Almost six years after the financial crisis, JPMorgan, Citigroup, and Bank of America face potential fines of around $12 billion each for their role in mortgage malfeasance. In the context of the damage done and the bailout money poured into banks; the fines are miniscule and won't even cover reparations in one or two blighted areas.
This is after a series of post-crisis banking scandals revealing the fragility of the banking system and after JPMorgan Chase was the only bank to receive an SEC fine combined with an admission of wrongdoing for its well-publicized London Whale incident. Officers of JPMorgan Chase have not been held accountable. Moreover, banks harbor massive balance sheet risk against which they hold insufficient capital.
Timothy Geithner's Ministry of Truth Tour
Timothy Geithner, former president of the Federal Reserve Bank of New York, a bank regulator during the run up to the financial crises, and later the Secretary of the Treasury, claims that no one knew housing prices could fall. He sounded like a very silly man when he said over and over on his recent book tour that sophisticated financiers didn't understand the dynamics of a housing bubble. I never once heard him mention well-documented fraud, despite massive fraud uncovered by Congressional investigations.
With men of Geithner's ilk having their back and the potential of huge financial rewards, many rational men of weak character assessed the risks and rewards of fraud and chose to enrich themselves, since the chances of being held accountable were slim. It turns out they were correct.
No one I know disputes the need for bailouts and interventions, but all of us -- except a handful who have banking officers' direct numbers on speed dial for deal purposes -- question the absence of indictments of senior banking officials (for a variety of forms of malfeasance) and the corrupt people they funded: among others, mortgage lenders.
All of these banks continue to benefit from opacity and massive government support. But how has this worked out for the areas in the United States most damaged by mortgage malfeasance?
Housing Market Devastation for the Prey
In October 2007, CNBC's Diana Olick called me about Countrywide's so-called plan to modify mortgage loans scheduled to reset to higher rates. Subprime borrowers with a strong payment history would be able to refinance and possibly get prime FHA loans. Current paying borrowers with credit issues would be offered Fannie Mae or Freddie Mac loans under a new expanded program.
Mortgage Loans with Less than Zero Value
Mortgage modification programs, including HAMP, were abysmal failures. At the time I told Olick that mortgage servicers were selling loans for 3-6 cents on the dollar and they were happy to dump them: "They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60 percent are unattainable. My average recovery rate assumption of 30 percent is also currently unattainable."
If loans couldn't be sold to a sucker, banks and their servicers walked away. Mortgage securitization complicated matters, and often homes are left vacant and not foreclosed upon. Looters strip vacant properties of pipes, fixtures, and anything of salvage value. The loans within the securitizations are worthless.
Why do banks and trustees pretend the loans have value? If banks and lenders foreclosed, it would be revealed that the taxes, cost to maintain the property before resale, and the legal costs relative to the value of the property meant that they had negative equity.
At first this was a problem for loans with low loan balances, but as property values dropped, even loans with higher balances had the same problem. The problem spread, and it hasn't yet stopped spreading.
Triple Tragedy: Meltdown, Spreading Contagion, and Crime
This tragedy is echoed by similar problems in Ohio, Michigan and other subprime targets on the West Coast, Nevada, and in the South. Although some examples aren't as stark or depressing, the general idea of plummeting property values and vacant properties infecting a neighborhood and its surrounding areas still stands. Affected states have to carry the burden of these paralyzed limbs, and banks and their cronies that perpetrated this mess just walk away.
Chicago's Stark Example: Detroit within the City
Since 2007, Chicago's Englewood and West Englewood areas slid into a sinkhole. Homes that once housed lower middle class and middle class families stand empty. Those with the means to move have fled. Those without the means have stayed while the prairie reclaims a large part of the south side of Chicago. More and more homes have been boarded up. Grass has grown so high in some formerly residential areas it obscures all but the tallest humans. Crime soared. Property values in surrounding neighborhoods are plummeting as the wasteland spreads to their doorsteps.
"Countrywide Broke the Law"
It would be easy to turn away from this and blame the borrowers. Some of the borrowers were absentee landlords who knew what they were doing. Some borrowers overreached. But in many cases, people were victimized by predatory lenders. For example, a complaint of alleged fraud against Goldman Sachs filed by Landesbank Baden-Wuerttemberg includes allegations of fraudulent practices by Countrywide, now owned by Bank of America.
Landesbank Baden-Wurttemberg (LBBW lost its appeal in the fraud lawsuit related to collateralized debt obligations backed chiefly by residential mortgages. LBBW is a sophisticated investor obliged to perform its own due diligence, and the court apparently held the view that LBBW's independent due diligence wasn't appropriate for the circumstances. In other cases, sophisticated investors have been able to win large settlements, since material information that only the underwriter knew was withheld from investors performing appropriate due diligence. Even diligent sophisticated investors can be defrauded when malefactors work hard enough at fraud.
As for the underlying mortgage loans, a former Countrywide employee stated that approximately 90 percent of all "liars' loans, loans that allowed reduced documentation about borrowers' income and assets, sold out of a Chicago office had inflated incomes.
In 2008, Countrywide settled a multi-state suit for over $8 billion, including a settlement with Illinois for predatory lending practices and alleged fraud. The borrowers weren't inflating the income. Countrywide allegedly routinely doubled the amount of the potential borrower's income to qualify borrowers for loans they couldn't afford so that Countrywide and its mortgage brokers could continue to earn fees and commissions.
Prior to Countrywide's paltry settlement with eleven states, Illinois Attorney General Lisa Madigan stated: "Countrywide broke the law, homeowners did not."
Fed's August 2007 Back Door Bailout of Countrywide
In August 2007, investors shunned Countrywide's asset backed commercial paper (ABCP) backed by its mortgage loans and demanded much higher interest rates. In the ensuing panic, Countrywide wanted to borrow around $11.5 billion from banks on its credit card-like revolving credit lines, but the banks balked. The banks asked the Fed for concessions, and the Fed agreed.
The Fed deal appeared to have been leaked. On Thursday, August 16, 2007, the Dow fell more than 340 points when it appeared Countrywide was about to go under, but rebounded to close down only 15 points. The next morning the Fed announced its new bank lending concessions.
The Fed bailed out Countrywide and its affiliated banks through its back door. The Fed agreed to let banks borrow against private label mortgage loans with phony "AAA" ratings, cut the banks' discount rate from 6.25 to 5.75 percent, and extended "overnight" borrowings to 30 days.
Abandoned Properties: BofA, Wells Fargo, U.S. Bank, and JPMorgan
Banks that supplied money -- and in some cases now own -- suspect mortgage lenders also packaged up and sold those loans to investors. They own or owned mortgage "servicers" that cannot recover foreclosure costs combined with the costs of maintaining and reselling the house. After pumping up appraisals and falsifying borrowers' income on applications, banks are walking away and sticking taxpayers with the bill.
According to the Woodstock Institute's 2010 report, the mortgage servicers and trustees linked to abandoned properties in Chicago are Bank of America, Wells Fargo, U.S. Bank, Deutsche Bank, and JPMorgan Chase.
Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing and fraud, there are no meaningful felony indictments of senior executives at mortgage lenders or of senior executives of banks bailed out by taxpayers.
2014: Blooming Blight for Cities, Beefy Bonuses for Banks
Let's use Chicago as an example of predatory mortgage practices for which banks earned fees for lending to corrupt mortgage lenders, and then earned money for underwriting and selling opaque packages of mortgages combined with derivatives. Every financier worth their salt knew massive securities fraud was aided and abetted by bosses up the chain of command, as structured finance revenues exploded within banks and investment banks.
"More Devastating Scale than any Al Qaeda Attack"
Wall Street's PR spin, lobbying, money train to Congress, and bullying of fact finders have kept much of the truth away from the public.
In January 2010, Frank Rich of the New York Times pointed out:
"What we don't know will hurt us, and quite possibly on a more devastating scale than any [Al] Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin."
Yet Congress, regulators, and the Department of Justice let down U.S. citizens. The banking system is as fragile as ever, and economic dislocations caused by malfeasance haven't been addressed.
According to a June 2013 study by the Woodstock Institute, "Deciphering Blight: Vacant Buildings Data Collection in the Chicago Six County Region," (comprised of Cook, DuPage, Kane, Lake, McHenry, and Will Counties): "growing numbers of foreclosures contributed significantly to the vacant property inventory."
The Woodstock Institute's research showed numbers that illustrate ongoing deep deterioration:
2008: 44,568 vacant for less than six months; 23,009 vacant more than two years
2012: 19,833 vacant for less than six months; 69,174 vacant more than two years
As blight spread through south side neighborhoods, crime fanned out into once safe city neighborhoods. A debt loaded city and state is losing fleeing taxpayers to other states with better track records for containing crime.
"Opportunities for Big Things"
Chicago, Illinois, happens to be the former home of President Barack Obama and his family. They still own a house in Chicago's Hyde Park neighborhood. While Chicago is a poster child for this phenomenon, it is being played out in selected regions throughout the United States.
Rahm Emanuel, then White House Chief of Staff and now Mayor of Chicago, famously declared: "Rule one: Never allow a crisis to go to waste. There are opportunities for big things."
But since the financial meltdown, the people who created the crisis have taken advantage of it and achieved "big things" -- especially big profits and bonuses.
Bank CEOs received multimillion dollar compensation packages last year. That's more than enough to bid on one of the gutted homes auctioned at starting bids of $100 in Chicago. Of course, they'll have to pay any back taxes and expenses. But then they could enjoy a stroll every evening in a new neighborhood; it will open their eyes to a completely new lifestyle that they themselves participated in creating.
An earlier version of this article appeared at The Financial Report.
See also: "Why POTUS Allowed Bailouts Without Indictments."