Bank Lawyer's Blog

Was It Something I Said?

Last Wednesday we called for Alphonso Jackson to resign, and just like clockwork, today he fell on his sword (actually, his dagger, but it still hurt). Some nitwits think that Senators Dodd and Murray had something to do with it, but we all know that a Bush appointee pays no attention to evil-doers, so that couldn't have influenced Alphonso.

Jackson himself claimed it was all about family values.

"There comes a time when one must attend more diligently to personal and family matters. Now is such a time for me," Jackson added.

We understand that his first "diligent attendance to family matters" will be to sell his children to Thai slave traders for a small annual honorarium and a share of next year's Bangkok "monster Thai stick" production.

Others were quick to jump on the "it's all about me" bandwagon. The latest issue of The Dallas Business Journal traces Jackson's downfall to its tireless investigative reporting.

Nearly two years after a Dallas Business Journal report sparked a federal investigation of U.S. Housing Secretary Alphonso Jackson, the embattled administrator has resigned. 

[...]

A former president and CEO of the Dallas Housing Authority, Jackson has fought off charges of cronyism and the politicization of HUD's contracting processes for the last two years. The controversy was sparked by a May 2006 report in the DBJ, which covered a speech Jackson gave in Dallas to a private group of minority real estate executives.

The secretary told the group he had canceled a contract after the contractor said he had a problem with President Bush: "Why should I reward someone who doesn't like the president, so they can use the funds to try to campaign against the president?" Jackson said. "Logic says they don't get the contract. That's the way I believe."

The secretary also told the audience "how government works. Once you get the contract," he said, "they just keep giving you tax dollars. ... The most amazing thing I've ever seen is the amount of contracts we give out every day. One contract can make you wealthy."

Jackson later apologized for the remarks about the contractor and said he had lied. Responding to a flurry of complaints, the HUD Inspector General launched an investigation.

Sure, all that was important, but not nearly as important as repeated bad-mouthing by the borderline loons who swim in the fetid waters of Bank Lawyer's Blog. We just hate it when the "Main Stream Media" tries to steal the thunder of the blogosphere, which, after all, is the new media. It's the spittle-spewing bloggers who own the future, not the dour, dumpy old hags like The Dallas Business Journal.

Naturally, neither political party made much hay out of Big Al's exit.

"The administration's response to the housing crisis should have been more rapid and more comprehensive," House Speaker Nancy Pelosi (D., Calif.) said in a statement released after Mr. Jackson's announcement. She said the new secretary should "aggressively address urgent housing issues."

Nancy would have said more about the matter, but she had to dive into a manhole to duck the Hellfire missile that mysteriously swept in from somewhere on the far side of the Potomac.

The Decider-in-Chief was predictably crestfallen that his pal Al took a powder.

President Bush said he accepted the resignation with regret and praised Mr. Jackson's work. Officials declined to comment on who might replace him.

Mr. Jackson, a Dallas native, was a top housing official in Dallas when Mr. Bush was Texas governor, and became HUD deputy secretary in 2001. He took the top job in 2004.

Bush then turned to an assistant and asked, "What's Rummy up to these days?"

Six Simple Rules

Banking Law Prof gives everyone a hit list of "takeaways" from the subprime mortgage mess:

    1. There’s blame enough to go around.
    2. Those who do not remember the past are condemned to repeat it.
    3. If it sounds too good to be true, it probably is.
    4. If you don’t understand it, don’t invest in it.
    5. What goes around comes around.
    6. It’s still good to be the little pig who built his house of brick.

I especially like the last one, and appreciate the irony of the fact that in this the Lone Star State, the brick houses have been built by folks who a sizable portion of the American public apparently desires to ship "back home" pronto, no matter what the effect of that forced exodus might be on an economy currently teetering on the brink. The ripple effects of the housing debacle continue to roll out, and as today's The Wall Street Journal noted, homebuilders are under the gun. Which, of course, means that their "anxious lenders" (as the Journal describes them) are also under the gun, as we observed a few moons ago. With all due respect to the Tom Tancredos and Lou Dobbs of American politics and media, what we don't need to do at the moment is to ship the homebuilders' labor force "off-site" for an extended  siesta in their "home country." Homebuilders may not be throwing houses up like bluebonnets anymore, but at least in this part of the world, they're still building and selling them. Let's remember lesson number 2 above and exercise not only a little compassion, but a little common sense. Before we learn lesson number 5 the hard way.

This message was NOT approved by John McCain, Barack Obama or Hillary Clinton.

HUD Punts DAP Denial

I know it's spring, but today I broke out the hockey skates, rang up The Devil, and went ice skating in Hell. I also agreed with the Editorial Board of The New York Times.

Alphonso Jackson, the Secretary of Housing and Urban Development, shocked an audience of business leaders two years ago when he told of denying a government contract solely because the head of the bidding company spoke ill of President Bush.

“Why should I reward someone who doesn’t like the president, so they can use funds to try to campaign against the president?’’ Mr. Jackson asked with bare-knuckled glee. After the ensuing controversy, he claimed his comments were merely “anecdotal,” and insisted he did not believe in such punishment.

Funny thing: now Mr. Jackson stands accused of just these sorts of shenanigans. Specifically, he is the subject of investigations by Congress into allegations that he rewarded developer friends and abused political enemies in doling out taxpayers’ funds.

And the calls have begun for his resignation.

The editorial runs through the recent allegations against Mr. Jackson, many of them mentioned in previous posts (just search this blog under the heading "HUD"). It ends with a scathing reference to last week's letter by Senator's Dodd and Murray to The Decider in Chief that called for Alphonso's head on a silver platter resignation.

A reporter called me last week and asked to interview me for comments on the recent federal district court decision out of Washington, D.C. that invalidated a regulation that HUD attempted to issue that would have put an end to the practice of homebuilders funneling downpayment assistance (DAP) to borrowers on FHA-insured loans through non-profit corporations. In my most recent post on the topic, written at the time that the same district court had issued a preliminary injunction against HUD's enforcement of the regulation, I expressed incredulity that HUD hadn't made a case  in support of its regulation that would survive a challenge under the Administrative Procedures Act. Obviously, I hadn't counted on the absolute arrogance, blazing incompetence, or both, of the powers that be at HUD.

Parsing the obviousness of the final opinion, it's absolutely astounding that HUD extracted from a GAO report, issued in 2005, that supported, with much data, the proposition that loans with DAP defaulted at much higher rates than loans without it, only some hearsay from unnamed Fannie Mae and Freddie Mac officials about the supposed effect of DAP on sales prices. It's even more astounding that the only "hard evidence" (after the court disregarded the "soft evidence") used by HUD to support the sole basis HUD stated in its proposed rule (i.e., that DAP causes higher sales prices and loan balances, which are bad for both borrowers and for HUD) was an internal HUD report that was cited in the final rule, but not in the proposed rule. The judge intimated in footnotes, but did not decide, that Alphonso Jackson prejudged the rule and wasn't going to let HUD seriously consider any evidence that supported a contrary opinion (based upon some fairly asinine public statements to that effect by Jackson). The judge also wryly commented upon the attempt of HUD's trial lawyers to build a case in support of the final rule by noting that the APA requires that the "case building" exercise be undertaken as part of the process of adopting the rule, not after the fact.

I humbly beg the pardon of the judge in this case. I just assumed from the evidence at hand that even Forrest Gump could have concocted a prima facie case for the rule and that the judge was misguided. My bad!

It takes a big man to admit he's wrong. It takes an even bigger man to sit there and cry like a little girl while other men laugh at him for being wrong. I am that bigger man.

There was also a decision by another federal district court judge in California, who not only prevented enforcement of the rule, but barred Alphonso from participating in the rule making process if and when HUD tries a "do-over." I haven't read that opinion, although I'm sure it's full of gems of equal worth. At this point, even Stevie Wonder could see that HUD under Jackson is staring to look like the gang that couldn't shoot straight.

As I noted in an update to my earlier post, when I was informed by one of HUD's opponents that HUD's failure was more one of not following the procedural requirements of the APA than it was the non-existence of factual support for the rule, this is one more reason why Alphonso has got to go.

P.S. DAP's still a scam and, if logic prevails and a rule is formulated by beings with opposable thumbs, it will eventually bite the dust.

The Barbie Bandits Get Benched

Crime may not pay, but it certainly hurts a lot less for criminals who are tall, blond, female, young and cute.

Recently, bank robbers in Dallas have been having "Maxwell's Silver Hammer" come down, on their heads.

Dallas bank robber Mario Flores Garfias Jr. has been sentenced to 12 years in prison, without parole, by U.S. District Judge Barbara M.G. Lynn. She also ordered Garfias to pay restitution of $11,283.

Garfias, 29, admitted robbing three banks and one credit union in Dallas during a two-week period last fall...

That's three years per bank, without parole. On the other hand, Mario will still be in his prime when he gets out (40 is the new 30, right?), assuming he serves the full term. There's always the chance that he'll find his Maker in prison and come out a changed man, ready to work for the good of his fellow citizens and to empty himself of all hate and violence so that he might live eternally. Then again, he might also come out with enough stellar contacts with other criminals to make up what might be an all-star crew of bank busters. What are the odds?

Mario's not alone, however cold that comfort might be to him. One Billy Wayne Ferris recently got an even heftier sentence to The Big House from a Dallas-based federal judge.

A Dallas man who admitted to robbing banks in Dallas and Arkansas last summer has been sentenced to nearly 16 years in federal prison.

Billy Wayne Farris, 44, was sentenced by U.S. District Judge Jane J. Boyle to 188 months in prison and ordered to pay $3,854 in restitution.

Billy Wayne did only two banks (at least, that's all he was convicted of robbing), but he got eight years per robbery, although a less onerous fine (as if he's EVER going to pay it). I guess if you're going down for bank robbery, you want "Babs," not Jane, as your judge. Billy Wayne will be middle aged (60 being the new 40) when he exists the slammer, although parole might be in the offing, so he could get out before he Mario and before he joins the AARP.

If only Mario and Billy Wayne had been...oh...young, female and hot. Ex-strippers, especially.

They were Internet darlings because of their daring and their looks.

Tall blondes, Heather Lyn Johnston, 20, and Ashley Nicole Miller, 19, were worth hundreds of clicks every time their media-given moniker Barbie Bandits made a headline or meta tag.

On YouTube alone, the bank surveillance video — which showed the women wearing designer sunglasses and stylish jeans as they giggled their way through the theft of nearly $11,000 from a bank in Acworth —counted for nearly 38,000 views in a little more than one year.

The former Buford Highway strippers were the among the constellation of bright lights in the Internet world, spawning blog sites and comic re-edits of their escapade.

The information became tragically comic as news emerged that the pair, who grew up in Gwinnett County, had to call their conspirators for directions to the west Cobb bank, then used their 25 percent share of the loot to get their hair done and shop for designer clothes.

Johnston also made the morning talk show rounds and showed up on the tabloid news programs.

On Monday, both were scared young women dressed conservatively and sitting in a cold Cobb County courtroom waiting to learn whether the theft that brought them international media coverage would send them to jail.

"I'm ready for three years; I'm not ready for 10 years," Johnston whispered to her lawyer before Superior Court Judge Mary E. Staley took the bench.

Bank teller Benny Allen III, who told the girls what to write in the demand note and handed them the money, was the first to stand before Staley. The 23-year-old was on five years' probation for a drug bust in Bartow County.

He had pleaded guilty to the bank theft, but prosecutor Bonnie Derrer said he had not upheld his agreement to testify truthfully against Michael Chastang, who was convicted of hatching the scheme and is to be sentenced today.

Staley gave Allen five years in jail and five on probation.

Miller, wearing a white blouse and black skirt and with a fresh French manicure, glanced nervously at her mother. She was next.

Her lawyer asked Staley for 12 months' probation and first-offender status, so she could have a chance to have her record expunged if she stayed out of trouble.

Miller, who once called the heist "the worst decision I ever made,"  told the judge: "I realize what I did was irresponsible."

Staley said she recognized Miller had come around to telling the truth, but initially had not been as truthful and willing to help as Johnston.

"I can see my way to giving you a lighter sentence than the state has recommended," said Staley, who ordered Miller to jail for two years and placed her on probation for eight.

Staley allowed Miller's mother to say goodbye, then the young woman was led off by sheriff's deputies.

[...]

Under house-arrest at her Grayson home since her March 31 release from jail on bond, Johnston was the first to provide police with details. She has testified three times for the prosecution.

"I don't see much difference between the four of y'all, in terms of criminality," Staley said. But "I think it was a profound statement that you came in here in August, and you took responsibility."

Staley ordered Johnston to serve 10 years' probation, perform community service, repay the bank and pay a $2,000 fine.

Thus, the tall, blond, bad hot stripper who was slow to rat out the others got two years and the tall, blond, less bad hot stripper who turned on her cohorts more quickly than she can pick a twenty off the floor without using her hands gets to work in a homeless shelter and pay a small fine (how many nights wrapped around a pole dangling upside down will it take to gin up the two grand fine?). Neither of them got an exceedingly harsh sentence. Then again, neither was named Mario or Billy Wayne.

The wheels of justice grind exceedingly slowly, but they grind exceedingly serendipitously. "Don't do the crime, if you can't do the time." Or, if you can't be the first to the confessional. Or, if you're not a tall, blond, young, hot "ex-stripper."

Separating Some Of The Chaff From The Rest Of The Chaff

Colorado's new mortgage broker licensing law has already kept some questionable characters out of a profession where a good man (or woman) is sometimes hard to find. According to a recent story in The Rocky Mountain News, Colorado's Director of Real Estate Erin Toll (whose battles with title insurers as Insurance Commissioner were previously profiled here) has, like Melanie Griffith's character in the movie "Working Girl," a bod for sin but a head for business (or "bidness" as we like to say in The Lone Star State).

One person pleaded guilty to criminally negligent homicide.

Another committed lewd and lascivious acts in the presence of a child. Another is a burglar and thief and is being sued by the office of the attorney general for alleged violations of the Colorado Consumer Protection Act.

What they have in common was a desire to be licensed as mortgage brokers in Colorado.

These criminals were among 73 people who have had their request denied or have been disciplined by the Colorado Division of Real Estate since Gov. Bill Ritter signed a law last year licensing brokers for the first time.

The law went into effect Jan. 1.

Erin Toll, the director of the real estate division, believes the actions will help reduce the record foreclosures in the state and save consumers millions of dollars.

"What this means is that we are doing our job of protecting consumers," Toll said.

"We're left to imagine where we would be in terms of foreclosures if we didn't have so many bad actors in the mortgage business in the first place," Toll said.

"Now that we're getting bad actors off the street, it is bound to mean that foreclosures will not grow as fast as they were," she said.

[...]

"I do think it's fair to say we have spared millions of dollars in potential fraud," Toll said.

Just think how many more millions you would have saved if you'd licensed legislators!

However severe the crackdown on scofflaws might seem, it's not as if you have to be fresh out of the seminary to get a broker's license in Colorful Colorado.

Still, the vast majority of people who have applied for licenses have received them.

As of early March, there were 9,146 licensed brokers in the state.

"We have about another 680 in the pipeline, so we are almost at 10,000," Toll said.

At the rate they're grinding out mortgage brokers, they'll soon be pressing attorneys as the fastest growing license to steal.

The benefits of licensing are difficult to quantify, but some observers are giving it a shot anyway.

Zachary Urban, who runs the Colorado Foreclosure Hotline (1-877-601-HOPE) and who also sits on the real estate division's board, said the biggest benefit of the licensing can't be measured.

"What I think licensing is doing is making a much larger number of folks make the conscious effort not to even begin the process" because they know they won't meet minimum standards.

Not all of those who have been denied a license are merely going to fade into the sunset, return to robbing banks, or run for Congress. Some are engaging in a favorite American pastime: civil litigation.

Senate Bill 203, which created the Mortgage Broker Licensing Act, among other things, prohibits brokers from engaging in 24 specific activities, including misrepresentation, fraud, conflicts of interest and obligations to consumers.

It does not prohibit a convicted murderer, for example, from becoming a mortgage broker. Several of the convicted felons are challenging their denial of a license by Toll, but none of the cases has been resolved yet.

"Murder may not fit exactly as fraud, but under common law, I think if we asked the (murder) victim's family, we might find that the victim may have been lured or deceived before they were dragged into the bushes and killed," Toll said.

"It's sort of a gray area, and we've decided to err on the side of the consumer. After all, mortgage brokers often go into people's homes."

If Osama bin-Laden eventually gets flushed out of Pakistan, it's nice to know that there will be a plaintiff's attorney willing to take up his cause and take on fascists like Erin Toll who are blatantly exercising their "homicide-o-phobia" in an attempt to deny murderers the right to earn an honest buck as a Colorado mortgage broker. After all, even a Holy Warrior has to make a living.

Regulatory Flexibility

Rooting around, searching for something totally unrelated, I recently unearthed a recent Office of Thrift Supervision Approval of Rebuttal of Control granted to Legg Mason Inc. and certain related entities in January.

The rebuttal was filed in connection with the proposed acquisition by Legg Mason and various of its subsidiaries to acquire more than ten percent of Countrywide Financial Corporation's voting stock. Obviously, Legg Mason doesn't want the group of related companies or any of its members to be classified as a savings and loan holding company, for a number of very sound reasons. Legg Mason had been granted approval by the OTS in 2003 to acquire more than ten percent but less than twenty-five percent of the stock of Countrywide's voting stock, but was required by the OTS to obtain prior OTS approval for any "subgroup" to acquire more than ten percent of any class of voting stock of a savings association in the future. The Legg Mason companies now proposing to acquire the additional voting stock of Countrywide are such a "subgroup."

In support of the subgroup's Rebuttal of Control, it filed a Rebuttal of Control Agreement. The form of those agreements is set forth in 12 CFR 574.100. To rebut a presumption of control, the acquirors are supposed to submit an agreement that "materially complies" with the form set forth in 12 CFR 574.100, although the OTS has the authority to "otherwise agree in writing." The Legg Mason "subgroup" requested a number of changes from the standard form, and the OTS agreed to them.

A number of the changes were made to conform to the OTS' 2003 ruling, and others made to ensure that the acquirors did not control Countrywide. However, the  OTS also  approved some additional changes to engage in certain advisory services with Countrywide and its affiliates, something that the standard agreement prohibits. In fact, the standard agreement prohibits the acquirors from engaging in any intercompany transactions with the thrift or holding company. The OTS doesn't believe that in this case, the ban on intercompany transactions is warranted because the nature of the services to be provided by the subgroup to Countrywide, and by Countrywide to the subgroup, would not "enable the Acquirors  to influence or control " Countrywide or its affiliates. Those services are (1) banking and financial services to be provided by Countrywide and (2) investment advisory services to be provided by the Legg Mason "subgroup."  The services are to be provided on market rates and terms.

The OTS merely states that with respect to Countrywide providing banking and financial services services to Legg Mason, the OTS "does not believe" that such services would permit Legg Mason to control or influence Countrywide. That's the end of the discussion. The advisory services to be provided by the Legg Mason entities to Countrywide merits a paragraph, the crux of which is that since there's plenty of market competition for such advisory services, the danger of influence or control is not present.

The OTS may or may not be correct in the conclusions it reached. Unfortunately, without more discussion of its analysis, it's impossible to challenge its reasoning. In other words, the OTS just breezed through the issues and reached a conclusion favorable to Legg Mason's subgroup being able to acquire more voting stock of Countrywide.

Not that a bank regulator would have done whatever it took to let Legg Mason pump badly needed capital into troubled Countrywide. The fact that Legg Mason upped its stake in Countrywide to 15% a couple of weeks after the OTS gave its approval and that Countrywide desperately needed the "scratch" was likely coincidental. Not that the OTS might have looked the other way when, in September 2007, the "subgroup" publicly announced that they had increased their voting stock from 8.76% to 10.04%, which should have required a prior approval of the Rebuttal of Control at that time, not four months later. I'm also sure that the OTS' decision being released one week to the day following the announcement by Bank of America that it was acquiring Countrywide is pure serendipity.

A CEO of a federal thrift recounted to me how he once listened to an OTS minion, looking especially arrogant with half-closed eyelids and a barely-concealed Elvis-like sneer, blather about the OTS' "unwritten rule" concerning savings and loan holding company capital requirements (find those "unwritten" rules in the regulations, I dare you), and about how the savings and loan executive should have known about these "unwritten rules" that the executive unwittingly "violated." With 30+ years of such experiences under my belt, I tend to take a jaundiced view of these matters. When a regulator wants to serve his agency's self-interest, the "What, Me Worry?" style of analysis can quickly replace the "tortures-of-the-damned-drowning-in-a-river-of-red-tape-and-nitpickers" style in which many financial thrift employees find themselves floundering when they want an interpretation on an issue on which the regulators have no skin in the game.

Perhaps Legg Mason hasn't been directly trying to influence Countrywide. On the other hand, the public statements that Legg Mason fund manager Bill Miller has made criticizing Bank of America's offer price and demanding that Countrywide drop its poisoned pills, might lead a skeptic to think otherwise. It won't make any difference to the OTS. The need to keep Countrywide afloat pending the consummation its acquisition by Bank of America  will keep its views of regulatory compliance "elastic."

Moral Hazards

A colleague and friend wrote to me recently about what I thought of this article in last Sunday's The New York Times by Gretchen Morgenson, that starts off with a typical focus for The Grey Lady: the venality of big banks.

What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Morgenson's ire is focused mainly on the Fed-engineered "rescue" of Bear Stearns by JPMorgan Chase. She points to all the greed and grime that Bear Stearns has left in its rough-and-tumble wake as it gorged itself on the subprime feast. She labels it "this decade's version of Drexel Burnham" and advocates forcefully that, like Drexel, it should be "left to die."

She makes a telling point when she quotes William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”

"Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?" asked [Mr. Fleckenstein]. "This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation."

Morgenson agrees with Fleckenstein.

And so we are. After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.

Inevitably, she brings the "moral hazard" argument into the mix, through another quote, this one from Graham Fisher & Company analyst Joe Rosser.

"The Fed has now crossed the line in a very clear way on ‘moral hazard,’ because they have opened the door to the view that they are required to save almost any institution through non-recourse loans — except the government doesn’t have the money and it destroys the U.S.’s reputation as the broadest, deepest, most transparent and properly regulated capital market in the world."

Morgenson ruefully expects "the taxpayer," the poor, old, beaten-down taxpayer, to ultimately pick up the tab if the failures continue. Being one of those taxpayers, I suppose I, too, ought to share her sense of outrage at the "bailout" of Bear Stearns. However, I think the taxpayer shouldn't be looked upon as a blameless "victim" of rampant Wall Street greed.

Many of us (including yours falsely) in the fat and happy land of milk and honey, have been busily filling our pie holes and demanding a larger share of an economic pie that we expect will grow larger and larger until the sun burns out (or we croak, whichever comes first), and are complicit in fostering attitudes that institutions like Bear Stearns merely reflect. After all, Bear Stearns is nothing more or less than the collection of human beings who own and run it. It's not as if the legal fiction that is "Bear Stearns" could "strike a pose" or "have an attitude."

I think the crux of the problem with many aspects of American life is that many of us want, with a libertarian ferocity, absolute freedom of economic action and, simultaneously, an absolute freedom from suffering any adverse economic consequences as the result of those actions. Would Wall Street have idly stood by if Congress, state legislators, and/or federal or state regulators "stifled" their ability to create the subprime mess ("You're thwarting innovation and depriving the poor of access to credit and the American dream of home ownership.")? No, they would not, and they would have been supported by consumer advocates and many of the political and regulatory hacks who now are all over the "innovators" like Lindsay Lohan on a line of coke. As long as everybody was making money, home values were rising, and Americans were using their homes as self-replenishing piggy banks that would always be full, so that they could live the good life, here and now, there were "no worries, mate." If anyone in the government had moved to turn off that gushing spigot prematurely, they would have been crucified.

As the inevitable excesses unwind, does anyone really expect that the majority of the American public, even those who most heartily wring their hands about "moral hazards," would be willing to suffer the economic dislocation that would likely occur if the federal government didn't intervene (especially in a presidential election year) to cushion the blows so that the hot-house flowers that so many of us have become won't wilt under the severe recession that might very well ensue? It's great to teach the "big boys" lessons about "moral hazards" as long as I can still afford my Venti Caramel Macchiato and raspberry scone. The federal government is doing precisely what the average Jack and Jill wants them to do: "Make my life painless."

If the Bear Stearns "bailout" (and ask the employee-shareholders how $2.00-a-share sounds as a retirement plan) is symptomatic of a "moral hazard," it's a hazard that menaces more streets than "Wall." Try "Main."

Bad Legislation Just Keeps On Coming

Although a final condemnation will have to await the drafting of a bill that's in process in Colorado, a preliminary press report justifies a hearty shout of "WTF"?

With foreclosure rates a problem in Colorado and throughout the country, Rep. Jerry Frangas, D-Denver, is drafting a bill that is intended to preserve property values in communities affected by residential foreclosures.

According to a draft of the bill obtained Thursday, the proposed legislation requires electric, gas and water utility companies to disclose when it appears a residence has been unoccupied for 60 days.

The proposed legislation also allows local authorities and mortgage companies to close or block off windows in abandoned property -- including removing weeds, brush and trash from the properties.

Mortgage companies that fail to maintain properties after 30 days' notice could be fined or cited for abatement efforts.

The standard deed of trust forms in use in Colorado should already give a lender the right to enter upon the property and to prevent or abate "waste." However, if this bill proposes that the state will impose a duty upon lenders to clean up properties that secure their loans prior to the time that they complete foreclosure proceedings and take title to the property, and subject them to fines if they do not, then I expect that lenders will squawk loudly.

Perhaps we're jumping the gun. It wouldn't be the first time. We'll see what this piece of sausage legislation looks like once it's introduced.

While we're on the subject of bad legislation, let's not leave out a piece of federal legislation introduced last week by Congressmen Mike Castle and Paul Kanjorski, the Emergency Mortgage Loan Modification Act of 2008, which was the subject of an article in Housing Wire.That bill would shield servicers from legal liability arising out of their decision to engage in "bulk modifications" of loans in a securitized pool, if the loans are in payment default or payment default is "reasonably forseeable." To sail into the "safe harbor" provided by the bill, the loan servicer must "reasonably believe that the net present value to be realized on the loan, as determined under the applicable contract, will be maximized by entering into the workout plan."

Although in his press release Rep. Kanjorski opines that the bill does not violate private contracts, that opinion is debatable. Paul Jackson at Housing Wire puts the problem succinctly.

Part of the problem, as HW covered earlier, may be that the highest-rated securities in most subprime RMBS deals have yet to suffer a wave of downgrades; the result, sources say, is that investors in different classes are at odds with each other over what is in their best interests.

As we mentioned only yesterday, when Congress messes with private contractual rights, trial lawyers get orgasmic. A commenter at Housing Wire wryly predicted the ultimate effect of such legislation.

The politicians really do need to buy a clue. Do they really think the big boys who hold the AAA or other highly rated paper are slugs, and that they’ll just sit on their hands and take the losses?

This law really should be named the Legal Profession Full Employment Act of 2008. Because I can guarantee you that government interference in these contractual arrangements will result in litigation - with a very strong claim that this proposed government action is an illegal taking. The aggrieved parties here aren’t you average folks - these are the big boys, with the big bucks, and who will hire the big guns.

If this legislation passes, count on it being in litigation for at least 5 years - and with an injunction prohibiting its enforcement as well. Meaning, no servicer will rely on the law, and nothing will change - other than more lawyers making more money litigating
over it.

Don't count on politicians "buying a clue." Of course, a special interest group can always buy a politician a clue (and his or her vote), but professional politicians rarely come out-of-pocket for clues.

Wamu Wins Big

Buried in the back pages of the trade press last Friday, while the meltdown of Bear Stearns and the usual Congressional posturing in advance of its "Spring Break" occupied the attention of reporters inside and outside the banking biz, was the announcement of yet another in a long line of Winstar decisions. This one was in favor of Washington Mutual and holders of "litigation tacking warrants" (LTWs) issued by the former Dime Bancorp, which Wamu acquired. Dime had acquired the former Anchor Savings in a transaction that  involved "supervisory goodwill." As regular readers know, I've been involved in past litigation against the bank regulators (and later, against the U.S. Government) arising out of the breach by the government of assistance agreements entered into with acquirers of insolvent thrifts in the 1980s.

Dime was granted "supervisory forbearance" that allowed it to include in regulatory capital, as "supervisory goodwill," the negative net worth of Anchor Savings when Dime acquired Anchor. When FIRREA was enacted in August 1989, supervisory goodwill was no longer allowed to be counted in capital, and institutions like Dime sued the government for damages for breach of contract. Dime issued LTWs to shareholders to allow them to share in any recovery obtained as a result of the litigation (the LTWs are convertible into Dime stock). Wamu assumed the litigation and the LTWs when it purchased Dime (the LTWs are now convertible into Wamu stock).

In Wamu's case, the thrift won a whopping $382 million from the Court of Federal Claims. That's a mere drop in the bucket for a government that thinks that honoring its contractual obligations is an option, not a duty. For Wamu, it's a nice dollop of cash that (assuming that the award is upheld on appeal) will come in handy.

When we commented on a similar case in October 2005, a number of "experts" opined that the decision might be the "tipping point" that would result in a government decision to settle these cases. We demurred. I think that we were correct. We quoted attorney Charles Cooper at the time as being "spot-on" when he observed:

I would not anticipate that it would have any impact on the government's own now 15-year litigation strategy of resisting every case and every issue within every case no matter how many times they have litigated and lost every issue. If anything it will probably only cause the government lawyers on these cases to dig in harder.   

Make that a "now 18-year litigation strategy."

People express concern, even outrage, that the government is creating a "moral hazard" by "bailing out" outfits like Bear Stearns and, perhaps, other financial institutions, that created the current mortgage and wider credit mess in which we find ourselves. I have to laugh at the prospect that anyone would think that the concept of "morality" even enters into the heads of government bureaucrats. The U.S. government often acts like an organized criminal enterprise, not only internationally, but domestically, as well. You don't have to be a crazed wing nut in the lunatic fringe of the blogosphere to hold that opinion. Plenty of conservative businessmen have been on the receiving end of actions by the government that are simply reprehensible. The old bromide that "a deal's a deal" is a joke to the U.S. government.

Watching the HBO series on John Adams last night brought home to me again how wise were the flawed human beings who founded this system of checks and balances. They understood well the profound corrupting nature of political power, and the absolute necessity for an independent, strong judiciary that could ensure that the hacks who populate the halls of Congress and the federal bureaucracy have at least one barrier to absolute tyranny. Of course, it also helps if a litigant has plenty of cash to afford expensive litigators. The government will throw the resources of the American taxpayer at the plaintiff, and we all know what an inexhaustible well the taxpayer has proved to be.

What's another $382 million of taxpayer funds? As noted in the previous post, that's the exact amount that Citigroup won on a similar Winstar claim. $382 million here, $382 million there, another $96.8 million elsewhere, and pretty soon, it starts adding up to real money.

All Clear

On the road again, for the rest of this week. Readers are safe from further bloviations until next Monday.

In the meantime, watch Jim Cramer get (as today's NewsBusters phrased it) verklempt over Eliot Spitzer on this morning's Today Show.  As the first commenter to the NewsBuster's post put it, "I was so shocked I laughed and then I immediately felt bad for laughing." That's the same way I felt all through the movie "Bad Santa."