In a recent 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

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

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!”


“SunTrust had no effective document management system in place to process and retain the borrowers’ applications and supporting documentation. When the HAMP applications poured in, SunTrust put them in stacks on the floor without organization. At one point, the stacks of opened and unprocessed HAMP applications were so voluminous that their weight buckled the floor.”  [Page 12, Restitution and Remediation Agreement between Suntrust and the U.S. Department of Justice, July 3, 2104.] Continue reading “SunTrustMortgage – In Trouble With The Feds!”

congresscloudsFormer Congressman Barney Frank testified before the House of Representatives Committee on Financial Services on Wednesday, arguing that the Dodd-Frank Wall Street Reform and Consumer Protection Act and the voluminous set of regulations that followed shortly thereafter was a positive for the economy and safeguarded the American public from ever having to face an economic down turn the likes of the great recession ever again. Frank, a former chairman of the committee he now sat in front of, was one of five witnesses called before the committee to assess the impact of the law from multiple angles. He was the lone witness to testify in favor of the law.  MReoprt, July 23, 2014

It’s been four years since Dodd-Frank was signed into law.  So how’s it going?  Has Wall Street been reformed? Have there been any innovative law protecting consumers from themselves? Continue reading “Q-Rant! Barney Defends Frankendodd!”

BooksFor those folks who remember the implosion of Enron in October 2001, they may also remember the collapse of its international accounting firm Arthur Anderson. The short version of the story is that when Enron’s financial scandal broke, Arthur Anderson’s management sent a missive to staff gently reminding them of the company’s “document retention” policies. This was interpreted by most as a not-so-subtle instruction to start shredding Enron paperwork, which they dutifully did. Continue reading “Swiss Miss: How Credit Suisse’s Conviction Avoided Arthur Anderson’s Fate”

RowboatMaiden Voyage. This is the very first of what hopefully will be a series of periodic newsletters. I am hedging when I say “periodic” – but at least every three months. [If you’ve not signed up yet, go to link here!]

For readers of my website [here], they know that I alternate between objectivity and subjectivity, the latter occasionally morphing into a “rant.” Why?  Because I can, that’s why!  I’ve spent my legal career trying to grow a practice; going along to get along. I’ve been out on my own for four years, have a satisfying solo real estate practice, and so have fewer toes to step on.  In other words, I don’t worry so much about expressing my personal opinion today. Besides, who’s gonna fire me?! Continue reading “Q-Law Newsletter’s Maiden Voyage!”

Hands RaisedIn a recent Wall Street Journal article entitled “Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business” by Nick Timiraos and Annamaria Andriotis, we continue to hear that banks are beating the bushes for borrowers; and they are relaxing some of the tough lending requirements that have stymied may would-be homebuyers over the past few years.  The reason? The refi boom which was triggered by ever lower interest rates has about run its course.  In the search for other profit centers, many banks are trying to fill the void with loan origination business.  Continue reading “Easing Bank Credit Standards And Lending Terms? It’s About Time!”

BullyAs readers of this site know, I have no love lost for the Dodd-Frank Act.  To review my prior rants, go to posts here and here. The gist of my objection to the law is that it casts too wide a net.  It was created by politicians, bureaucrats, and regulators that had no real idea how it would be implemented. This is because they neither understood nor cared about implementation. To them, that issue would be worked out during the administrative process, which they regarded as mere details for underlings. But as we know, details are where the devil resides…. Continue reading “FrankenDodd’s Collateral Damage: Banks Too Small To Succeed”

Take the Bonus and RunHas anyone wondered why it is that politicians are always diving for cover during a crisis, but the first to hold hearings and declare an emergency afterwards?  Virtually every major law, from Glass-Steagall after the banks collapsed and the  Great Depression, to Dodd-Frank after the financial crisis of 2008/9 and the Great Recession, it seems the pols are always rushing to the fire after it’s been put out. Only then do they enact laws to install fire prevention systems. Yet in reality, as we have all seen in the build-up to the recent collapse of the credit and housing markets, there were plenty of warning signs.  Why wasn’t anything done then?  The answer is pretty simple – sad, but simple.  Like flimsy reeds in a stagnant pond, politicians in D.C. only move with the political winds. Continue reading “Politics: The (Real) Oldest Profession”