Not Too Big To Fail: Mike Perry talks about IndyMac Bank and the financial crisis ten years on
This July 11th marks ten years since IndyMac Bank was seized by the FDIC.
As the founding Chairman and CEO, I knew post-crisis views about our institution were not true. I also believed that the mainstream narrative, that greedy and reckless bankers-Wall Street caused the 2008 financial crisis, wasn’t true either.
We weren’t greedy or reckless. Pre-crisis, no one thought that of us.
We responsibly pursued nonconforming (primarily Alt-A) mortgage lending, a $2 trillion U.S. marketplace, as a hybrid thrift-mortgage banker. Only a small percentage of our lending was as risky as FHA-VA home loans and none was riskier.
In 2007 Moodys, the lone holdout, upgraded our unsecured, corporate debt rating to investment grade. That year, we also received our best Safety and Soundness exam from our thrift regulators, and later on, they and the FDIC recommended me and I was accepted to serve on The Federal Reserve System’s Thrift Institutions Advisory Council, where I met with Chairman Bernanke and others.
By the way, in 2015 I filed a FOIA request and an appeal with the OCC, the successor to IndyMac’s regulator, to obtain that 2007 Safety and Soundness exam and was denied. Why would the OCC want to keep this from public view, after all these years? I later found it in a court filing, unrelated to me, and made it public on my blog nottoobigtofail.org.
In 2008, in the midst of the financial crisis and well after the nonconforming mortgage securities market had collapsed, and we had suffered significant losses, I wrote to our shareholders and told them that if they chose not to re-elect me, I would forego all severance and resign. Instead, along with the rest of the board, I was re-elected with over 90% shareholder approval.
Shouldn’t these 2007-2008 actions by those who knew IndyMac best, call into question post-crisis views about us?
I wasn’t fully woke to how partisan the Obama Administration’s investigations and enforcement actions related to the financial crisis were until Peter J. Wallison, a Republican minority member of The Financial Crisis Inquiry Commission (FCIC) explained in his 2015 book how the CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION, were agreed only to by the Democrat Chairman and the other five Democrats.
The four Republicans on the committee did not agree to the Democrat-majority’s views.
I don’t recall reading about this important fact? The Democrat majority’s press release on January 27, 2011, never mentioned Republican dissent and deliberately mislead by referring to “The Commission” throughout and saying this report: “Is the first official government report on what caused the crisis.”
Mr. Wallison describes this partisanship, “The ferocity of the left in defending Fannie Mae, Freddie Mac, and the government’s housing policies before 2008 is sometimes shocking. They have no data, no policy arguments, just a virulent denial that anything other than the private financial sector could possibly be responsible for the financial crisis.”
How could a false narrative, about a major financial crisis, have carried the day ten years ago and be perpetuated even today?
I wasn’t that surprised that liberal politicians would mislead and even lie about the crisis. I also vaguely understood that private plaintiffs’ attorneys filed frivolous, securities fraud class action lawsuits all the time.
I was surprised and disappointed though to learn that lawyers, both inside and outside government, mislead and lie with impunity “within the four corners” of their lawsuits and other civil court filings. They are almost never held to account by the courts or anyone else. It’s called “litigation privilege” and even famed Harvard Law Professor Alan Dershowitz has complained saying, “Welcome to the Kafkaesque world of American justice.”
Just as disturbing, I learned from direct experience, that government officials (with me, it was SEC enforcement) and politicians can lie about and publicly defame individual Americans, and yet are protected from defamation claims by another legal standard called “sovereign immunity”.
I think it’s wrong that most of the mainstream press regurgitate these unproven, often knowingly false claims in civil lawsuits and statements by government officials and politicians. The claims are so voluminous and detailed that many readers have to be fooled into believing they are factual and the truth, when they are not. And the facts and truth often never emerge, because of settlements that prohibit it or mislead, or because of the often long timeframes involved in civil litigation matters.
Thanks to President Trump’s election, there’s further explanation. There are parallels between the Democrats’ phony Trump-Russia collusion allegations and “witch hunt”, DOJ special counsel investigation and the false Democrat narrative that greedy and reckless bankers-Wall Street were to blame and the government must hold them to account. The big difference is that President Trump has his office and Twitter, half the Country, and a Republican Congress defending him. Crisis era bankers like myself, had their attorneys and their families and friends. And our lawyers advised us not to say a peep in our defense, for years. I didn’t entirely follow this advice, but most did.
Some Democrats are socialists. They distrust business people and hate anyone who makes money. For them, the financial crisis had a silver lining. They didn’t care about facts or the truth. They were out for blood. They had their villain, and some, including socialist U.S. Senator Bernie Sanders, called for bankers to be jailed, despite a lack of evidence.
Preet Bharara, a Democrat and President Obama’s U.S. Attorney for the Southern District of New York from 2009 on, was forced to respond to these un-American calls to “jail the bankers”, mostly by key members of his own party. More than once and in frustration, he said something like, “There weren’t any criminal activities. We looked hard.”
Milton Friedman and Anna J. Schwartz, in their famous tome on monetary policy, written decades ago, blamed the Federal Reserve for causing The Great Depression. Fed Chairman Bernanke finally admitted some Fed responsibility in an informal talk, nearly a century later. Many economic and monetary experts, like Stanford’s John B. Taylor, believe the Fed’s monetary policies were also the primary cause of The Great Recession.
In hindsight, I believe there was an “alignment-of-interests” among important and diverse groups within our government and in the private sector to scapegoat bankers-Wall Street.
Economists and other financial crisis experts like Mr. Taylor, Mr. Wallison, former IMF Chief Economist Mr. Raghuram G. Rajan, and co-authors Steven D. Gjerstad and Nobel Laureate in Economics Vernon L. Smith, have all written books about the root-causes of the 2008 financial crisis, but their books and findings have largely been ignored by the liberal press. Why?
Because those scholars mostly blamed the government: The Fed, government housing programs, well-intended laws to help the poor buy homes, 1997’s bipartisan Taxpayer Relief Act that exempted home resales from up to $500,000 in capital gains, and the national statistical rating agencies. They also blamed our country’s perpetual trade deficits and related large inflows of foreign capital. They largely didn’t blame the bankers-Wall Street and that didn’t fit the false narrative that liberal politicians and their friends in the press wanted to perpetuate.
Important financial players, including institutional investors, pension fund managers, short sellers, and even distressed buyers of failed banks like IndyMac, also had incentive to scapegoat bankers-Wall Street.
Investors and pension fund managers would rather claim that their crisis era losses were caused by banker-Wall Street malfeasance (mortgage fraud, securities disclosure fraud), than their own risk appetites and investment decisions.
Short sellers likely made the 2007-2009 financial panic worse, driving housing and securities’ prices lower and causing some firms to fail that wouldn’t have. Scapegoating bankers-Wall Street helped them avoid scrutiny of their crisis era activities and billions in profit.
Even the distressed investors, who bought IndyMac Bank from the FDIC, had an incentive to falsely describe IndyMac as “a mess” and pre-crisis lending decisions made as imprudent or improper, so that they could portray their post-crisis actions as more robust and important and ethical, and justify the billions in profits they made, mostly from letting irrational, panicked markets recover with time.
In 2011, the FDIC’s receiver civilly sued me for $600 million (a figure they got right out of our 2007 10-Q disclosures, with no work!) and accused me of being a negligent banker, because I alone didn’t see the crisis coming and do more than I was already doing. In my 2012 settlement, I DENIED their allegations and importantly they stated that they did not allege I caused IndyMac to fail or the FDIC insurance fund to suffer a loss.
It took a lot of chutzpah for the FDIC to sue me for lack of foresight, when they needed little predictive power to act like a prudent trustee (like The Fed with Bear Stearns assets and Lehman’s bankruptcy trustee) and not fire-sell IndyMac into the worst financial crisis in history. FDIC Chairwoman Sheila Bair told The New York Times’ Paul Krugman just days after announcing IndyMac’s January 2009 sale, “We don’t have really any rational pricing right now for some of these asset categories.”
Here’s an important conflict of interest I don’t recall ever being discussed. The FDIC insures thrift and bank deposits. They have huge incentive to falsely blame bankers and others for their own insurance decisions and fund losses.
We became a thrift in mid-2000, after the FDIC took an entire year to review our nonconforming mortgage lending business and all of our assets and liabilities, and approved us for federal deposit insurance. It was the FDIC’s decision to insure our business model, not ours.
So why did we become a federally-insured thrift?
IndyMac survived the 1998 global liquidity crisis as a mortgage reit, reliant on the capital markets for funding. After, we prudently became a thrift, whereas firms like Goldman Sachs, Morgan Stanley, and GE Capital had to be saved from their liquidity crises and bankruptcy by the federal government, who allowed them to become banks overnight and guaranteed the money market funds, who were buying their commercial paper. During the 2007-2008 crisis, IndyMac was able to pay off all of its capital markets funding and still have over a billion dollars of liquidity, which we maintained until a United States Senator from New York, in June 2008, improperly publicly expressed concerns about us and spawned a bank run. Why did he do that?
For IndyMac Bank, the false mainstream narrative about us rests on the fact that we failed and were seized by the FDIC on July 11, 2008, and we were a major nonconforming (Alt-A) mortgage lender.
Read the excerpts below. One is by a federal judge. Three are from federal court records. Two statements are under oath. One is by the crisis era Federal Reserve Chairman. And two are by crisis era United States Treasury Secretaries.
Tell me, after reading these, if you think IndyMac’s failure is evidence of any malfeasance?
“The Court will briefly discuss the FDIC’s claim that the “Great Recession” was not only foreseeable, but was actually foreseen by the defendants. The Court discusses this claim only due to the absurdity of the FDIC’s position. In sum, the FDIC claims that defendants were not only more prescient than the nation’s most trusted bank regulators and economists, but that they disregarded their own foresight of the coming crisis in favor of making risky loans. Such an assertion is wholly implausible. The surrounding facts, and public statements of economists and leaders such as Henry Paulson and Ben Bernanke belie FDIC’s position here. It appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative was not considered to be “too big to fail.” Taking the position that a big bank’s directors and officers should be forgiven for failure due to its size and an unpredictable economic catastrophe while aggressively pursuing monetary compensation from a small bank’s directors and officers is unfortunate if not outright unjust. The Court finds that defendants are entitled to the business judgment rule’s protection as a matter of law and indisputable fact. Therefore the Court enters judgment against plaintiffs’ claims for negligence and breach of fiduciary duty.”, United States District Judge Terrence W. Boyle, September 10, 2014, Order Granting Defendants’ Motion for Summary Judgment in FDIC, as receiver for Cooperative Bank v. Frederick Willetts III, et.al
“September and October of 2008 was the worst financial crisis in global history, including the Great Depression. Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” Former Federal Reserve Chairman Ben Bernanke, U.S. Court of Federal Claims, August 2014
“Mr. Paulson said, among other things, that Citigroup Inc. would have failed without government assistance. Mr. Boies entered into evidence an email from one Fed official to another relaying a concern that Morgan Stanley was within hours of collapsing and conveying that Goldman Sachs Group Inc. thought such a chain of events would mean its company was “toast.” Mr. Paulson, pressed about the treatment of different companies in need of government aid, said, “To me, it’s a little bit apples and oranges.” “We did things based on circumstances we faced,” he said.”, U.S. Court of Federal Claims, October 2014 (excerpt from The Wall Street Journal)
“Certainly Citi and BofA were insolvent.”, former U.S. Treasury Secretary Timothy F. Geithner, The New York Times account of his book tour
Besides failing during the crisis, the other reason IndyMac was maligned related to false allegations about our, and the industry’s, pre-crisis mortgage lending standards and practices.
Mortgage borrowers who struggled to pay or defaulted during the crisis were universally portrayed in the liberal press as victims of their lenders. That’s not really true, at least in my experience and in every situation I read about and researched, over the years.
Many people with mortgages experience normal life crises every year, such as disability, other health issues, divorce, and death that impair their ability to pay. Others experienced job losses or significant pay reductions exacerbated by The Great Recession. None of these borrowers were victims of their mortgage lenders though, but all of them deserved help to be able to stay in their home, if they could. And they got a lot of help, not only because it was the right thing to do, but also because it was clearly in every lender and investors’ economic interest to help them. No lender or investor makes money on a foreclosure, especially when home prices are falling.
That said, some mortgage borrowers were neither victims nor deserving of much help.
Because of that 1997 tax law change, after the housing bubble burst, lenders found out that some owner-occupied borrowers were actually speculators. They were flipping houses every few years and taking advantage of the tax free, capital gains treatment. These folks stopped paying right away and some lived rent free for a year or more. Most eventually “walked away” from their mortgages.
Let me clear up a common mortgage crisis misperception. The fact that a borrower’s mortgage is temporarily “underwater” (exceeds their home’s value), has no impact on their ability to pay their mortgage. It only has an impact on their willingness to pay.
Finally, there were some who were using the appreciating value of their homes as piggybanks, to maintain an otherwise unsustainable standard of living. Are the Coronels of Azusa, who pulled $350,000 in cash out of their home, in 11 refinance transactions over the years, a victim of their mortgage lenders? No. Yet The Los Angeles Times never mentioned these facts and others, and falsely portrayed them as victims.
Pre-crisis mortgage fraud-defects were described as massive and rampant, and deliberately ignored by lenders. That’s not true either.
Mortgage fraud and defects are like the terms hate speech and micro aggressions, in that there is no real definition. Check out FHA’s Quarterly Post Endorsement Technical Reviews from the post-crisis, post-DOJ litigation period 2012-2016, which are publicly available online. During this period, FHA initially claims that the industry is delivering 40%-47% unacceptable-serious defect mortgages to them quarter-in and quarter-out. Yet, after mortgage lenders are able to conduct the normal adversarial process to rebut these claims, FHA’s initial claims rate declines by almost 90%, to around 4% to 5%! So what’s the real difference, between pre and post crisis FHA mortgages? The difference is FHA was told by someone in the government, likely the Obama DOJ, to suspend the adversarial process for crisis era mortgage defect allegations, so they could civilly litigate them.
And finally, mortgage securities issuers and sellers of mortgages, were also accused of pervasive mortgage and securities disclosure fraud. Again, that’s not true.
It’s been ten years, enough with the false allegations and hearsay. What was proven in a court of law or admitted to in a settlement agreement? Not much.
In the 2014 BofA-Merrill-Countrywide-First Franklin-DOJ omnibus mortgage settlement agreement, it says “The Parties acknowledge that this Agreement is made without any trial or adjudication or finding of any issue of fact or law.” The DOJ filled Annex 1 with a laundry list of unproven allegations and hearsay, yet BofA didn’t really care, because they never agreed to those allegations. How so? Extract the following from the above statement, “The Parties acknowledge this Agreement is made without any finding of any issue of fact.” Could that be any clearer? The legal spin occurs because the agreement says BofA “Acknowledges” Annex 1. Look up the definition of “Acknowledge”, it means that BofA just acknowledges the existence of Annex 1, not that they agree with anything in it! Why this legal hide-the-ball? So that the civil division of Obama’s DOJ could falsely spin to the American public that BofA admitted to the unproven allegations and hearsay in Annex 1, and perpetuate the false narrative of rampant pre-crisis mortgage fraud-defects.
When the FDIC sued me, they made no allegations about deficiencies in our mortgage lending standards or practices. Neither did the SEC in their civil securities disclosure fraud suit against me, which they lost, almost entirely, on summary judgment.
The U.S. mortgage market is massive. It’s trillions of dollars and tens of millions of borrowers. Yet not a single news article, nor a single crisis era lawsuit or settlement by the government or private plaintiffs provided a statistically-valid sample to support their claims of mortgage fraud-serious defects. Not one.
Most government and private plaintiff lawsuits relied on a relative handful of adversely-selected mortgages…only ones that had gone bad….as evidence of systemic mortgage fraud-defects and underwriting deficiencies. By way of example, the Obama DOJ based its civil lawsuit against Quicken Loans and its FHA lending practices, on just 55 adversely-selected mortgages, out of 246,000 FHA loans Quicken made.
The Obama DOJ sued every major FHA mortgage lender and sought quick, misleading settlements, using the coercive power that the government holds over banks, as a result of federal deposit insurance. This had a two-fold purpose. It helped cement the false narrative about pre-crisis mortgage lending practices, and it helped recapitalize the insolvent FHA insurance fund.
Earlier this year, in March, an important Alt-A mortgage fraud-defect case between trustees for mortgage securities issued by Lehman, who were representing pre crisis, institutional investors who had bought these bonds, and the trustees for Lehman’s bankruptcy estate concluded before a federal judge. The judge required a rare loan-by-loan review of all mortgages. This federal judge ruled against the mortgage securities trustee and institutional investors’ mortgage fraud-defect claims, saying their review was biased and that the court’s review did not support their claim of losses caused by mortgage fraud-defects. In other words, investor losses were most likely caused by other factors, possibly the housing bubble-bust and The Great Recession?
A regulated thrift-bank, like IndyMac, can’t bet on a statistically-improbable, fat-tailed or Black Swan event occurring, even if we thought it possible. And we didn’t. No one really knew what was about to happen, even well into the crisis of 2008.
In the Spring of 2008, Texas Pacific Group and other sophisticated investors, invested $7 billion in Washington Mutual. Just months later, when the FDIC seized WAMU, they lost every penny. They didn’t know either, despite their significant financial expertise and extensive due diligence. To my knowledge, they didn’t blame anyone else or claim they were defrauded. How could they? They made a risky bet, with potentially great upside, and they lost.
The winners in the 2008 financial crisis were a handful of speculators, like those profiled in The Big Short. They mostly used publicly-available mortgage securities disclosures, including monthly loan servicing-delinquency reports, to establish their investment thesis. Isn’t that proof that mortgage securities disclosure fraud allegations by the SEC and others were false? Also, think about why these speculators had to time the exit of their short trades. Wasn’t it because they knew that these securities were oversold and would recover significant value over time? And they did. These speculators took massive risks. They were right then, but several prominent ones haven’t done so well since.
In recent years, Nobel Laureate in Economics Robert Shiller said, “There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.”
I hope I’ve made clear why there hasn’t been any consensus.
Maybe it’s time for President Trump and Congress to appoint a new, truly non-partisan Financial Crisis Inquiry Commission, without any politicians? All the crisis era bankers-Wall Street can now talk and there’s ten years of data, study, research, and hindsight.
Finally, why did the government make so many systemic changes to the financial system post-crisis, including a doubling of bank capital levels and increased liquidity requirements, if it truly was individual banker-Wall Street bad behavior?
Long-time Fed Chairman Greenspan said this in his 2010 paper, The Crisis: “How much of the underlying risk in a financial system should be shouldered solely by banks and other financial institutions? Central banks have chosen implicitly, if not in a more overt fashion, to set capital and other reserve standards for banks to guard against outcomes that exclude those once or twice in a century crises that threaten the stability of our domestic and international financial systems. We have chosen capital standards that by any stretch of the imagination cannot protect against all adverse loss outcomes. There is implicit in this exercise the admission that, in certain episodes, problems at commercial banks and other financial institutions, when their risk-management systems prove inadequate, will be handled by central banks. At the same time, society on the whole should require that we set the bar very high. Hundred-year floods come only once every hundred years. Financial institutions should expect to look to the central bank only in extremely rare situations. At issue is whether the current crisis is that “hundred year flood.” At best, once in a century observations can yield results that are scarcely robust. But recent evidence suggests what happened in the wake of the Lehman collapse is likely the most severe global crisis ever. Since modern financial data compilation began, we never had a “hundred year flood” that exposed the full intensity of the negative tail. The aftermath of the Lehman crisis traced out a startlingly larger negative tail than most anybody had earlier imagined. I assume, with hope more than knowledge, that this was indeed the extreme of possible financial crisis that could be experienced in a market economy.”
Translation, Greenspan said that all pre-crisis risk models, both in the private sector and government, were inadequate in hindsight. He “hopes, but doesn’t really know” if the new, post-crisis ones being built will work. He said that the Fed was responsible for setting private bank capital levels in the U.S.. That they chose to set them to NOT cover “The Hundred Year Flood” or “Black Swan” event. And, at those rare times, they understood that the government would have to come to the rescue of the private banking system, with additional capital and liquidity. Could that be any clearer? Isn’t that why the Fed has roughly doubled post-crisis bank capital requirements?
We can seek the facts and the truth, or we can just keep blaming those greedy and reckless bankers-Wall Street. Everyone hates them anyways.
Mike Perry is a 55-year old, former founding Chairman and CEO of IndyMac Bank. After his thrift failed during the 2008 crisis, he was sued by the government and numerous private plaintiffs for over a billion dollars. He maintains a blog at http://www.nottoobigtofail.org.