Here is one quote from the WSJ article:

Several current and former Goldman employees described the tests as annoying yet unavoidable chores left to the last minute. Nevertheless, analysts who failed to meet the deadlines or score well enough could risk drawing the ire of their supervisors, people familiar with the matter said. Sharing answers, those people said, became a routine way to save time during an often hectic workweek. (Emphasis added.)

Hmmm. So apparently, cheating on the little stuff is understandable after a tough work week.  And so what should we expect to happen when these budding big bankers have to take high-stakes regulatory licensing exams? Will they suddenly grow a conscience?

Am I surprised by this revelation?  Not really.  As they say, “The apple doesn’t fall far from the tree.” ~PCQ

DecisionAs with much that the CFPB does these days, there is some that is good, some bad, and some, just plain ugly.  And for a cynic like me, everything – even the good stuff – seems to be imparted with a slightly paternalistic and patronizing tone.

You see, in the CFPB world view, the American people are divided into two basic camps: One is made up of evil, bloodsucking, vampire squids, looking to latch onto members of the other camp; the gullible, naïve, dumb and dumber set, who were all born yesterday. Continue reading “TRID Fatigue? Here’s What Buyers Need To Know (In Plain English)”

DecisionIn the July 23, 2015 Wall Street Journal, former Senator Phil Gramm, wrote about the “double whammy” effect of Dodd-Frank (here). First, it “…has hit the banking industry hard, hurting the recovery.” But second and worse, “…is its effect on the rule of law.” Continue reading “How Dodd-Frank Destroys The Rule Of Law”

Decision“Bureaucracy destroys initiative. There is little that bureaucrats hate more than innovation, especially innovation that produces better results than the old routines. Improvements always make those at the top of the heap look inept. Who enjoys appearing inept?”  ― Frank HerbertHeretics of Dune

Just to refresh memories: Continue reading “The CFPB – Are We There Yet?”

Crossing out Plan A and writing Plan B on a blackboard.His head was bent in sorrow, green scales fell like rain,
Puff no longer went to play along the cherry lane.
Without his life-long friend, puff could not be brave,
So puff that mighty dragon sadly slipped into his cave.

Puff The Magic Dragon – Peter, Paul, and Mary, 1963

The Portland Business Journal reports that MBank’s great joint venture has gone up in smoke.  [“Oregon’s MBank to abandon cannabis lending, let 70 clients go”] Gosh it wasn’t that long ago the bank big wigs first took the leap into the pot business – although I don’t know anything about cannabis lending; I thought all the growers, distributors, dealers, and various other murky figures needed was a safe place for their cash – besides the back yard, attic, crawl space, air vent, freezer, and other assorted disingenuously “secret” places. Continue reading “MBank’s Great Joint Venture Goes Up In Smoke!”

Crossing FingerAccording to a recent article in, titled “Ocwen posts open letter and apology to borrowers,” the widely reviled Ocwen, apparently (sob) guilt-ridden because it, once again, was caught doing what it does best –  taking advantage of the little guy. Continue reading “Ocwen’s Heartfelt Apology – Ummm, Right!”

Little Girl‘The former Federal Reserve chairman, speaking at a conference in Chicago yesterday, told moderator Mark Zandi of Moody’s Analytics Inc. — “just between the two of us” — that “I recently tried to refinance my mortgage and I was unsuccessful in doing so.” When the audience laughed, Bernanke said, “I’m not making that up.”  ~Oct. 3, 2014

In an October 3, 2014 post on, here, it was reported that former Fed Chair, Ben Bernanke, was turned down for a loan to refinance his home.  This is a guy that now pulls down $250,000 a speech.  What’s up? Continue reading ““I’m Sorry Mr. Bernanke, But You Don’t Qualify For A Loan””

Breaking NewsThis 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 Continue reading “Breaking News: Big Bank Spills All To Secret Congressional Committee!”