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Time for a National Bank Holiday

There was and still is fraud everywhere in the mortgage finance system.  One way to remedy this wide spread fraud in the mortgage finance system and truly resolve this financial crisis is by declaring a good old fashion National Bank Holiday (a la FDR) and truly scrutinize banks’ books for fraud and insolvency.  If we keep avoiding it or hoping we can grow our way out this mess nothing will be resolved and Wall Street will continue going about its very profitable business and lead us into another financial crisis. 

Professor Randall Wray summarized the levels of fraud this way:

We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers—who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.

Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.

Just in case there is some doubt that control fraud continues unabated consider this warning from the Basel Committee on Bank Supervision (Basel is an international organization that sets industry standards for international banks):

Banks are failing to implement bonus practices that rein in risks blamed for contributing to the financial crisis, a group of global banking regulators said.

The principle of matching pay to risk “has proven to be challenging” the Basel Committee on Banking Supervision said in a statement on its website today. “As of October 2010, effective implementation” of such bonus practices “has not been achieved,” said the committee, which last month proposed tougher capital rules for banks worldwide.

Wall Street, despite practically destroying our economy, hasn’t changed.  Who expected they would?  The Obama Administration?  We have done nothing to force them to change their behavior.  There have been no consequences for their actions. In fact, it has been quite the opposite - these financial conglomerates are profitable and continue to hand out huge bonuses while the real economy and the rest of us continue to suffer with high unemployment. 

To date, the Obama Administration’s handling of this financial crisis and its dealing with Wall Street have been absolutely atrocious.  The strategy seems to be that economic growth will cure the financial crisis.  But that’s not happening and Wall Street continues to benefit from cheap money/low interest rate environment and again while the rest of us suffer.

One big way to change Wall Street’s fraudulent and reckless behavior is by truly holding them accountable.  Professor Wray has offered a different approach for the Obama Administration:

1)  Declare a national bank holiday that would close the biggest financial institutions—say, the top dozen or so. Send in the supervisors to examine their books to uncover fraud. Determine which ones are insolvent and resolve them. While resolving them, net their claims on one another (including derivatives). Do not allow any insolvent institutions to reopen, and do not use the resolution process to merge institutions (we don’t need even bigger “too big to fail” banks). Prosecute the crooks and jail the guilty.

2)  Stop all foreclosures. Investigate and prosecute all institutions that have been selling or buying fake documents to be used in foreclosures. Prosecute the crooks and jail the guilty.

3)  Announce that all homeowners who occupied their homes on October 1, 2010 will be allowed to remain in their homes indefinitely. Create a national mediation board to adjust all mortgage payments to “owner’s equivalent rent”—the fair value of rent for the home. Establish a fund to provide rental assistance to keep low income homeowners in their homes.

4)  Give purported mortgage holders 30 days to produce the original notes; if they cannot find them, hand the homes over to the owner-occupants—free and clear of debt.

5)  Create a process to allow securities holders to sue for recovery of value. This must be national—state courts will not be able to handle the case load.

6)  Direct the GSEs [Fannie Mae and Freddie Mac] to refinance mortgages at a low fixed rate. Mortgages would be provided against real estate appraised at fair market value to any borrower for a primary residence. The GSEs would pay holders of existing mortgages only current fair market value. Those holding these mortgages can seek redress through the process outlined in step 5. Only in the case of borrower fraud would the homeowner be held responsible for losses attributed to the refinancing.

7)  There will be fall-out from losses. It is better to deal with the collateral damage directly than to prop up the control fraud banks. For example, pension funds hold toxic waste securities as well as equities in the control fraud banks, and by all reasonable accounting the Pension Benefit Guarantee Corporation is already insolvent. But it is better to directly bail-out pensions than to maintain the charade that fraudulently created securities have value.

We need to stop kicking the can down the road and directly address the problems in the financial sector and Wall Street.  If you agree then please contact the White House via Email or call 202-456-1111 and tell President Obama it’s time to declare a National Bank Holiday and resolve the fraud and insolvency on Wall Street. Good luck.

Further suggested reading:

1) Foreclose the Foreclosure Frauds (Part 1)
2) Specious Arguments Against Bank Holiday
3) Foreclosure Fraud: We Need to Fix the Banks Again