Monthly Archives: April 2016

“This NYT article about Minsky is a joke, right? “Let’s keep these bankers off balance by not telling them all the rules and not telling them when we change the rules!” That’s ”stepping over dollar bills to pick up pennies.” Who creates most of the artificial stability/straight line growth, that leads to imprudent lending and mal-investment? Our government and their central bank, The Fed!!! Why? They are afraid of the political repercussions…

…of a normal business cycle (with temporarily lower economic activity and higher unemployment), yet the business cycle must occur for prudent lending and investment to occur. This is at the root of the massive 2008 financial crisis, yet virtually no one in government is addressing it, because its solution is painful to implement. (It’s the same principle as not allowing smaller natural forest fires to burn, when the rare one actually does occur, it can’t be easily brought under control and it becomes massive and unnecessarily damaging.)”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Mr. Minsky pithily observed that stability gives rise to instability. As the economy grows steadily, banks and companies start to overreach. Banks lend too much, and companies and consumers overborrow, which ultimately makes the system fragile. And while financial regulation was necessary to limit excessive behavior during those stable times, Mr. Minsky observed that bankers eventually found ways around the rules.”, Peter Eavis, “How Regulators Mess With Bankers’ Minds, and Why That’s Good”, The New York Times, April 15, 2016

Rules, Rules

How Regulators Mess With Bankers’ Minds, and Why That’s Good

Peter Eavis

Bank regulators on Wednesday sent a message that big banks are still too big and too complex. They rejected special plans, called living wills, that the banks have to submit to show they can go through an orderly bankruptcy.

The thinking behind the regulators’ call for living wills is that if a large bank crash is orderly, there will be no need to save it and no need for taxpayer bailouts.

Pretty straightforward, right? Not for the banks. The regulators deliberately did not communicate the exact things the banks needed to do for their plans to pass muster. In this way, they kept them on their toes — and treating powerful banks this way may end up playing a surprisingly important role in keeping the financial regulation effective over time.

Over the decades leading up to the financial crisis of 2008, banks learned how to sidestep and water down the relatively tough regulations introduced after the crash of 1929. This ability of the banks to get their way was spotted by Hyman Minsky, a maverick economist who died 20 years ago. He was prophetic, too. He identified and warned about the sort of trends in the financial system and the wider economy that helped cause the last financial crisis. That is why when everything started falling apart in 2008, some commentators said a “Minsky moment” had arrived.

Mr. Minsky pithily observed that stability gives rise to instability. As the economy grows steadily, banks and companies start to overreach. Banks lend too much, and companies and consumers overborrow, which ultimately makes the system fragile. And while financial regulation was necessary to limit excessive behavior during those stable times, Mr. Minsky observed that bankers eventually found ways around the rules.

This part of Mr. Minsky’s thinking was on my mind this week at the annual Minsky conference at theLevy Economics Institute of Bard College. The focus of the gathering was the Dodd-Frank Act, the sweeping overhaul of the financial system that Congress passed in 2010. Many of the speakers, being acolytes of Mr. Minsky, said they expected the bankers to find ways to dodge Dodd-Frank in the coming years.

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Hyman Minsky, an economist who died almost 20 years ago, was prescient about the trends in the financial system and wider economy that contributed to the financial crisis of 2008. Credit Levy Economics Institute of Bard College

But Dodd-Frank might have built-in self-protections. It seems to take into account Mr. Minsky’s warnings, with provisions that allow the law to be refreshed and changed as the financial system evolves. Regulators have already used those features to seize the initiative over bankers.

They have done so with so-called living wills. The regulators get to determine what needs to be in the living wills. One senior agency official told me on Wednesday that they try not to make the exercise so clear that the banks treat it just like any other compliance exercise.

Perhaps even more important are the annual regulatory stress tests that assess how large banks would bear up under theoretical crashes in the markets and global economy. Undertaken by the Federal Reserve, these tests have caused significant headaches for the banks, and some banks have failed them, mostly because their plans for handling the hypothetical stress were judged inadequate. This has caused unease among the banks’ senior managers. If the banks flunk the stress tests, they don’t get to distribute money to shareholders or buy back shares. The banks are kept on their toes because conditions assumed in the tests, and the things regulators look for, can change.

Dodd-Frank also set up something called the Financial Stability Oversight Council, a special regulatory body that sits above other regulators. One of its main jobs is to scour the financial system looking for new risks. If it can resist the influence of bank lawyers and lobbyists, the council could use this power to limit the growth of new financial products that are devised to avoid regulation.

The council also seeks to identify which large financial firms that are not banks — think, big insurance companies — should be subject to stricter regulation. It’s a duty that was devised in response to the huge buildup of risks at the American International Group, which received one of the biggest bailouts.

True, the financial industry has already won a substantial victory to limit regulation. A Federal District Court recently ruled that the council could not subject MetLife, a large insurance company, to stricter regulation. Still, many lawyers believe that the court’s ruling is shaky and will be overturned on appeal.

Mr. Minsky would be wary, however. These features of Dodd-Frank that allow regulators to stay ahead of the banks require independent-minded regulators to use them. The economy is strengthening, and banks are getting healthier. This is the period of stability that Mr. Minsky warns about, when the regulators start to believe that most risks have been constrained, causing them to miss new dangers. And the financial industry is likely to win important victories in Congress that roll back regulation, as it did at the end of 2014, when an important part of Dodd-Frank was gutted.

But for now at least, banking regulators seem willing to use their freedom to mess with the banks.

A version of this article appears in print on April 15, 2016, on page B1 of the New York edition with the headline: Messing With Minds of Bankers Is Good.

“I received the March 8, 2016 email below from Phil Angelides, former Chairman of The Financial Crisis Inquiry Commission, and felt I needed to respond…

…First, being a lifelong Californian and fifth-generation Sacramentan, Phil and I were friendly, did business together (My banks lent money to Phil and his real estate partners.), and I raised funds for his political campaigns, including his successful bid for State Treasurer. Phil called me at home the Saturday after IndyMac Bank was seized by the FDIC (July 11, 2008) and expressed his personal sorrow and well wishes to me. It is a moment I will never forget and always be grateful for and it is painful for me to have to so thoroughly (but respectfully) disagree with him and Mr. Min, who espouse the liberal view of the crisis. On this blog, I have offered to publicly debate Mr. Angelides anywhere, anytime and I would reiterate this offer and also extend it to Mr. Min. Mr. Angelides and Mr. Min both have fabulous educational, political, and government pedigrees, but they have absolutely no experience in banking, mortgage finance, or economics. Respectfully, I don’t believe they are equipped to opine on the causes and cures of the financial crisis. Don’t agree? Well, then let’s hope they accept my debate challenge.

That said, here is my rebuttal to Mr. Angelides’ and Mr. Min’s February 10, 2016, Quartz opinion article on the financial crisis (prompted by the release of The Big Short movie):

First, Mr. Angelides’ and Mr. Min’s Quartz opinion article(a relatively new and unestablished on-line business news publication from the liberal-leaning Atlantic Media) is titled with the false and inflammatory headline: ““Immigrants and poor people” were not the cause of the financial crisis”.

Mike Perry’s Response: “Of course “immigrants and the poor” were not the cause of the financial crisis and I am not aware of anyone who has made that outrageous and false claim? Yet Mr. Angelides and Mr. Min literally took a line out of The Big Short movie, where the character Mark Baum says: “In a few years people are going to be doing what they always do when the economy tanks. They will be blaming immigrants and poor people.” And somehow made it a FACT to lead with as the title of their article!!! This is a movie that went to great pains to say it was based on the book, but was not meant to be a factual account….so much so, that it was classified as a “comedy” in the Golden Globe Awards! I almost should stop rebutting their OpEd article here, right?”

Next, Mr. Angelides and Mr. Min say……”Unfortunately, the movie’s success has spurred Wall Street allies to dust off their revisionist claims that the federal government’s affordable housing and community lending policies caused the crisis. These assertions have been thoroughly debunked in every serious analysis of the crisis. Nine of 10 FCIC members, including five Democrats, three Republicans, and one independent, explicitly rejected these claims.”

Mike Perry’s response: “I don’t know about this sub-point in regards to just affordable housing and community lending, but I think Mr. Angelides and Mr. Min are being highly misleading with these comments. Why? I just pulled out the FCIC Report. In the Table of Contents, Commissioner Votes, viii….you have six Commissioners (including Mr. Angelides) voting to adopt the report and four Commissioners (including the Vice Chairman, the Hon. Bill Thomas) dissenting from the report. As I understand it, not a single Republican on the Commission voted to adopt Democratic politician Mr. Angelides’ report. Instead, the Republicans on the committee issued two separate dissenting reports. In other words, Mr. Angelides was unable to produce a bipartisan report. In fact, one of the dissenting Republican commissioners, Mr. Peter Wallison of The American Enterprise Institute, wrote an entire book about the fact that in his view, well-intended federal government pressure to reduce home lending standards (to expand home ownership), was a key cause of the U.S. mortgage crisis. And in his book, Mr. Wallison devotes nearly an entire chapter to explaining how Mr. Angelides was determined to produce a “liberal whitewash”, blaming greedy and reckless bankers (and poor regulation), no matter the facts. That contrasts pretty significantly with Mr. Angelides and Mr. Min’s false spin in the statements above of bipartisan agreement, doesn’t it? Read these two blog postings, which are excerpted from Mr. Wallison’s book, and you will see that Mr. Angelides and Mr. Min’s claims of “consensus” (support of their view) at the FCIC and among economic and financial experts is false:

April 8, 2015 – Statement 676: “It is telling that Congress adopted the (Dodd-Frank) act in July 2010, six months BEFORE the FCIC’s report was issued, a clear demonstration that the Democratic Congress knew well in advance exactly what this well-controlled commission would say.”, Peter J. Wallison, “Hidden in Plain Sight, Chapter 3: The Financial Crisis Inquiry Commission and Other Explanations for the Crisis”

January 28, 2015 – Statement 583: “Academic economists generally agree that the mortgage meltdown during the recent financial crisis was in large part a consequence of government “affordable housing” policies…

Next Mr. Angelides and Mr. Min say…”First, the vast majority of the subprime mortgages originated from 2002-2007 were made by non-bank lenders and then purchased, transformed into complex securities, and sold to investors by Wall Street. These fell outside the scope of federal community lending and affordable housing policies, which apply to Fannie Mae, Freddie Mac, and traditional banks with federally insured deposits.”

Mike Perry’s response: “The first part is true. The second part is not. Fannie and Freddie’s regulator gave them community lending/affordable housing credit for the AAA private MBS they bought. Paraphrasing from my memory, FCIC member Peter Wallison stated in his 2015 book: “Demand for subprime, Alt-a and other private MBS was driven by huge demand from Fannie and Freddie, who received (affordable housing) credit from HUD for these MBS purchases/investments.”

Next Mr. Angelides and Mr. Min say….”Second, Wall Street was where the action was during the housing bubble. From 2003 to 2006, Wall Street’s share of the total mortgage market soared, from roughly 10% in early 2003 to nearly 40% of the market (and 55% of all mortgage-backed securities) by 2005 and 2006. This surge in Wall Street’s mortgage securitization machine came almost entirely at the expense of Fannie, Freddie, and the traditional banks… Third, actual data on mortgage delinquencies and mortgage-related losses clearly tells the story of what drove the financial meltdown. It found that delinquency rates for loans purchased or guaranteed by Fannie and Freddie, which were subject to HUD affordable housing goals, were substantially lower than for mortgages securitized by other financial firms not subject to those goals….As, economist Mark Zandi noted in 2013, Wall Street MBS suffered realized loss rates of 20.3% from 2006 to 2012, compared to 5.8% for traditional banks,  and 3.7% for Fannie/Freddie MBS. In short, it’s hard to argue that affordable housing and community lending policies led to the financial crisis when entities responsible for financing and originating the riskiest loans were not subject to these policies.”

Mike Perry’s response: This is a half-truth. FCIC member Peter Wallison points out that by 2008, 57% of all mortgages in the U.S. were higher-risk, non-traditional mortgages (NTM’s) and that Fannie, Freddie, FHA, and VA owned, insured, or guaranteed 76% of these NTM’s (via whole loans or securities). So Mr. Angelides and Mr. Min are misleading us when they only talk about  Fannie and Freddie MBS performance. As already pointed out Fannie and Freddie drove the private MBS market with their massive purchases of AAA’s. In addition, because of Fannie and Freddie’s implied government guarantee, they had the lowest-rate mortgage and the Best Price (for mortgage originators)…so they were able to cherry-pick and did, the very best, lowest risk subprime and Alt-a mortgages, before private MBS securitization. Also, during and after the crisis, Fannie and Freddie MBS benefited from an explicit government guarantee and also from government programs for loan modifications (principal and interest reductions). The Private MBS market received no government help. In addition, Mr. Angelides and Mr. Min completely ignore FHA/VA. Had the private MBS market not existed and disbursed subprime and other nonconforming mortgage risk around the financial system, it would have been heavily concentrated at FHA/VA and at Fannie and Freddie and the government would have sustained massive, direct losses from the crisis. Don’t believe me that FHA is a subprime lender? Go look at the data. Their books of insurance business (during those bubble years) have similar delinquencies/defaults and losses to subprime mortgages. And when the subprime and private MBS market collapsed, whose market share exploded? FHA’s!!! And go look at the massive losses FHA knowingly took on it’s post-crisis (2009-2011) books of business. (Was it really responsible for FHA to encourage home buyers in 2008-2011 to catch a falling knife of declining home prices, with 3% down mortgages, when the entire private sector home lenders had pulled back and institutional home buyers were sitting on the sidelines, prudently waiting?) Here are three blog postings I have made on this subject:

April 13, 2015 – Statement 686: “Clearly, the SEC’s current securities fraud (disclosure) cases against the CEO’s and CFO’s of Fannie and Freddie, provide strong evidence to support your point about the non-disclosure of NTM’s (nontraditional mortgages) pre-crisis. I had no idea that by June 2008 that roughly 57% of all mortgages in the U.S. were NTM’s and I sure didn’t have any idea that Fannie, Freddie, FHA, and VA owned, insured, or guaranteed 76% of these NTMs (via whole loans or securities)…

February 26, 2013 – Statement 42:  Is FHA “A home wrecker”?

February 26, 2013 – Statement 41:  HUD/FHA is Not More Capable or Noble Than Their Private Sector Counterparts

Next Mr. Angelides and Mr. Min say..”Fourth, pegging government housing policies as the cause of the crisis ignores what has happened in the U.S. commercial real estate market and in housing markets in other countries such as Spain, Ireland, and the United Kingdom. Commercial real estate in the U.S. and some foreign housing markets experienced a bubble at least as big as that of the U.S. housing market. If government housing policies caused the U.S. housing bubble, what explains the bubble in commercial real estate and other housing markets?”

Mike Perry’s Response: “I agree with this argument, but it also applies to the private (Wall Street) MBS market. Take the last sentence, it could easily read, “If private (Wall Street) MBS caused the U.S. housing bubble, what explains the bubble in commercial real estate and other housing markets (around the world)?” Right? And if you follow your own logic here Mr. Angelides and Mr. Min, your liberal argument that “greedy and reckless bankers (and poor regulation) were the cause of the financial crisis” also can’t be right, can it? All the world’s bankers were greedy and reckless (and their regulators were hapless) at exactly the same time Mr. Angelides and Mr. Min? That makes no sense. And even if they were, what exactly did they do to cause all of these asset bubbles/busts around the world? Maybe that’s why not a single Republican commissioner signed on to your Democrat-FCIC report Mr. Angelides? And maybe Mr. Angelides your committee should have spent more time on government incentives and economic issues like government monetary policies and The Federal Reserve? Many influential economists (including Nobel Laureate’s) have written that monetary policies were the primary cause of asset bubbles and busts and/or that other government incentives also distorted housing and financial markets. But that wouldn’t fit with your liberal view that government is always good and right and the private sector is always bad and wrong, would it?

Next, Mr. Angelides and Mr. Min say…..”….there is a simple fact: While Fannie Mae and Freddie Mac required a bailout due to the nationwide drop in home prices of more than 30% and their sever undercapitalization, Fannie Mae and Freddie Mac mortgage securities did not cause the losses that rippled through the financial system in 2007 and 2008 and brought down firms such as Bear Stearns, Merrill Lynch, AIG, and Lehman Brothers. Fannie and Freddie mortgage securities essentially maintained their value throughout the crisis because of the implicit government backstop they enjoy, while the mortgage securities created on Wall Street crashed and caused significant losses at major financial institutions.”

Mike Perry’s Response: “This is outrageous and misleading and says nothing about the causes of the financial crisis. Mr. Angelides and Mr. Min are saying, “Hey, because U.S. taxpayers backed Fannie and Freddie with nearly $190 billion in capital and the full faith an credit of the U.S. government, they did not fail in the crisis and they were able to continue to fully guarantee the MBS securities they had issued.” Of course!!!! FHA and the FDIC also became insolvent during the crisis and were saved only because they were backed by the full faith and credit of the U.S. government and the American taxpayer. So what? Private firms failed who weren’t backed by the government? So what? What does that have to do with the true root-causes of the financial crisis and what we should do (or not do) going forward?”

Finally, Mr. Angelides and Mr. Min say…”Ever since the release of the FCIC’s report in 2011, there has been a furious effort on the part of Wall Street and its allies to rewrite the history of the financial crisis. But after five years of assaults, the accuracy of the FCIC’s report remains unblemished. It’s long past time to put their zombie lies to rest and get on with the business of ensuring that the recklessness on Wall Street so vividly portrayed in The Big Short never again puts our nation’s economy and American families at risk.”

Mike Perry’s Response: As discussed above, Mr. Angelides FCIC report was effectively “dead-on-arrival” as a credible, bipartisan document of the true, root-causes of the financial crisis. Instead, it became a Democratic party propaganda piece that was designed to “cement” the false, liberal narrative “that greedy and reckless bankers and poor regulations and/or hapless regulators” caused the crisis. I hope you can see from my rebuttal above (and my entire blog) that it is liberals like Mr. Angelides and Mr. Min that have been distorting the facts and the truth about the financial crisis. And, how does any of this reconcile with Democratic party Presidential front-runner, Hillary Clinton, making paid speeches to Goldman Sachs and other Wall Street bankers? Ethically, she should never have met with these firms and took their money, if she believed what Mr. Angelides and Mr. Min are selling. And if you are cynical and don’t believe she is ethical, then you would have to believe she is not so stupid as to risk her Presidential candidacy, for a few paid speeches? (By the way, Mr. Min’s bio shows that he worked for Sen. Schumer during the financial crisis and it was Sen. Schumer’s inappropriate public statements that caused IndyMac Bank to be seized by the FDIC on July 11, 2008….resulting in big gains to liberal New York short sellers, some who I believe were friends and political donors to Sen. Schumer.)

Other related historical blog postings that refute Mr. Angelides’ and Mr. Min’s claims about the financial crisis:

April 16, 2015 – Statement 698: “The FHFA’s latest decision to lower fees for some (riskier) borrowers is “just starting to look like part of a larger trend, that’s my real concern. What’s next?” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. “There was not some single moment or event that got us into the last mess, but the accumulation of lots of errors.””, The Wall Street Journal, April 16, 2015

April 16, 2015 – Statement 696: “In a famous speech to the American Economic Association in January 2010, then Federal Reserve Chairman Ben Bernanke postulated that the Fed had no significant impact on the housing bubble or on the increase in financial leverage and that monetary policy was too blunt a tool to be used to smooth asset cycles. After emphasizing for years that low rates have the ability to boost asset prices, under what criteria can the Fed insist that it had no influence on the boom preceding the financial crisis?…

April 14, 2015 – Statement 691: “I believe you are right that government-mandated housing policies (forced upon Fan and Fred by HUD), caused a massive, industry-wide loosening of mortgage lending underwriting standards and this helped sustain the bubble, but I believe as you note (and agree) more importantly they were the cause of the massive defaults once housing prices started to fall…

April 13, 2015 – Statement 687: “I can tell you for a fact, pre-crisis, the folks at IndyMac (me included) thought we were doing both good for U.S. homeowners/borrowers, good for the economy (by supporting the government’s housing goals) and good for ourselves. It’s tough to decide what the right types and amount of home mortgages to make. Post-crisis, with the benefit of hindsight, the banking, mortgage, and consumer regulators took years and in the end they didn’t really decide…

April 10, 2015 – Statement 683: “Fannie and Freddie did not fully disclose their exposure to NTM (nontraditional mortgages) until after they had been taken over by a government conservator in 2008. Before the crisis, analysts, regulators, academic commentators, rating agencies and the Federal Reserve (did not understand) the scope of the NTM problem, believing it was much smaller, and that the number of traditional prime mortgages outstanding was much larger, than in fact they were…

April 10, 2015 – Statement 681: “On June 24, 2004, seventy-six House Democrats, led by Nancy Pelosi (D-Calif.) and Barney Frank (D-Mass.), delivered the necessary support through a letter to President Bush, showing how much their support was linked to the affordable-housing goals. “We write as members of the House of Representatives who continually press the GSEs to do more in affordable housing,” the letter began…

April 10, 2015 – Statement 680: “Under direction of its chair, James Johnson, Fannie Mae had seen the political value of lending to low-income borrowers. In 1991, even before the enactment of the GSE Act, Fannie had made a $10 billion pledge of support for low-income housing, adapting a vehicle for reduced underwriting standards…

April 10, 2015 – Statement 679: “In June 2008, just before the crisis fully gripped the nation, there would be a moment of recognition that HUD’s policies were at fault, when the fact that many families would lose their homes was connected to the affordable-housing goals…

April 10, 2015 – Statement 678: “Before the adoption of the Federal Housing Enterprises Financial Safety and Soundness Act (the GSE Act) in 1992 and the imposition of the affordable-housing goals, the GSEs followed conservative underwriting practices. Mortgage defaults were usually well under 1 percent, and the homeownership rate in the United States hovered around 64 percent, where it had been for almost thirty years…

April 8, 2015 – Statement 676: “It is telling that Congress adopted the (Dodd-Frank) act in July 2010, six months BEFORE the FCIC’s report was issued, a clear demonstration that the Democratic Congress knew well in advance exactly what this well-controlled commission would say.”, Peter J. Wallison, “Hidden in Plain Sight, Chapter 3: The Financial Crisis Inquiry Commission and Other Explanations for the Crisis”

February 26, 2015 – Statement 627: “In my opinion, a financial crisis is not only a likely consequence of implicit (government) subsidies for risky lending but a necessary one because that is when implicit guarantees ultimately become real-life bailouts and trigger the taxpayer payments necessary to fund Washington’s longstanding lending goals…

April 8, 2015 – Statement 675: “I really appreciate the idea that you would consider other views. (I don’t see a lot of liberal/progressives who will even read anything that doesn’t comport with their “worldview”. In other words, they are anti the scientific method.)…

January 29, 2015 – Statement 585: “But Watt (Melvin L. Watt, director of the Federal Housing Finance Agency), a former longtime House Democrat, said the agency had taken steps to make sure that a loan with a 3% down payment “is just as safe” as a loan with a 10% down payment.”, The Los Angeles Times

January 29, 2015 – Statement 584: “In these pages I argue that, but for the housing policies of the U.S. Government during the Clinton and George W. Bush administrations, there would not have been a financial crisis in 2008. Moreover, because of the government’s extraordinary role in bringing on the crisis, it is invalid to treat it as an inherent part of a capitalist or free market system, or to use it as a pretext for greater government control of the financial system…

 

From: Phil Angelides [mailto:pa@angelides.ccsend.com] On Behalf Of Phil Angelides
Sent: Tuesday, March 8, 2016 9:37 AM
To: Michael Perry <mperry@raubhil.com>
Subject:My op-ed with David Min on The Big Short and revisionist claims about the financial crisis
I thought you might be interested in the recent op-ed that I co-authored with David Min of the University of California, Irvine School of Law, which appeared in Quartz, the global business news publication of Atlantic Media.

The popular success of The Big Short has spurred Wall Street’s allies to dust off their revisionist claims that the federal government’s affordable housing and community lending policies caused the financial meltdown of 2007-2008. These assertions have been debunked in every serious analysis of the crisis, including the final report of the Financial Crisis Inquiry Commission (FCIC) which I chaired and which conducted the nation’s official inquiry into the causes of the financial crisis.

The FCIC’s report, released five years ago at this time, concluded that the crisis was avoidable and was caused by widespread failures of regulation, reckless risk taking on Wall Street, and systematic breaches in ethics and accountability. The claims that government affordable housing and community lending policies caused the crisis were explicitly rejected by nine of 10 FCIC commissioners, including five Democrats, three Republicans, and one independent. But that hasn’t stopped an unrelenting effort by some on Wall Street and in Washington to re-write history – all to justify repealing the new public protections against financial wrongdoing and recklessness put in place by the Dodd-Frank financial reform law.

Here is a link to the article, which also appears below:
http://qz.com/612512/immigrants-and-poor-people-were-not-the-cause-of-the-financial-crisis/

 

QUARTZ

“Immigrants and poor people” were not the cause of the financial crisis

Written by Phil Angelides and David Min

February 10, 2016

“In a few years people are going to be doing what they always do when the economy tanks. They will be blaming immigrants and poor people.” -Mark Baum, The Big Short

It is fitting that The Big Short is heading into Oscar season on the fifth anniversary of the release of the Financial Crisis Inquiry Commission (FCIC) report, which documented how widespread failures in regulation and recklessness on Wall Street led to the recent financial crisis. Unfortunately, the movie’s success has spurred Wall Street allies to dust off their revisionist claims that the federal government’s affordable housing andcommunity lending policies caused the crisis.

These assertions have been thoroughly debunked in every serious analysis of the crisis. Nine of the 10 FCIC members, including five Democrats, three Republicans, and one independent, explicitly rejected these claims. The same conclusion has been reached by a broad consensus of non-partisan experts, including the Government Accountability Office, the Harvard Joint Center for Housing Studies,  the Federal Housing Finance Agency (FHFA), economists at  various Federal Reserve Banks , and virtually all academics who have studied the mortgage crisis.

There are many reasons why attempts to blame government affordable housing and community lending policies for the financial crisis have been found baseless.

First, the vast majority of the subprime mortgages originated from 2002-2007 were made by non-bank lenders and then purchased, transformed into complex securities, and sold to investors by Wall Street. These loans fell outside the scope of federal community lending and affordable housing policies, which apply to Fannie Mae, Freddie Mac, and traditional banks with federally insured deposits. Additionally, many of the riskiest loans (such as for the newly built McMansions in Miami featured in The Big Short) were made to higher-income borrowers or to help people purchase more expensive homes, and thus would not have met affordable housing requirements.

Second, Wall Street was where the action was during the housing bubble. From 2003 to 2006, Wall Street’s share of the total mortgage market soared, from a market share of roughly 10% in early 2003 to nearly 40% of the market (and 55% of all mortgage-backed securities) by 2005 and 2006.

This surge in the Wall Street’s mortgage securitization machine came almost entirely at the expense of Fannie, Freddie, and the traditional banks-which saw a corresponding drop in market share over the same period.

Third, the actual data on mortgage delinquencies and mortgage-related losses clearly tells the story of what drove the financial meltdown. The FCIC analyzed the performance of approximately 25 million mortgages outstanding at the end of each year from 2006 to 2009. It found that delinquency rates for loans purchased or guaranteed by Fannie and Freddie, which were subject to the Department of Housing and Urban Development’s affordable housing goals, were substantially lower than for mortgages securitized by other financial firms not subject to those goals.

This was the case even for loans to borrowers with similar credit scores. As an example, the FCIC data for a subset of borrowers with scores below 660 showed that, by the end of 2008, 6.2% of Fannie and Freddie mortgages were seriously delinquent, compared to 28.3% for mortgages securitized by other financial firms.

In addition, numerous studies have shown that the Community Reinvestment Act (CRA), the federal anti-redlining law, had a negligible effect on mortgage originations during the crisis. That’s because the law applies to traditional banking institutions and to loans made within the areas they serve. Indeed, the FCIC found that mortgages made by CRA-regulated lenders in the neighborhoods in which they were required to lend were actually half as likely to default as mortgages in the same neighborhoods made by non-bank lenders.

Because mortgages originated for Wall Street had such high delinquency rates, this also meant that Wall Street bore the greatest losses. As economist Mark Zandi noted in 2013, Wall Street mortgage-backed securities suffered a realized loss rate of 20.3% from 2006 to 2012, compared to 5.8% for traditional banks and 3.7% for Fannie/Freddie mortgage securities. In short, it’s hard to argue that affordable housing and community lending policies led to the financial crisis when the entities responsible for financing and originating the riskiest loans were not subject to these policies.

Fourth, pegging government housing policies as the cause of the crisis ignores what happened in the U.S. commercial real estate market and in housing markets in other countries such as Spain, Ireland, and the United Kingdom. Commercial real estate in the U.S. and some foreign housing markets experienced a bubble at least as big as that of the U.S. housing market. If government housing policies caused the U.S. housing bubble, what explains the bubble in commercial real estate and other housing markets?

Fannie Mae and Freddie Mac mortgage securities did not cause the losses that rippled through the financial system in 2007 and 2008  Fifth, the most problematic loans that were originated during the subprime mortgage boom were those that combined a number of troublesome features. These features included “rock bottom” credit scores, no income verification, and adjustable interest rates that reset after a couple of years.

These loans were almost entirely attributable to Wall Street. For example, Wall Street financed about ten times as much in mortgages with low down payments and low credit scores as did Fannie and Freddie. In addition, according to FHFA, only 11.7% of the loans securitized by Fannie Mae and Freddie Mac from 2001 to 2008 were adjustable-rate mortgages, compared to 70.1% of the mortgages securitized by Wall Street.These adjustable-rate loans had a much higher default rate than more stable fixed rate mortgages.

Finally, there is this simple fact: While Fannie Mae and Freddie Mac required a bailout due to a nationwide drop in home prices of more than 30% and their severe undercapitalization, Fannie Mae and Freddie Mac mortgage securities did not cause the losses that rippled through the financial system in 2007 and 2008 and brought down firms such as Bears Stearns, Merrill Lynch, AIG, and Lehman Brothers. Fannie and Freddie mortgage securities essentially maintained their value throughout the crisis because of the implicit government backstop they enjoy, while the mortgage securities created on Wall Street crashed and caused significant losses at major financial institutions.

Ever since the release of the FCIC’s report in 2011, there has been a furious effort on the part of Wall Street and its allies to rewrite the history of the financial crisis. But after five years of assaults, the accuracy of the FCIC’s report remains unblemished. It’s long past time to put their zombie lies to rest and get on with the business of ensuring that the recklessness on Wall Street so vividly portrayed in The Big Short never again puts our nation’s economy and American families at risk.

Phil Angelides, 3301 C Street, Suite 1000 2nd Floor, Sacramento, CA 95816

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“…this is fundamentally a failure of Dodd-Frank to keep its central promise. Six years after the law was passed, and eight years since the financial crisis, regulators given broad authority to remake American finance, with thousands of regulatory officials on their payroll, cannot figure out a system to allow financial giants to fail, even in theory…

…What are we paying these people for? As the search continues for people outside 1600 Pennsylvania Avenue who believe that Dodd-Frank is reforming the U.S. financial system, judges are beginning to question the law’s most basic premises. Just possibly, taxpayers can contemplate a better future.”, The Wall Street Journal Editorial Board, April 14, 2016

Opinion

Dodd-Frank in Retreat

Regulators admit the law hasn’t worked while judges question abuses.

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President Barack Obama in the White House on April 13. PHOTO: EUROPEAN PRESSPHOTO AGENCY

It’s been a rough few weeks for President Obama’s signature reform of American finance. Across Washington deep cracks are appearing in the foundations of the Dodd-Frank law Mr. Obama enacted in 2010.

A federal judge has knocked down a major decision from Mr. Obama’s Financial Stability Oversight Council. Also, a federal appeals court panel is questioning the constitutionality of Mr. Obama’s Consumer Financial Protection Bureau. On Wednesday regulators officially declared that most of the nation’s banking giants are still too big and too complicated to fail.

Dodd-Frank’s failure on its own terms virtually guarantees that someone will reform it. The question is whether it will be the judicial or legislative branch. Republicans have been criticizing Dodd-Frank since it was on the drafting table. More significant is that both Democratic presidential candidates are now also talking reform. Obviously a Bernie Sanders rewrite of financial rules would look very different from a Ted Cruz version. But outside of the White House, the status quo has almost no constituency. And with Barack Obama due to vacate the premises in just nine months, Dodd-Frank’s flaws are becoming impossible to ignore.

Two weeks ago U.S. District Judge Rosemary Collyer rescinded the government’s designation of insurer MetLife as a “systemically important financial institution.” It was the first time such a designation had been challenged in court. Indeed in its first title defense, the stability council created by Dodd-Frank lost by a knockout. Judge Collyer called the council’s decision “unreasonable” and the result of a “fatally flawed” process.

***

This week in the same D.C. Circuit, an appeals court panel is questioning whether another Dodd-Frank creation should even exist. Government attorneys may have figured they would have to explain only why the new Consumer Financial Protection Bureau is ignoring the parts of federal housing law it doesn’t like and overturning long-standing interpretations of others.

But earlier this month the appeals court warned them to be ready to respond to larger questions about the new agency. The consumer bureau is an odd creation. Unlike most independent agencies, it isn’t run by a bipartisan board but by a single director. It also doesn’t have to pay attention to Congress because it doesn’t require annual appropriations from legislators. The bureau simply draws its budget from the Federal Reserve, which can’t turn off the funding spigot even if it wants to.

This week’s case neatly captured the unaccountable nature of this bizarre Beltway creature. The consumer bureau has been demanding that, for its alleged sins, New Jersey mortgage lender PHH should pay 18 times the amount ordered by the bureau’s own in-house administrative law judge. And why not, since the bureau reports to no one?

At Tuesday’s hearing, Judge Brett Kavanaugh made it clear that the bureau’s “very unusual structure” has him concerned about more than just a novel way of interpreting lending laws. “You are concentrating huge power in a single person and the President has no power over it,” Judge Kavanaugh said.

***

That same day word began to leak out of Washington of still another failure in the architecture of Dodd-Frank. On Wednesday morning the Fed and the Federal Deposit Insurance Corporation confirmed the results of their study of “orderly resolution” plans at America’s biggest banks. Known as “living wills,” they are supposed to show in detail how these banking titans, in the event of failure, could be placed into bankruptcy without wrecking the financial system.

The Fed and the FDIC agreed that the plans submitted by five of the eight banking giants reviewed were “not credible.” Bank of America, Bank of New York Mellon, J.P. Morgan Chase, State Street and Wells Fargo received these failing grades. The plans from Goldman Sachs and Morgan Stanley were deemed “not credible” by one of the two agencies. And even though Citigroup was the one kid in the class who managed to pass both the Fed and FDIC tests, regulators found “shortcomings” there too.

Much of the press may play these results as another outrage committed by giant banks, but this is fundamentally a failure of Dodd-Frank to keep its central promise. Six years after the law was passed, and eight years since the financial crisis, regulators given broad authority to remake American finance, with thousands of regulatory officials on their payroll, cannot figure out a system to allow financial giants to fail, even in theory. What are we paying these people for?

As the search continues for people outside 1600 Pennsylvania Avenue who believe that Dodd-Frank is reforming the U.S. financial system, judges are beginning to question the law’s most basic premises. Just possibly, taxpayers can contemplate a better future.

“Mr. Dimon implies that Main Street is “inventing conflicts where none need exist.” From his lofty perch on Wall Street, and with the blessed assurance of too-big-to-fail/too-big-to-jail status, one can forgive Mr. Dimon for not being able to recognize the strife endemic within a system that guarantees an unlevel playing field. Community bank “mistakes” end in financial ruin and criminal referrals…

…This un-American, two-tiered system of justice opens prisons for community bankers, while allowing Wall Street to pay for its sins with shareholder money. Preston L. Kennedy, President and CEO Bank of Zachary Zachary, La.

“I agree with Mr. Kennedy’s “unfair, un-American two-tier system points about banks/bankers.” Unfortunately, I experienced it first-hand and am still recovering. I don’t think he, nor most Americans, understand though that JPMorgan was coerced by the our current liberal government into these settlements, so that they could “cement” their false narrative that greedy and reckless bankers (and poor regulation) were the primary causes of the 2008 financial crisis. It’s working to an extent, but that’s to many people like myself (libertarians, conservatives, think tanks, economists, etc.), who are determined to study the facts and publicly write about it, the truth is finally emerging and will continue to emerge.”, Mike Perry, former Chairman and CEO, IndyMac Bank

April 13, The Wall Street Journal

Opinion

The Big Banks Are More Equal Than Others

The reliance of the largest banks on a government guarantee against failure has destabilized the banking ecosystem.

The correspondent banking system that Jamie Dimon describes (“Large Banks and Small Banks Are Allies, Not Enemies,” op-ed, April 6) has existed for 200 years. While the story of our financial system is one of interdependence, the reliance of today’s largest banks on a government guarantee against failure has destabilized the banking ecosystem and threatens institutions not deemed “too big to fail.”

Community banks are critical of the largest financial firms, not merely due to their size but because concentrating most of the industry’s assets in a handful of banks puts the entire system at risk. The 2008 crisis showed that the largest banks are powerful enough to bring down the financial system, prompt a multitrillion-dollar taxpayer backstop and cause massive economic disruption which exacerbated banking industry consolidation. This isn’t a question of large and small. It’s a fundamental question of concentration, risk and moral hazard.

America faces many challenges and one of them is how to address the systemic risks posed by our too-big-to-fail institutions.

Camden R. Fine

President and CEO

Independent Community Bankers of America

Washington

Regulations brought about by actions of banks like Mr. Dimon’s are absolutely affecting our ability to serve members and the communities in which we live and work, through no fault of our own.

The regulatory cost impact on the credit-union industry was $6.1 billion in 2014, and the lost revenues to credit unions from services that were discontinued or reduced because of added regulation is at least an additional $1.1 billion. This total impact of $7.2 billion is equivalent to an astonishing 80% of industry earnings and 6% of our credit unions’ net worth.

It’s time for policy makers to act by recognizing the need for regulatory relief for credit unions and small banks.

Jim Nussle

President/CEO

Credit Union National Association

Washington

Community banks have been strangled by a wave of regulation designed to reign in the systemically dangerous “mistakes” of Wall Street, for which J.P. Morgan Chase has paid more than $23 billion in fines.

Mr. Dimon implies that Main Street is “inventing conflicts where none need exist.” From his lofty perch on Wall Street, and with the blessed assurance of too-big-to-fail/too-big-to-jail status, one can forgive Mr. Dimon for not being able to recognize the strife endemic within a system that guarantees an unlevel playing field. Community bank “mistakes” end in financial ruin and criminal referrals. This un-American, two-tiered system of justice opens prisons for community bankers, while allowing Wall Street to pay for its sins with shareholder money.

Preston L. Kennedy

President and CEO

Bank of Zachary

Zachary, La.

 

“About a decade ago, Goldman Sachs Group Inc.’s due diligence for a residential mortgage-backed security showed an “unusually high” percentage of loans with credit and compliance defect…

…When a review committee asked “How do we know that we caught everything?” an employee said, “we don’t.” The committee approved the deal.”, Aruna Viswanatha, “Decade-Old Details Revealed in Goldman Pact”, The Wall Street Journal, April 12, 2016

“I contend that most of these due diligence underwriting defects were either not correct or not material. They were just a Red Herring that allowed the government and private plaintiffs’ to claim securities fraud on the part of securities issuers and underwriters. How can I say that? Look at blog postings #410 and #514 below. The due diligence error rates in 2014 are as high or higher and no one is doing a thing about them. Why? Because they are defects that are not material. That is the only logical answer. If not, how do you explain them? By the way, why do you think all these matters were settled by the government? I think because they would have never proved them in a court of law.” Mike Perry, former Chairman and CEO, IndyMac Bank

October 7, 2014 – Statement 410: “Again, the truth is finally emerging. FHA’s audit of mortgage loans insured by them in Q1 2014 apparently has uncovered huge, “material” underwriting error rates. If this is true, it goes a long way to disprove the mainstream view that pre-crisis mortgage underwriting deficiencies were a material cause of mortgage (and mortgage securities) losses during the financial crisis…

December 2, 2014 – Statement 514: “If one in seven appraisals are currently inflating home values by 20% or more, why aren’t Fannie, Freddie, FHA, and VA stepping up lender buybacks and instead recently announced policies that act to reduce them? And why aren’t the banking regulators doing more than “reviewing the issue”? I will tell you why…

Markets

Decade-Old Details Revealed in Goldman Mortgage Pact

Bank agrees to pay $5 billion to resolve U.S. and state claims that it misled investors

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New York Attorney General Eric Schneiderman spoke at a news conference Monday in Manhattan. Goldman Sachs completed an agreement to pay $5 billion to resolve U.S. and state claims that it misled investors about mortgage securities. PHOTO: STEPHANIE KEITH/REUTERS

By Aruna Viswanatha

About a decade ago, Goldman Sachs Group Inc.’s due diligence for a residential mortgage-backed security showed an “unusually high” percentage of loans with credit and compliance defects. When a review committee asked “How do we know that we caught everything?” an employee said, “we don’t.” The committee approved the deal.

That exchange, and several other details on how Goldman packaged and sold securities backed by mortgages before the credit and financial crisis culminating in 2008, were unveiled Monday in a final settlement between the Wall Street bank and the Justice Department in which Goldman agreed to pay $5 billion.

Under the agreement, the bank acknowledged it sold tens of billions of dollars in risky mortgage securities, and didn’t screen out questionable loans from some of the bonds in the way it told investors it would, authorities said.

In one bond deal, for example, a Goldman employee found “[e]xtremely aggressive underwriting,” but only took out questionable mortgages from 30% of the deal, according to a statement of facts released in connection with the agreement. In another instance, the bank believed a lender’s underwriting guidelines were “off market,” meaning that “very few lenders” offered a similar feature, yet told investors that the lender had a “commitment to loan quality over volume.”

The pact, which mirrors past agreements other banks have reached tied to the crisis and doesn’t specifically name any allegedly culpable employees or executives, includes a $2.3 billion federal penalty levied by the Justice Department. It also contains $875 million to end claims by several other federal agencies and states including New York, and $1.8 billion in help to struggling borrowers.

The bank announced it had reached a tentative accord in January. On Monday, Goldman spokesman Michael DuVally said: “We are pleased to put these legacy matters behind us. Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce our commitment to our clients and ensure our governance processes are robust.”

The agreement is the latest from an effort by the Justice Department, New York and other states to penalize banks for allegedly fueling a housing bubble and its subsequent collapse by aggressively selling shaky mortgages.

J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Morgan Stanley have previously paid nearly $40 billion to end related investigations.

“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Stuart Delery, the No. 3 official at the Justice Department.

New York Attorney General Eric Schneiderman said his state is expected to receive $190 million in cash and $480 million in homeowner help under the accord, money he said would to go “help New Yorkers keep their homes and rebuild their communities.”

The government’s inquiry into Goldman related to mortgage-backed securities that the firm packaged and sold between 2005 and 2007, the years when the housing market was soaring and investor demand for related bonds was still strong.

The same market later served as ground zero to the worst financial crisis in decades, tipping the economy into recession.

Goldman told investors starting in January 2006 that it would review underwriting and compliance processes at any lender it purchased loans from, according to the statement of facts. The statement said Goldman also reviewed a sample of loans to assess whether they met the lender’s underwriting guidelines.

But between December 2005 and 2007, the reviewers flagged as many as 20% of the sample loans as deviating from guidelines or presenting potentially unacceptable risks, some of which Goldman still used in its mortgage securities. Goldman usually didn’t increase the review pool to identify other questionable loans, the statement said.

Monday’s settlement showed some at Goldman knew of coming risks before the bubble burst. In April 2006, for example, a Goldman manager circulated a “very bullish” research report on Countrywide Financial Corp., one of the largest subprime lenders which later collapsed during the crisis.

Goldman’s head of due diligence, who had just overseen the bank’s review on six Countrywide deals, said upon seeing the report: “If they only knew . . . .

“I reluctantly watched The Big Short on a plane ride recently. Here is a HUGE, HUGE takeaway: The S.E.C., some private plaintiffs, and mostly liberal government officials/politicians have claimed that sophisticated investors were fraudulently deceived by mortgage securities’ issuers and underwriters (Wall Street) into buying securities that they otherwise would not have bought…

…Yet, the entire premise of The Big Short (The movie. I started to read the book, but couldn’t finish because it was far too fresh and painful at the time…I need to do it now.) is that these groups of unrelated investors/speculators, by reading the publicly-available securities prospectuses, which include the individual mortgage loan information (FICO’s, LTV’s, etc.) on every loan in the security and monitoring the publicly-available monthly mortgage loan servicing tapes (which discloses current, delinquent, and nonperforming mortgages), made the decision to investigate further, share their investment hypothesis with others to seek confirmation, and ultimately decided to SHORT some of these mortgage securities (and also various financial institutions and mortgage lenders/insurers). In other words, the securities disclosures weren’t fraudulent. They didn’t have misleading or omitted information. They were in fact the core piece of information that allowed these investors to make their ultimately winning investment decision. Maybe that’s why at the end of the movie, when they described each of the main characters and what they were doing today, it said that: “Dr. Michael Burry reached out to the federal government and offered to be interviewed and share with the government all that he had learned, but had never heard from them. Yet, he had been audited by the IRS twice since then”? Maybe the government didn’t want to know how he and others used publicly-available securities disclosures by mortgage securities issuers and by other S.E.C. registrants to make their investment decisions, because that would have destroyed their claims in all of the bogus securities fraud cases they wanted to file against the industry? Don’t believe me? What has the S.E.C. or any private securities plaintiffs proved in a court of law? As far as I am aware, not much.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“The problem all along, with all of these settlements — and this one highlights it even more — is that they are carefully crafted more to conceal than reveal to the American public what really happened here — and what the so-called penalty is.”, said Dennis Kelleher, the founder of the advocacy organization Better Markets, referring to the government announcement…

…“They appear to have grossly inflated the settlement amount for P.R. purposes to mislead the public, while in the fine print, enabling Goldman Sachs to pay 50 to 75 percent less,””, Nathaniel Popper, “In Settlement’s Fine Print, Goldman May Save $1 Billion”, The New York Times, April 12, 2016

“Mr. Kelleher is mostly complaining that Wall Street banks like Goldman Sachs “got off easy” and that “the public has a right to know the facts and what really happened and the government is not allowing that to happen”. I could not agree with Mr. Kelleher’s latter point more!!! That’s what I have been saying and documenting on this blog, for a long time. The truth is we have no idea whether or not Goldman got of easy or not, because these settlements were coerced by the government out of Too-Big-to-Fail, government-guaranteed and regulated banks. No facts were ever determined in a court of law. My strong sense is that these settlements were all about “cementing” the Democrat/liberal view (as they have been in charge of our Federal government for the past 7 years) that greedy and reckless bankers, and poor regulation, were the primary cause of the 2008 financial crisis. I believe that view to be false.”, Mike Perry, former Chairman and CEO, IndyMac Bank

In Settlement’s Fine Print, Goldman May Save $1 Billion

By NATHANIEL POPPER

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The headquarters of Goldman Sachs in New York. Credit Mark Lennihan/Associated Press

State and federal officials said on Monday that Goldman Sachs would pay $5.1 billion to settle accusations of wrongdoing before the financial crisis.

But that is just on paper. Buried in the fine print are provisions that allow Goldman to pay hundreds of millions of dollars less — perhaps as much as $1 billion less — than that headline figure. And that is before the tax benefits of the deal are included.

The bank will be able to reduce its bill substantially through a combination of government incentives and tax credits. For example, the settlement calls for Goldman to spend $240 million on affordable housing. But a chart attached to the settlement explains that the bank will have to pay at most only 30 percent of that money to fulfill the deal. That is because it will receive a particularly large credit for each dollar it spends on affordable housing.

Goldman is the last of the major American banks to settle with the government. Past deals with other banks also contained some of these concessions, but Goldman appears to have negotiated an even sweeter deal on certain points. For all the banks, the credits suggest that the amounts that the banks will have to actually spend on consumer relief will be much lower than the numbers announced in the news releases.

“They appear to have grossly inflated the settlement amount for P.R. purposes to mislead the public, while in the fine print, enabling Goldman Sachs to pay 50 to 75 percent less,” said Dennis Kelleher, the founder of the advocacy organization Better Markets, referring to the government announcement. “The problem all along, with all of these settlements — and this one highlights it even more — is that they are carefully crafted more to conceal than reveal to the American public what really happened here — and what the so-called penalty is.”

A Justice Department official with direct knowledge of the negotiations, who spoke on the condition that his name not be disclosed, said that the banks were given extra credit for activities that the government wanted to encourage, like funding development of low-income housing or providing relief to areas hit by natural disasters. But he also said that the final terms were a result of a back and forth between the banks and government officials.

Goldman is the last of the big American banks to reach a settlement with the national working group that was set up in 2012 to investigate how Wall Street exacerbated the mortgage bubble and ensuing financial crisis. The group included several federal regulators and state attorneys general.

The final bill for Goldman is less than the settlements of mortgage giants like JPMorgan, which the government said was paying $13.3 billion, but more than the $3.2 billion settlement the government secured with Goldman’s closest competitor, Morgan Stanley.

The special credits negotiated by the banks are laid out in annexes connected to each settlement.

JPMorgan Chase, for instance, earned a $1.15 credit toward its settlement requirements for each dollar of loan forgiveness it offered within the first year, according to the settlement it completed in 2013. Goldman, in contrast, is getting $1.50 of credit for each dollar of loan forgiveness within the first six months after the settlement — an additional incentive that JPMorgan did not receive. JPMorgan also did not get the 70 percent discount on money going to affordable housing.

When asked about these differences, the Justice Department official said that the wrongdoing that the banks were accused of was different and, as a result, the negotiations took different courses.

Like other banks, Goldman bought loans issued by subprime mortgage specialists like Countrywide Financial. Goldman then packaged these loans into bonds that were able to get the highest rating from credit rating agencies. The loans were sold to investors, who sustained losses when the loans went sour.

Over the course of 2006, Goldman employees took note of the decreasing quality of loans that it was buying, according to a statement of fact released along with the settlement. When an outside analyst wrote a positive report about Countrywide’s stock in April 2006, the head of due diligence at Goldman wrote in an email: “If they only knew.”

Despite the worrying signs, Goldman did not alert investors who were buying the bonds it was packaging, officials said on Monday.

“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” Stuart F. Delery, the acting associate attorney general, said in a statement. The bank agreed to a statement of facts outlining its wrongdoing.

Goldman said in a statement on Monday: “We are pleased to put these legacy matters behind us. Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce our commitment to our clients and ensure our governance processes are robust.”

Nearly half of Goldman’s settlement — $2.4 billion — will be paid in a civil penalty. Most of the rest will go to provide relief to consumers who were hurt by the financial crisis.

Goldman will benefit from considerable concessions when it comes to consumer relief.

On the broadest level, any money that Goldman spends on consumer relief will be deductible from its corporate tax bill. If Goldman spends $2.5 billion on consumer relief, and pays the maximum United States corporate tax rate of 35 percent, it could, in theory, reap $875 million in tax savings.

But Goldman could easily pay less than $2.5 billion in consumer relief because of the sections of the settlement that give it extra credit for certain types of activity.

For every $1 that the bank spends on affordable housing developments, the bank will get a $3.25 credit toward the $240 million, with the possibility of getting 15 percent more credit if it pays early.

Eric T. Schneiderman, the New York attorney general, announced that Goldman would pay $280 million for community reinvestment and neighborhood stabilization in New York. But an annex to the agreement with New York explains that Goldman will get $2 of credit for every dollar it spends in this area, meaning that it will ultimately have to pay only $140 million to meet the terms of the deal.

In sum, the details in the various annexes suggest that Goldman could end up paying over $1 billion less than the $5 billion than was announced on Monday.

In January, Goldman said that it put aside $3.4 billion in 2015 to cover the costs of what would become its $5 billion settlement.

A version of this article appears in print on April 12, 2016, on page A1 of the New York edition with the headline: Goldman’s Settlement on Mortgages Is Less Than Meets the Eye

“What do you think of the Wells Fargo settlement last Friday? As I understand it, Wells “admitted” to the claims in the settlement, but its “non-response” press release seems like a denial? The government’s harsh claims (that Wells was a poor underwriter of FHA mortgages over a long period of time, that Wells intentionally defrauded FHA by not disclosing QC findings for years, and that Wells’ poor underwriting of FHA loans caused people to lose their homes..) seem mostly false to me, knowing the Democrats/liberals in charge of our government the past 7 years have a goal of cementing blame on Wall Street/the Banks/mortgage lenders for the crisis…

…Wells didn’t apologize for intentionally defrauding FHA (and harming homeowners) and one low level manager is the scapegoat? FHA doesn’t terminate or suspend Wells from the direct endorsement program? There is no discussion of an independent monitor, to ensure the loans Wells delivers to FHA now meet its parameters? There is no discussion of underwriting changes/improvements that have been made by Wells? And importantly, Wells’ shareholders and the market for its stock didn’t react at all, despite the seriousness of the government’s claims and mortgage lending and underwriting being at the core of Wells Fargo’s past, present, and future business model. Why? Because the government’s claims are largely false and most everyone important to Wells…its regulators, its shareholders and other institutional investors, and its employees know that to be the case and because Wells’ reputation won’t be damaged with its customers, because most aren’t paying attention and/or don’t care and/or don’t believe the government claims? I think it’s something like this. Love to hear your thoughts. What do you think?” Mike Perry, former Chairman and CEO, IndyMac Bank, April 12, 2016

Here are some of the industry responses I received privately (and so I have made them anonymous) to the above:

“Mike, Wells has impressed me over the years as being extremely well run, and I can’t believe they did anything wrong other than by accident. I like Dan Gilbert’s approach which is, dammit, we didn’t do anything wrong, we’re not writing a check, and we’ll fight you in court till hell freezes over. I’d like to have enough money such that, if something like this happened to me, I’d go on TV, say that I refused to knuckle under and admit to something I never did and then tell the world that effective tomorrow, I was closing the company.  And it would be great if I were the biggest lender in the country. What if Atlas shrugged?  Well, I just shrugged.”

“The fact that the government didn’t terminate Wells’ direct endorsement speaks volumes.  Wells is the best of the banks and conservative.  FHA audits every originator so where were they prior to the crisis.  It Is easy for any objective observer to assess the motivations of the government.”

“Mike, I look forward to discussing this when we are together.  I never thought wells did a thing wrong and all the regulators have done is push wells and others out of the fha market.”

“Interesting stuff, Mike..thanks for sharing.  I think you’re spot on…these governmental grabs are known for what they are by those who are informed and no longer cause gasps by their announcements…accepted for simple exercise of the government’s practice of extortion of financial institutions for damages not proven and amounts not supported by facts.  Blah, blah, blah…..you’ve heard it from me more times than we can count(!).”

“Mike: Nice to hear from you. To be candid, I have largely stopped paying attention to the myriad settlements the government has forced….including this one. I think your thoughts are generally on point, however. I found that when I focused on and stated any opinion on government actions in the wake of the housing crisis….I tended to get into trouble professionally. The last 8 years have not been a good time to be a squeaky wheel.”

Wells Fargo’s FHA Settlement Press Release, April 8, 2016

The Department of Justice’s Wells Fargo/FHA Press Release, April 8, 2016

“F.H.A. and government-sponsored Fannie Mae and Freddie Mac have been demanding lower credit standards — just as the feds did starting under President Bill Clinton, in pursuit of the same “affordable housing” goal. The Office of the Comptroller of the Currency recently warned that mortgage underwriting standards have slipped and now reflect “broad trends similar to those experienced from 2005 through 2007, before the most recent financial crisis.”…

…When the economy and housing prices turn south again, a lot of these loans will go bad, just as they did last time. Some borrowers need only put 3 percent down to get a Fannie Mae loan — even if the down payment is a gift. Fannie also has started up a new subprime lending program. Good news: That probably won’t cause another global financial crisis, because the banks largely learned their lesson on that front back in 2008. Bad news: The taxpayers will likely wind up on the hook. Directly or indirectly, Uncle Sam has been responsible for insuring at least 80 percent of new mortgages since 2008. President Obama loves to cite “the definition of insanity” as “doing the same thing over and over again and expecting a different result.” Which prompts the question: Is he expecting these disastrous mortgage policies to bring a different result this time?”, Excerpt from the New York Post Editorial Board’s: “Team Obama is Setting Us Up for Another Housing Collapse”, April 9, 2016