…advance leftist pet projects, and protect its legacy—and hardly anyone has noticed. The administration’s multiyear campaign against the banking industry has quietly steered money to organizations and politicians who are working to ensure liberal policy and political victories at every level of government. The conduit for this funding is the Residential Mortgage-Backed Securities Working Group, a coalition of federal and state regulators and prosecutors created in 2012 to “identify, investigate, and prosecute instances of wrongdoing” in the residential mortgage-backed securities market. In conjunction with the Justice Department, the RMBS Working Group has reached multibillion-dollar settlements with essentially every major bank in America. The most recent came in April when the Justice Department announced a $5.1 billion settlement with Goldman Sachs. In February Morgan Stanley agreed to a $3.2 billion settlement. Previous targets were Citigroup ($7 billion), J.P. Morgan Chase ($13 billion), and Bank of America, which in 2014 reached the largest civil settlement in American history at $16.65 billion. Smaller deals with other banks have also been announced. Despite the best efforts of a few principled legislators late last year, Congress missed an opportunity to amend the Justice Department’s funding bill to stop further handouts. Lawmakers now have another opportunity as Congress enters budget negotiation for fiscal year 2017. Rep. Bob Goodlatte (R., Va.) introduced a bill in April that would prevent government officials from enforcing settlements that funnel money to third parties, and it needs to gain wider traction with his colleagues. The political shakedowns disguised as public service must end.”, Andy Koenig, “Look Who’s Getting That Bank Settlement Cash”, The Wall Street Journal, August 29, 2016

“It couldn’t be any clearer, could it? These banks settlements are not about seeking the facts and the truth about the financial, housing, and mortgage crisis. They are political shakedowns from a liberal government, its politicians, lawyers, bureaucrats, and supporters. In other words, these coerced bank settlements aren’t worth the paper they are written on, if you want to understand anything about the crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

Look Who’s Getting That Bank Settlement Cash

Tens of millions of dollars disguised as ‘consumer relief’ are going to liberal political groups.

New York Attorney General Eric Schneiderman discussing a settlement with Goldman Sachs, April 11. PHOTO: REUTERS

By Andy Koenig

Imagine if the president of the United States forced America’s biggest banks to funnel hundreds of millions—and potentially billions—of dollars to the corporations and lobbyists who supported his agenda, all while calling it “Main Street Relief.” The public outcry would rightly be deafening. Yet the Obama administration has used a similar strategy to enrich its political allies, advance leftist pet projects, and protect its legacy—and hardly anyone has noticed.

The administration’s multiyear campaign against the banking industry has quietly steered money to organizations and politicians who are working to ensure liberal policy and political victories at every level of government. The conduit for this funding is the Residential Mortgage-Backed Securities Working Group, a coalition of federal and state regulators and prosecutors created in 2012 to “identify, investigate, and prosecute instances of wrongdoing” in the residential mortgage-backed securities market. In conjunction with the Justice Department, the RMBS Working Group has reached multibillion-dollar settlements with essentially every major bank in America.

The most recent came in April when the Justice Department announced a $5.1 billion settlement with Goldman Sachs. In February Morgan Stanley agreed to a $3.2 billion settlement. Previous targets were Citigroup ($7 billion), J.P. Morgan Chase ($13 billion), and Bank of America, which in 2014 reached the largest civil settlement in American history at $16.65 billion. Smaller deals with other banks have also been announced.

Combined, the banks must divert well over $11 billion into “consumer relief,” which is supposed to benefit homeowners harmed during the Great Recession. Yet it is unknown how much, if any, of the banks’ settlement money will find its way to individual homeowners. Instead, a substantial portion is allocated to private, nonprofit organizations drawn from a federally approved list. Some groups on the list—Catholic Charities, for instance—are relatively nonpolitical. Others—La Raza, the National Urban League, the National Community Reinvestment Coalition and more—are anything but.

This is a handout to the administration’s allies. Many of these groups engage in voter registration, community organizing and lobbying on liberal policy priorities at every level of government. They also provide grants to other liberal groups not eligible for payouts under the settlements. Thanks to the Obama administration, and the fungibility of money, the settlements’ beneficiaries can now devote hundreds of thousands or even millions of dollars to these activities.

The settlements also give banks a financial incentive to fund these groups. Most of the deals give double credit or more against the settlement amount for every dollar in “donations.” Bank of America’s donation list—the only bank to disclose exactly where it sends its money—shows how this benefits liberal groups. The bank has so far given at least $1.15 million to the National Urban League, which counts as if it were $2.6 million against the bank’s settlement. Similarly, $1.5 million to La Raza takes $3.5 million off the total amount of “consumer relief” owed by the bank. There are scores of other examples.

Our analysis of over 80 beneficiaries from Bank of America’s settlement shows that they received, on average, more than 10% of their 2015 budgets from the bank. When other bank checks are added, the amount funneled to these organizations is guaranteed to rise. And the banks have multiple years to pay their total penalties, meaning some liberal interest groups can count on additional funding for years—and election cycles—to come.

As part of their “consumer relief” penalties, Bank of America and J.P. Morgan Chase must also pay a minimum $75 million to Community Development Financial Institutions—taxpayer-funded groups propped up by the Obama administration as an alternative to payday lenders. “Housing Counseling Agencies” also get at least $30 million. This essentially circumvents Congress’s recent decision to cut $43 million in federal funds routed to these groups through the Department of Housing and Urban Development.

The politicians who negotiate the settlements as part of the RMBS Working Group have also directed money to their supporters and states. Illinois’s Democratic attorney general Lisa Madigan announced she had secured $22.5 million from February’s Morgan Stanley deal for her state’s debt-ridden pension funds—a blatant payout to public unions. The deals with J.P. Morgan Chase, Bank of America and Citigroup yielded a further $344 million for both “consumer relief” and direct payments to pension funds.

New York hit the jackpot too. Attorney General Eric Schneiderman, also a Democrat and chairman of the RMBS Working Group, arranged for Morgan Stanley to fork over $400 million to New York nonprofits and $150 million to the state.

Despite the best efforts of a few principled legislators late last year, Congress missed an opportunity to amend the Justice Department’s funding bill to stop further handouts. Lawmakers now have another opportunity as Congress enters budget negotiation for fiscal year 2017. Rep. Bob Goodlatte (R., Va.) introduced a bill in April that would prevent government officials from enforcing settlements that funnel money to third parties, and it needs to gain wider traction with his colleagues. The political shakedowns disguised as public service must end.

Mr. Koenig is senior policy adviser at Freedom Partners Chamber of Commerce.

…As Mr. Bernanke told the Financial Crisis Inquiry Commission in 2010, the “only way we could have saved Lehman would have been by breaking the law, and I’m not sure I’m willing to accept those consequences for the Federal Reserve and for our systems of laws.” That’s because by statute the Fed can make loans only to institutions it believes can pay them back. Again, to quote Mr. Bernanke: “The company’s available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs.” But after what seems an exhaustive review of a now voluminous record of transcripts, exhibits and other evidence from multiple official inquiries, Professor Ball concludes there is “no evidence” that the decision-makers “examined the adequacy of Lehman’s collateral, or that legal barriers deterred them from assisting the firm.” Rather, the decision to let Lehman fail reflected a mixture of politics — Mr. Paulson famously said he didn’t want to go down in history as “Mr. Bailout,” and the Bush administration had come under fierce criticism for rescuing Bear Stearns and the mortgage giants Fannie Mae and Freddie Mac — economic policy driven by managing “moral hazard,” and a misguided sense that investors had anticipated a Lehman failure and the consequences would be manageable….And the Fed did lend into continuing runs at both Bear Stearns and A.I.G., although officials argued then that those companies had adequate collateral to guarantee repayment. But Professor Ball shows there was no detailed analysis undertaken to evaluate the value of the collateral at any of the three companies. “This claim is yet another Fed position that does not survive scrutiny,” he concludes. “It’s out of the mainstream of what most academics do,” David Romer, a professor of economics at the University of California, Berkeley, told me this week about Professor Ball’s paper. (Professor Romer read and commented on an early draft.) “It’s likely to offend some people and be controversial. But with respect to the specific questions he asks” — did the Fed have the legal authority to lend and was it forced to shut Lehman down — “I find his answers pretty compelling.” “Larry Ball’s carefully researched work is incredibly important for drawing the proper lessons from the 2008 crisis,” said Athanasios Orphanides, an economics professor and expert on central banking at M.I.T.’s Sloan School of Management….Mr. Paulson said he stood by earlier comments he gave me: “We were united in our determination to do all we can to prevent a systemically important institution from going down.” He added, “Although it was Ben and Tim’s decision to make, I shared their view that Lehman was insolvent and I know the marketplace did.” “I’m not trying to judge them or say I or anyone else would have done any better,” Professor Ball said. “There was extraordinary political pressure not to bail out Lehman, and it would have been very difficult to go against that. But that’s completely different from what they’ve said. The record needs to be set straight.” Professor Ball concludes: “Lehman might have survived indefinitely as an independent firm; it might have been acquired by another institution; or eventually it might have been forced to wind down its business. Any of these outcomes, however, would likely have been less disruptive to the financial system than the bankruptcy that actually occurred.””, James B. Stewart, “Pointing Fingers at the Fed in the Lehman Disaster”, The New York Times, July 22, 2016

“Another major financial crisis narrative from the government (and its officials at the time) is challenged as false and I believe it is false! I believe the same thing happened to IndyMac Bank. No collateral analysis was done by the Federal Reserve and/or FDIC. Clearly, when markets are severely disrupted, if those distressed prices are used to mark assets to market, then every bank and financial firm in the U.S. and world (because of their leverage) would have been insolvent in the 2^nd half of 2008 and 1^st half or so of 2009. It would be like buying a brand new $100,000 BMW on credit ($90,000 loan) in Dubai, India and driving out into the rural countryside and getting a call from the bank saying we are calling your loan immediately, pay us back what you can….and you stop and stand on the side of the road, with a for sale sign on your new luxury car…what are you going to get for it out there? Not much, with no real buyers. That’s roughly how the FDIC fire-sold IndyMac Bank in late 2008 (sold)/early 2009 (closed) at a time when FDIC Chair Sheila Bair was quoted in The New York Times saying “asset prices were irrational.” So, if asset prices were irrational Ms. Bair, wasn’t the FDIC’s fire-sale of IndyMac Bank into that irrationality, irrational and irresponsible and isn’t that why IndyMac Bank cost the FDIC insurance fund billions, not anything management did? You didn’t know, your were just following FDIC protocols? Then why did every other trustee or conservator of crisis era assets and institutions wait years to sell (some other countries like the U.K. still own stakes in their major banks today), until markets recovered rationality and liquidity and confidence?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Economy

Pointing a Finger at the Fed in the Lehman Disaster

Common Sense

By JAMES B. STEWART

The former Lehman Brothers headquarters. There has been much debate over whether the government should have done more to rescue the now-failed investment bank. Credit Mario Tama/Getty Images

As the last eight years have unfolded, the enormous economic and political consequences of the Lehman Brothers failure have emerged with stark clarity, never more evident than in this week’s Republican convention.

The widespread anger, frustration and disillusionment that has fueled the rise of Donald J. Trump can be traced to Lehman’s collapse, the bailout of Wall Street and the ensuing Great Recession.

No wonder the debate over Lehman’s fate, and whether it could have been avoided by Treasury and Federal Reserve officials, hasn’t subsided.

Now a widely respected academic — Laurence M. Ball, chairman of the economics department at Johns Hopkins University and author of “Money, Banking and Financial Markets” — has produced the most comprehensive and persuasive argument yet that the Federal Reserve could have saved Lehman from the precipitous and chaotic bankruptcy that occurred that fateful weekend in September 2008.

He recently presented the result of four years of research, “The Fed and Lehman Brothers,” to a group of economists gathered in Cambridge, Mass.

In especially strong language for an academic, Professor Ball takes issue with the established narrative that the Fed was powerless to lend to Lehman in its waning hours: “Fed officials have not been transparent about the Lehman crisis. Their explanations for their actions rest on flawed economic and legal reasoning and dubious factual claims.”

By focusing narrowly on a claim by the Fed that it had no choice but to let Lehman fail, Professor Ball, in his 214-page paper, has brought much needed clarity and rigor to the historical record. His conclusions directly contradict accounts in testimony, memoirs and myriad media interviews by the principal decision makers — Henry M. Paulson Jr., the former Treasury secretary; Ben S. Bernanke, then the Fed chairman; and Timothy F. Geithner, who was president of the New York Fed.

As Mr. Bernanke told the Financial Crisis Inquiry Commission in 2010, the “only way we could have saved Lehman would have been by breaking the law, and I’m not sure I’m willing to accept those consequences for the Federal Reserve and for our systems of laws.”

That’s because by statute the Fed can make loans only to institutions it believes can pay them back. Again, to quote Mr. Bernanke: “The company’s available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs.”

But after what seems an exhaustive review of a now voluminous record of transcripts, exhibits and other evidence from multiple official inquiries, Professor Ball concludes there is “no evidence” that the decision-makers “examined the adequacy of Lehman’s collateral, or that legal barriers deterred them from assisting the firm.”

Rather, the decision to let Lehman fail reflected a mixture of politics — Mr. Paulson famously said he didn’t want to go down in history as “Mr. Bailout,” and the Bush administration had come under fierce criticism for rescuing Bear Stearns and the mortgage giants Fannie Mae and Freddie Mac — economic policy driven by managing “moral hazard,” and a misguided sense that investors had anticipated a Lehman failure and the consequences would be manageable.

“It’s out of the mainstream of what most academics do,” David Romer, a professor of economics at the University of California, Berkeley, told me this week about Professor Ball’s paper. (Professor Romer read and commented on an early draft.) “It’s likely to offend some people and be controversial. But with respect to the specific questions he asks” — did the Fed have the legal authority to lend and was it forced to shut Lehman down — “I find his answers pretty compelling.”

Professor Ball has an impressive roster of mainstream economics credentials: He has a Ph.D. in economics from the Massachusetts Institute of Technology, taught at Harvard and Princeton, is a visiting scholar at the International Monetary Fund and is a research associate at the National Bureau of Economic Research.

“Larry Ball’s carefully researched work is incredibly important for drawing the proper lessons from the 2008 crisis,” said Athanasios Orphanides, an economics professor and expert on central banking at M.I.T.’s Sloan School of Management.

I did speak to several people who remain unpersuaded (none willing to be identified), and it’s fair to say no one paper will ever fully resolve this debate. Several said that, however impressive in the abstract, Professor Ball’s analysis was missing a real-world perspective, which was that almost no one believed at the time that Lehman was solvent and virtually nothing short of a politically untenable federal takeover of Lehman would have staved off a run. Defenders of the theory that Lehman was deeply insolvent also point to the fact that Lehman’s creditors ended up suffering tens of billions of dollars of losses in the bankruptcy.

None of the principals themselves have budged from their oft-stated positions that the Fed’s hands were tied. Mr. Paulson said he stood by earlier comments he gave me: “We were united in our determination to do all we can to prevent a systemically important institution from going down.” He added, “Although it was Ben and Tim’s decision to make, I shared their view that Lehman was insolvent and I know the marketplace did.”

Mr. Geithner said he had not read the paper and thus could not comment. Mr. Bernanke didn’t respond to a request for comment.

Having written extensively about these same issues, and interviewed the major decision makers on multiple occasions, I think that much of Professor Ball’s account rings true.

That isn’t to say that, during the maelstrom of events that precipitated the financial crisis, the Fed’s legal authority wasn’t the subject of continuing concern to Treasury and Fed officials. But it also was not the be-all and end-all that it was eventually characterized as in subsequent accounts of the crisis, which also had the self-serving effect of absolving the officials of any blame for what, with benefit of hindsight, seems a deeply flawed judgment call.

My colleague Peter Eavis and I reported in 2014 that an internal Fed team assigned to value Lehman’s collateral reached a preliminary finding that the firm was narrowly solvent and the Fed could have justified a loan. But everyone was too busy to listen, and the report was never delivered to Mr. Geithner, Mr. Bernanke or Mr. Paulson. This is consistent with Professor Ball’s findings.

“I’d always had these nagging questions about why the Fed stepped in with Bear Stearns and A.I.G. but not Lehman,” he told me this week. “The explanations never really made sense.”

As one example, he noted the oft-cited rationale that Fed officials “shouldn’t lend into a run” and that a loan to Lehman would have been “a bridge to nowhere.”

“That’s nonsensical,” Professor Ball said. “It’s Economics 101. That’s exactly when the lender of last resort needs to lend.”

And the Fed did lend into continuing runs at both Bear Stearns and A.I.G., although officials argued then that those companies had adequate collateral to guarantee repayment. But Professor Ball shows there was no detailed analysis undertaken to evaluate the value of the collateral at any of the three companies. “This claim is yet another Fed position that does not survive scrutiny,” he concludes.

One of the more intriguing questions Professor Ball tackles is why Mr. Paulson, rather than Mr. Bernanke, appears to have been the primary decision maker, when sole authority to lend to an institution in distress rests with the Fed. The answer, he suggests, is to be found more in psychology than data.

“By many accounts, Paulson was a highly assertive person who often told others what to do, and Bernanke was not,” Professor Ball writes. “Based on these traits, we would expect Paulson to take charge in a crisis.”

There’s no way to know whether lending to Lehman that weekend would have staved off a financial crisis, or significantly reduced its magnitude.

“I’m not trying to judge them or say I or anyone else would have done any better,” Professor Ball said. “There was extraordinary political pressure not to bail out Lehman, and it would have been very difficult to go against that. But that’s completely different from what they’ve said. The record needs to be set straight.”

Professor Ball concludes: “Lehman might have survived indefinitely as an independent firm; it might have been acquired by another institution; or eventually it might have been forced to wind down its business. Any of these outcomes, however, would likely have been less disruptive to the financial system than the bankruptcy that actually occurred.”

Correction: July 21, 2016
An earlier version of this article misstated the given name of an economics professor at the Massachusetts Institute of Technology. He is Athanasios Orphanides, not Athansios.

A version of this article appears in print on July 22, 2016, on page B1 of the New York edition with the headline: Faulting the Fed in Lehman’s Fall

…in order to comply with certain federal laws that they believe (in their subjective interpretation) require all federally-insured depository institutions like banks to lend a certain percentage of their total, to low income and minority borrowers, even if that’s risky, not their expertise, and as a result, they wouldn’t voluntarily choose to do so? Isn’t this exactly what happened for years, leading up to the 2008 housing and mortgage crisis and yet was blamed on the private sector and not the government and/or other consumer advocacy groups?”, Mike Perry, former Chairman and CEO, IndyMac Bank

“But banks aren’t simply businesses pursuing returns for shareholders: The government requires them to lend across income, ethnic and racial groups, even as it encourages banks to curb risks in the wake of the financial crisis. While First Republic’s mortgage business is being increasingly copied by the biggest banks, it makes few home loans to lower-income, black or Hispanic borrowers. For San Francisco-based First Republic, 91% of its mortgage approvals in 2014 went to high-income customers versus 45% for lenders nationally, according to a Wall Street Journal analysis of federal home-loan data that relied in part on ComplianceTech’s LendingPatterns.com. First Republic also lends to black and Hispanic borrowers at rates below the industry average. In 2014, it didn’t extend any mortgages to low-or-moderate-income African-American customers, according to the analysis. Overall, the bank gave 0.5% of its mortgage approvals to blacks and 2.2% to Hispanics in 2014 versus 5.5% to blacks and 8.9% to Hispanics at all lenders. The bank said there is no conflict between its loan strategy and equal-lending laws. “First Republic has a strong, affirmative outreach to serve low-income and minority communities,” General Counsel Edward Dobranski said. The bank also said it has made a concerted effort recently to lend more to these groups. Bank data from 2015 viewed by the Journal showed the bank’s rates of home lending to black and Hispanic customers were the same and lower, respectively, compared with the prior year. The company said it has increased lending to black and Hispanic customers in the first six months of 2016. The bank’s figures would be higher if loans purchased from third parties were included in the Journal’s analysis, it said. Banks sometimes purchase such loans to diversify their borrowers. Earlier this year, First Republic was criticized in a report by the Federal Deposit Insurance Corp. for low levels of lending to lower-income borrowers. Overall, the report said First Republic had “poor penetration among individuals of different income levels,” but said that it showed “no evidence of discriminatory or other illegal credit practices.” There are few clear answers about whether home loans to the rich could run afoul of diversity laws. One law pushes banks to lend across income groups in areas in which they operate. Meanwhile, other laws have been used to allege banks focusing on the rich are discriminating against minorities. The law specifies that “banks should not just lend to rich people,” said John Vogel, an adjunct professor at Dartmouth’s Tuck School of Business who studies lending. But “there aren’t any kind of criteria that say what percent of mortgages” have to go to lower-income people. The lender’s strategy has remained steady since its founding in 1985: attract affluent customers through jumbo loans, then use customer service to persuade them to buy other products. The bank said it now draws clients in other ways, too. The low default rates of jumbo loans help explain why the largest U.S. banks have all increased the portion of their mortgage approvals going to jumbo loans in recent years.”, Rachel Louise Ensign, AnnaMaria Andriotis and Paul Overberg, “First Republic: Is It Wrong to Build a Bank for Wealthy Clients Only? Bank makes few home loans to lower-income, black or Hispanic borrowers”, The Wall Street Journal, August 17, 2016

Markets

First Republic: Is It Wrong to Build a Bank for Wealthy Clients Only?

Bank makes few home loans to lower-income, black or Hispanic borrowers

By Rachel Louise Ensign, AnnaMaria Andriotis and Paul Overberg

Brands like Ferrari, Prada and Hermès have built lucrative businesses by focusing squarely on rich customers. First Republic Bank is trying to do the same.

Over three decades, the bank has catapulted from a tiny thrift to a lender of choice for some deep-pocketed clients, including Facebook Inc. chief Mark Zuckerberg. The bank draws in clients with excellent terms on mortgages and perks like branch parties and private museum tours.

Shareholders are enamored with the bank. First Republic’s stock has gained 184% over the past five years, compared with an 82% increase in the KBW Nasdaq Bank Index. Its assets have climbed from less than $4 billion at the end of 2000 to $65 billion at the end of the second quarter.

But banks aren’t simply businesses pursuing returns for shareholders: The government requires them to lend across income, ethnic and racial groups, even as it encourages banks to curb risks in the wake of the financial crisis. While First Republic’s mortgage business is being increasingly copied by the biggest banks, it makes few home loans to lower-income, black or Hispanic borrowers.

For San Francisco-based First Republic, 91% of its mortgage approvals in 2014 went to high-income customers versus 45% for lenders nationally, according to a Wall Street Journal analysis of federal home-loan data that relied in part on ComplianceTech’s LendingPatterns.com.

First Republic also lends to black and Hispanic borrowers at rates below the industry average. In 2014, it didn’t extend any mortgages to low-or-moderate-income African-American customers, according to the analysis. Overall, the bank gave 0.5% of its mortgage approvals to blacks and 2.2% to Hispanics in 2014 versus 5.5% to blacks and 8.9% to Hispanics at all lenders.

The bank said there is no conflict between its loan strategy and equal-lending laws. “First Republic has a strong, affirmative outreach to serve low-income and minority communities,” General Counsel Edward Dobranski said.

The bank also said it has made a concerted effort recently to lend more to these groups. Bank data from 2015 viewed by the Journal showed the bank’s rates of home lending to black and Hispanic customers were the same and lower, respectively, compared with the prior year.

The company said it has increased lending to black and Hispanic customers in the first six months of 2016. The bank’s figures would be higher if loans purchased from third parties were included in the Journal’s analysis, it said. Banks sometimes purchase such loans to diversify their borrowers.

Many financial institutions long have catered to the rich. Some are exempt from certain rules on diverse mortgage lending, while others don’t face the same potential issues because they are private banks within firms that lend broadly.

Wealthy customers, seen as promising prospects for cross selling fee-generating products, are appealing to banks as they find profits pinched by years of low interest rates.

Earlier this year, First Republic was criticized in a report by the Federal Deposit Insurance Corp. for low levels of lending to lower-income borrowers. It did get good marks for employee community service and buying tax credits that fund low-income housing.

Overall, the report said First Republic had “poor penetration among individuals of different income levels,” but said that it showed “no evidence of discriminatory or other illegal credit practices.”

There are few clear answers about whether home loans to the rich could run afoul of diversity laws. One law pushes banks to lend across income groups in areas in which they operate. Meanwhile, other laws have been used to allege banks focusing on the rich are discriminating against minorities.

The law specifies that “banks should not just lend to rich people,” said John Vogel, an adjunct professor at Dartmouth’s Tuck School of Business who studies lending. But “there aren’t any kind of criteria that say what percent of mortgages” have to go to lower-income people.

First Republic has 69 branches, including in New York and Palm Beach, Fla. It offers mortgage clients, who have a median net worth of $3.3 million, perks such as fresh-baked chocolate-chip cookies and, until recently, ATMs that spit out only $100 bills.

At a recent party at a Midtown Manhattan branch, clients were served watermelon cocktails and oysters. Many were on a first-name basis with the branch manager and said personal attention was the reason they chose the lender.

Bankers said they know most of the customers who walk into their branches and can approve mortgage applications for existing clients within a day. They ferry cash to clients by hand if need be.

About three-quarters of its mortgage approvals are “jumbo” loans, or loans above $417,000 in most parts of the country. The average mortgage at First Republic is more than $1.2 million, according to the Journal analysis. The bank in 2014 had a higher concentration of jumbo loan originations than any other major mortgage lender, 88% of dollar volume, compared with 47% for J.P. Morgan Chase & Co., according to trade publication Inside Mortgage Finance.

The lender’s strategy has remained steady since its founding in 1985: attract affluent customers through jumbo loans, then use customer service to persuade them to buy other products. The bank said it now draws clients in other ways, too.

The low default rates of jumbo loans help explain why the largest U.S. banks have all increased the portion of their mortgage approvals going to jumbo loans in recent years.

When big banks’ mortgage defaults rose during the crisis, First Republic’s home-loan charge-offs were less than one-tenth the average for large banks, according to an investor presentation.

The bank is “an extremely creative lender,” said Chrissie Lawrence, a real-estate broker in Wellesley, Mass. She refers many clients to the bank, citing its willingness to make mortgages to those in unusual financial situations such as new doctors who don’t have enough savings or borrowers who need loans larger than the value of the home they are buying.

In 2012, the bank made a $5.95 million jumbo loan with a starting rate of 1.05% to Facebook’s Mr. Zuckerberg, according to public documents. Facebook declined to comment on Mr. Zuckerberg’s behalf; the bank declined to discuss details but said it offers better rates to bigger customers.

…Their applications for government-backed mortgages—mostly those insured by the Federal Housing Administration—jumped 60%, according to the report. FHA mortgages are generally easier to get approved for—in large part because they permit lower credit scores—but can also come with higher costs for borrowers. Mortgage lending to African-Americans has declined since the last housing boom, a direct result of tightened underwriting standards that persist eight years after the meltdown, according to a new report…Black borrowers accounted for a smaller share of mortgage originations in 2014, at 5%, than in 2004 when they were 7%. The decline is largely because of tighter underwriting requirements that most lenders have been sticking to since the recession. In part, this has been to avoid the threat of having to buy back loans from the agencies, according to the report.”, AnnaMaria Andriotis, “Tighter Underwriting Rules Cut Portion of Mortgages to Blacks, Report Says”, The Wall Street Journal, August 17, 2016

“Pre-crisis, every major mortgage lender had lowered their underwriting standards over time, under pressure from consumer groups and the government (including government housing and banking regulators) and because the decades long housing price boom masked any bad credit/underwriting decisions. Post crisis, the only ones who continues with lower underwriting standards are FHA and VA (almost like the nationalization/federalization of student loans), because the private mortgage lenders were unfairly blamed (and sued and settled for tens of billions) when the housing bubble burst and credit standards (pushed by the government, consumer groups, and housing prices) went too far….so today, blacks and other minorities, as a group, are getting fewer mortgages and paying higher rates for their mortgages. Memories are already forgetting the 2008 crisis and consumer groups and the government are already starting once again to pressure banks and other mortgage lenders to lower their lending standards and the Federal Reserve has “helped”, by dramatically inflating home prices once again via their monetary manipulations….and once again, some day in the next decade or so, we will have another housing bubble burst and possibly another mortgage crisis….but this time, most of those loans may end up being held by the government, at FHA and VA (just like the government holds most of the bad student loans….via the federal student loan program) and most of the lenders they will hope to blame/sue will be smaller firms, who won’t have any meaningful net worth to tap (as many of the Big Banks have wisely said, “No Mas”, when it comes to FHA loans and being unfairly sued by the government).”, Mike Perry, former Chairman and CEO, IndyMac Bank

Markets

Tighter Underwriting Rules Cut Portion of Mortgages to Blacks, Report Says

Blacks made up smaller share of originations in 2014 vs. 2004, African-American trade group finds

A ‘for sale’ sign sits in front of a home in Vienna, Va. Black borrowers accounted for 5% of mortgage originations in 2014 compared with 7% in 2004, according to an analysis of the most recent Home Mortgage Disclosure Act data by the National Association of Real Estate Brokers. PHOTO: REUTERS

By AnnaMaria Andriotis

Mortgage lending to African-Americans has declined since the last housing boom, a direct result of tightened underwriting standards that persist eight years after the meltdown, according to a new report.

Black borrowers accounted for a smaller share of mortgage originations in 2014, at 5%, than in 2004 when they were 7%. By contrast, white borrowers accounted for 69% of mortgages in 2014 versus 58% 10 years before then. That is based on an analysis of the most recent Home Mortgage Disclosure Act data in a report commissioned by the National Association of Real Estate Brokers, or NAREB, a trade group of African-American real-estate agents and brokers.

Using similar data, The Wall Street Journal in June reported that minorities are receiving a smaller share of mortgages from the largest U.S. retail banks as many have shifted their mortgage operations toward so-called jumbo mortgages. These cater to more affluent borrowers with loans exceeding $417,000 in most parts of the country.

Jumbos have become increasingly appealing to banks in recent years because of their low default rates. The loans are mostly held on banks’ books.

The report released Monday by NAREB doesn’t address jumbo loans. It focuses on the decline of black borrowers receiving smaller mortgages that are eligible for purchase by Fannie Mae or Freddie Mac. Only 3% of Fannie Mae- and Freddie Mac-eligible mortgages went to black borrowers in 2014, down from 6% in 2004, according to the report.

The decline is largely because of tighter underwriting requirements that most lenders have been sticking to since the recession. In part, this has been to avoid the threat of having to buy back loans from the agencies, according to the report.

Default rates have been declining on mortgages in recent years as many lenders have required higher credit scores and as the economy has improved. Defaults on mortgages used to purchase or refinance homes totaled 0.65% in June, down from 0.80% a year ago, according to the S&P/Experian Consumer Credit Default Indices. That figure was 5.58% in June 2009 during the housing crisis.

Also pushing defaults down is the near extinction of subprime mortgages, or those to borrowers with low credit scores, which were widespread during the last housing bubble. Those loans “disproportionately went to black and Latino households,” said James Carr, a professor in Wayne State University’s Department of Urban Studies and Planning, who co-wrote the report for NAREB.

Nearly half of all mortgage dollars extended to borrowers in 2015 were sold to Fannie Mae or Freddie Mac, according to trade publication Inside Mortgage Finance.

Between 2004 and 2014, black borrowers’ applications for Fannie- and Freddie-eligible mortgages fell 82%. Their applications for government-backed mortgages—mostly those insured by the Federal Housing Administration—jumped 60%, according to the report. FHA mortgages are generally easier to get approved for—in large part because they permit lower credit scores—but can also come with higher costs for borrowers.

The report also says “outdated credit scores” are holding back black borrowers from getting mortgages. It says many black borrowers lost their homes to foreclosure or experienced other negative credit events that still weigh down their credit scores. Others don’t use banking services often and their lack of historical usage of loans is also negatively affecting their scores.

…when the crash came in 2008, public sentiment turned sharply against Wall Street’s big firms. Goldman stood out for its success amid the calamity, earning hundreds of millions of dollars betting against the housing market…That summer (2010, after Goldman was charged by the SEC) Mr. Blankfein was among the A-list guests at Mr. Clinton’s 64th birthday bash in the Hamptons. And Goldmansettled the charges for what was then a record $550 million fine…The company was in the midst of an expensive reputation reclamation plan. The centerpiece was an existing program called 10,000 Women, to which Goldman committed $100 million.”, Nicholas Confessore and Susanne Craig, “2008 Crisis Deepened the Ties Between Clintons and Goldman Sachs”, The New York Times, September 25, 2016

“Must be nice to have a former U.S. President publicly defend you, when the Securities and Exchange Commission accuses you of securities fraud (and public sentiment is against you)! The U.S. government also bailed out Too Big to Fail Goldman Sachs with tens of billions of capital and hundreds of billion of government guaranteed financing….they even let them become a bank holding company, almost over night! No one helped my Not Too Big to Fail Bank with anything….in fact, a U.S. Senator made it impossible for us to survive in 2008. And certainly no one publicly came to my defense when the FDIC and SEC made false allegations against me and sued me personally for over $600 million. It was just me and my outstanding lawyers at Covington & Burling LLP. And the truth mostly prevailed, as not a single allegation was ever proven against me (because they were not true) and everything that went to court, I won on summary judgment. By the way, if there is one Wall Street firm that I do believe is evil, it’s Goldman Sachs, as I believe they sat (and do today) at the center of much trading and used that inside information to profit and also because their people move in and out of our government’s highest levels. Read the full article below. It’s time to get rid of Too Big to Fail Banks and end crony capitalism (between big business and big government politicians) in America.”, Mike Perry, former Chairman and CEO, IndyMac Bank

2008 Crisis Deepened the Ties Between Clintons and Goldman Sachs

By NICHOLAS CONFESSORE and SUSANNE CRAIG

Hillary Clinton and Lloyd C. Blankfein, chairman and chief executive of Goldman Sachs, at a Clinton Global Initiative meeting in 2014 in New York. Credit Shannon Stapleton/Reuters

A blue-ribbon commission had just excoriated Goldman Sachs and other Wall Street banks for fueling the financial crisis. Prosecutors were investigating whether Goldman had misled investors. The company was a whipping boy for politicians looking to lay blame for the crash.

But in spring of 2011, Lloyd C. Blankfein, leading one of the nation’s most reviled companies, found himself onstage with Secretary of State Hillary Clinton, one of the nation’s most admired public figures at the time. And Mrs. Clinton had come to praise Goldman Sachs.

The State Department, Mrs. Clinton announced that day in an auditorium in its Foggy Bottom headquarters, would throw its weight behind a Goldman philanthropic initiative aimed at encouraging female entrepreneurs around the world — a program Goldman viewed as central to rehabilitating its reputation.

Mrs. Clinton’s blessing — an important public seal of approval for Goldman at a time when it had few defenders in Washington — underscored a long-running relationship between one of the country’s most powerful financial firms and one of its most famous political families. Over 20-plus years, Goldman provided the Clintons with some of their most influential advisers, millions of dollars in campaign contributions and speaking fees, and financial support for the family foundation’s charitable programs.

And in the wake of the worst crash since the Great Depression, as the firm fended off investigations and criticism from Republicans and Democrats alike, the Clintons drew Goldman only closer. Bill Clinton publicly defended the company and leased office space from Goldman for his foundation. Mrs. Clinton, after leaving the State Department, earned $675,000 to deliver three speeches at Goldman events, where she reassured executives that they had an important role to play in the nation’s recovery.

The four years between the end of the financial crisis and the start of Mrs. Clinton’s second White House bid revealed a family that viewed Wall Street’s elite as friends and collaborators even as the public viewed them with suspicion and scorn. Those relationships would become a focal point for attacks on Mrs. Clinton’s integrity and independence by Senator Bernie Sanders of Vermont.

And even now, under a barrage of populist taunts from Donald J. Trump, the Republican presidential nominee, Mrs. Clinton faces lingering doubts about the sincerity of her proposals to rein in Wall Street behavior. In June, 60 percent of registered voters expressed concern that her links to Wall Street could prevent her from holding the financial industry accountable, an NBC News/Wall Street Journal poll found.

“Wall Street now conjures up images of corruption, and if you are a person from Wall Street, you have to overcome that,” said Roy C. Smith, a former Goldman Sachs partner who teaches finance at New York University. “One of the big rubs against Hillary now is that she was paid by Goldman to give speeches at Goldman.”

Mrs. Clinton rejects the idea that her loyalties are in doubt. Josh Schwerin, a spokesman, said in a statement on Saturday that Mrs. Clinton was “fighting for tough new rules and more accountability on Wall Street” and to build a more equitable economic system.

Goldman’s links to the Clintons date to the 1990s, when Robert E. Rubin, the company’s co-senior partner, left to join President Bill Clinton’s economic policy team. Economically and politically, it was a vastly different era. Mr. Clinton had embraced deficit reduction and balanced budgets, an approach later called “Rubinomics” after Mr. Rubin, who became Treasury secretary in 1995.

While Wall Street leaned right over all, executives at Goldman gave most of their political contributions to Democrats. Mr. Clinton raised taxes on the wealthy but steered his party to the center on financial issues, helping craft legislation to abolish the Glass-Steagallrules separating commercial and investment banking and exempt some of the products known as derivatives from regulation.

“In the early ’90s, support from the business community and the financial sector was seen as an important credential for Democrats looking to shed the anti-business label that Republicans had been hanging around their necks,” said Howard Wolfson, a top strategist for Mrs. Clinton’s 2008 presidential campaign.

From left, Mayor Michael R. Bloomberg, Senator Hillary Clinton, Lloyd C. Blankfein and Henry M. Paulson Jr. at the groundbreaking of Goldman Sachs’s headquarters in Lower Manhattan in 2005. Mr. Paulson was chief executive of the company at the time. Credit Marilynn K. Yee/The New York Times

The Clintons’ relationships with Wall Street deepened in the 2000s, when Mr. Clinton set up his foundation in Harlem and Mrs. Clinton was elected to the Senate from New York. That brought her in close touch with the big Wall Street firms, a source of jobs and tax revenue for New York — and a leading source of campaign funds for Mrs. Clinton. During her years in Congress, employees of Goldman donated in excess of $234,000 to Mrs. Clinton, more than those of any other company except Citigroup, according to the Center for Responsive Politics.

Along with other New York politicians, Mrs. Clinton worked to obtain federal tax breaks to resuscitate Lower Manhattan after the Sept. 11, 2001, attacks, and those breaks helped Goldman build its new, roughly $2 billion headquarters. When it broke ground in 2005, Mrs. Clinton and other New York officials were on-site.

“Major employers like Goldman Sachs needed to know they had a partner in government,” Mrs. Clinton said at the time.

The firm was her family’s partner outside government, too. Goldman was a lucrative stop on the speaking circuit for Mr. Clinton, who earned over half a million dollars for three Goldman events in 2005 alone. When Mrs. Clinton first ran for president, Mr. Blankfein and his wife, Laura, hosted a fund-raiser at their apartment, ultimately raising more than $100,000 for Mrs. Clinton’s bid.

And when Mr. Blankfein endorsed Mrs. Clinton in 2007, the campaign proudly promoted his support, releasing a statement in which he called Mrs. Clinton “a strong and experienced leader.”

As a spate of foreclosures pushed the country into a recession, Mrs. Clinton, locked in a primary race with Barack Obama, struck a progressive but pragmatic tone. She called for closing the carried-interest tax loophole that benefited financiers and for better oversight of complex financial products. In a December 2007 policy speech at Nasdaq headquarters, she acknowledged her “wonderful donors” in the audience and urged financial executives to voluntarily help struggling homeowners. “Wall Street helped create the foreclosure crisis,” Mrs. Clinton said, “and Wall Street needs to help us solve it.”

Mrs. Clinton at the Nasdaq Marketsite in Times Square in 2007. Credit Patrick Andrade for The New York Times

But when the crash came in 2008, public sentiment turned sharply against Wall Street’s big firms. Goldman stood out for its success amid the calamity, earning hundreds of millions of dollars betting against the housing market. In April 2010, the Securities and Exchange Commission charged Goldman with misleading its investors. At a Senate hearing that month, Mr. Blankfein endured a withering and bipartisan cross-examination.

Mr. Clinton took a different tack. At a conference in Washington the week of the hearing, he said derivatives trading needed better oversight, but he was skeptical of the commission’s charges. “I’m not at all sure they violated the law,” the former president said.

That summer Mr. Blankfein was among the A-list guests at Mr. Clinton’s 64th birthday bash in the Hamptons. And Goldman settled the charges for what was then a record $550 million fine.

The company was in the midst of an expensive reputation reclamation plan. The centerpiece was an existing program called 10,000 Women, to which Goldman committed $100 million.

“We preferred to demonstrate that we were willing to put skin in the game,” John F. W. Rogers, Goldman’s influential chief of staff, said in a 2009 interview.

In 2011, the State Department created a formal partnership with the Goldman program, a natural complement to Mrs. Clinton’s efforts to mitigate poverty and discrimination against women.

For Goldman, 10,000 Women became a major philanthropic and public relations success. The program’s events attracted influential figures such as the liberal news media entrepreneur Arianna Huffington, who devoted a section of her Huffington Post to the program’s successes.

“I don’t really care why people do good things,” Ms. Huffington said in an interview. “Without a doubt, thousands of women have been helped by this program.”

When Mrs. Clinton left the State Department in 2013, she followed her husband into paid speechmaking. If Mrs. Clinton was concerned about the appearance of taking hefty fees from Wall Street while considering a second presidential bid, she did not show it: In her first year on the circuit, more than a third of her paid speeches were for financial companies.

Each of her three Goldman speeches were private, and Mrs. Clinton has rebuffed requests to release transcripts of them. And at the time, she still embraced Goldman as a partner. In 2014, she appeared at the annual meeting of the Clinton Global Initiative, an offshoot of the Clinton Foundation known as C.G.I., to highlight the 10,000 Women program.

“Thanks to Goldman Sachs and thanks to 10,000 Women for really shining a bright spotlight on what is possible if you believe in and you provide support to women,” Mrs. Clinton said.

It would be one of the last times Mrs. Clinton spoke warmly of the company. Within a year, she was running for president and grappling with the anti-Wall Street wave remaking both parties. Amid her primary fight against Mr. Sanders, Mrs. Clinton energetically defended the Dodd-Frank financial overhaul and called for even broader regulation of Wall Street.

The financial crisis “basically ended the debate within the Democratic Party,” said Austan Goolsbee, a former Obama economic adviser.

Goldman, too, has taken a step back. When C.G.I. held its final conference last week, Goldman sent neither a delegation nor sponsorship cash. Though its employees have contributed hundreds of thousands of dollars to her campaign, none are among Mrs. Clinton’s top bundlers.

On CNBC in February, Mr. Blankfein was asked whom he supported in the campaign.

“I don’t want to help or hurt anybody,” he demurred, “by giving them an endorsement.”

A version of this article appears in print on September 25, 2016, on page A1 of the New York edition with the headline: Clintons Drew Goldman Close as Crisis Struck.

…Maybe it’s always been this way. A tempting theory, though, is that, around the 1990s, plaintiffs-bar ethics infected the larger legal and administrative culture. If so, the tobacco settlement of 1998 may be a turning point…His (Trump’s) lying seems juvenile, boastful—and so far unrelated to the kind that is dissolving faith in American institutions…”, Holman W. Jenkins Jr., “The Donald Abides”, The Wall Street Journal, September 28, 2016

“The SEC and FDIC bureaucrats, mostly all government lawyers, lied about me in their civil lawsuits and never proved a single allegation in court and everything that went to court I won. (They were dismissed on summary judgment as a matter of law, applied to the undisputed facts.) I have long contended on this blog, that I thought scummy plaintiffs’ lawyers and their tactics had creeped into our government and its lawyers, because I lived it and am pretty sure it’s true, wrong, and un-American. I am glad to see Mr. Jenkins point this theory out in his recent Wall Street Journal editorial.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

The Donald Abides

Resolved: The election pits a very flawed insider vs. a very flawed outsider.

After the presidential debate at Hofstra University, Sept. 26. PHOTO: ASSOCIATED PRESS

By Holman W. Jenkins, Jr.

Just as a voter, helped by the media, was thinking Donald Trump is a shocking liar, along came Elizabeth Warren’s bravura performance in last week’s Wells Fargo hearing. Unfortunately, she also completely falsified the scandal, insisting that fraudulent sales inflated the company’s stock and the CEO’s pay.

It didn’t happen that way. As a New York Times reporter told PBS, “Sometimes a bank employee would open up an account for someone, the person didn’t know it, and then two days later they would close it. . . . It wasn’t even making the bank money. It was just meeting goals for the sake of meeting goals.”

The Obama Consumer Financial Protection Bureau has engaged in deliberate statistical lying to accuse wholesale auto lenders of racism that they are incapable of (because they know nothing about the borrower’s race).

Mr. Obama himself said if you like your health plan, you can keep it, not because it was true but because it was necessary to allow his law to pass.

The sacking of the Benghazi consulate may have been a routine government muddle, but there’s no longer any doubt that the administration deliberately lied to the American people when saying the attack was a spontaneous response to an internet video.

OK, mendacity permeates our politics, mostly in the service of some kind of shakedown or other. See the settlements imposed on banks for selling Fannie and Freddie subprime loans Congress mandated that they buy.

It might not be too reductionist to say that lying for money is what a lot of people in and around government now do for a living. Maybe it’s always been this way. A tempting theory, though, is that, around the 1990s, plaintiffs-bar ethics infected the larger legal and administrative culture. If so, the tobacco settlement of 1998 may be a turning point.

Mr. Trump has shown an alarming tendency to pass along unsubstantiated tweets, and to echo the covers of supermarket tabloids.

He attributes to himself successful predictions that he never made, like his claim to have opposed the Iraq invasion.

His latest howler is his ever-inventive milking of the birther controversy, now crediting himself with winkling out the truth (Mr. Obama was born in the U.S.) while blaming Hillary Clinton in 2008 for fomenting a faux mystery.

His lying seems juvenile, boastful—and so far unrelated to the kind that is dissolving faith in American institutions, though we certainly offer no warranty about how he would behave in office.

The media set up a mighty wind before Monday’s debate insisting that somebody truth-squad his every statement. They are disappointed now. Mr. Trump weathered the attacks destined to come his way based on his checkered business record, his history of vulgar statements and tall tales, just about everything except his alleged mob ties.

He is not a lifelong politician like Mrs. Clinton and it showed. But he survived on stage. Notice, he also apparently made a strategic decision not to raise Bill Clinton’s infidelities and stuck to it.

One of the least perceptive TV comments, I didn’t catch by whom, claimed Mr. Trump has proved himself incapable of taking advice or changing his approach. Au contraire: He changes positions constantly, has constantly alternated between scripted and free-form in his style.

He doesn’t know what he thinks about most issues (except trade) and yet has been content to bull ahead and sort it out later.

Give him credit: His act does have other dimensions. The buildings he put his name on, some of which he built, are real. His numerous product lines are real. His TV show was a real hit.

An Atlantic Monthly writer, in a now much-quoted felicity, once said that the “part of the 2016 story that will be hardest to explain after it’s all over” is that “Trump did not deceive anyone.” A formulation catching on lately advises taking Trump seriously, not literally.

In the end this fall’s election, as Monday’s debate probably established, will resolve into very flawed outsider vs. very flawed insider—and will be decided by the American people in that vein.

It won’t become—as the media and Democrats hoped going into Monday’s debate—“Hillary is the only option because Trump is unacceptable.”

A final note: People who believe the truth is inherently valuable generally are not attracted to the political profession, or at least equipped to do well in it. (Yes, there are exceptions.) Yet a few of us were listening most closely to hear if Mrs. Clinton betrayed the slightest inkling that anything had gone wrong in Obama’s America.

Lies are inevitable but the president’s worst lie (or hypocrisy as some prefer it) was his pretense that he cared about the unemployed, underemployed, and economically insecure in our struggling economy—when, in fact, his focus was on delivering the wish lists of Democratic interest groups seeking more regulation, more taxes, more subsidies, more government control over things in general.

Somehow, some way, the next president will have to see a different path ahead or God help us.

…because the cases never go to court because no bank can afford to resist the government’s orders in a post-Dodd-Frank regulatory world. This is the latest morality tale in modern systemic risk. Government caprice has become a major risk, and maybe the major risk, to the global financial system. The new imponderable is the U.S. settlement raid that’s among the largest it has demanded. The huge fines rest on a dubious theory that government prosecutors know better than investors how assets ought to have been priced in a market mania 10 years ago. And with a handful of exceptions (none at Deutsche Bank), regulators haven’t found individual bank employees who committed prosecutable crimes in the mortgage mess.”, The Wall Street Journal Editorial Board, “Who’s the Systemic Risk Now?”, September 29, 2016

Opinion

Who’s the Systemic Risk Now?

Washington’s assault on Deutsche Bank imperils Europe’s economy.

PHOTO: BLOOMBERG NEWS

Regulators like to bray about the dangers of systemic financial risk, but they seem not to care when they’re the source of the risk. Consider the U.S. assault on Deutsche Bank that has tanked European bank shares this week.

The German bank’s share price has fallen as much as 20% since a Sept. 15 Journal report that the U.S. Justice Department is seeking a fine of up to $14 billion for selling mortgage-backed securities between 2005 and 2007. That is well beyond Deutsche Bank’s ability to pay, given its $18 billion market capitalization before the story broke.

Deutsche Bank says it “has no intent to settle these potential civil claims anywhere near the number cited.” Markets are spooked anyway. A fine much above $3 billion would strain an institution that faces potential payouts in other regulatory cases, and the bank has already settled claims for billions of dollars for the likes of alleged interest-rate rigging. That includes Deutsche’s Bank’s $1.9 billion share of the 2013 settlement of the bizarre U.S. claim that numerous banks somehow deceived the sharks at Fannie Mae and Freddie Mac.

So it’s not crazy to think this fiasco could become a systemic crisis. With a €1.8 trillion ($2.022 trillion) balance sheet often criticized for its opacity, Deutsche Bank would struggle to replenish capital at today’s share price. Trouble at one of the European Union’s largest banks could trigger a new round of market fears over counterparty risk and political uncertainty.

Chancellor Angela Merkel’s government insists no bailout will be forthcoming, and Berlin may even mean it. New European Union rules make bailouts harder to execute, and Berlin blocked Italy’s attempts to rescue its struggling large banks earlier this year.

Most of the risks now cited to explain Deutsche Bank’s woes are well-known, including its long struggle to reorganize to boost profitability amid ultralow interest rates and sluggish global growth. Markets concluded these risks are manageable, although at a large discount to the share price in 2014. The bank’s results in the recent European Banking Authority stress test were in line with other large banks, and it has been working to increase capital.

The new imponderable is the U.S. settlement raid that’s among the largest it has demanded. The huge fines rest on a dubious theory that government prosecutors know better than investors how assets ought to have been priced in a market mania 10 years ago. And with a handful of exceptions (none at Deutsche Bank), regulators haven’t found individual bank employees who committed prosecutable crimes in the mortgage mess. These bank robberies are political.

Some Europeans think the Deutsche Bank raid is American retaliation for the EU’s August ruling that Apple owes back taxes of €13 billion in Europe. But Washington doesn’t need that incentive. The Obama Administration has also been merrily plundering American banks to satisfy the retribution demands of the Bernie Sanders-Elizabeth Warren wing of the Democratic Party.

The evidence hardly matters because the cases never go to court because no bank can afford to resist the government’s orders in a post-Dodd-Frank regulatory world. This is the latest morality tale in modern systemic risk. Government caprice has become a major risk, and maybe the major risk, to the global financial system.

…Whether this is a “big, fat, ugly bubble” depends on how one defines a bubble. But a composite index for stocks, bonds and homes shows that their combined valuations have never been higher in 50 years. Housing prices have been rising faster than incomes, putting a first home out of reach for many Americans. The increasingly close and risky link between the Fed’s easy-money policies and financial markets has been demonstrated again in recent days. Early this month, some Fed governors indicated that the central bank might at long last raise interest rates at its next meeting. The stock market dropped sharply in response. Then when decision time came on Sept. 21 and the Fed left rates unchanged, stock prices rallied by 1% that day. Mr. Trump was also right that despite the Fed’s efforts, the U.S. has experienced “the worst revival of an economy since the Great Depression.” The economy’s growth rate is well below its precrisis norm, and the benefits have been slow to reach the middle class and Main Street. Much of the Fed’s easy money has gone into financial engineering, as companies borrow billions of dollars to buy back their own stock. Corporate debt as a share of GDP has risen to match the highs hit before the 2008 crisis. That kind of finance does more to increase asset prices than to help the middle class. Since the rich own more assets, they gain the most. In this way the Fed’s policies have fueled a sharp rise in wealth inequality world-wide – and a boom in the global population of billionaires. Ironically, rising resentment against such inequality is lifting the electoral prospects of angry populists like Mr. Trump, a billionaire promising to fight for the little guy. His rants may often be inaccurate, but regarding the ripple effects of the Fed’s easy money, Mr. Trump is directly on point.”, Ruchir Sharma, “Trump Tess Up a Necessary Debate on the Fed”, The Wall Street Journal, September 29, 2016

OPINION | COMMENTARY

Trump Tees Up a Necessary Debate on the Fed

Sixty percent of stock gains since the 2008 panic have occurred on days when the Fed makes policy decisions.

After Monday’s presidential debate at Hofstra University in Hempstead, N.Y. PHOTO: GETTY IMAGES
By RUCHIR SHARMA
Sept. 28, 2016 6:43 p.m. ET
190 COMMENTS
The press spends a lot of energy tracking the many errors in Donald Trump’s loose talk, and during Monday’s presidential debate Hillary Clinton expressed hope that fact checkers were “turning up the volume” on her rival. But when it comes to the Federal Reserve, Mr. Trump isn’t all wrong.

In a looping debate rant, Mr. Trump argued that an increasingly “political” Fed is holding interest rates low to help Democrats in November, driving up a “big, fat, ugly bubble” that will pop when the central bank raises rates. This riff has some truth to it.

Leave the conspiracy theory aside and look at the facts: Since the Fed began aggressive monetary easing in 2008, my calculations show that nearly 60% of stock market gains have come on those days, once every six weeks, that the Federal Open Market Committee announces its policy decisions.

Put another way, the S&P 500 index has gained 699 points since January 2008, and 422 of those points came on the 70 Fed announcement days. The average gain on announcement days was 0.49%, or roughly 50 times higher than the average gain of 0.01% on other days.

This is a sign of dysfunction. The stock market should be a barometer of the economy, but in practice it has become a barometer of Fed policy.

My research, dating to 1960, shows that this stock-market partying on Fed announcement days is a relatively new and increasingly powerful feature of the economy. Fed policy proclamations had little influence on the stock market before 1980. Between 1980 and 2007, returns on Fed announcement days averaged 0.24%, about half as much as during the current easing cycle. The effect of Fed announcements rose sharply after 2008 when the Fed launched the early rounds of quantitative easing (usually called QE), its bond purchases intended to inject money into the economy.

It might seem that the market effect of the Fed’s easy-money policies has dissipated in the past couple of years. The S&P 500 has been moving sideways since 2014, when the central bank announced it would wind down its QE program.

But this is an illusion. Stock prices have held steady even though corporate earnings have been falling since 2014. Valuations—the ratio of price to earnings—continue to rise. With investors searching for yield in the low interest-rate world created by the Fed, the valuations of stocks that pay high dividends are particularly stretched. The markets are as dependent on the Fed as ever.

Last week the Organization for Economic Cooperation and Development warned that “financial instability risks are rising,” in part because easy money is driving up asset prices. At least two regional Fed presidents, Eric Rosengren in Boston and Esther George in Kansas City, have warned recently of a potential asset bubble in commercial real estate.

Their language falls well short of the alarmism of Mr. Trump, who in Monday’s debate predicted that the stock market will “come crashing down” if the Fed raises rates “even a little bit.” But it is fair to say that many serious people share his basic concern.

Whether this is a “big, fat, ugly bubble” depends on how one defines a bubble. But a composite index for stocks, bonds and homes shows that their combined valuations have never been higher in 50 years. Housing prices have been rising faster than incomes, putting a first home out of reach for many Americans.

Fed Chair Janet Yellen did come into office sounding unusually political, promising to govern in the interest of “Main Street not Wall Street,” although that promise hasn’t panned out. Mr. Trump was basically right in saying that Fed policy has done more to boost the prices of financial assets—including stocks, bonds and housing—than it has done to help the economy overall.

The increasingly close and risky link between the Fed’s easy-money policies and financial markets has been demonstrated again in recent days. Early this month, some Fed governors indicated that the central bank might at long last raise interest rates at its next meeting. The stock market dropped sharply in response. Then when decision time came on Sept. 21 and the Fed left rates unchanged, stock prices rallied by 1% that day.

Mr. Trump was also right that despite the Fed’s efforts, the U.S. has experienced “the worst revival of an economy since the Great Depression.” The economy’s growth rate is well below its precrisis norm, and the benefits have been slow to reach the middle class and Main Street. Much of the Fed’s easy money has gone into financial engineering, as companies borrow billions of dollars to buy back their own stock. Corporate debt as a share of GDP has risen to match the highs hit before the 2008 crisis.
That kind of finance does more to increase asset prices than to help the middle class. Since the rich own more assets, they gain the most. In this way the Fed’s policies have fueled a sharp rise in wealth inequality world-wide—and a boom in the global population of billionaires. Ironically, rising resentment against such inequality is lifting the electoral prospects of angry populists like Mr. Trump, a billionaire promising to fight for the little guy. His rants may often be inaccurate, but regarding the ripple effects of the Fed’s easy money, Mr. Trump is directly on point.

Mr. Sharma, chief global strategist at Morgan Stanley Investment Management, is the author of “The Rise and Fall of Nations,” from W.W. Norton (June 2016).

…They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment. The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market. The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.” Interest rates today, in the U.S., are perilously close to zero. What will the mandarins do in the next emergency?”, James Grant, “Hostage to a Bull Market”, The Wall Street Journal, September 10-11, 2016

“I stand with James Grant, who stands with Rand and Ron Paul, who stands with Nobel Economic Laureate’s Milton Friedman and F.A. Hayek, who stands with the genius, founder of the Austrian School of Economics, Ludwig von Mises…..against liberal Harvard economist Ken Rogoff and all those economists who ascribe to the flawed doctrines of John Maynard Keynes and believe that government/central bank control and manipulation of our money and rates, is somehow wiser than free markets. Think about it, would you have government central planners deciding how much wine we produce and at what price? Of course not. Then why would you believe it makes any sense that half of every economic transaction, money, be centrally planned and priced (rates) by a handful of unelected government economic “experts”, who have been consistently wrong, for years, in their economic projections? I like many others, believe The Federal Reserve’s manipulation of money and market rates, is a key cause of our recurring asset bubbles and busts, and the 2008 financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Books

Hostage to a Bull Market

Negative rates? You rub your eyes. You can recall no precedent. There has never been one in 5,000 years of banking.

PHOTO: GETTY IMAGES

By James Grant

If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice.

Ken Rogoff is a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund and (to boot) a chess grandmaster. He laid out his case against cash in a Saturday essay in this newspaper two weeks ago. By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates.

THE CURSE OF CASH

By Kenneth S. Rogoff

Princeton, 283 pages, $29.95

“The Curse of Cash,” the Rogoffian case in full, comes in two parts. The first is a helping of monetary small bites: a little history (in which the gold standard gets the back of the author’s hand), a little central-banking practice, a little underground economy. It’s all in the service of showing where money came from and where it should be going.

Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message.

Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position. It is the only position that seems to cross his mind.

Which brings us to the business end of this production. Come the next recession, the book’s second part contends, the Fed should have the latitude to drive interest rates below zero. Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before.

In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity.

You may doubt this. Mr. Rogoff himself sees difficulties. For him, the problem is cash. The ungrateful objects of the policy community’s statecraft will stockpile it.

What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. If the author has his way, there will be no more Benjamin Franklins, only Hamiltons, Lincolns and George Washingtons. Ideally, says Mr. Rogoff, many of today’s banknotes will take the future form of clunky, base-metal coins “to make it even more difficult to carry large quantities of currency.”

It’s plenty difficult enough now. Federal statute makes greenbacks in five- and even four-figure sums virtually non-negotiable. Just try to buy a car with a briefcase full of “legal tender.” Or try to deposit those tens of thousands of green dollar bills in the bank. The branch manager would likely file a Suspicious Activity Report. This intelligence would reside with the Treasury’s Financial Crimes Enforcement Network, as mandated by the Bank Secrecy Act of 1970. The government seems to hate cash as much as the fashion-forward economists do.

To such deep thinkers as Mr. Rogoff, 0% is only a number, not a boundary. It ought not to constrain an enlightened central bank, which strives to set a negative inflation-adjusted interest rate when prices are drooping. Thus, if the CPI should happen to come in at 1%, let the federal-funds rate be set at, say, minus 1%. If the CPI should measure minus 1% (meaning that prices are actually falling), let the funds rate register minus 3%.

This is a big can of worms that the author has pried open. He assumes, first and foremost, that falling prices are a calamity. It is not such a calamity that many Americans don’t spend most of the weekend seeking them out. Still, the policy community wants nothing to do with them.

And the policy community, especially in Europe, has had its way. More than $13 trillion of sovereign debt (German, Japanese, Swiss) is quoted at a yield of less than nothing. In Denmark, the banks pay homeowners to take out a mortgage. In Switzerland, depositors pay the bank to accept their francs.

Negative rates? You rub your eyes and search your memory. You can recall no precedent. And if you consult the latest edition of “A History of Interest Rates” (2005) by Sidney Homer and Richard Sylla, you will find none. A recent check with Mr. Sylla confirms the impression. Today’s negative bond yields, he says, are the first in at least 5,000 years.

A positive integer would almost seem inherent in the idea of interest. When most of us want something, we want it now. And if we don’t have the money to buy it now, we borrow. “Present goods are, as a rule, worth more than future goods of like kind and number,” posited the eminent 19th-century Austrian theorist Eugen von Böhm-Bawerk. He called this behavioral truism the core of his theory of interest.

Then again, because not everyone is equally impatient, some of us are prepared to wait, therefore to lend. Seen in this light, the rate of interest is either the cost of impetuousness or the reward to thrift. In the topsy-turvy world of Mr. Rogoff, negative rates would be the reward to impetuousness and the cost of thrift. A small price to pay, he insists, for a quick exit from a deep slump.

The author does not forget to salt his text with words of caution. They are unconvincing. Mr. Rogoff is a true believer in the discretionary command of monetary matters by former tenured economics faculty—the Ph.D. standard, let’s call it. Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.

Curiosity is notable by its absence in these pages. How have we come to this radical pass? What is it about today’s monetary and banking arrangements that seems to impel us to more and more desperate policy gambits? The nature of modern central banking and the pseudoscience of modern monetary economics are themselves surely part of the problem.

Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment.

The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market.

The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.” Interest rates today, in the U.S., are perilously close to zero. What will the mandarins do in the next emergency?

You have to wonder if the agitators for negative interest rates read the newspapers. The crisis of state and municipal pension finance is no longer looming but upon us. In a world of 2% long-dated Treasury yields, the pension managers operate under the fanciful assumption that they can, on average, generate annual returns in excess of 7.5%. Just how America’s income-starved savers and pensioners would receive the news of the adoption of negative interest rates could be a fruitful topic for Mr. Rogoff’s next book; it plays no part in this one.

You have never met a more cocksure lot than the monetary-policy clerisy. The author, one of the highest of these high priests, casts aside his pro forma concerns about radical experimentation to deliver the following prediction about the coming brave new world: “A true shift to a world where negative interest policy is possible will be transformative, comparable to moving off the gold standard in the 1930s, moving off of fixed exchange rates in the 1970s, and the advent of modern independent central banks around the world in the 1980s and 1990s. Like all of these changes, there will be uncertainties during the transition, but after awhile, central banks and financial market participants likely won’t be able to imagine doing things any other way.”

It would make one more confident in such forecasts if the leading lights of the policy community had not been looking the wrong way in 2008. How did they miss the biggest event of their professional lives? The simple answer is that, though central bankers believe themselves to be independent of their governments (a debatable claim), they are hardly independent of each other or of the doctrines of John Maynard Keynes and his modern-day disciples.

The Nobel physicist Richard Feynman had their number as long ago as 1974, when, in an address to the graduates of CalTech, he warned against “Cargo Cult Science.” He talked about the inhabitants of the South Seas who, after seeing a cargo plane once land on their island, build makeshift runways and don bamboo headphones to re-create the setting in which the plane would land again. Cargo-cult scientists, like the islanders, do everything right, Feynman said: They “follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land.”

So it is with monetary policy. The economists build their runways and don their headphones. They create their econometric models and decorate their scholarly papers with mathematical appendices. Like the hopeful cargo cultists, they faithfully implement the rigmarole of modern science. Still, the economic planes don’t land.

Meteorology is a legitimate science, though anyone with a weather app on a smartphone knows how fallible the meteorologists are—how frequently they revise their forecasts of the short-term future of such inanimate things as raindrops. How much less reliable, then, are the economists who presume to forecast human behavior not just over the course of days but over the sweep of years?

As for the campaign for zero cash in the service of negative interest rates, Mr. Rogoff’s brief is best seen not as detached scientific analysis but as a kind of left-wing crotchet. Strip away the technical pretense and what you have is politics. The author wants the government to control your money. It’s as simple as that.

—Mr. Grant, the editor of Grant’s Interest Rate Observer, is writing
a life of Walter Bagehot.

…They just picked a number from I don’t know where…It lacks any level of fairness…It’s total political crap.”, Apple Chief Executive Tim Cook responding in the press on Thursday, September 1, 2016 re. a European Union ruling that the company owed Ireland up to $14.5 billion in back taxes, “CEO of Apple calls EU tax ruling ‘political’”, The Los Angeles Times, September  2, 2016

“This is how I felt when our federal government’s largely unaccountable bureaucrats at the SEC and FDIC made their bogus crisis-era claims against me…wholly unproven to this day (because they weren’t true)…..and everything that went to court (where the facts could be heard), I won. This is why I have spent so much of my time and my life these past few years (since this was all legally resolved in 2014), studying the financial crisis and documenting my case (and other related ones) on this blog.”, Mike Perry, former Chairman and CEO, IndyMac Bank