The 14 Trillion Dollar Scam and the Unfinished Business of Financial Reform

Guest Post by Jesse

  1. Financial Institutions should not be allowed to cheat people through confusing and complex products, or just plain lying about credit cards and mortgages.
  2. Financial Institutions should not be allowed to use taxpayers to pick up their risks through deposits or bailouts.

We know what needs to be done. Big financial institutions are flexing their political power to keep us from doing it, and to undermine what has already been attempted.

Auto loans now look like the pre-crisis mortgage market because they were exempted by Congress from Consumer Financial Protection Bureau oversight.

Department of Justice relies on deferred prosecutions and does not take repeat offending institutions to trial, and the SEC is even worse. They are abusing a system that was designed for low level non-violent offenders.

It is time to end the slap on the wrist culture at DOJ and SEC. Fines should be equal, at a minimum, to every dime of profits gained, and there should be an independent judicial review of these deals.

It is time for the Fed to make enforcement a top priority. Big financial institutions have every incentive to commit large financial offenses, and that is what they do. They rig global markets, and launder criminal funds and help the very wealthy to engage in tax cheating.

Dodd-Frank did not end ‘too big to fail.’ We need to stop talking about it and break up the Big Banks now, and force them to face the consequences of their own investment decisions. Too much of a technocratic approach is undermined over time, favoring a few well-connected, lawyered-up firms over time. What is needed is a structural approach, not a heavier layer of regulation. We need a new Glass-Steagall Law.

Congress must be able to limit the Fed’s emergency lending of subsidized loans to global financial institutions without oversight.

Reforming the tax laws is critical to effective reform. Corporations are incented for short term thinking and using stock buybacks to manipulate price performance. The tax code incents Banks to engage in higher leverage and lower capitalization.

High Frequency Traders introduce more volatility without adding value. A targeted financial transaction tax would curb this without affecting mom and pop investors.

The shadow banking system is unregulated and open to serious short term financial risk before the next Lehman or Bear Stearns starts another financial crisis.

The system is rigged, and those that rigged it want to keep it that way.


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Chicago999444
Chicago999444

This is all very obvious, but the only way it will ever happen is if the end-users of our financial system- the investors both large and smal, the home and car buyers, the users of all types of debts, stop co-operating, and refuse to buy a financial “product” that they have not scrutinized down to the last tiny line of print, and thoroughly understand. For starters, they could start actually READING the contract before they sign it- I’m appalled at the number of people who sign complex contracts without reading them first.

I continue to be astonished by how many people of a level of education and intelligence to know better, including institutional money managers being paid salaries in the high 6 digits, invest or buy with only a cursory knowledge of what they’re buying. Just looking at the breakdown of a particular CDO on the Bloomberg screen should have been enough for many institutional buyers to know that a “AAA-rated” CDO whose bundled home loans had a 17% delinquency rate was maybe inappropriately rated- I expect an Ivy-educated money manager with a CFA designation, who is being paid $500K a year, to be just a LITTLE more astute than a ghetto car-buyer signing onto a 7 year loan with 18% interest just to get his paws on a $40,000 car, yet these people routinely bought junk that a half-hour of due dili would have told them were junk at best, and usually ticking bombs packed with unacceptable risk. I talk to a lot of people about money, including one rich man I know who bought a REIT, signing a very wordy subscription agreement, after a 20 minute consultation and without reading the prospectus and was surprised to learn that it was non-tradeable. Hint: if you have to sign a subscription agreement to buy a particular investment, it is not liquid. Most people will do ANYTHING to buy a house, and sign onto mortgages and loans having never read the loan documents, let alone clearing an understanding of what the terms mean, and are shocked, just SHOCKED, when the payments triple after 5 years. Most real estate agents can’t even properly parse a standard offer contract, and most buyers and agents never bother.

Read before you sign, and if you don’t understand it, find someone who does. If there is anything you do not understand, or do not like, do not sign. I know this might be difficult for a money manager who is under pressure to keep his fund 95% invested, must make decisions very quickly, and has to chose from hundreds of possible choices that are all more or less bad. The current deformed financial world, perverted by interest rate repression and central bank manipulation, is what it is, and it is just a terrible time to have to manage investments or advise anyone else. It is easier for an individual- you do not have to invest in or buy ANYTHING badly enough, to sign onto something after 15 minutes of skimming a contract, financial statement, prospectus, or offering memorandum.

Stucky

“Most people will do ANYTHING to buy a house, and sign onto mortgages and loans having never read the loan documents, let alone clearing an understanding of what the terms mean, and are shocked, just SHOCKED …….” —————– Chicago999444

They are “SHOCKED” because they are “WILLFULLY STUPID”. No, that’s being too kind …. most home buyers are DUMB FUCKS to the nth degree. You have no idea, really.

You all know I was a mortgage broker for many year. I sold Neg-AM “minimum payment” mortgages … where the mortgage balance INCREASES if you take the minimum payment option. One of the easiest sales I’ve ever been involved in.

Now, before you think to yourself that I’m a motherfucking asshole for doing this, hear me out. I was 100% upfront about the risks, EVERY time, without one exception ever. My presentation of the product consisted of several pictorial and graphic printouts. SIMPLE stuff, honestly.

One of them was a bar-chart taking up a full printed page. In size 48 font, in bold red, was the title of the chart — “MORTGAGE BALANCE INCREASE”. 5 bars, each one getting progressively bigger, labeled Year 1 through Year 5. Above each individual bar was a label “Estimated New Balance”, along with my calculation of the estimated increase to the mortgage balance. Soooo, for example, a borrower would visually see that their $200,000 mortgage could grow to $240,000 after five years.

Guess what happened? 8 out of 10 didn’t give a shit. In fact, it was quite common that people would interrupt my presentation and DEMAND that I take their application, and get the ball rolling ASAP.

I was amazed. I got my first deal ever in my mortgage career on the very first call. I asked my broker boss, who came with me; “Will they all be this easy?”. I’ll never forget what he said. He simply said, “Yup. All anyone cares about is the payment amount. Remember what you learned in class … people are stupid.”

Stucky

oops …. let me add one more aspect to the level of stupidity home buyers have. The closing.

The 100+ pages of closing documents to be signed was done by a Closing Agent … a representative of the lending bank …. not by me, the loan officer. I did attend these closings, but I rarely said even a word other than “Thank You” when the deed was done.

It is during closing that the key financial aspects of the mortgage are fully disclosed; the real interest rate, the terms, and yes the balances … printed out, showing each month for 360 months …. INCLUDING the payment in Year 10, when the minimum payment option ceased. By Year 10, if the the borrower only made minimum payments prior, the new payment was DOUBLE or even TRIPLE their current minimum payment.

Guess what happened? People STILL didn’t give a shit!! To them, ten years was a lifetime away. “WHERE DO I SIGN!!” Amazing.

Chicago999444
Chicago999444

One young woman I know is furious because her bank will not give her a Principal Write-down on a house she bought for $500K at the bubble house. She says: I’m not a deadbeat- I can afford the house. It’s not like I couldn’t afford it? HUH? How does a young person making a journalist’s pay “afford” a $500K house, especially with no down-payment? You see the expectations here: A. that she should get a $250K gift from her lender in the form of a write-down just because she made a bad bet; B. that someone should do her thinking for her.

I meet this expectation with investors a lot, with people far older, richer, more financially literate and better-educated than this girl, and FINRA enables them in the belief that someone should protect them from their own stupidity and carelessness. “Nobody told me”- never mind that there was a 200 page prospectus, with risk warnings all over the front. Never mind that he did not bother to ask.

IndenturedServant

Chicago999444 said:
“For starters, they could start actually READING the contract before they sign it- I’m appalled at the number of people who sign complex contracts without reading them first. ”

It’s no excuse but those putting the documents in front of you have no time or desire for you to read them. It is clearly evident that no one reads the documents by simply observing how fast they try to get you to sign them.

The wife and I got the call to come sign docs on our first mortgage (1994) which took place at a lawyers office. In the room was a lawyer, our RE agent and someone from the bank. They placed a stack of paper in front of us about 3/4″ thick with each page requiring signatures marked by a sticky note protruding from the stack. I grabbed the top page and started reading while one of the people started rattling off “what we were signing”. When I finished reading the page I handed it to my wife and grabbed the second page and started reading.

I think I got through the third page before the room went silent and someone asked if we were going to read every page. I half asked/stated that “were liable for everything being signed” to which the lawyer said yes so I said I’d be happy to take a copy home to read and write down anything I had questions about but they said we couldn’t take it home. I grabbed page four and started reading before handing the page to my wife and as I reached for the next page they started scrambling to find a copy I could take home and read. A few minutes later we were headed home with a copy to read.

Except for the volume of paperwork we had to sign, everything looked reasonable and we only had a few questions but they tried to make us feel guilty that the signing was delayed a week. I started the signing meeting by asking if everyone else just walks in and signs a bunch of documents they’ve never seen before. to which the lawyer replied “yes”.

Oddly enough, we signed on July 3rd, exactly 21 years ago today. We moved in the next day.

Westcoaster
Westcoaster

I had to hand back docs meant for the seller at my fixed-rate loan closing, the agent was clueless. I sped-read most of the paperwork (which was how I knew they were handing me the wrong docs) and they still screwed me on the escrow impound. I hounded Quicken Loans for a final, everything included monthly payment and finalized the deal with those numbers. Then 10 months after closing, JP Morgan/Chase has taken over servicing and hits me with an almost $1,000 increase in the payment for the next year, and $300 more for the rest of the loan. Said it was an escrow deficiency. Quicken Loans took no responsiblity for the major fuck-up. Chase wouldn’t even talk to me about it. No negotiation, take it or leave it. I left it.

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