More on the FCIC Report

As Professor cummings noted the FCIC report has been released. Initial reactions to the report can be found here, here, here. Reaction to the rebuttals to the report can be found here. If you have been reading the Corporate Justice Blog, you won't be surprised at the findings of the committee. If you have been following the passage of the Dodd-Frank financial reform bill many of these findings were addressed, even if the sufficiency of some of those measures might remain in question. The commission found:

There was an explosion in risky sub-prime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red lags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

What is more telling about the report is what the commission found were not causes of the financial collapse. These causes, having been used by conservatives to advance their free market and deregulation prerogatives, have NOT found a welcome home with the commission. Here are some examples:

1) Fannie Mae and Freddie Mac were the cause of the financial crisis. The commission writes, "We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. " The commission goes on to say that rather than leaders in the sub-prime market that the GSEs were followers and that the delinquency rates on sub-prime loans purchased by the GSEs was less than other financial firms. While certainly the GSEs were not innocent in the crisis, as this blog has noted the performance of Fannie Mae and Freddie Mac were much more a symptom than the illness that was the financial crisis.

2) The Community Reinvestment Act played a role in the financial crisis. The commission finds "the CRA was not a signiicant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law." While the commission goes on to question the national priority of homeownership, one President George W. Bush called the "American Dream," it doesn't place the blame on poor Americans looking for help entering the middle class.

3) The deficit. One of the now popular conservative arguments, and one that has enveloped the mainstream media, is that the deficit is the cause of our economic problems. Unsurprisingly, the deficit does not receive a mention in the commission's report. While many conservative leaders propose harsh austerity measures, they fail to note that these very measures in the United Kingdom have them headed towards a double dip recession, while the stimulative measures initiated by President Obama has the US on a slow but steady course of growth.

4) Excessive regulation and failure to let the free market work was the cause of the crisis. One thing you have undoubtedly heard is that "uncertainty" and "hostility" towards business is the reason that the economy fails to grow. The commission found, "The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of inancial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe." The commission has harsh words for those who believe that just letting the free market work is an acceptable strategy for a functioning economy. The belief of those on Wall Street that they were "market makers" and "wealth creators" who had found ways to remove all risk from their transactions and could "beat the market" has ended up to be unfounded. This culture remains on Wall Street and is the reasoning behind the still excessive bonuses received on Wall Street.

Financial Crisis Inquiry Commission Report

The Financial Crisis Inquiry Commission, formed by a 2009 Congressional enactment, has at last issued its final report, despite a fractured and divided committee. Charged with examining the underlying causes of the financial market crisis of 2008, the bipartisan FCIC spent hundreds of hours interviewing dozens of market actors and poured over thousands of pages of reports with the end goal to provide a comprehensive picture of the root causes of the market collapse of 2008. In its 545 page book-report, the FCIC concluded that the crisis was "avoidable" and that "warning signs" had developed years prior to the meltdown.

According to the Wall Street Journal, the report found that:

"Twelve of the 13 largest U.S. financial institutions 'were at risk of failure' at the depth of the 2008 financial crisis, while at least 50 hedge funds tried to capitalize on it, according to a report released Thursday [January 27, 2011] by a U.S. panel investigating how the financial system unraveled."

In several future posts, the Corporate Justice Blog will drill down into the report, examine the contentious nature of the bipartisan committee debate, and discuss the defecting committee members separate report filed last month, December 15, 2010, by the Republican Commissioners of the FCIC styled the "Financial Crisis Primer."

From Wall Street to Main Street Symposium

On Thursday and Friday, January 27th and 28th, 2011, the Chapman Law Review will host its annual symposium "From Wall Street to Main Street: The Future of Financial Regulation." The symposium will analyze the Dodd-Frank Financial Reform Act as speakers and panelists will describe various provisions of Dodd-Frank and opine on the potential that this new financial industry regulation will be successful. A cutting edge group of legal scholars, regulators, practitioners, and bankers will tackle the financial market crisis of 2008 from a variety of perspectives through the lens of the new Dodd-Frank regulation.

The event will be podcast live. Go here, and scroll down to "webcasts." Further, each panel has its own weblink as indicated below:

Panel I: Into the Bog: An Introduction to Dodd-Frank

Panel II: Congress Punts; Administrative Agencies Receive; Welcome to a Decade of Rulemaking

Keynote: Steven Schwarcz: Ex Ante Versus Ex Post Approaches to Financial Regulation

Panel III: The Return of the Rating Agencies: Rerun or Redemption?

Panel IV: Who's the Boss: Re-writing the Rules of Corporate Governance

Rhetoric Matters. . .

People should take responsibility for their words and this prophetic video should be watched by anyone participating in public discourse:


The bottom line is that demonizing people simply is not costless. In the final analysis we are all citizens of this great nation and while we may disagree on policy we should be mindful of the powerful ties that bind us together. When we were attacked on 9/11 the terrorists drew no distinction between conservatives and liberals. Both Democrats and Republicans stormed Omaha Beach. We Americans are all on the same side.

From Wall Street to Main Street Symposium

The Chapman University School of Law and the Chapman Law Review will host a Symposium on Thursday and Friday, January 27th and 28th, 2011 entitled "From Wall Street to Main Street: The Future of Financial Regulation." The Symposium aims to examine the Dodd-Frank Wall Street Reform and Consumer Protection Act featuring keynote speaker Professor Steven Schwarcz and panels focused on deciphering the content and implications of new Wall Street regulations.

Corporate Justice Blog contributors Steven Ramirez, Jill Barclift and andré douglas pond cummings are among the participants that will appear on panels scheduled for 1.28.11 including (a) Into the Bog: An Introduction to Dodd-Frank; (b) Congress Punts; Administrative Agencies Receive; Welcome to a Decade of Rulemaking; (c) The Return of the Rating Agencies: Rerun or Redemption?; and (d) Who's the Boss: Re-writing the Rules of Corporate Governance.

The Symposium promises to be a cutting edge event. For more information and registration instructions, click here. Wall Street reform is something that this blog has and will examine surgically in coming weeks and months.

Merry Christmas to All, with a Special Wish to the Least Fortunate Among Us

Christianity as practiced in too much of the USA really has me baffled these days. Where is the outrage among the hundreds of millions of Christians regarding the 99ers and the 9/11 first responders?

The 99ers are the millions left out of the extension of unemployment benefits and are now facing unemployment with zero aid after exhausting 99 weeks of benefits. The 9/11 first responders are those who were left ill after rushing to the WTC to save lives or otherwise help. They now face crushing health care costs. There are now bills pending to resolve these issues, and I urge anyone with a GOP Senator to contact that Senator and urge passage of these bills.

Much has passed recently during this lame duck session of Congress. Perhaps the most costly and high profile action was the extension of the Bush tax cuts to even the very wealthy--at a total cost of $858 billion. The cuts for those making more than $250,000 will cost $75 billion and will have little stimulative impact.

It is truly morally corrupt and deeply anti-Christian to shower massive wealth on the already wealthy while leaving the most unfortunate among us literally out in the cold this Christmas.

I attended St. Isaac Jogues grammar school and graduated from Our Lady of Perpetual Help. The most vivid lesson from that Christian schooling in my mind is: "That which you do to the least of my brothers, you do unto to me." Somewhere American Christianity seems to have lost that fundamental teaching, at least for too many. I sometimes think that too many Christians in the USA think this is a part of the Sermon on the Mount: "Blessed are the tax cutters, for they shall inherit millions tax free."

So, Merry Christmas to all--and if you wish to help the most unfortunate among us this holiday season I recommend food pantries and a letter to your representatives.

Reversing Field: Examining Commercialization, Labor, Gender, and Race in 21st Century Sports Law

A new book has just been released called "Reversing Field: Examining Commercialization, Labor, Gender and Race in 21st Century Sports Law." Edited by andré douglas pond cummings and Anne Marie Lofaso, this book interrogates the "dark side" of sports, focusing on the commercialization of collegiate athletics and the exploitation of college athletes, as well as issues of racism, sexism and discrimination in professional and collegiate sports.

Per the frontmatter: "Reversing Field invites students, professionals, and enthusiasts of sport – whether law, management and marketing, or the game itself – to explore the legal issues and regulations surrounding collegiate and professional athletics in the United States. This theoretical and methodological interrogation of sports law openly addresses race, labor, gender, and the commercialization of sports, while offering solutions to the disruptions that threaten its very foundation during an era of increased media scrutiny and consumerism. In over thirty chapters, academics, practitioners, and critics vigorously confront and debate matters such as the Arms Race, gender bias, racism, the Rooney Rule, and steroid use, offering new thought and resolution to the vexing legal issues that confront sports in the 21^st century."

Successful Partnerships

The Economist has recently published a short piece examining the ingredients of successful business partnerings. In describing successful partnerings, like those of Warren Buffet and Charlie Munger (Berkshire Hathaway); Michael Eisner and Frank Wells (Disney); and Bill Gates and Paul Allen/Steve Ballmer (Microsoft), the article describes characteristics of successful business partnerings as follows:

"Partners need to be able to trust each other absolutely. . . . Partners also need to possess a delicate balance between similarities and differences. A striking number of successful partners combine similar backgrounds with very different attitudes to fame."

The Economist focuses on one surprising business combination that has worked for more than forty years -- that of Mick Jagger and Keith Richards. To read more about the successful Rolling Stones combination of Jagger and Richards, check out the article here.

Shutting Down the Big Banks

Economists William Black and Randall Wray argue that several big banks should be foreclosed on, starting with Bank of America, for engaging in a pattern of criminal fraudulent behavior first in its mortgage lending practices and now in the foreclosure processes. To read how and why Black and Wray believe that Bank of America should be forced into receivership see:

Foreclose on the Foreclosure Fraudsters, Part I: Put Bank of America in Receivership; and

Foreclose on the Foreclosure Fraudsters, Part II: Spurious Arguments Against Holding the Fraudsters Accountable

If Bank of America and other Wall Street banks had been taken over in 2009 when they were nearly insolvent and desperate for a lifeline, everything would be much different now both on Wall Street and on Main Street. Instead, the big banks have continued "rewarding" their executives with enormous bonuses as they continue to be silently buoyed by the Fed.

Are the Megabanks Insolvent?

Three trillion dollars in uninsured mortgage exposure? Nine hundred billion in home equity loans (probably better termed no-equity loans)? Plus, 1.7 trillion dollars in suspect commercial loans? "The collateral for these loans is definitely worth less than the loan balance." What a nightmare.

Add in any realistic valuation adjustments for MERS related losses, lost note losses, and the fact that residential real estate sales are still declining and it gets really hard to see how the banking sector can be fully solvent.

The Obama administration needs to do new stress tests, with a specific focus on foreclosure fiasco issues, and then assess which banks are viable and which ones are not. Those that are not viable must be shuttered immediately--before they can do more damage or become even more insolvent.

Can All The King's Men Put MERS Back Together Again?

If I weren't crying so much about the doings of the lame duck Congress I would bust out laughing (or maybe its vice versa).

Nowhere does the great sausage machine seem more out of kilter than on the issues surrounding the mortgage foreclosure crisis. They seem utterly clueless on what to do. And, as the Congressional Research Service highlights this week, lawmakers really have no way to untangle how any putative bailout legislation would impact the various federal interests in the residential real estate market:

Another interesting wrinkle is that the federal government is an active participant in multiple, and sometimes conflicting aspects, of the mortgage market. For instance, the Department of the Treasury (Treasury) has used Troubled Asset Relief Program (TARP) funds to acquire stock and warrants to purchase stock in banks with significant mortgage-related assets (e.g., CitiGroup) and to implement the Making Home Affordable Program; the Treasury also has used funds from the Housing and Economic Recovery Act (HERA, P.L. 110-343) to purchase millions of dollars worth of mortgage-backed securities from Fannie Mae and Freddie Mac; the Federal Housing Finance Agency (FHFA) is acting as conservator of Fannie Mae and Freddie Mac; and the Federal Deposit Insurance Corporation (FDIC) holds interests in mortgage assets as conservator and receiver over failed commercial banks and thrifts. As a result, the government will be directly impacted by, and at times, will be actively involved in, mortgage-related legal disputes.

So, as I posited in earlier posts, lawmakers should move cautiously in this area, as the possible unintended consequences of any law could prove devastating.

Perhaps the first thing lawmakers must insist upon is that the banks come clean on the depths of the problem. Recent evidence suggests that it is far worse than the banks have portrayed. For example, the Washington Post reports this morning that the banks have launched a major lobbying effort in the halls of Congress which belies their position that this is all about mere legal technicalities and everything will be all right. Similarly, the lawyers in the trenches report with seeming unanimity that none of them ever sees foreclosure cases where the paperwork is in order:

Visit msnbc.com for breaking news, world news, and news about the economy

Matt Taibbi reports the same in a recent Rolling Stone story on this whole mess. This quote represents my worst fears concerning the depths of this crisis underlying the thousands of fraudulently prepared lost note affidavits:

It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.

So, my point is simply that before Congress takes a leap in favor of the megabanks they should at least try to figure out who they are tossing under the bus to save their precious megabanks and just how much money its going to cost the government.

Similarly, they seem powerless to me to change UCC section 3-309 regarding lost notes. That must happen on a state by state basis, and would virtually revolutionize he law of commercial paper which has always made it difficult if not impossible to recover on lost notes except in relatively narrow circumstances.

Congress must wait to define the scope of the problem, its powers, and the interests of the government itself before leaping into the tsunami created by the megabanks to attempt what may well be an impossible rescue. Instead, the administration should fire-up the Dodd-Frank Orderly Liquidation Authority, scatter the megabanks to the four winds, fire and investigate the reckless bank managers, and quickly undertake a massive loan modification program to save consumption and reestablish the rule of law in our economy.

COP on Foreclosure Crisis and Bank Solvency: "Severe Threats Remain"

The TARP Congressional Oversight Panel (COP) today released "Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation." The above video is a very helpful summary of the full report.

The findings of the COP on this issue now represent the most comprehensive and detailed analysis of the foreclosure crisis I have seen to date. I whole-heartedly agree with the report, and I was pleased to see the COP call for further stress tests of the banks to find-out the depths of the the threat the foreclsoure crisis is likely to present to our financial system.

Yet, I am troubled by one loose end raised by the report. The TARP COP has vastly more resources than any blogger to drill down and find out whether the banks have the notes or not for the millions of mortgage loans packaged during the real estate bubble. I am baffled that weeks are flying by and we still have no authoritative guidance on how big the missing note problem is.

That seems antithetical to a well-functiong system of capitalism backed by the rule of law. Is it really the case that virtually the entire global financial system must fly blind on this rather crucial issue? Can someone please tell us if the bankers have the notes?

Does the Use of MERS Constitute Consumer Fraud?

One major issue facing those hoping for a federal solution (aka yet another bank bailout) to the MERS controversy is the fact that MERS implicates a wide range of state law issues that are simply not conducive to broad brushed federal intervention or defacto guarantees. We are talking basic property rights, contract law and recording regimes which have been left to states for centuries. Any "federal solution" should be viewed with deep suspicion because the only real reason for Congressional meddling with these traditional state law functions would be to once again shield the banks from unpleasant legal and competitive outcomes. Further, because 50 state law regimes are at issue it would be very difficult for Congress (or bank lobbyists) to craft legislation without potentially serious unintended consequences.

Consider, for example, the recent DC Attorney General Determination that the use of MERS as the original mortgagee to evade recording fees constitutes consumer fraud under DC law. According to the DC Attorney General: "A noteholder’s security interest in a DC home should normally be reflected in the public land records maintained by the District’s Recorder of Deeds. Under District law, in contrast to the laws of many states, each deed or other document transferring a mortgage interest must be recorded with the Recorder of Deeds within 30 days of execution. This requirement is not satisfied by private tracking of mortgage interests through the Mortgage Electronic Registration Systems (MERS)." Thus, a foreclosure proceeding against a homeowner is deceptive to the extent the party seeking foreclosure has no recorded right to do so.

Many jurisdictions would follow this basic approach. Thus, for example, in Illinois, a mortgage must identify the grantee. The mortgage "shall" be recorded and is effective as a lien, generally, only when recorded. And, in Illinois, deceptive practices are statutorily defined to include any misrepresentation of a material fact, in any consumer transaction. In my view, Illinois should therefore also find that the use of MERS constitutes consumer fraud. The same likely holds true in many other jurisdictions.

The basic idea is that a consumer is entitled to know the identity of the mortgagee of their property, and should be able to assess the validity of the mortgage based upon readily available information. It is hard to argue that these facts are not material to a consumer, either faced with foreclosure or otherwise. For example, as stated in the DC Attorney General's opinion how can a homeowner accurately assess a lender's right to foreclose if a lender's mortgage is not duly recorded in the recorder's office. Similarly, if a mortgagor is underwater on their property they should be able to contact the mortgagee without relying on the good graces of their servicer who very often has incentives to pursue foreclosure instead of a loan modification. It is a material fact to know the actual holder of the mortgage.

The upshot of all this means that the great destabilization of property rights associated with the use of MERS is not the only legal problem that courts must address. They also need to think hard about whether consumers have a right (protected by the state consumer fraud statutes) to be able to discern the identity of their mortgagee through public records, independently of the determination of the loan servicer's calculation of its profit interest.

Underlying this judicial determination is an important policy consideration: do courts want to empower consumers to plead their case for loan modifications or forbearance directly with the end lender, or do they want to empower servicers to maximize their ability to generate profits from fees associated with foreclosures? If they choose servicers over homeowners, they will essentially encourage more foreclosures along with associated macroeconomic carnage in the form of devastated families (hurting consumption today and human capital formation long term), massive continued price depreciation nationwide from the downward pressure exerted from foreclosures, and continued losses to the MBS investors from real estate depreciation nationwide. The only beneficiaries will be three or four megabanks that dominate the servicer market.

Congress faces a more complicated calculus. It is a lame duck Congress. The job market sucks. Certainly, those who will not return can be forgiven if they have their eyes on the job market--and the megabanks control more wealth than virtually anyone else in our society. Moreover, since they enjoy a government guarantee the megabanks can pay employees above market wages regardless of their performance or the performance of the economy.

Still the ultimate point of this blog entry is that it would highly inappropriate and macroeconomically devastating for the federal government to once again give the megabankers legal indulgences to allow the senseless foreclosure machine to continue unabated. Further, this time such indulgences would involve a massive extension of federal power into traditional areas of state law ranging from property rights definition, recording statutes, foreclosure rights, mortgages, contracts and consumer fraud.

Let's hope Congress makes the right call and allows our preexisting legal system to dole out incentives and disincentives without political interference on behalf of the most outlaw elements of our society.

Citizens United and the 2010 Mid-term Election

With the 2010 mid-term election in the rear view mirror, the impact of Citizens United can now be practically assessed. For those that spent any time watching television in October 2010, the impact of Citizens United was on full display during this election advertising cycle. 2010 saw a new record set on the amount of money spent on election advertising and electioneering, with some estimates coming in at more than $3 billion being spent, much of it on television spots. Some argue that the ads this election cycle were more vicious than ever before. Without question, they were more plentiful. Of course, Citizens United is the U.S. Supreme Court decision that allows unfettered (and in some cases anonymous) contributions from corporations to specific political and judicial candidates.

A couple of important points to consider:

First, when judges are elected, particularly in partisan contested elections, the potential for nefarious outcomes is elevated. To this point, see this Washington Post editorial entitled "Putting a Halt to Judicial Elections." Further, I have recently dropped an essay with the Iowa Law Review, where i discuss recent empirical evidence that finds that judges that are elected in partisan contests are significantly more likely to find for corporate defendants and interests than are those judges that are appointed. The essay is entitled: "Procuring Justice: Citizens United, Caperton, and Partisan Judicial Elections" and can be accessed at the Iowa Law Review Bulletin.

Second, much of the corporate electioneering is being steered into state local elections by prominent out-of-state groups and organizations, that are crypticly named "Americans for Safety and Strength" or "Americans for Fiscal Responsibility," etc. These organizations provide no ideological affiliation, but do provide cover for many corporate contributions that remain undiscoverable in many instances. Professor Atiba Ellis hosted a Citizens United conference at the West Virginia University College of Law, wherein he and law professors from the University of Akron discussed the impact of Citizens United on this 2010 election cycle.

Citizens United, as described many times in this blogspace, enables an atmosphere of diabolical electioneering, and we have just now begun to see its impacts.

Prof. Christopher Peterson (and myself) Will Present a Webcast on the Mortgage Morass Tomorrow

As I previously emphasized, Professor Christopher Peterson recently posted an outstanding update to his outstanding law review article in the Cincinnati Law Review.

Tomorrow the University of Utah, Quinney College of Law, will host a webcast (available here) presentation by Professor Peterson and myself entitled “Foreclosure Fiasco? Lost Promissory Notes and the Mortgage Electronic Registration System.” The webcast will run from 12:15 to 1:30 p.m., Utah Time or 1:15 to 2:30, Chicago time.

I will comment and try to put Professor Peterson's outstanding work in perspective, as I have tried to do here, here, here and here.

We will also address the problem of lost and destroyed notes, which along with MERS casts a pall over the residential real estate market today. Indeed. most real estate experts attribute renewed weakness in the real estate market to the mortgage morass.

Professor Peterson displays uncommon scholarly courage as the messenger of bad news for the megabank sector. I urge anyone concerned about the power of the megabanks or the economy in general to tune-in as I predict the banks will soon beseech our elected representatives to relieve them from the legal and economic consequences of the recklessness of their senior managers. My argument is that some megabanks may already be insolvent and should be escorted into the Dodd-Frank Orderly Liquidation Authority Regime.

Late last Friday afternoon, for example, Bank of America disclosed that it faces $375 billion (although much less in light of this ruling which is not final) in claims that the mortgage backed-securities sold by it and its affiliates included such deep-seated flaws that BOA must repurchase the private label securities. This exposure certainly does not boost their financial solvency. The full BAC 10-Q is available here. Similarly, the Attorney General of the District of Columbia just issued an innovative, even pioneering, opinion that the use of MERS may violate the DC consumer protection statute. This too carries the potential, if followed in other jurisdictions, to severely impact the capital of the megabanks.

I cannot imagine a more timely issue.