Gambling? In Casablanca?
posted by Frank Pasquale
With each passing week, there are more embarrassing revelations about foreclosure practices. Here’s a mind-boggling chart, limning failures to follow “obligations . . . from secured credit and trust law.” Adam Levitin argues that most legal observers are slow to recognize how bad things have gotten, because they believe “there’s no way there were massive screw-ups because thousands of top Wall Street legal minds were working on securitization deals.” Levitin responds: “the best legal minds in the country weren’t doing diligence on endorsements on securitization deals.”
After reading Levitin’s testimony, and much of Michael Hudson’s book The Monster, I was reminded of a Global Witness report called Undue Diligence: How Banks Do Business with Corrupt Regimes. The report shows how major financial institutions have enhanced their profits by not looking too carefully into the details of transactions they engage in. As Global Witness concludes:
The banks that feature in this report are hiding behind a series of convenient excuses – of being prevented by bank secrecy laws from disclosing the name of a customer; . . . of dealing with a commercial entity, when in fact it was a state owned company in a corrupt state; of dealing with state funds, when actually the state has been captured by a human rights-abusing dictator; of dealing with a correspondent bank, when the customers behind it were pillaging the state to pay for conflict.
In an industry where repressive rulers in Equatorial Guinea, Republic of Congo, Gabon, Liberia, Angola and Turkmenistan have been acceptable clients, why not “play ball” with subprime lenders churning out thousands of dubious loans? As Hudson quotes one top Lehman official in London, “the prevailing atmosphere was for fast growth and special fast-track treatment for what we now know were toxic deals” (256).
Moreover, why try too hard to be sure that complex securitizations are actually completed correctly? And finally, when it all goes south, why try to carefully reconstruct what actually went on, when you can hire “Foreclosure Department Supervisors” (or, as JP Morgan Chase put it, “Burger King Kids”) for $10-12 an hour to try to rush into more fee-generating sales?
In the case of foreclosure fraud, the convenient excuses are strikingly double: we needed expedients like MERS to speed securitization and get more people into homes; now we need LPS and the Interstate Recognition of Notarizations Act of 2010 to get them out. As Hudson reports, high-speed lending has been as much about legal immunity as it is about efficiency:
The flow of money from Wall Street allowed lenders and brokers to open up shop, make thousands of loans, and then shut down if lawsuits or regulatory investigations became a problem. Then they could move to another state or reopen under another name. As law professor Chris Peterson observed. . . .”As thinly capitalized originators make more and more loans, claims against the lender accumulate, while the lender’s assets do not. [They] . . . are used like a disposable filter: absorbing and deflecting claims and defenses until those claims and defenses render the business structure unusable.” (174)
Many are concerned that the “Foreclosure Fraud Task Force” set up to investigate these practices has little chance of succeeding. In his book, Hudson concluded that the Bush-era “OCC and OTS considered their role to be not watchdogs but partners and defenders of the very institutions they were supposed to police” (166). While there are some energetic regulators in Washington now, it’s unclear how influential they are. Most regulators’ incentives aren’t great; as Levitin said in another context, a “concern here is that the bank regulators so badly don’t want for there to be a problem that they won’t look at the notes in the hopes that this issue goes away.” Perhaps only the judicial system can get to the bottom of the mess.
November 28, 2010 at 11:46 am
Posted in: Consumer Protection Law, Economic Analysis of Law, Financial Institutions
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