Le Show; 2010-12-05

From deep inside your radio, this is Lysho for the last few months I've been reading and learning from a blog on matters economic called naked capitalism and sharing some of the tidbits I've gleaned there from with you on this program and I thought today it would be educational for both me and you to have the author of this blog on the program to guide us through the thicket of the foreclosure mess, a thicket which seems to be thickening as we as we speak. So I'm welcoming to the Lysho Don, you've, you've smith author not only of the blog naked capitalism but of the book e-conned e-c-o-n-n-e-d, you've welcomed. Harry, thanks so much my pleasure to be here. And I have to say first of all, it came as a surprise a couple months into reading your blog when I discovered through a video interview of you that though you spelled the name YVES, you are in fact a female. That's correct. I actually started out with that nom-de-blog precisely because every study ever done shows that if you take the same writing sample and attributed to a male name versus a female name, it will be better perceived.

And with the internet, you at least initially have the advantage of anonymity. There's this joke that, you know, somebody who's writing on the internet could be a 14 year old or a dog. Obviously, I'm, hopefully, neither. Hopefully, neither. I'm, hopefully, neither. Yeah. But, you know, you can sort of muff things for a while if you want to. And there is a proud tradition of people writing under things that are more obvious pen names than the one I use. Well, I, I'm, I'm almost embarrassed to say this, but I have to say it. You write like a man. Well, thank you. I don't know if I should be thanked for that, but there it is. Anyway, so in real life, aside from blogging, what is it that you do that brings you into this world? Well, I'm a bit of a hybrid. I've actually been involved in the financial services industry for, I hate to say, 30 years. I started out on Wall Street, a golden sacs, in corporate finance, which is the part of the business that's involved in helping large companies raise money. Then I went to McKinsey and worked in their financial institutions group almost entirely again for big global financial firms.

Then was recruited by one of my clients, Sumitomo Bank, to start up their US Mergers and acquisitions department in the days when Japan looked like it was taking over the world and that looked like an exciting thing to do. That could make sense in 1989 for a whole bunch of reasons. And I've had my own consulting practice since then. And I've, you know, again, continued to work a lot with major financial institutions, as well as hedge funds and substantial private individuals. The financial institutions work has actually got me into some trading floor work. So I've just wound up by where my assignments have taken me of getting my nose under the hood of a lot of different sort of sub businesses in the financial services industry. And just to take off Sarah Palin, you went to Harvard and Harvard Business School, right? That's correct. Were you at Harvard Business School at the same time as George W. Bush? I know. Okay. I know some people who know him from back then who claim that he was apparently much more intelligent than. Okay. Well, we'll leave that for another time.

So you've been writing a lot in your blog and linking to other sources on the issue of the foreclosure situation. And anybody who's following this in the national media would think that from what the banks have been saying to us about it, it's basically a matter of sloppy paperwork. You're writing and the links that you point us to suggests something rather different. So what is the state of this situation right now and what does the legal case camp versus countrywide tell us about it? You're correct in implying that the banks are trying to minimize this as an issue. The problem starts from the fact that mortgages are now sold to get them in the hands of investors. You know, a lot of people think of the old relationship where you'd go to the bank, you'd get the mortgage, the bank would keep the mortgage. That really isn't the way things work anymore for almost all borrowers.

You know, you may still go to the bank to get your house loan, but now most almost all loans are sold to investors. And the way that's done is they're bundled together and they ultimately have to get into a little legal lock box called a trust. It's like a little separate company. It's a very passive company. Once the mortgages go in there, it's really supposed to be the same set of mortgages. They really aren't supposed to trade them in and out or substitute them. And the contracts that create these things were very specific in terms of what the different people involved in setting up these deals had to do to get the little mortgages into the little lock box. Now, what appears to have happened on a really widespread basis, in that case you mentioned Kempferstice Countrywide, gives a critical bit of proof of it, is that for some reason, you know, and it's really hard to tell because the banks are very closed now. But you see the evidence of it coming up in foreclosure cases. We've seen a lot of evidence on the ground coming up with people fighting foreclosures. But there's a lot of evidence on the ground that has suggested that somewhere between say 2002 and 2005, the banks quit of doing a lot of the things that their very own agreements said they had to do to get the mortgages properly into the legal lock box called a trust.

And the consequences are really serious because the agreements were also set up in such a way to make it virtually impossible to go fix it after the fact. Now, what this case you mentioned Kempferstice Countrywide, this was just one borrower fighting Countrywide. And in some of the court testimony, they got an executive from Countrywide, which is now owned by Bank of America, but Countrywide was the biggest subprime originator. And executive from Countrywide, who'd been there 10 years, saying basically it was our practice not to transfer the mortgage into the trust for us to retain it. And people have suspected this is true, but actually have somebody say it is basically confirmation of the worst case scenario anybody had imagined. And Bank of America soon in that case rushed to say that's not our policy and that person is working in a whole other part of the business and doesn't know what she's talking about a few years.

Exactly, and that's so the doggate my homework, it isn't even funny. I mean, they served up this witness as Bank of America chose this witness to represent them in this case. Their own attorney made the same admission, a lot of lawyers who are objective, you know, don't have a dog in this fight, have looked at it and said, this is just baloney, she's been there 10 years, she obviously has a significant job in this area, she would know what the practices are in this area. And separately, I've heard the same thing independently from other people that for example, another consumer lawyer was trying to track down where one of the mortgages was. And there are two legal pieces to these mortgages, legally the part that has to get into the lock boxes, what they call the note, it's the actual borrower IOU that the borrower signs, that they had somehow gotten to countrywide and literally a countrywide employee walk down the corridor, pull the note out of the file, which is not where it's supposed to be if you had followed the contracts and said, matter of fact, oh yeah, we kept them all here, they're all here. So, you know, I have separately heard, you know, confirmation of this before the camp thing came out, but it's one thing to have, you know, kind of a mole, say this who really might not have the whole picture versus somebody who's seasoned and been with countrywide a very long time and was chosen to be the banks representative in a legal case on this matter.

Now, as I read what you're writing, these mortgages don't just go from the originating institution into the trust, they a lot of them travel a very circuitous journey through a number of different sets of corporate hands, or at least in names of corporate hands, if hands can have names. And that each time the mortgages passed from one set of hands to another, it would in ordinary practice go through the county recorder's office in the county where the house, the mortgage is on is located and there'd be a fee, a recordation fee attached. And by doing what they've done, they've saved themselves some amount of money. There's a court case in Massachusetts, I think, where the county recorder says, hey, you guys didn't run your your transfers through this office and you owe us $500,000, which doesn't sound like a lot times all the numbers of counties in the United States still is like Trump changed the bank. So one wonders that they did it to save that. But on the other side of the picture, if I'm not mistaken, one reason that the lock boxes you call it or the trust has these specific restrictions on when the mortgages can be in there and you can't be post dating them and getting them in late is is for the tax implications of the trust.

That's correct. This is a whole multi layered issue when they and that's why it's a little bit hard to peel all the layers of the problem back. You're correct with their whole bunch of different motivations for why they skip these steps. But basically, yes, the overview is correct that the it was always a provision in these contracts that it would not go directly from say the country wide to say the trust, but they would always go through intermediary parties. Because they wanted to establish something called I hate to say it bankruptcy remoteness. They wanted once the mortgages got into the lock box that if country wide got in trouble that people the country wide owed money to or the FDIC couldn't say, hey, you guys sold it to that trust and when you owed us money, you shouldn't have done this. We're going to go to the trust and grab it back. The investors did not want to be exposed to that. And so the way to make sure they that no one could go to the trust and grab the mortgage back from the investors was to have it go through several intermediary parties and each each time it went through it had to be something called a true sale.

And there are certain legal requirements for that. But basically, as all the agreements say that it had to go through these parties and the note, which is it's like a check, you literally had to be endorsed by each party. So if it went from A to B, you'd have to show that A signed it over. And then you'd have to show that B picked it up and that B signed it over. And then if it went to a C, that C signed it over. And then, and then it finally went to D, the normal minimum chain was ABCD. So you normally had at least two parties in the middle. That was hassle. And you're right that the recording fees were a motivation. The banks used an entity which was set up in the late 90s called, called MERS to try to skip those recording fees. That's part of this question. That they were supposed to go through this conveyance chain that they did it to skip recording fees. They did it to save hassle. And they basically appear as a whole industry to have just decided they were going to change their procedures to save money and hassle and never bothered changing their legal contracts.

I mean, that's the crazy part. So they had this huge gap between what they committed to everybody to do and what they didn't do. And the tax issue, you're correct, is one of the reasons, the other reason this is difficult to fix. Because from a tax perspective, the reason they made everything so rigid was that the little legal lock box was supposed to be passive. And the tax laws required that the mortgages had to get in there by a certain point in time that basically subject to incredibly limited restrictions. It either had to be in there by the time the deal was sold to investors or at the very worst across all these deals 90 days after. And the window, the subprime market died in mid 2007, three months past when that market stopped is a long past. Let's take that detour that you offered for a moment, MERS, which as I've been reading about it in your blog as a fascinating little sub world. What are the initial stand for?

Mortgage electronic registration system, and it's a database of these transactions. More or less, I mean, it actually serves to functions. It's one of the things it does is to track mortgage servicing rights. So if you're, you know, the people who are MERS members, only MERS members have access to it, which basically means servicers who are the guys who handle the payments every month. You know, they're the ones who take the money from the borrowers. And when they get the money, they distribute, they redistribute it to the, they handle all the mechanics of distributing to investors. And they also handle the foreclosure procedure. So they, they have a lot of administrative duties. So services, pardon me, just a minute. Services are the function that the bank used to have when it held on to the mortgage. That's correct. And typically some of them are independent. A lot of them are departments within bank, which gets a bit confusing because you've got, you know, for example, you've got a bank like Wells Fargo wearing its hat as Wells Fargo servicing, but it doesn't own the loan, the loan is owned by a bunch of investors. You know, so you do have these, you do have people, you do have people wearing sort of what, you know, who am I today relative to all the different parties.

So one role is they keep track of, you know, if you punch in a particular loan number into MERS and the MERS members are typically the servicers and the foreclosure mills. You and I can't go to MERS and become a MERS member. So they keep track of who's servicing the loan. They also supposedly keep track of who actually owns the loan. The problem with the, they supposedly keep track is that compliance by all of these little servicers is voluntary. And there are no penalties if they are slow to input the data. So, you know, one thing that everybody suspects, but again, can't prove is that, again, when the note was supposed to move through all these intermediary parties, even if it was done, that remember there was a period when it looks like this was done correctly, it doesn't even mean the transfers were properly recorded in MERS. And there are cases, of course, we're seeing these increasing number of cases coming to light where the wrong party shows up trying to foreclose or sometimes multiple parties show up to foreclose. And again, if MERS had any integrity, that should be impossible.

So again, we're seeing evidence on the ground that the theory of what a great system MERS is versus the practice of how it works is not so hot. Those who say ordinary citizens don't like the fact that in the old world, these would go down to be able to go down to their courthouse and see who actually held the mortgage. And now the whole thing has disappeared into the battles of MERS and the public can't find out what the heck is going on here. How many employees does MERS have? 47. I think it may be up to 48. So they've outsourced all the database, I believe, to electronic data systems. So it's really almost a virtual company. And they have this very bizarre corporate structure, which has been described as on orthodox to the point of being virtually fraudulent, where the MERS members will temporarily put on a MERS had. They say, oh, even though I worked full time for, again, say, Wells Fargo, I'm going to temporarily be a MERS signing officer and do all these things in the name of MERS, even though MERS never paid me a nickel.

I mean, it's just that there's this whole crazy set of arrangements that they've come up with, which now that people have looked at it, they're beginning to question the legitimacy of a lot of the ways that it does business. How many people have signed documents as supposed MERS officers? Well, it's kind of hard to know because, again, MERS won't tell us, but at any one point in time, MERS has over 20,000 signing officers authorizing its behalf. 20,000 officers and 47 employees. If you took it at face value, you'd say that's a rather tap heavy organization, wouldn't you? Exactly, exactly. That's one of the reasons why this whole arrangement is so questionable. It's obvious MERS can't properly supervise these people. And then they claim, oh, we only give people limited authority. They can only operate in this teeny space, so how could they do any damage? Well, again, there's evidence on the ground that contradicts that. For example, they claim that they've got electronic procedures so that no one could possibly transfer a mortgage from one party to another without both sides authorizing it. It's what they call an electronic handshake. Supposedly, somebody on one side of the transaction has to authorize it before the party on the other side could move it.

Well, you've got lots of evidence in courts that MERS signing officers have also shown up as the supposed signing officer on behalf of entities that went bankrupt a long time ago. So it is impossible for the entity that went bankrupt two years ago to have authorized this person to do anything on their behalf. There are lots of cases of that. The only person who could authorize something once a corporation is in bankruptcy is the bankruptcy referee, right? You're absolutely correct. So, and there's no evidence that this happens. So there's just so much chicaneery going on. That's why this whole bank position that you talked about at the top of the show that this is just a paperwork problem is baloney. I mean, you can say this is technically all paperwork, but that's like saying the credit card agreement you sign is just paperwork. You know, if you deviate even slightly from that, the banks are all over you with a zillion fees. So on the one hand, if it's not MERS paperwork, when it's your agreement with them, but what's their agreement with other parties, suddenly what's MERS paperwork? It doesn't matter if we do it right. I mean, it's obvious that they have this very two-tier view of the law that there's one set of laws that are provided for as far as banks are concerned and that everybody else really has to tow the line.

But the problem right now is those servicers that we've been talking about have motivations that are very different from those of the investors. You would think that the servicers should want to do what's right for the investor. No, the servicers want to do what's right for the servicer. And the servicers get paid first. They get, you know, so when borrowers pays money to through servicers to the investors, if there are any fees, the servicers gets the fees first. Therefore, servicers is highly motivated to charge fees. And foreclosure is a really lucrative activity. They get to charge all kinds of fees in connection with foreclosures. So the servicer doesn't really have a motivation not to foreclose if anything they have a very big motivation to foreclose. And it's hit the point now where investors are being hurt by the number of foreclosures. This is another piece of story that's just not getting out in the mainstream media at all. You have the mainstream media view that, oh, the people who are not paying are really evil people. And of course foreclosure is the right answer.

This is not the way life works with any other kind of lender in the world. If you have a borrower who has gotten in trouble, the first thing that the lender investigates is whether the borrower has enough income still that they're better off taking half a loaf than none. This is just prudent limit your loss behavior. So that's why we have, for example, a chapter 11 process when companies get in trouble, they first see if they can restructure a deal, have the investors take less rather than liquidate the company. Everybody understands in, for example, chapter 11 land that you liquidate the company only when it's a complete goner. Similarly, for a lot of, not all, but for, you know, some high but unknown percentage of borrowers, they could pay a loan at a reduced rate. So now we hit the point where the losses on foreclosure that investors are suffering are literally on average over 70% of the mortgage amount. Now with 70% losses, you could have a huge cut in the amount that the borrower owes. You could whack the mortgage 50%. And the investor would be happy.

But the servicer would not be happy. The servicer makes more money like a little doomsday machine just sort of marching ahead and, you know, chewing up borrowers and the economy willy nilly for their own institutional imperative. And so one of the reasons that these, this kind of litigation may move forward, investors generally don't like suing because it's like, you know, sort of turning harsh light on the fact that there's a problem. But we've got such a big gap between what, what the investors interests are and what the servicers interests are and the way the servicers have been behaving that from the investor's perspective, suing might be a way to get the servicers to finally take doing mortgage modification seriously, which is what the investors actually would prefer. Now this gets into the administration's attempt to further mortgage modification to help people stay in their homes and, and the fact that it's been pretty much a failure is a strong word, but. Fiasco is another word that begins with F that would describe it. So what's dual tracking? Is that, is that something that's contributed to this? Absolutely. Do a dual tracking means that effectively when a bar gets in trouble, even though the bank is talking to them about doing the mortgage modification, they are still moving forward with the legal steps to foreclose.

And what's happened is that the servicers have pretty clearly gamed the administration's last program called HAMP. I mean, the Treasury even had some bloggers, I was one of them into talk to them and Guy are basically even admitted the meeting that the Treasury was well aware and embarrassed by the fact that the servicers had gamed HAMP. The administration's even admitting this in public, which you don't usually, they don't usually do unless failure is so evident that they can't deny it. But in any event, so what happens is that, of course, there were some people who had were already in trouble were already laid on payments, but there are a lot of people who heard about these mortgage mod programs who are under duress, you know, like it's a real struggle for them to make the payments. You know, they could see that if anything even slightly goes wrong in their life in the next year, they could be in trouble. And so let's be proactive. Let's be responsible proactive and call and see if we can get in this mortgage mod program.

Well, again, this is extensively documented. In many cases, the bank said, you have to not pay for us to even consider you for this program. So they were told to get the link went. They were told to get the link went. And then on the 91st day, because usually in many of these agreements, you have to be three months to link went before the bank can take. And again, it varies by agreement, but typically it's 90 days. They start the foreclosure process and a lot of in a lot of states where the foreclosure can happen really quickly, you know, suddenly by, you know, day 120 day 150, they've lost their house. And the bank is still talking to them like they're going to get a mod. They are the bank is still talking leading them to believe that they're getting a mod. They're even have paperwork going back and forth. And yet the bank grabs a house. I mean, it's just astonishing how many cases there are that this has happened. Is that a function, at least in part of the fact that there are two different parts of the bank handling modifications and foreclosures?

Well, in theory, that could be the case. But in practice, this is, you know, and some of the banks have used us to dogate my homework. And we didn't have the systems and they all get it from piously swear before Congress that, oh, well, now we know this is a problem. And really we've put up new systems to implement this. If the numbers weren't so large, you could believe this, but the numbers are so large, it just doesn't add up. I mean, for example, you also had cases of the banks repeatedly losing people's paperwork. I mean, that was another sort of excuse for the machinery grinding on. I mean, how many times does a borrower have to send paperwork to the authorized number and the bank loses it? I mean, they're just too, they're just too many incidents of bank screw ups that are too similar for this not to look institutionalized to a significant degree. And we'll have more of our conversation with Eve Smith moments from now here on the show. Let's start.

This is Lish. We have a call in our news maker. Hello. Hello. This is Senator Joel Lieberman. Hi. You've been talking about the WikiLeaks on your program today. No, actually we've...

Because I'm going to have to ask you to stop that. We've been talking about the foreclosure situation, sir. Oh. Oh, well, I've been misbrief then. Well, have a great show. Thank you, bye-bye. This is Lish. We continue our conversation with Eve Smith, author of the blog, Naked Capitalism. The name has popped up in your writing that fascinates me. Linda Greene. Oh, yes. She's one of the famed rubber signers. What does that mean? The robot signers physically typically sit at the servicer. They're typically... Sometimes they sit at the foreclosure mills, but usually with the servicers. Typically they're very badly paid. And typically their job is to sign documents all day. And literally the stuff would show up in their desk. Literally a file would show up at their desk, but somebody had already supposedly pre-checked. And they would sign these documents. And the reason that this is a problem, and why the banks are still trying to dismiss this paperwork, is that documents they would sign were in almost all cases affidavits. Which meant that in an affidavit stands in trials, in place of testimony. And in testimony, someone is supposed to swear that they have personal knowledge of a matter.

Now for somebody whose file has shown up on their desk, and they're signing literally these various robot signers have said they signed anywhere from the typical numbers are 5 to 8,000 documents a month. And they typically often don't sign. They typically have a rubber stamp. Which if you look at these documents, you can see signs of where, like they're the Incas Heavarder in the middle and lighter at the ends. But they can't have personal knowledge of this. These affidavits were clearly improper. And to the Center RoboSigner was responsible for anything, the checking that they did was simply that, for example, if I'm a GMAC employee signing on behalf of US Trust, I have to sign as this particular title. The checking that if they were signing for that particular legal entity, that's the title that they were signing under was correct. So a RoboSigner like Linda Green would sign as a vice president of a number of different firms.

Vice President organic, again the title could vary, but vice president would be a very typical type for someone like Linda Green, who's making like 12 bucks an hour or maybe on a good day 15. Vice Presidents come cheap these days. Yes. Do you have a bank account? So you trust a bank to that extent? Well, it's actually, it turns out it was a little local bankless but by Canadian banks, at least I'm not supporting a tarp bank. It could be worse. So what we see is a lot of people in Washington in New York saying, for the sake of the housing market foreclosures have to speed up. This foreclosure thing, when Bank of America and GP Morgan Chase suspended their foreclosures for a month or two, the alarm was being spread that this could seize up the housing market and damage the recovery. What's your assessment of this? That is such an intellectually incoherent position. I don't know, it doesn't deserve to be dignified. You've seen these statistics. I think the Wall Street Journal's latest statistic was at the average time from delinquency to foreclosure is something like 478 days. That's the servicers doing the servicers themselves are some now some of it is admittedly pile up in the courthouse because in some states like Florida.

They've now had to implement these things called a rocket docket because they have a big back load of court court cases that they're trying to move through more quickly. But sort of X cases like Florida. The banks are not foreclosing very quickly because they have such a huge overhang of inventory. And if the bank takes the house, the bank is then responsible for the local property taxes. So if it's going to take a very long time to sell the house anyhow, the bank would rather have the borrower on the hook. So the notion that the reason that the administration and other people went on this line of we don't want to slow up foreclosures has much more to do with we don't want to create the perception that there is uncertainty about the right to foreclose. The slow foreclosure was nonsense code for another issue, which is not wanting to raise doubts.

The banks themselves are have put on the brakes on foreclosures massively or actually grabbing the house, turning into they still may be grinding through the foreclosure process to keep their options open. But they want the borrower in the house as long as possible because the borrower maintains the house to some degree. You know, they make sure the pipes don't freeze over, they mow the grass, and again, they are on the hook for the real estate taxes. And meantime, if the house is foreclosed, what happens to the flow of money going to the investors in the mortgage on that house? This is I'm glad you brought that up because that's another reason why the the servicers are highly motivated to foreclose. Under the agreements that the servicers have signed, the servicers are obligated to keep advancing money to the investors. So, you know, borrow quits paying, the investors still keep getting money as if the borrower was paying. And the servicers way to get the money back is through foreclosing. Of course, you could say that creates obviously a contrary impulse. The servicers should in any market where they can sell the house quickly, they should want to grab the house and sell it quickly because then they don't have to keep advancing all this money.

Now, again, the contracts are a little better designed than the the impression I'm giving says the contracts actually say that once, you know, a loan becomes sort of they have different language, but it amounts to hopelessly the length. Once, you know, once it's pretty clear, the borrower is toast that they are permitted to no longer keep advancing principle and interest. But in practice, first, they never set up their software to stop that. And second, the rating agencies have something called servicers ratings and the rating agencies look at the servicers to see if they're really making their payments on a timely basis. So, the servicers are kind of under pressure from the rating agencies also to keep advancing this money to the investors. So, the servicers would lose if the investors were actually to succeed in getting mortgage modifications because if they've advanced a lot of interest and principle, they need the foreclosure to get the cash and house to pay themselves back and then they give what's left over to the investor. Okay. This is the big, this is this is why the industry is trying to say, it's just paperwork. Don't open that box. Really don't open that box. It's just paperwork and it's not a problem because the more you look at it, the more you realize what a colossal disaster this is.

Now, I'm going to ask you a theory question now. This is complex stuff. We've been sort of hacking through the thicket with the aid of your intellectual machete. Most of this material has not been in the consumer media. Listen, I'm as illiterate economically as the next person, if not more so. And it's been observed by a lot of people that most journalists are as well, except financial journalists. Do you think that's the reason why this material is not in the public discourse at this time? There are several reasons. One is that actually this has the severity of the problem really has come to light only since the robust signing scandal broke out. Before the people who were aware of the degree of this problem were foreclosure defense lawyers. And they could easily be dismissed because almost all of these people are either legal aid or pro bono or retired lawyers who might have been more serious lawyers in the past and are operating in a quasi legal aid sort of fashion versus banks.

Despite the financial crisis, banks have credibility and banks has access to the media. And most people and certainly most journalists don't understand that these foreclosure defense lawyers who frankly do not make a lot of money and would make more money doing almost any other type of law are actually fairly credible people. And the tendency to think that people who represent little people who are in trouble are like ambulance chasers, you know, the people who go after car wrecks and disability cases and like that. And these are really a different type of beast legally. But you had all of this evidence piling up in courthouses, but still looked anecdotal. Even if you've got a large sample, it's a large sample in a bunch of different very spread out courthouses. And nobody really had the motivation to put it all together. So you until it became and the robust signing issue legitimated it.

But you still have this the battle lines are still very much drawn between the banks who have credibility and access. Still the foreclosure defense lawyers and some of the people who are getting voices in these congressional hearings like respected academics who've been writing about this for a while. Kurt Egert, Adam Levitan, you know, I mean, they're legitimate people who are cutting out in favor of these theories who are taken quite seriously. But really, but really it's two very different set of parties with very different access to the media. Okay, so so much for diagnosis now prognosis. That is to say, what do we do with this? The let's speed up the foreclosures angle was, you know, well, let's just let the banks fix the paperwork and everything will be fine. And the foreclosures can start again. And as I read you, there was a bill introduced in Congress. I don't you can tell me what you think its chances are that was sort of post facto designed to say anything murs did is legal. Right.

The language has not been proposed. So it's been presented in the blogosphere as being much further along than it is. There have been basically some trial balloons floated, but no specific language has been proposed. Every lawyer I speak to whose legitimate says basically a retroactive fix is impossible. But legally, it just wouldn't fly. And that these problems are sufficiently well embedded. You know, there's all this historical stuff that murs has done that even if somebody comes up with a prospective fix, it's not clear that it's going to work for two reasons. One is that, of course, you've got the historical problems as I alluded. And the second is that they're seeking to accomplish this through Congress when this is all what they call dirt law. The state-based real estate law and there are there are decades of Supreme Court decisions that say very clearly that dirt law real estate law is very clearly exempt from federal intervention.

If they tried this, you'd have a massive constitutional battle, which would create uncertainty, which I think is the last thing anybody wants. So somebody points out that you try going down this path, you could just make matters worse. I don't think this is going to go anywhere. The argument would be because it's clearly local government, it's a tenth amendment issue conservatives would recognize that. And then I thought, well, the argument would be these local transactions entered the stream of interstate commerce through the securitization process. Now, if your analysis is correct, basically that argument boils down to it should be a federal problem because there was a fraudulent scheme to enter it in interstate commerce. Yeah, I mean, they could try that angle, but again, foreclosures are handled locally. I mean, ultimately you're talking about the perfection of rights on a local basis. And so I think, as I said, even if they try running this theory, it's going to wind up being a constitutional fight. A lot of states are not going to take this line down. And frankly, to your point about conservatives and Republicans,

a lot of, I don't know that you could get it through this Congress anyhow. I mean, for example, in the, the first round of the, unfortunately, I'm not unfortunately I'm delighted to be on the show, but I'm actually missing the second round. Oh, I'm sorry, banking committee. I know I'm very happy to be here. But the first round of the, of the Senate banking committee hearings on the foreclosure mess, you had Richard Shelby beating up on the Murr's guy. I mean, Shelby, of course, you love it when these congressmen played dumb. Shelby used to own a title insurance company. And he was clearly not happy with Murr. So with a guy like Shelby, who's pretty well regarded and in an influential position, not buying the Murr's theory. I don't think this is going to get very far. He's a Republican from Alabama or people who don't follow the Senate intricately. So if you're prescribing what's, what's the way out of this mess? Well, what we really need is I alluded is a better process for doing modifications. And that really means deep principal mods. And again, we've had Orwellian language about the federal administration's mortgage mod programs. They talk about permanent mods.

They're five year payment reduction plans. They are not principal mods. And there's a lot of evidence that says that borrowers are much more highly motivated to try to keep the house. If they think they might have some positive equity someday, you know, even if you reduce somebody's payment in five years, it's going to kick up. And they're still looking at being severely underwater. Even after five years of struggle, how motivated are they going to be to really keep the house? And we need, and we need research to prove that we need to research to prove this. I know this is intuitively obvious, correct? So what we need is a better process for people to do the, of course, triage means three, but it's really bifurcation. Who's viable under a, you know, reasonable and there may be some variability by state and market as to what reasonable looks like principal mod. And there are actually organized processes to make this more streamlined. For example, there's a group called Naka, which, and the problem is they were probably a little bit aggressive in the way they were doing the consumer budgeting.

But they came up with a system where literally they would have what amount of, I mean, fairs is probably not the right word because of fairs sounds like a happy event. But they would have fairs where services would show up borrowers were showed show up borrowers were told what paperwork they had to have. So Naka would screen the borrowers, make sure the borrower really had the income verification, whatever budget information they needed to have. Then the Naka person would sit down, scan the borrower documents into a database, sit down with the borrower and work through a budget. So what their real household expenses were. And so they could tempt model out what they could afford in the way of the payment, then they would kick it over to the servicer to actually see what kind of mod they could give. Now with a groups like Naka willing to do the heavy lifting that the servicers aren't paid to do don't like doing, you know, that's, you know, there's already template for a solution out there. We just need to come that takes the burden off the servicers who don't want to do that kind of legwork.

We then just need to come up with, you know, some sort of templates in terms of, of course, that everybody's going to have to be pressured to do this, but some sort of templates as to what mod levels are appropriate. And this is probably going to come through the state attorney generals. I mean, the treasury does not want to be out in front of this. The treasury absolutely does not want to inconvenience life for banks. And that's because the banks have these very big second mortgage portfolios, which if they have to write down the first mortgages, they're going to have to take more losses on the second mortgage portfolios and they've shown to date. So part of the, the, the, the treasuries, hamming and hawing and acting sort of, you know, doe eyed about why the banks aren't doing mods is a little bit disingenuous. But there appear to be enough state attorney generals that are on the case who need to know you've got 50 and they act like a unified front. Obviously, some are more with have taken this mission more seriously than others. I think they're going to be enough state attorney generals keeping the heat on this that there's some reason. Again, nothing is ever certain there. There's a reasonable probability that we might see that is the outcome. I mean, that would be the best outcome that we have finally out of this process.

Pressure on the banks to do mods for viable borrowers and then for the borrowers that really are toast, you come up with. They are going to have to give up the house. I mean, there's the notion that people are trying to fight foreclosures who are underwater is largely urban legend. I mean, there may be a few people out there who are really diluted about their ability to pay. But for the most part, people who are fighting foreclosures typically think they're victim of a servicing error. Or sometimes it's somebody in bankruptcy where the bank is trying to grab the house, even though they're in bankruptcy and the bank is supposed to leave them alone and let them negotiate the best repayment plan they can and they can't touch the house during that period. Now you mentioned the Treasury Department acting do wide didn't Treasury under Secretary Barr just recently announced an investigation of all this? Please. I mean, you know, they've got something like 11 different groups involved and they're going in and they're going to come up, they're doing this investigation in eight weeks. Including Christmas.

Including Christmas and Thanksgiving. There's no way. Oh, and he also said this is really serious. We're spending five to eight hours on every loan file. If you know what you're doing, it's impossible to spend five to eight hours on every loan file. That's an admission that they're wasting time and don't know what they're doing. I mean, it shows that they have not bothered training anybody and this is an exercise in form over substance. Where are the toxic assets that the toxic asset relief program was designed to get out of the banks? The biggest toxic assets were collateralized debt obligations. Which were for though when those bonds when we were talking about those those mortgage back security securities. They actually had multiple pieces. This gets all a bit convoluted. They were structure. This is why it's called structured credit, but they were structured so that some people got the money first and then and that's how you got AAA securities. And then only when the triple A guy got everything he was supposed to get did the guy next in the food chain start getting some money.

So those are the junior and the super senior, which I love. Exactly. So they talk about these different tranches. So what happened with to get a collateralized debt obligation is you first had the bonds that were created out of the mortgages. And so you had a triple A piece of that, right? And then you had the lower pieces. People wanted a triple A piece. They didn't really want the lower pieces so much, the riskier pieces. And so a little bit of that would get sold to investors. But mainly they couldn't sell that stuff. So it's kind of like the problem you have with the pig, right? Everybody wants the bacon, you know, the pork loin. People don't really want the snout in the lips. That snout deliver the hoos. Those get thrown into sausage. So the CDO is kind of the equivalent of security sausage. They would take these unwanted parts and throw them into CDOs and then retrench them. So again, the first people who got the cash flows out of the CDO could get a triple A. Now we discovered later those, what they threw into these CDOs was so junky that you couldn't really get it in the end of the triple A's weren't really triple A's at all. But the junky pieces went into CDOs. And those ultimately the banks wound up holding a lot of them.

That's why we had such a huge train wreck in the banking system because the banks were, they're a longer form versions of the story that I won't bore you with. But the short form is that some of the banks were keeping them literally to game their bonus systems. Other banks were just creating them so quickly they couldn't sell them because they were merely getting sort of routine profit of looking like they were underwriting them and selling them. And they counted them like certain departments got credited for profit even though they were still sitting around at the banks. And then when the music stopped the banks were just long enormous amounts of this paper. Now admittedly some of them went to real investors to around the world to blew up. But a lot of it wound up at the banks. And so that's why the big reason why we had a banking crisis. When you say real investors those would include European banks wouldn't they? Well actually the European banks were big originators. So some of the banks were you're correct. So some of the banks were the smaller, the the famous ones were the German Laundice Bank. The German Laundice Bank and where everybody's favorite big stuffies. I mean they were basically permitted to do everything that a hedge fund would do.

But they were run by public servants who weren't incentivized to really be very smart. That's a lovely way of looking. They didn't get any upside for being right. They didn't get any downside for being wrong. And it was perceived to be sophisticated to buy this crazy stuff. So they thought they were doing the right thing and they were being totally snuckered. But it was also the big European banks themselves were big keepers of this. UBS was an enormous one, a couple of French banks. Deutsche Bank, although Deutsche Bank claims not to be very exposed. That's just because Deutsche Bank is really big. In aggregate they were very exposed. But they're such a huge bank and they could still not take as big a hit as some of the others. Well so the banks, the U.S. banks, you say have all these second mortgages on these properties that they'd have to write down and take enormous losses. Right. It wasn't that also the problem with a lot of the toxic assets that they got to fix in the law

that spared them from writing those down. So there's this enormous amount of stuff the banks have that's still being valued as. Well on the one hand, the banks are being permitted to carry the stuff they still have at values that most people would say is inflated. And some of that is the super cheap interest rates. Everything on 0% interest rates, everything looks like it's better than it ought to be. And a lot of the stuff really didn't trade, so the banks have a lot of latitude in terms of how they value it. The flip side is that some of these CDOs are actually being unwound, that they are being dissolved and the underlying little pieces of mortgage bonds that are in them are being sold in the market. So you do have cases where you're actually having liquidations. And so the banks can't pretend they're worth more than they're worth. So that part of it appears to be being ground through albeit a bit slowly. I mean the second mortgage is, even though CDOs are problem,

the second mortgage is appear at this point to be a bigger problem than the CDO problem. Okay, finally in this area of prognosis, you've pointed out that there was a process that we went through in the savings and loan crisis in the late 80s, early 90s, called resolution. And that clearly was not the process followed during the banking crisis, the credit crunch, whatever we want to call it, of 2008. Is that something that we should have done, should still want to do? Absolutely, it would be, the problem now is you have so many policy makers who would not be willing to admit that what they did in 2008 and early 2009 was wrong, that unfortunately I see the odds of us going down that path is being quite low. What is resolution? The typical model is you find some way to get the bad assets out of the banks. That usually means if the bank has enough bad assets, that it has to be put on some form of life support, which is receivership. Unfortunately, that got branded as nationalization, which suggests communist seizing productive businesses

as opposed to euthanizing something that's not so last legs anyhow. You therefore strip out the bad assets and you find some way to liquidate them over time. You have a sort of discipline process for figuring out what they're worth and figuring out how you're going to get buyers to bid on this stuff and just clearing the crap out. You take what's left, the better parts of the bank, and you get that back into private hands as quickly as possible with new management and with a new board. One of the critical pieces of this is that you make it very clear to executives that run bad companies that they don't get rewarded. And typically in a resolution process, you would fire the executives for cause. I don't care what anybody says about this nonsense about executive contracts or is such a thing as firing people for cause. And the excuse that we couldn't do that and we couldn't have found legal theories under which we could have revoked these ridiculous severance payments

is to me just not credible. A lot of the SNL guys ended up in jail. That's correct. That would have been another way to handle it. Basically, you want to fight us on severance? You might get orange jumpsuit out of this. They would have backed down quickly if somebody had tried that line seriously. So does this suggest that the SNL guys for all their influence, for all their contributions to both political parties during the heyday of the savings and loans didn't have the political clout that the leaders of the big four, big five banks have? That's absolutely correct. I mean, they were even though Keating famously boasted, I think that he owned five senators. Five senators is not enough. It's not a majority. Yeah. So yes, unfortunately, you know, the financial services industry is the second biggest contributor to congressional campaigns. Only the healthcare industry is bigger. And probably more important, I would say, as important, if not more important, is the way that they have penetrated

the regulatory infrastructure. You both have the explicit influence. You know, via sort of government sacks, via the revolving door, how many people go from public service into a cushy private sector jobs with banks? You had the other level that the regulators, even the ones who think they're public servants, like I have to say, even though that I honestly think, as much as I have no sympathy with anything, any of Geithner's positions, I honestly think he thinks he's doing the right thing, which is what makes him so persuasive to the media, that he is so drunk that there are people like him who have so drunk the industry cool aid, that they're more effective spokesmen than people who are cynical. Well, this has been fascinating to me to try to follow all this. Obviously, people get paid an awful lot of money to think this stuff up. Well, no, it's true.

And the sad part about this is that this system was really well designed. I mean, it did comport itself well for, you know, more than 15 years until people started abusing it. I mean, this really is a massive self-inflicted wound. And for the industry to try to say that it was somehow innocent or somehow these were mistakes is just baloney. One little follow-up question. You said the securitization of mortgage has been around for 20 years, but yet it exploded in like the 2002 time. What was the ignition for that explosion? Well, that was a super cheap interest rate. I mean, this was sort of effectively part of policy. I mean, you remember that Greenspan had been actually encouraging people to take adjustable rate mortgages, arguing that they were a better deal for consumers and fixed rates. You know, we'd had a long period of overly easy consumer credit as the solution for the fact that worker wages were stagnant. If you look at a sort of a longer term time chart,

you see that starting in the 1980s, you have consumer debt to GDP increasing gradually over the 80s and then dropping a bit in the late, in the SNL crisis, you know, the late 80s, early 90s recession. Then you see it increasing a bit more gradually in the early 90s. And it, 1999, shoot to the moon. I mean, you just saw consumer debt levels. It was primarily mortgage debt. Just shoot to the moon. So, how could anyone have not have seen this happening? I mean, there was all kinds of press about how, for example, the consumers, the consumer saving rate was zero. It was hovering around zero and even certain quarters was negative. How could the Fed not see that this was a problem? And yet, they came up with all these complicated rationalization. So, it was an unfortunately very bad combination of super low interest rates that induced everybody to pile in more leverage and regulatory inattention to the irresponsible behavior that was taking place. And for the consumers, debt was being sold as wealth.

That's correct. I mean, you know, if you, and there are a lot of people who, you know, some of the, some people were completely naive and some people allowed themselves to be conned. But, you know, a lot, if you're a young person and you see housing prices escalating and you've been told, as people were told for 20 or 30 years, that renting a stupid and buying a smart, you're going to be afraid, oh my god, if I don't buy now, I'll never be able to buy a house. I'll be a renter for my life, and that's a really horrible thing. You know, so there really was, you know, as much as, you know, some people overextended themselves, there was also a very aggressive promotion of this notion of home ownership. I really want to thank you for lending your expertise and your ability to kind of make this pretty comprehensible to the lay person, such as myself, really appreciate yourself. Well, thank you so much. I really appreciate the opportunity. Thank you for giving me so much time. Eve Smith, author of the blog, Naked Capitalism. Sounds sexy.

And of the book, Econ, thank you so much. Thank you. Just a little bit of news from outside the bubble, that non-newsworthy WikiLeaks stuff included revelations that the United States pressured Germany to knock off and prosecuting anybody was involved in the extraordinary rendition of a young man named Al-Mazri, a totally innocent man who was bundled off the Syrian torture, and conservatives in the United Kingdom, before they were elected to office, promised the United States that there would be, among other things, more pro-American weapons procurement, damn those French armament makers anyway. Oh, sorry, Senator Al-Mazri, I'll knock it off.

Ladies and gentlemen, that's going to conclude this week's edition of La Show the Programme, it turns next week at the same time over the same stations and it'll be just like resolution if you had agreed to join with me that way. Thank you very much. Thanks to Henry Parade at Howard Schwartz Engineering in New York, Nick Kray, a delaying Lee Studios in London and Adrian Boddenham here at Global Radio in London for help with today's broadcast. La Show is on Twitter at the Harry Shire. La Show comes to you from Century of Progress Productions and originates to the facilities of KCRW's Santa Monica. Santa Monica? Come on, you've heard of it. You know it well. It's a community recognized around the world as the home of the homeless.