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Is Chinese Elite Looting More Newsworthy than Middle Eastern–or US–Looting?

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NYT has a really good article today on how the family of Chinese Prime Minister Wen Jiabao has gotten enormously wealthy while he’s been in power. The Chinese government has already started censoring the story itself and discussions of it.

And while I applaud NYT’s coverage of the corruption of the Chinese elite, I was left wondering whether NYT would print the equivalent story on Middle Eastern dictators or–even more unlikely–American elites.

While there has been some coverage of how Hosni Mubarak, Moammar Qaddafi, Ali Abdullah Saleh, or Zine El Abindine Ben Ali looted their countries of billions now that they’ve fallen, one of the only times we’ve heard about Saudi looting came after Riggs Bank got busted.

And while we’ve had reports on Countrywide’s VIP program and the general process by which members of Congress get enormously wealthy on our dime as well as stories focused on those (like Maxine Waters), we rarely see maps like the one NYT drew of the business connections involved.

Partly, I wonder whether the US is just better at hiding these connections. Some of this kind of work would stumble on America’s shell corporations, for example.

In the case of Mr. Wen’s mother, The Times calculated her stake in Ping An — valued at $120 million in 2007 — by examining public records and government-issued identity cards, and by following the ownership trail to three Chinese investment entities. The name recorded on his mother’s shares was Taihong, a holding company registered in Tianjin, the prime minister’s hometown.

The apparent efforts to conceal the wealth reflect the highly charged politics surrounding the country’s ruling elite, many of whom are also enormously wealthy but reluctant to draw attention to their riches. When Bloomberg News reported in June that the extended family of Vice President Xi Jinping, set to become China’s next president, had amassed hundreds of millions of dollars in assets, the Chinese government blocked access inside the country to the Bloomberg Web site.

“In the senior leadership, there’s no family that doesn’t have these problems,” said a former government colleague of Wen Jiabao who has known him for more than 20 years and who spoke on the condition of anonymity. “His enemies are intentionally trying to smear him by letting this leak out.”

And partly it may be lack of self-awareness. NYT complains, for example, that Chinese disclosure laws don’t apply to extended relatives.

In the winter of 2007, just before he began his second term as prime minister, Wen Jiabao called for new measures to fight corruption, particularly among high-ranking officials.

“Leaders at all levels of government should take the lead in the antigraft drive,” he told a gathering of high-level party members in Beijing. “They should strictly ensure that their family members, friends and close subordinates do not abuse government influence.”

The speech was consistent with the prime minister’s earlier drive to toughen disclosure rules for public servants, and to require senior officials to reveal their family assets.

Whether Mr. Wen has made such disclosures for his own family is unclear, since the Communist Party does not release such information. Even so, many of the holdings found by The Times would not need to be disclosed under the rules since they are not held in the name of the prime minister’s immediate family — his wife, son and daughter.

Eighty percent of the $2.7 billion in assets identified in The Times’s investigation and verified by the outside auditors were held by, among others, the prime minister’s mother, his younger brother, two brothers-in-law, a sister-in-law, daughter-in-law and the parents of his son’s wife, none of whom is subject to party disclosure rules.

But when Congress finally passed a bill cracking down on insider trading this year, it didn’t even cover the spouses of members of Congress and we’re exempting some Executive Branch members on national security grounds.

Maybe I’m being churlish. But I really wonder if such a superb article would come out to expose graft of our allies that got deposited into American banks. And I wish we saw more of this kind of reporting about our own corrupt elite.

In somewhat related news, Silvio Berlusconi got sentenced to four years for tax fraud today (though appeals will probably save him from jail time). And we still haven’t seen Mitt Romney’s tax returns.

The Freddie Mac/Bank of America Settlement: Billions of Reasons to Actually Investigate the Loans

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As Gretchen Morgenson tells it, the headline story from an FHFA Inspector General report on a $1.35B deal Freddie Mac made last year with Bank of America is that the analysis behind the deal was flawed.

Freddie Mac used a flawed analysis when it accepted $1.35 billion from Bank of America to settle claims that the bank misled it about loans purchased during the mortgage boom, according to an oversight report scheduled for release on Tuesday.

The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company.

It’s not until the 11th paragraph that Morgenson reveals the underlying issue: Freddie Mac  refused to examine whether certain later-defaulting mortgages with unpaid principal amounting to $50 billion–ones originated during the peak of the housing boom–were defaulting because of bank representation and warranties defects before it settled with Bank of America. While it’s unclear how many of the 300,000 loans in this category were Countrywide loans covered in the settlement, of the Countrywide loans Freddie did review, they made buy back requests on 24% of them. So this might represent several billion in problem loans they didn’t make BoA buy back.

Back in March 2010, a senior examiner noted that a bunch of mortgages originated during the 2005-2007 period, when Option ARM and Interest Only mortgages were popular, were defaulting later than traditional mortgages–3-5 years after origination rather than during the first 3 years. He posited that the later default date might be because teaser rates were only beginning to end at that point, meaning that mortgages that had affordable for the first 3 years would become unaffordable after reset, leading to default.

[I]t would be reasonable to assume that many of the borrowers, faced with significantly increasing payments in the near term and very little equity in their home, made the decision to default before their [payments reset to higher levels]. It would also be reasonable to assume that the stated income and stated asset underwriting requirement played a role, but neither assumption can be tested without a review of the loans.

He raised this possibility with his supervisors and later, with Freddie’s senior managers, suggesting they review these later loans to test his theory (they attributed the atypical default pattern to falling house prices). Doing so was important, the senior examiner argued, because at that point Freddie only reviewed loans that had defaulted by the 2-year mark for reps and warranties defects.

In effect, Freddie might be exempting a whole class of the most exotic mortgages from reps and warranties review because they didn’t default until after Freddie’s review process stopped tracking them.

As an FHFA memo made clear, Freddie wasn’t reviewing for defects 93% of the loans originated in 2005-6 that had defaulted in the first half of 2010 (the graphic above shows the portion of loans that weren’t examined).

In response to the senior examiner’s concerns, in June 2010, a Freddie senior manager (someone who would report to Freddie’s CEO) agreed to do a review of these loans. But then, weeks later, a different senior Freddie manager stated he was “vehemently against looking at more loans.” That senior manager offered no justification, though others thought such an examination would make little difference and that doing the investigation might lose Freddie BoA’s business.

The senior examiner kept raising this issue–to at least 12 different FHFA people, including Acting Director Edward DeMarco. And when Freddie’s internal auditors reviewed the proposed settlement with BoA–which effectively settled all outstanding reps and warranties issues pertaining to Countrywide–they raised this sampling issue, too, and recommended Freddie do a sampling to see what might be included in these other loans. Because they were rushing to close the BoA deal, Freddie looked at a non-representative sample of mortgages (these came from all originators, not just Countrywide, which had a much higher defect rate than other banks) and declared everything kosher.

So to review: a senior examiner found $50B worth of defaulted mortgages that Freddie had not examined for reps and warranties and raised a plausible reason they might want to do so. Freddie agreed, then refused, to do so. Then, as Freddie was rushing through this BoA deal last December, Freddie’s auditors suggested they might want to check their math on these loans, so Freddie checked their math on a completely different set of mortgages. In spite of having a 6-month warning that up to $50B worth of loans might be a problem, Freddie signed away any BoA liability for good for the piddling price of $1.35B.

Of course, Tom Miller–with his $7.8B servicing deal with BoA–and Bank of New York Mellon–with their $8.5B investors deal with BoA–are trying to do this again. They’re rushing through settlements without taking the time to actually investigate the loan level data to see what the settlement should actually be. As the FHFA IG noted in its report,

Regardless of the cause of these defaults, the search for representations and warranties defects is the point of the loan review process; and if the search does not begin, then the defects will not be found.

Like Tom Miller and BNYM, Freddie was “vehemently opposed” to actually examine what they were settling with BoA on. And while we don’t know the cost, we might start calculating that amount in the billions.

And in the case of the possible bailout Freddie gave BoA because it refused to look at the loans, US taxpayers paid the bill.

Update: I originally conflated the amount of total loans that Freddie hasn’t been reviewing–$50B–with the amount of Countrywide loans in question. For other banks, Freddie should be able to do the analysis and make buyback requests for these exotic loans.

Bank of America Offers to Pay $8.5 Billion to Stay in Business

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DDay and Masaccio and Yves Smith have already covered Bank of America’s offer to pay 2 to 3 cents on the dollar to make good on its securitization misrepresentations. But I wanted to point out one issue of timing.

In her coverage of it, Yves notes the following:

So with all these considerations arguing for fighting a few more rounds, and BofA in the past taking a very aggressive posture on disputing these cases, why would it settle?

The other side has no ability to judge what it might get since it has not gotten access to the loan files (the Clayton reports that everyone makes noise about which found pretty significant violations of representations, did not look at which were significant from a risk of loss perspective. So they may make for great headline, but they aren’t very helpful in this context.

Put it simply: BofA can judge what its risks are VASTLY better than the investors. There are a lot of reasons why it would make sense for BofA not to settle now. Yet it was all over this like a cheap suit. That says it must regard this settlement as a real bargain.

While DDay alluded to this in his post, I wanted to make an explicit reminder. BoA has agreed to this settlement just weeks after Abigail Field did the work the Attorneys General and other regulators should have been doing. And she found that for a sample of NY foreclosures, Countrywide had endorsed none of the notes of Countrywide-generated mortgages.

Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor’s mortgage. Instead, her testimony was key to the judge’s ruling that Bank of America (BAC) couldn’t foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.

[snip]

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them.

Shortly after Field’s report, NY Attorney General Eric Schneiderman started an investigation of the problem. And, as Field notes in her article,

And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out.

In other words, the proof–which we all knew existed–is finally surfacing that Bank of America could and probably should be wiped out by its liability for Countrywide. The dog and pony show calling this a huge settlement no doubt is designed to convince everyone BoA has found a way to put this problem behind it. And remain in business.

So, yeah, $8.5 billion to remain in business is a bargain.

Did Servicers Commit Fraud So Banksters Could Get Big Bonuses?

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When I asked yesterday about the relationship between the stress tests and the servicers’ foreclosure fraud, I had a hunch that the banksters might have been committing that fraud so as to be able to show financial viability so as to be able to repay TARP funds so as to escape the oversight of the government. I wondered whether the stress tests were not just a means by which the government should have exercised some control over the servicers that they already knew to be having problems, but were also one reason the servicers were pushing for the most profitable outcomes (including choosing to foreclose rather than modify loans).

Rortybomb, who knows a lot more about how this stuff worked than I do, provides these damning details:

For what it is worth, I’m sure those conducting the stress test knew that this conflict existed and knew that it was very profitable to the banks. Servicing is considered a “hedge”, because as the origination business dries up foreclosures will increase and servicing income would go up, something Countrywide and others loved to talk about.

Let’s go to a Countrywide Earnings call from Q3 2007:

Now, we are frequently asked what the impact on our servicing costs and earnings will be from increased delinquencies and lost mitigation efforts, and what happens to costs. And what we point out is, as I will now, is that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services.

The servicing operation will “fully offset” lost income from increased delinquencies and lack of origination business. This is by design. It’s tough to find good counter-cyclical strategies, but this appears to be one. If you were both TBTF and really in need of cash, could you squeeze this a bit further, say by violating the rule of law?

[snip]

Someone enterprising on the hill could ask how the servicing income was incorporated into the stress test and how predictive it was in the adverse scenario case. Things like this make it even more important that the government takes a strong hand in rooting out foreclosure fraud.  We cannot allow an impression to form that we collectively looked the other way at issues of foreclosure abuse, issues well documented since before the stress test, because this business line is one of the few profitable things available to TBTF firms.  TBTF firms that needed cash, were (and are) backstopped by taxpayers and wanted to get out of TARP to issue bonuses.   Nobody gets to be above the law, regardless of how systemically important they are or whatever numbers needed to be hit on the stress test.

In other words, going back to 2007, mortgage companies were upfront in claiming that their servicer-related profits served to offset their loan losses. That’s not to say they would have argued that in their stress test results (again, I’m not expert on this, but I’m not even sure that the stress tests looked at the servicer income). But it does say that to prove viability–to make a half-credible claim they weren’t insolvent and to evade restrictions on bonuses and political giving–they had an incentive to suggest their servicer income was enough to offset a significant chunk of their loan losses. That not only gave them a huge incentive to keep servicer costs low (by doing things like hiring WalMart greeters and hair stylists to serve as robo-signers), but it also increased the incentive to increase profits as a servicer by refusing to modify loans.

So I’d go further than Rortybomb in calling for some enterprising Hill person to look into this. Given that we know Timmeh Geither, campaigner against injustice, was officially warned and knew about this conflict, I’d like to know how much he knew about this hedge. The Administration now says it was helpless to stop this kind of fraud, yet it chose not to use at least two sources of leverage (cramdown and stress tests) to control it. Is that because they knew the servicer fraud was an important part of extend anad pretend?