Regulatory agencies exist to protect the public, not the corporations they regulate. The head of the Office of Comptroller of the Currency doesn't seem to understand that. But that's not why John Walsh needs to resign.
The OCC was created to stabilize the economy, make it easier to conduct trade, and protect people's savings. It didn't do that. In fact, it ignored the warnings raised by others. But that's not why John Walsh needs to resign.
His agency failed to anticipate the foreclosure crisis, and it overlooked bank criminality. Later John Walsh misled a Senate panel -- and the general public -- about the size of the problem. And even after being forced to clarify those misleading statements, Mr. Walsh keeps on repeating them. Whether by intent or ineptitude, he continues to misinform the public.
And that's why John Walsh needs to resign.
The Interview
John Walsh keeps using deceptive language in order to minimize bank fraud. This week he told the Financial Times that there were "a small number of cases where we felt there should have been a stop" to foreclosures. A "small number" -- that's the same phrase he used in testifying before a Senate panel. Under pressure, he eventually conceded that there were probably "tens of thousands" of them, even by his own limited definition. But he didn't explain that to the readers of the Financial Times when he used the same misleading phrase again.
Walsh also says that the problem of bank foreclosure fraud "came to light at the end of September... through some court proceedings." That's completely false. Court filings on the topic have been public since 2009. (See US Bank vs. Ibanez, etc.) What's more, eagle-eyed observers had been finding evidence of fraudulent foreclosure activity as far back as 2003 (we'll make some more information available on that score shortly).
Walsh's video interview is a slow-motion train wreck. He compares bank criminality to speeding -- "as with speeding, if there's a violation of law there will be penalties." He announces unspecified penalties, but promises they'll be less severe "if we find that not a lot of homeowners were injured" -- which is exactly the "finding" he's been jury-rigging the numbers in order to achieve. ( He also says that "subprime underwriting that was done within the national banks was done properly." Interesting.)
Walsh makes it clear that he's more interested in closing this case than he is in justice, or in preventing future crimes. We need to "complete the process," he says, to "draw a line and get the industry to move on."
People talk of "regulatory capture," that process where an agency becomes a servant of the industry it regulates. John Walsh is the Patty Hearst, the "Tania," of regulatory capture. Yves Smith has more information on the OCC and Walsh, and asks: "What do we call the OCC? The Office of Capital Corruption? The Office of Criminal Capitulation?" Before we change its name, though, let's change its leader.
How did it come to this?
Wildcat Banks and Dollars in Every Color
Regulators exist to protect the public, and John Walsh's agency, the Office of the Comptroller of the Currency, exists to ensure that we have an honest and reliable currency and banking system. Back in the nineteenth century, "wildcat banks" were springing up everywhere, issuing unreliable dollars that other banks often didn't recognize at full value. Some estimates say that by 1860 there may have been as many as 10,000 different bank notes in circulation.
The federal government needed to stabilize the nation's finances and establish a reliable national currency. (It needed to borrow money for the Civil War, too.) So it issued green dollars ("greenbacks"), and gave them its full guarantee. The OCC was formed to make sure that banks were reliable and were handling the new currency properly. A dollar needed to be worth a dollar everywhere. (Some Libertarians want to go back to multiple currencies, but that's a topic for another day.)
In a way, the OCC made the Sears catalog possible -- and it helped make a national economy possible, too. It wasn't formed "of the banks, by the banks, and for the banks." The OCC was created to protect people's savings, and to encourage commerce.
Enter John Walsh
John Walsh became the OCC's chief of staff in 2005, the same year that the OCC issued a regulation prohibiting states from regulating national banks. That regulation was finally overthrown by the Supreme Court in 2009, but the OCC tied the states' hands as the system collapsed. Mr. Walsh joined the OCC when John Dugan, a former bank lobbyist and political apparatchik, was in charge. (Dugan consistently made statements that served his industry's interests rather than the public's and displayed an appalling ignorance of his business -- or hoped for it from his listeners). Walsh became acting head when Dugan's term ended in 2010, and he's been there ever since.
Walsh's OCC recently took control of the Office of Thrift Supervision, too, and the OTC's recent history of disgrace and failure was thoroughly documented in the Levin/Coburn Report on the financial crisis.
There were two important priorities for the head of the OCC when Mr. Walsh took the job: restore the public trust and confidence shattered by his predecessor, and ensure that similar regulatory breakdowns could never happen again. Walsh has failed at both assignments.
America's Least Wanted: Covering Up
Of course, he's not that John Walsh, the America's Most Wanted guy. Unlike his namesake, this John Walsh doesn't seem to want to catch wrongdoers. Instead of pursuing criminals and exposing them to public scrutiny, this John Walsh exposed his agency to public embarrassment by attempting to do the opposite.
Mr. Walsh told a Senate panel that "our work identified a small number of foreclosure sales that should not have proceeded [emphasis mine]." But his "small number" comment was only put in context afterwards, through an OCC spokesman who explained when pressed that the agency had only examined 2,800 foreclosures. That's less than three-tenth of one percent of the foreclosures underway at the time. So how could it have found a large number?
Walsh later conceded that the actual number of wrongful foreclosures might be "in the tens of thousands." And even that number's artificially small, since Walsh insists on a narrow and unreasonable definition of wrongful bank behavior. As Reuters thoroughly documented, both Walsh's methods and his statements were suspect. Since his testimony was widely reported, but the clarifications were not, Walsh managed to leave a permanently misleading impression with the American public.
The Sales Pitch
Said Walsh: "If there is any reassurance here, and there is sadly very little, it is that borrowers subject to foreclosure in our sample were indeed seriously delinquent." But why were they delinquent? In many cases people fell behind on their loans because predatory banks and loan servicers hit them with unfair, undeserved fines and additional fees. Sometimes lenders forced a loan into delinquency with fraudulent fees, then justified a foreclosure because the borrower was behind on payments. Walsh has made this cynical industry argument his own.
Walsh comes across like a smooth salesman for the banks and mortgage companies he's supposed to regulate. As his video interview with the Financial Times demonstrates, Walsh even uses the industry's slick phraseology ("improper" instead of "illegal," for example) to describe massive, systematic, serial fraud by banks and loan servicers. Even Financial Times reporter Tom Braithwaite succumbs, describing thousands of fraudulent documents with the industry-honed phrase "shoddy paperwork."
Walsh has also suggested that $20 billion would be an unfairly high amount to levy on the banks, given the scale of their wrongdoing. Actually, it's extraordinarily low. We've laid out our argument in more detail elsewhere, but the U.S. housing market has lost ten trillion dollars in value -- and homeowners have been left holding the bag. Homeowners didn't choose the appraisers, write the loan contracts, or hire PR firms to convince the public that homes were a fail-safe investment. Yet homeowners, not banks, are paying the price.
Time to resign
John Walsh doesn't seem to understand his agency's mission. His organization missed the warning signs for the last crisis, and now he's papering over a pattern of criminality by the institutions he supervises. He's "back-dating" foreclosure fraud, claiming it only surfaced last September. That's either because he intended to mislead his audience, or because he lacks a fundamental understanding of the most urgent matter before his agency.
He used slippery language to persuade some senators that only a "small number" of foreclosures were improper, was forced to concede it was a misleading statement, and then used the same language again. He either did that despite the fact that it misled people once before, or because it misled people once before.
Whatever his reasons, it's time for John Walsh to resign.
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow
Basically telling you: " No hear, no see, no speak." Got that?
Thanks for probably one of your best articles to date. There is no doubt that Mr Walsh needs to resign. I basically agree with your main points, namely:
a) Mr. Walsh failed to anticipate the foreclosure crisis due to federal reserve and congressional criminality. With the fed pumping out cheap easy credit, causing an asset bubble, and congress mandating that banks lower standards to stop discriminating against those who cannot afford houses (lets call them ‘the poor’) as well as forcing Freddie and Fannie to become the guarantor and buyer-of-last-resort thus creating the subprime market, there is no doubt that he failed in his job to protect the economy (from ruinous government intervention).
b) You are also correct in pointing out that Mr. Walsh misrepresented the scale and scope of the bank fraud problem. By saying that ‘small number’ when referring to ‘tens of thousands’ he was extremely misleading. With 3 million filings in 2010 alone, and add in the three previous three years, say 10 million foreclosure filings give or take to date, calling 10,000 a ‘small number is one of the biggest overstatements in history. He should have used ‘de minimis’ or ‘extremely insignificant’ or ‘nearly none existent’. The fact that he used such alarmist language is clearly a sign that he is not fit for the job.
Thanks again for making two fine points.
Kai
I see it day-in and day-out. I have seen overdraft situations snowball so fast the people were out a couple thousand dollars.
I have seen institutions so greedy to take your money in overdraft fees they actually repost the withdrawals (debits) to maximize the income. You ask how this is done? Simple arithmetic really. Let us say you went shopping and spent $3 at Starbucks, $50 at the grocery store and then you paid your $1000 mortgage. The last transaction overdraws your account and you are simply assessed one overdraft fee. To maximize the fee income, the banks reverse the transactions taking out the largest amount first and then on to the smaller debits. In other words what would have been one overdraft fee turned into 3 overdraft fees. Of course they wait until the end of the day to see all the debits before re-organizing them in a manner for fee maximization and not by the time in which they were presented for payment.
You know what baffles me? Why is it that people know banks took everyone and this economy for a ride but people still use them? If you don’t like how business is done, stop using their services. At one point Bank of America offered VISA cards in California as a pilot program for illegal aliens?
Reac the rest on my blog because of word limitations here: www.BenFrasier.com/blog
Get an outsider for the job, and they are easily hoodwinked, bamboozled, flummoxed and generally snookered by those on the inside.
It's understandably difficult to find the few who possess not only expertise and willingness to serve, but the ethics required to act in the interests of the public rather than those of business.
I disagree. The reason politicians "regulate" industries, is to generate bribes (I mean campaign cash) from those in the industry. Many articles have been written on "regulatory capture" (again, another term "political capture" is more accurate). Politicians promise "regulations" that benefit some in the industry at the expense of others. Both the helped and harmed companies start the campaign cash flowing so any legislation helps them. And (most) politicians don't want to just harm companies in the industry, as all their contributions will go to their opponents.
As Matt Welch of Reason wrote at http://reason.org/news/show/the-corporation-word:
December saw the passing of a great American: the academic and bureaucrat Alfred E. Kahn, father of airline deregulation. Kahn was a liberal Democrat who, after applying rigorous study to the impact of federal regulation on industry, came to the conclusion that in many cases regulation served to raise prices, blunt innovation, form government-sanctioned industrial cartels, and discriminate against new businesses. The market, not the government, was the most effective tool to discipline big business, because corporations that punished their customers were doomed to failure. In short, Kahn understood that misguided regulation produced exactly what Robert F. Kennedy Jr. claims to despise: big business and government entwined in unholy corporatism.
Or we should just gamble every time we deal with a business that today is not the day they hurt-kill-bankrupt us?
Some degree of regulatory oversight is needed to prevent unecessary market failures by unscrupulous individuals. Also bad outcomes happend without regulatory oversight. Think the airline industry and Reagan's push for deregulation. Prices went down but so did safety oversight. When a roof rips off a jet, someone may be at fault for skipping on safety maintenance in order to save a few bucks and be more "market competitive".
Controlled markets with some regulations are the best solution.
Also recognize that in manufacturing, coupled with globalization, no regulations means corporations migrate to nation-states that maintain the worst labor and environmental standards since these become unrealized costs for a manufactured item. China has become the new favored place for manufacturing becuase they have near-expendible labor and little or no environemntal regulations (think smog retuns after Olypmics!).
Economics is not a science that allows accurate predictive outcome. We try an economic framework, realize the outcomes, alter the process for needed improvements.
In what real world market has free market theory succeeded?
http://cpc.grijalva.house.gov/
http://en.wikipedia.org/wiki/Democratic_Leadership_Council
Seems like we're more and more at danger from government actions, since no one in government is held accountable for actions that harm us. And if we try to hold government accountable, seems like they turn on us and attack us.
Our government civil servants, no longer civil, no longer servants, and no longer the people's government.
Its not simply the people in those agencies. Its the problems of regulation itself. No regulator is able to obtain all of the relevent information about the economy they are trying to regulate. In the attempt, they often have to go to the very people they have to regulate to get this information in the first place, which is a major cause of regulatory capture. The industry leaders they talk to sweet talk them, act and talk as if they have the same interests as the regulators, and the regulators fall for it.
No amount of new regulation could have prevented the financial mess we have seen recently because it was CAUSED by regulation. The Fed dumped massive amounts of new money into the economy at low interest rates, and our politicians funnelled the money into the housing market to create the bubble.
When I hear liberals and progressivists blame "deregulation" or "lax regulation" for the crisis, I tend to think they are talking about micromanagement of the whole financial sector, which means some government official examining every loan or investment a bank makes with a fine toothed comb. With the number of transactions taking place throughout the economy, this would take an army of regulators numbering at least as many os bank employees!
http://www.nakedcapitalism.com/2011/04/occ-makes-patently-false-claim-that-slap-on-the-wrist-servicing-penalties-could-hurt-banks.html