There is a plethora of exciting stories in the news this week. The common theme is that banks are in the cross-hairs of regulators, who have finally started to pull the trigger. It will be interesting to see how effective these legal actions are. I’m hoping for nothing less than a complete return to sanity and fairness in our financial systems. Hey, I like to dream big.
SEC Accuses Goldman Sachs of Fraud
According the Associated Press (Yahoo Business), the SEC accused Goldman Sachs of civil fraud for selling mortgage securities that were crafted with input from a client who was betting on them to fail. When they did fail, two German banks lost close to $1 billion while the Goldman hedge fund client, Paulson & Co., capitalized on the deal. The SEC alleges Goldman misled the investors by failing to disclose Paulson & Co. played a role in selecting the mortgage pools and stood to profit from their decline.
“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Robert Khuzami – SEC Enforcement Director
I am thrilled the SEC is finally taking action against Goldman Sachs. Their arrogance seems to have only grown since the financial crisis, which was resolved nicely in their favor. And, I honestly believe they were feeling untouchable, because of their political influence. We shall see if they can be brought to justice for this and other crimes. The political mood has changed, as the elections are fast approaching and the banker’s misdeeds are becoming too obvious to sweep under the carpet. Allegedly, this is just the tip of the iceberg and more banks are expected to be charged by the SEC.
This action validates what Matt Taibbi and many others have been reporting for years, that Wall Street firms are manipulating markets, rigging bids and betting against the securities they are selling to their own clients. President Obama is pushing very hard for derivatives reform. And, it appears that as many as eight Republicans may break ranks to support the reform. This type of legislation resonates strongly with voters, who are furious with the handling of the bail outs. And, they are unhappy with bank-friendly politicians.
Massachusetts Fires Bank of America
According to Bloomberg News, Massachusetts’s treasurer Timothy Cahill says the state will withdraw more than $231 million from a Bank of America Corp. account because the company refuses to cap interest rates on its credit cards at 18%. The state said it would invest its funds with banks and other companies willing to follow the state’s usury law, which limits rates to 18%. This action follows the introduction of bills in Massachusetts, Maryland, Minnesota and New Mexico, to divert more money to smaller financial institutions.
I believe very strongly in limits on interest rates. When I was young, interest rates were capped at 21.99% and anything above that was considered a usury rate that was illegal. Banks got around this by moving their headquarters to Delaware and North Dakota, who eliminated their usury limits in exchange for the banks relocation. Those two states may have won some jobs and tax revenue, but consumers definitely lost in that deal. I would love to see more states join in to put pressure on banks to cap their rates.
Foreclosures on the Rise
According to Realty Track, foreclosure activity rose 7 percent in the first quarter of 2010. This was a 16 percent increase over the first quarter of 2009. Banks are accellerating their repossession and auction activity. The holidays are over, inventory is swelling and banks have decided to get on with it. Delinquent homeowners are being kicked to the curb.
Personally, I am torn over this kind of a story. On one hand, it saddens me to see people being evicted from their homes. Many have lost their jobs and have no emergency capital to deal with the loss of income. Others were duped into sub-prime mortgages with exploding interest rates, when they should have been qualified for conventional loans. As part of the bailout, banks were supposed to modify loans for worthy people and they have stifled most efforts to negotiate in good faith or to permanently modify loans.
On the other hand, part of buying a house entails paying the mortgage. And, that means earning enough to make those payments. It also means knowing what you are signing and expecting to hold up your end of the bargain. I’m not a fan of the bailout mentality or the bankrupt morality of shifting losses onto others. When someone buys a house, there is no guarantee it will increase in value. And, people shouldn’t expect that as part of the deal.
The Bottom Line
The bottom line is that banks have been bending the rules for years and the crackdown has finally arrived. Their defiance in the face of reform and the extravagant bonuses following the bailout has cost them political support. It’s time to level the playing-field for consumers and at the same time to remind banks that we still have laws in this country.
“Banks are an almost irresistible attraction for that element of our society which seeks unearned money.”
J. Edgar Hoover – Former Director of the FBI
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