Category Archives: Postings
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.
“Trustees acting on behalf of those investors had brought claims against the Lehman bankruptcy estate for breaches of representations and warranties in which the bank vouched for the accuracy and quality of the underlying loan documents. The trustees blamed losses in the mortgage-backed securities on so-called liar loans in which borrowers were largely taken at their word…
…While cases like these have proliferated against bank underwriters since 2008, relatively few big-dollar disputes have gone to trial, in part because of the complexity and cost of cross-checking information in loan pools of hundreds of thousands of mortgages against external sources. Other courts have used statistical sampling techniques to produce rough estimates of investor losses. Judge Chapman required a loan-by-loan review that she said failed to turn up actionable breaches “for the vast majority of loans at issue…The trustees said almost 55,000 of the 72,500 loans offered up for trial had inaccurate information about borrowers’ income, debt or occupancy based on discrepancies with tax returns, bankruptcy filings, credit reports and property records…But the judge said she doubted these types of records were always reliable or necessarily showed the loan applications were false. She also criticized the trustees for running what she said was a biased review process and for failing to prove that the value of the underlying loans had been depressed…U.S. Bankruptcy Judge Shelley C. Chapman’s decision marks a loss for investors, mostly hedge funds, which said their claims were worth $11.4 billion, and a win for Lehman’s bankruptcy administrators, who had proposed the $2.4 billion figure. She fixed the investors’ claim after a 22-day trial surrounding 72,500 home loans from before the 2008 financial crisis that bond trustees said were rife with misstatements about the borrowers’ income, their debts and their places of residence…Judge Chapman’s ruling doesn’t allow investors to collect on the entirety of their $2.4 billion claim; they will be paid out on equal footing with other Lehman unsecured creditors who also haven’t been fully repaid.”, Andrew Scurria, “Soured Lehman Claims Valued at $2.4 billion”, The Wall Street Journal, March 8, 2018
“I almost missed this tiny March 2018, Wall Street Journal article. It is horribly written and hides the key point (by regurgitating plaintiff allegations that the federal judge dismissed as biased and unproven at trial), but the key facts are here and support everything I have been saying on this blog. Essentially, that the allegations of rampant crisis-era mortgage fraud (by the Obama government folks at the DOJ, FDIC, and SEC and private plaintiffs such as this case) being the cause of massive MBS investor losses and the financial crisis, were never proven by anyone and in fact, disproven in this significant and highly representative industry case. This article notes (as I have several times on this blog) that almost none of these civil cases (by either the government or private plaintiffs), have gone to trial and so almost none of these cases involve any facts, determined in a court of law. And as the article notes, “Judge Chapman required a loan-by-loan review that she said failed to turn up actionable breaches ‘for the vast majority of loans at issue”…the judge said she doubted these types of records were always reliable or necessarily showed the loan applications were false. She also criticized the trustees for running what she said was a biased review process and for failing to prove the value of the underlying loans had been depressed (by the plaintiffs’ allegation).” Wow! This federal judge’s ruling (which is final and may not be appealed) powerfully refutes the rampant crisis era mortgage fraud allegations made by the Obama government and other private plaintiffs (who wanted to blame their risk-taking and losses on others). It adds huge support to my blog’s key points about crisis era mortgages, but unfortunately comes nearly ten years after the fact and far too late to help anyone defend themselves or their institution.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Soured Lehman Mortgage Claims Valued at $2.4 Billion
Bondholders had valued claims against Lehman at $11.4 billion
The Lehman Brothers building in September 2008. A bankruptcy judge ruled Thursday the bank caused $2.4 billion in damages to investors holding securities backed by shaky home mortgages, ending one of the last remaining disputes in a nearly decadelong liquidation. PHOTO: JOSHUA LOTT/REUTERS
By Andrew Scurria
Lehman Brothers Holdings Inc. caused $2.4 billion in damages to investors holding securities backed by shaky home mortgages, a New York bankruptcy judge ruled Thursday, ending one of the last remaining disputes in the defunct bank’s nearly decadelong liquidation.
U.S. Bankruptcy Judge Shelley C. Chapman’s decision marks a loss for investors, mostly hedge funds, which said their claims were worth $11.4 billion, and a win for Lehman’s bankruptcy administrators, who had proposed the $2.4 billion figure.
She fixed the investors’ claim after a 22-day trial surrounding 72,500 home loans from before the 2008 financial crisis that bond trustees said were rife with misstatements about the borrowers’ income, their debts and their places of residence.
Todd Cosenza, an attorney for the Lehman administrators, said “we are gratified with the court’s well-reasoned and thorough decision, which we believe reflects a fair outcome for all creditors.”
An attorney for the trustees declined to comment.
Neither side can appeal the decision under a trial framework they worked out last year to resolve Lehman’s liability for lapses in underwriting standards on mortgages that it bundled and securitized for resale.
Trustees acting on behalf of those investors had brought claims against the Lehman bankruptcy estate for breaches of representations and warranties in which the bank vouched for the accuracy and quality of the underlying loan documents. The trustees blamed losses in the mortgage-backed securities on so-called liar loans in which borrowers were largely taken at their word.
While cases like these have proliferated against bank underwriters since 2008, relatively few big-dollar disputes have gone to trial, in part because of the complexity and cost of cross-checking information in loan pools of hundreds of thousands of mortgages against external sources.
Other courts have used statistical sampling techniques to produce rough estimates of investor losses. Judge Chapman required a loan-by-loan review that she said failed to turn up actionable breaches “for the vast majority of loans at issue.”
The trustees’ case against Lehman underscored the difficulty in determining whether borrowers were truthful when they took out home loans. Court records show that one applicant, a Stanley Steemer driver, signed loan papers in 2006 saying he earned $6,500 a month. Tax records later revealed his earnings were less than half that, according to the trustees.
Another mortgage-loan applicant purportedly listed a gym membership among his debts but didn’t include two other home mortgages, totaling $205,900. A waitress in New Jersey pledged to move within 60 days to Las Vegas as a condition of her mortgage but filed court papers in a personal bankruptcy case years later suggesting she never did, documents say.
The trustees said almost 55,000 of the 72,500 loans offered up for trial had inaccurate information about borrowers’ income, debt or occupancy based on discrepancies with tax returns, bankruptcy filings, credit reports and property records.
But the judge said she doubted these types of records were always reliable or necessarily showed the loan applications were false. She also criticized the trustees for running what she said was a biased review process and for failing to prove that the value of the underlying loans had been depressed.
Judge Chapman’s ruling doesn’t allow investors to collect on the entirety of their $2.4 billion claim; they will be paid out on equal footing with other Lehman unsecured creditors who also haven’t been fully repaid.
The dispute has been marked by tensions between institutional investors who favored a settlement with Lehman and hedge funds which argued for a higher damages figure and pressured the trustees, who were in charge of the litigation, to go to trial.
BlackRock Financial Management Co., Pacific Investment Management Co. and Goldman Sachs Asset Management LP supported a $2.4 billion deal in settlement talks with the Lehman administrators, but hedge funds including Tilden Park Capital Management LP and BlueMountain Capital Management LLC saw that as a lowballed figure.
Lehman’s bankruptcy proceedings have paid out roughly $122 billion to creditors since it failed in 2008. The Lehman estate still has billions in remaining investments to unwind and is expected to exist in some form for several more years.
Unsecured creditors, who were estimated to receive about 21 cents on the dollar when Lehman’s liquidation plan went into effect in 2012, have now recovered nearly 44 cents and are in line for more. Bankruptcy administrators had set aside reserves to cover potential judgments that can now be distributed. The largest variable in the wind-down is now a $1 billion derivatives trial with Credit Suisse AG that is scheduled to begin in October.
“The Real Clear Investigations 5/14/18 article attached is a MUST READ. There are a LOT of parallels in how the Obama government behaved and lied about the financial crisis and scapegoated crisis era bankers and Wall Street and this phony Russian-Trump collusion…
Here’s two from this article:
1) For the last Obama Administration ICA, January 2017, alleging Trump-Russia collusion, Obama’s Director of National Intelligence Clapper breached standard protocol and did not get the intelligence assessment of the 17 agencies, as required. He handpicked analysts from just three agencies, CIA, FBI (Strock!!!), and NSA and appears to have deliberately excluded normal dissent and third party verification. The Financial Crisis Commission was controlled by Obama Democrats and all the staff worked for them. Not a single Republican on the Commission signed on to the Democrat-only conclusions, yet it was portrayed in the mainstream media that it was a non-political conclusion. Further to this point, Dodd-Frank was passed BEFORE this Commission’s report and findings were finalized and published. In other words, the majority of Democrats who controlled the Financial Crisis Commission knew the political conclusions they were supposed to reach.
2) This January 2017 Obama Administration ICA (Intelligence Community Assessment, by only the 3 agencies, not 17), included a two page summary of the salacious and unverified Steele Dossier, as an appendix. In Bank of America’s coerced (how can a government-regulated, federally-insured deposits and mortgages fight the government?) civil settlement with Obama’s DOJ, regarding crisis era mortgages (primarily related to their Countrywide acquisition), the DOJ attached an appendix to the settlement, which included many salacious and unverified allegations by Obama’s DOJ that were never proven and in which BofA/Countrywide disagreed. So, the “art” (really fraud and libel by the government, as they were misleading the American people and libeling BofA/Countrywide) of the civil settlement had BofA/Countrywide “acknowledging” that the appendix was attached and existed, but not agreeing to anything in it. Don’t believe me? Read it, as I did. I even discussed it at length in a posting at the time on this blog. Go read that too.” Mike Perry, former Chairman and CEO, IndyMac Bank
p.s. By the way, it appears that a key reason a 2-page, summary of the Steele dossier was attached to the January, 2017 ICA briefings to President Obama and President-elect Trump was that it then allowed Obama’s IC folks to leak that fact to the Press, so they could then publish the Steele Dossier in full. How so? Most of the mainstream Press, had copies of the full Steele Dossier for months, but couldn’t verify it, so they couldn’t publish it. Yet they could pretend they were ethical and the IC had verified it (otherwise, why brief two Presidents of the USA on it???), if they knew it had been presented to Obama/Trump in the ICA. And “amazingly” after it was presented to Obama and Trump, the Intelligence Community leaked this fact to the Press and the Press went crazy publishing the salacious and unverified dossier, smearing incoming President Trump, and leading to the appointment of the phony, totalitarian, highly-conflicted/partisan, and possibly illegal Special Counsel Mueller.
“It’s the Establishment versus the rest of us folks. My #2 (President) at IndyMac Bank was part of this Establishment. Stanford undergrad, Harvard Law, liberal Democrat, law clerk, who had worked for a time at the State Department. Even though he ran 90%+ of IndyMac’s mortgage/real estate lending, he wasn’t sued by anyone…
…while I was sued by a dozen plaintiffs, including the FDIC and SEC, for over a billion.
Three of his construction lending subordinates were sued for something like $160 million re. a dozen or so loans and he had signed on roughly half of them, as the most senior lending officer and still wasn’t sued! I have never said this before, but it’s time. He’s a Harvard lawyer, liberal Democrat, former State employee and wasn’t sued by anyone even though he was in charge of nearly all of our lending, as President of the Bank. Why?
My DC lawyers, about as Establishment as you can get, voiced bad feelings to me about my #2 on numerous occasions over the years, implying he had lied about his role and/or thrown me and others under the bus. I also thought it was because he was a Harvard lawyer, who had worked for a top law firm, and these top lawyers (both inside and outside government) all seem to protect each other. By the way, he also rarely wrote an email/memo, whereas (as you know being a FB friend) I wrote thousands…this is a lawyer tactic, to avoid any record or responsibility.
He’s back in the banking business, as a general counsel for a California bank and I was forced (really “extorted”) to accept a lifetime banking ban, in order to get my family out from under a bogus $600 million civil suit with the FDIC, which I denied all the allegations in the settlement. (One of the reasons I have never said this before, is all of the charges against us were bogus. None of us should have been sued.)”, Michael Perry, former Chairman and CEO, IndyMac Bancorp
p.s. My only case that went to court was with the SEC, I won everything on summary judgment! That $160 million case against my #2’s subordinates, they were found liable for ordinary negligence by a civil jury. It was BOGUS and would have been reversed on appeal (for numerous reasons, including not being protected by the Business Judgment Rule), but the FDIC didn’t want that, so they settled a $160+- million judgment against these three individuals for a measly $200,000 +- TOTAL for all three. The FDIC just wanted the phony headline judgment of $160 million to stand. By the way, I was there on the last day of the trial to support these guys. Guess who never showed up?
Key Excerpt from the Lifezette article below:
“Another day and another headline about Mueller’s investigation going overboard. A man, an investigator, evokes fear and trepidation as his ever-watchful eye probes illicitly into people’s deepest secrets. He visits house to house, person to person, and brings both the guilty and the innocent in line to the true faith. A true Stalinist.
The revolt must be quashed. The uprising put down. The leaders imprisoned or ruined. Preferably both.
No, we aren’t talking about the medieval Inquisition. We’re talking about Mueller, an officer of your government. But you wouldn’t know. He neither approaches the law evenhandedly, nor openly. Macbeth warned, “Wanton in fullness seeks to hide themselves.”
Were former Secretary of State Hillary Clinton’s lawyers’ offices ever ransacked? How about those of former Attorney General Loretta Lynch? Of course not. They are both members in good standing with the Establishment. They are protected species. As reported in “Animal Farm,” “With their superior knowledge, it was natural that they should assume the leadership.” Those in the Establishment always assume they know better. The rest of us are just deplorables.
This is not about Republicans versus Democrats. It’s about the Outies versus the Innies. President Ronald Reagan was an Outie. So the Innie, the despicably dirty and corrupt Iran-Contra special counsel Lawrence Walsh, went after Reagan, because he was a threat to the Establishment.”
“If you intentionally manipulated an asset’s marketplace by artificially restricting its supply, causing the asset’s price to rise to astronomical levels and then you sold a chunk of your supply (raising $359 million for yourself) near the top, to hardworking and largely uneducated immigrant American entrepreneurs,…
…many of whom borrowed to finance these purchases, should you be prosecuted for fraud and pay a big fine for this? What if less than three years later, you decided to no longer control the supply, so the asset price plummeted in value and these immigrant entrepreneurs were driven to default on their borrowings and/or declare bankruptcy (significantly impairing their ability to earn a living), should you be prosecuted for fraud and pay a big fine then? What if you are the City of New York and you did this with New York City taxi medallions and to NYC taxi cab owners?”, Mike Perry, former Chairman and CEO, IndyMac Bank
September 10, 2017, Winnie Hu, The New York Times
Taxi Medallions, Once a Safe Investment, Now Drag Owners Into Debt
By WINNIE HU
Uppkar Thind said he has to drive his yellow cab as many 13 hours a day, as he struggles to pay off a taxi medallion that he bought 11 years ago. Credit Caitlin Ochs for The New York Times
Owning a yellow cab has left Issa Isac in deep debt and facing a precarious future.
It was not supposed to turn out this way when Mr. Isac slid behind the wheel in 2005. Soon he was earning $200 a night driving. Three years later, he borrowed $335,000 to buy a New York City taxi medallion, which gave him the right to operate his own cab.
But now Mr. Isac earns half of what he did when he started, as riders have defected to Uber and other competitors. He stopped making the $2,700-a-month loan payment on his medallion in February because he was broke. Last month, it was sold to help pay his debts.
“I see my future crashing down,” said Mr. Isac, 46, an immigrant from Burkina Faso. “I worry every day. Sometimes, I can’t sleep thinking about it. Everything changed overnight.”
Taxi ownership once seemed a guaranteed route to financial security, something that was more tangible and reliable than the stock market since people hailed cabs in good times and bad. Generations of new immigrants toiled away for years to earn enough to buy a coveted medallion. Those who had them took pride in them, and viewed them as their retirement fund.
Uber and other ride-hail apps have upended all that.
Just as homeowners faced ruin when housing markets sank, struggling cab owners in Chicago, Boston, San Francisco and other cities are now facing foreclosure and bankruptcy. Many took out loans to pay for taxi medallions, counting on business that has instead nose-dived amid fierce competition. They are falling behind on loan payments, being turned away by lenders and stand to lose not only the medallions that are their livelihoods but also their homes and savings.
Nowhere is the crisis more dire than in New York, which has the largest taxi fleet in the country. Medallions now sell for a fraction of the record $1.3 million price in 2014, and in many cases, are worth far less than what their owners borrowed to buy them. Even if these owners sell their medallions, they still owe hundreds of thousands of dollars — far more than in many other cities where medallion prices were lower to begin with.
In an unprecedented fire sale of medallions, up to 46 of them are expected to go on the auction block later this month as part of bankruptcy proceedings against taxi companies affiliated with an embattled taxi mogul. While the city has previously held auctions to sell a limited number of new medallions — about 1,800 since 1996 — this is believed to be the first auction to dispose of foreclosed medallions, according to city officials.
While the auction has drawn attention to the precipitous fall of the once-mighty taxi industry, it does not reflect the hardship — and heartbreak — of individual owners like Mr. Isac. It is their stories that often get lost in the larger debate over new technology and commutes, and tell of the human cost of the city’s rapidly evolving transportation landscape.
Since 2015, a total of 85 medallions have been sold as part of foreclosure proceedings, according to city records. In August alone, 12 of the 21medallion sales were part of foreclosures; the prices of all the sales ranged from $150,000 to $450,000 per medallion.
Many more taxi owners say they do not know how much longer they can hold on. Didar Singh, 65, who took out a loan to buy two medallions for a total of $2.6 million in 2013, said he can only afford to pay the interest — $4,816 a month — on the loan. As it is, his taxis do not bring in enough to cover his expenses, forcing him to rely on savings and help from his children.
Sohan Gill once saw his medallion as such a good investment — ”better than a house” — that his wife bought two more in 2001. Now they cannot find enough drivers for the cabs because business is so bad. And Mr. Gill, 63, who had retired from driving, had to go back on the road. “How many more years am I going to drive to take care of these medallions?” he asked.
As recently as three years ago, taxi medallions sold for well over $1 million. Today, some have sold for as low as $150,000. Credit Caitlin Ochs for The New York Times
Gone are the years when taxi medallions steadily rose in value, largely because there was a limited supply of them. The city controls the number of medallions — currently capped at 13,587 — to prevent an oversupply of cabs like what occurred in the 1930s when concerns over congestion, reckless driving and cut-rate fares prompted the city to step in. The last time there was an auction for medallions was when the citysold 350 new medallions in 2014 at the height of the market, generating $359 million in revenue.
But today, yellow cabs are dwarfed by cars working for ride-hail apps, which face far fewer regulations. Taxi owners and their supporters complain that their competitors do not have a similar cap on their cars, and are not subject to strict rules on taxis that cover fares, vehicle equipment and access for disabled people, among other things.
There are more than 63,000 black cars providing rides in the city through five major app services: Uber, Lyft, Via, Gett and Juno. Of those, about 61,000 cars are connected with Uber, though they may also work for the other app services, too.
“We are not against competition, we are not against technology, but we want to compete fair and square,” said Nino Hervias, 58, a taxi owner and spokesman for the Taxi Medallion Owner Driver Association, which represents about 1,500 individual taxi owners, most of whom are immigrants.
Taxi owners have sought to sue the city over what they see as an unfair playing field, with little success. Earlier this year, a lawsuit filed against the city and taxi commission by taxi owners, trade groups and credit unions was dismissed by a federal judge who found that they had failed to show they were denied due process or equal protection.
Mr. Hervias and another driver have also taken legal action, known as an Article 78 proceeding, to compel the city and its regulators to establish and enforce standards that will make sure that all licensed cars — including yellow cabs — “are and remain financially stable.” The case is pending in State Supreme Court in Manhattan, with a court appearance scheduled in October.
Yellow taxis made an average of 277,042 daily trips and collected $4 million in fares per day in July, down from 332,231 daily trips and $4.9 million in fares the year before, according to city data.
Allan J. Fromberg, a spokesman for the taxi commission, said it had taken a number of steps to help struggling taxi owners, such as lifting a requirement for individual owners to personally drive their taxis at least 150 shifts a year, which was not only a burden for older people but also limited the pool of potential buyers for medallions. It has also supported laws that have eased restrictions on who could buy the medallions and significantly lowered the transfer tax on medallion sales.
The commission has also provided financial incentives to defray the cost and maintenance of handicap-accessible cars, Mr. Fromberg said. And it has created a pilot program that is intended to help fleet owners attract more drivers; the program allows drivers to pay a percentage of their earnings during a shift to lease the cab, in lieu of a flat fee up front that puts drivers under pressure and leaves them in the hole if they do not earn enough back.
But for many taxi owners, such measures have not been enough.
Mr. Isac is again leasing yellow cabs since he no longer has his own medallion. At times, he picks up only one passenger an hour. Even so, he is not ready to give up on yellow cabs yet.
“I’m still driving a yellow taxi because I want them to come back,” he said. “I don’t want to see yellow cars disappear from the streets.”
Uppkar Thind, 46, an immigrant from India, said he now has to drive 11 to 13 hours a day and can no longer take time off if he wants to break even. He is paying off a medallion that he bought for $357,000 in 2006 with money borrowed from his relatives and a credit union.
“I worked hard,’’ he said. “I achieved my American dream and it turned into a nightmare.”
A version of this article appears in print on September 11, 2017, on Page A1 of the New York edition with the headline: As Uber Ascends, Debt Demolishes Taxi Drivers
“It is ironic that the Great Depression was produced by government but was blamed on the private enterprise system. The Federal Reserve System explained in its 1933 annual report how much worse things would have been if the Federal Reserve had not behaved so well, yet the Federal Reserve was the chief culprit in making the depression as deep as it was. So the government produced the depression, the private enterprise system got blamed for it, and there was a tremendous change in attitudes…
…When you say ideas are not important, that change in attitudes would not have been possible if the groundwork had not been laid by the socialist intellectuals in the 1920s. It is interesting to note that every economic plank of the 1928 Socialist party platform has by now been either wholly or partly enacted…Financial System: You are fully aware of the weakness of our financial system. Is there any doubt that the weakness owes much to Washington? The savings and loan crisis was produced by government, first by accelerating inflation in the 1970s, which destroyed the net worth of many savings and loan institutions, then by poor regulation in the 1980s, by the increase in deposit insurance to $100,000, and more recently, by the heavy-handed handling of the crisis. You know the litany; I don’t have to spell it out.”, Nobel Laureate in Economics, Milton Friedman, Excerpt from “Why Government is the Problem”, Essays in Public Policy, no. 39, Stanford California: Hoover Institution Press, 1993
“The 2008 financial crisis is pretty much a repeat of the above…government again blaming the private sector (and those on the Left calling for the jailing of bankers) for a crisis caused mostly by government and the rise of socialism under Bernie/Warren…but we no longer have the brilliant Milton Friedman to say as much. P.S. By the way, the entire essay and especially the Q &A is a MUST READ (and is similar to Nobel Laureate in Economics F.A. Hayek’s views)…Mr. Friedman discusses at-length the government-created taxi monopolies (almost fore-telling Uber’s rise, nearly two decades later) and the healthcare crisis and government’s key role.”, Mike Perry, former Chairman and CEO, IndyMac Bank, July 26, 2017
“And it is quite fitting that “volatility” comes from volare, “to fly” in Latin. Depriving political (and other) systems of volatility harms them, causing eventually greater volatility of the cascading type. This section, Book II, deals with the fragility that comes from the denial of hormesis, the natural antifragility of organisms, and how we hurt systems with the very best intentions by playing conductor. We are fragilizing social and economic systems by denying them stressors and randomness,…
…putting them in the Procustean bed of cushy and comfortable….but ultimately harmeful…modernity.”, Nassim Nicholas Taleb, Antifragile: Things That Gain from Disorder
Comments from Mike Perry, former Chairman and CEO, IndyMac Bank: It is clear from Taleb’s comments in Antifragile and elsewhere, that he believes The Federal Reserve Bank of The United States, through its powerful monetary policies, created an artificial environment that distorted finance and the economy for years, lulled them into a state of fragility, and this led to the 2008 financial crisis. I agree. I know that the normal business/economic cycle (which the Fed did its best to eliminate) is important for proper credit risk management. Credit has its own normal cycle of expansion and tightening. Because the Fed smoothed out the natural business/economic cycle for years, the credit downturn was the worst in modern history. That’s on The Federal Reserve. I am with Mr. Taleb, Ron and Rand Paul, and many others….it is time to at least Audit the Fed and possibly time to End the Fed.
Great Moderation: A turkey problem. Before the turmoil that started in 2008, a gentleman called Benjamin Bernanke, then the Princeton professor, later to be chairman of the Federal Reserve Bank of the United States and the most powerful person in the world of economics and finance, dubbed the period we witnessed the “great moderation”—putting me in a very difficult position to argue for increase of fragility. This is like pronouncing that someone who has just spent a decade in a sterilized room is in “great health”—when he is the most vulnerable. Note that the turkey problem is an evolution of Russell’s chicken (The Black Swan).
The Great Turkey Problem…..
It looks like a drop in volatility—and it is not. A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes the day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief —right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey. This example builds on an adaptation of a metaphor by Bertrand Russell. The key here is that such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.
We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that we will see tends to prevail in intellectual circles and one that is grounded in the social sciences. So our mission in life becomes simple “how not to be a turkey,” or, if possible, how to be a turkey in reverse—antifragile, that is. “Not being a turkey” starts by figuring out the difference between true and manufactured stability.
Some people have fallen for the naïve turkey-style belief that the world is getting safer and safer, and of course they naively attribute it to the holy “state”. It is exactly like saying that nuclear bombs are safer because they explode less often…..When we look at risks in Extremistan, we don’t look at evidence (evidence comes too late), we look at potential damage: never has the world been more prone to more damage: never.* It is hard to explain to naïve data-driven people that risk is in the future, not in the past. (*A more rigorous reading of the data—-with appropriate adjustment for the unseen—shows that war that would decimate the planet would be completely consistent with statistics, and would not even be an “outlier.” As we will see, Ben Bernanke was similarly fooled with his Great Moderation, a turkey problem; one can be confused by the properties of any process with compressed volatility from the top. Some people, like Steven Pinker, misread the nature of the statistical process and hold such a thesis, similar to the “great moderation” in finance.
Other Taleb comments about The Federal Reserve….
Another expression of domain dependence: ask a U.S. citizen if some semi-governmental agency with a great deal of independence (and no interference from Congress) should control the price of cars, morning newspapers, and Malbec wine, as its domain specialty. He would jump in anger, as it appears to violate every principle the country stands for, and call you a Communist post-Soviet mole for even suggesting it. OK. Then ask him if the same government agency should control foreign exchange, mainly the rate of the dollar against the euro and the Mongolian tugrit. Same reaction: this is not France. Then very gently point out to him that the Federal Reserve Bank of the United States is in the business of controlling and managing the price of another good, another price, called the lending rate, the interest rate in the economy (and has proved to be good at it). The libertarian presidential candidate Ron Paul was called a crank for suggesting the abolition of the Federal Reserve, or even restricting its role. But he would also have been called a crank for suggesting the creation of an agency to control other prices.
I have called this mental defect the Lucretius problem, after the Latin poetic philosopher who wrote that the fool believes that the tallest mountain in the world will be equal to the tallest one he has observed. We consider the biggest object of any kind that we have seen in our lives or hear about as the largest item that can possibly exist. And we have been doing this for millennia. In Pharaonic Egypt, which happens to be the first complete top-down nation-state managed by bureaucrats, scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imaging much worse….and not thinking that the worst past event had to be a surprise, as it had no precedent. Likewise, the former Chairman of the Federal Reserve, Fragilista Doctor Alan Greenspan, in his apology to Congress offered the classic “It never happened before.” Well, nature, unlike Fragilista Greenspan, prepares for what has not happened before.* (*The obvious has not been tested empirically: Can the occurrence of extreme events be predicted from past history? Alas, according to a simple test. no, sorry.)
Likewise, those in corporations or in policy making (like Fragilista Greenspan) who are endowed with a sophisticated data-gathering department and are therefore getting a lot of “timely” statistics are capable of overreacting and mistaking noise for information—Greenspan kept an eye on such fluctuations as the sales of vacuum cleaners in Cleveland to, as they say, “get a precise idea about where the economy is going” and of course he micromanaged us into chaos. In business and economic decision making, reliance on data causes severe side effects—data is now plentiful thanks to connectivity, and the proportion of spuriousness in the data increases as one gets more immersed in it. A very rarely discussed property of data: it is toxic in large quantities—even moderate quantities.
Epiphenomena: The Soviet-Harvard illusion (lecturing birds on flying and believing the lecture is the cause of these wonderful skills) belongs to a class of casual illusions called epiphenomena. What are these illusions? When you spend time on the bridge of a ship or in the coxswain’s station with a large compass in front, you can easily develop the impression that the compass is directing the ship rather than merely reflecting its direction. The lecturing-birds-how-to-fly effect is an example of epiphenomenal belief: we see a high degree of academic research in countries that are wealthy and developed, leading us to think uncritically that research is the generator of wealth. In an epiphenomenon, you don’t usually observe A without observing B with it, depending on the cultural framework or what seems plausible to the local journalist. One rarely has the illusion that, given so many boys have short hair, short hair determines gender, or that wearing a tie causes one to be a businessman. But it is easy to fall into other epiphenomena, particularly when one is immersed in a news-driven culture. And one can easily see the trap of having these epiphenomena fuel action, then justify it retrospectively. A dictator—just like a government— will feel indispensable because the alternative is not easily visible, or is hidden by special interest groups. The Federal Reserve Bank of the United States, for instance can wreak havoc on the economy yet feel convinced of its effectiveness. People are scared of the alternative.
“Can anyone explain to me how the Italian banking crisis, which has been swept under the rug for years, fits the liberal American, Bernie/Warren narrative that greedy and reckless U.S. mortgage lenders and Wall Street’s greedy and fraudulent securitization of these “risky” mortgages caused the financial crisis? As I understand it, Italy didn’t have a housing bubble/bust…
…and Italian banks didn’t buy American mortgage-backed securities. Doesn’t government regulation, mandates, and intervention, like central banker’s manipulation of money and rates, fit (as an explanation for) a banking crisis in nearly the entire developed world, better?”, Mike Perry, former Chairman and CEO, IndyMac Bank, July 12, 2017
June 10, 2017, Paul J. Davies, The Wall Street Journal
How Fixing Italy’s Banks Is Helping Europe Heal
Italian banks, long a source of worry, might finally be aiding Europe’s recovery
By Paul J. Davies
Italian banks are out of the emergency room. There is a long convalescence ahead, but it is good news for the recovery of Europe as a whole.
The healing under way in Italy and elsewhere is making room for new lending, which can help to fuel economic growth.
Monte dei Paschi di Siena, Italy’s most troubled big bank, finally struck a deal with European regulators to complete its €5 billion ($5.7 billion) bailout this month.
A Monte dei Paschi di Siena bank logo in Rome in 2016. The troubled lender won approval from European regulators for a €5.4 billion ($6.1 billion) bailout. PHOTO: ALESSIA PIERDOMENICO/BLOOMBERG NEWS
Meanwhile, a smaller troubled bank, Banca Carige , which had also been keeping fears of financial crisis alive, announced a capital raising and bad-loan sale plan that sent its shares up 30%.
These solutions came swiftly after the state-backed sale to Intesa Sanpaolo of two banks in the Veneto region, which had been casting a shadow over the financial system. Italian bank stocks have rallied sharply, outperforming European rivals significantly since mid-June.
Between them, these events promise to take almost €50 billion of bad loans out of Italy’s banks, leaving about €275 billion in the system. However, UniCredit has pledged to sell €18 billion worth as part of its restructuring; and €57 billion are on the books of Intesa Sanpaolo, which as Italy’s healthiest bank is well placed to deal with them.
Italy’s problems are starting to look less dramatic. Yes, the country could have dealt with its weak banks sooner and in a less complicated way had there been the political will. But it has now neutralized its worst problems at a direct cash cost to the taxpayer of less than 1% of GDP—significantly less than Spain or Ireland spent several years ago.
And loans are turning bad at a slower rate: New bad debts at the 15 biggest banks in 2016 were at their lowest since before 2009, according to rating agency DBRS.
Now banks have the capacity to start lending again: Italian banks finally returned to growth in the first quarter of 2017, along with the banks of Germany and France, after years of near constant balance-sheet shrinkage.
Growth in those three countries turned the tide for the eurozone as a whole. Total eurozone bank loans were still shrinking at an annualized rate of 11.6% of GDP in the first quarter of 2016 and 3.8% in the last quarter of that year, but that became annualized growth of 1.4% in the first quarter of 2017, according to UBS.
Italy, long the source of worries about European instability, might finally be aiding the Continent’s recovery.
—Paul J. Davies
“Nobel Laureate in economics (for asset prices like housing/stocks/bonds & bubbles) Robert Shiller says we still (in 2017!) don’t know what caused the mid-1990s to mid-2000s, housing bubble, but liberal politicians like Senators Bernie Sanders and Elizabeth Warren, FCIC Chair Phil Angelides and their friends in the liberal Press, had no trouble calling (and continue to this day) for crisis era bankers to be jailed anyway, like totalitarian societies like Russia or Cuba (or like American McCarthyism),…
…, despite Democrat and Obama-appointed NY US Attorney, Preet Bharara, who led many of the banker investigations saying, “no bankers were jailed because there were no crimes committed.” Read the below, it also makes the case that bankers weren’t primarily responsible (non-criminally or morally/ethically) for the housing bubble and its bursting in 2008-09. In fact many would say home prices (and other assets like stocks and bonds) today are another bubble…..yet banks can’t be wrongly blamed this time. What’s the same? I and many others believe a lot of real estate and other asset speculation today has been caused by artificially low rates due to central bankers (The Federal Reserve), manipulation of rates and the supply of money.”, Mike Perry, former Chairman and CEO, IndyMac Bank, July 10, 2017
May 18, 2017, Robert J. Shiller, The New York Times
How Tales of ‘Flippers’ Led to a Housing Bubble
By ROBERT J. SHILLER
Credit Minh Uong/The New York Times
There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to 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.
But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era.
Consider the data for a moment. It shows us that extreme changes took place but doesn’t tell us why.
Real home prices rose 75 percent from February 1997 to December 2005, according to the S&P/Case-Shiller National Home Price Index, corrected for inflation by the Consumer Price Index. And then, from 2005 to 2012, real prices reversed course, falling to just 12 percent above their 1997 level. In the years since 2012, they have climbed 29 percent, about halfway back to their 2005 peak. This is a roller coaster in national home prices — it has been even scarier in some more volatile cities — yet we have no clarity on why it happened.
The problem for economists is that these changes don’t correspond to movements in the usual suspects: interest rates, building costs, population or rents. The Consumer Price Index for Rent of Primary Residence, compiled by the United States Bureau of Labor Statistics and corrected for inflation, went up only 8 percent in 1997 to 2005, so unmet demand for housing services can’t explain the huge increase in real home prices. It doesn’t explain the 29 percent rise in real home prices since 2012 either, because inflation-adjusted rents increased only 10 percent in that period. So what has been driving the wild ride in home prices?
I believe the price swings have something to do with the changing mentality of the times, changes caused by narratives that have gone viral and swept across the population. Looking for answers in such popular stories contrasts starkly with the prominent approach of modeling people as though they react logically to economic forces. But a less orthodox approach can be quite useful.
One thing is clear: The prevalent narratives of 1997 to 2005 did not include the concept of a housing bubble, not at first. A computer search using ProQuest or Google Ngrams shows that the phrase “housing bubble” was hardly used until 2005, the end of the boom. What is a bubble? It typically includes the notion that, spurred by the public’s expectation of ever further price increases, demand eventually reaches levels that cannot be sustained, and so the enthusiasm wanes and the bubble collapses. But that thought was just not on many people’s minds then, the evidence suggests.
Instead, during the 1997 to 2005 boom there were multitudes of narratives about smart investors who were bold enough to take a position in the market. To single out one strand, recall the stories of flippers who would buy a house, fix it up, and resell it within months at a huge profit. These stories appear to have been broadly exciting to people who didn’t flip houses themselves but who appear to have begun to think that stretching a little and buying a house with a large mortgage would make them wise investors.
In his book “The Complete Guide to Flipping Properties,” published in 2004, Steve Berges extolled what he called “the O.P.M. principle,” meaning “other people’s money.” He wrote, “Your objective is to control as much real estate as possible while using as little of your own capital as possible.” In other words, borrow as much as you can. He wrote about the upside of leverage but not about the perils of leverage during the kind of big price drops that were just around the corner.
It can take a long time for narratives like this to grip the popular imagination. Flipping was “a thing” in the condominium conversion boom of the 1970s and ’80s. The idea then was this: Big-time converters with deep pockets would buy apartment buildings and convert the rental apartments to owner-occupied condos, selling units to diverse individuals, some of them flippers. For public relations purposes, converters would offer to sell at reduced prices to renters already living in a building, and typically to some outsiders, too.
This generated buzz. When renters and speculators flipped their purchase contracts at a big profit, sometimes using borrowed money for down payments to flip multiple units without actually even closing on the condos, it was thrilling. It seemed that anyone with energy and initiative could get rich doing this.
Some people eager to make quick profits bought Donald J. Trump’s well-timed 2004 book, “Trump: Think Like a Billionaire: Everything You Need to Know About Success, Real Estate, and Life,” written with Meredith McIver. Some enrolled in the less well-timed Trump University, which emphasized real estate investment in 2005, at the very end of the housing boom; it shut down, amid lawsuits and recrimination, in 2010.
Narratives about flipping weren’t restricted to real estate. Just after the time of the condo boom, stories of rapid buying and selling of initial public offerings took off as well. As with the condo promoters, I.P.O. underwriters would sell some shares below market prices to customers, who might then flip the I.P.O. for a quick profit.
The promoters of condo conversions and I.P.O.s were onto something. By giving discounts to buyers who would make a high return, they captivated the nation with tales of people who had no advanced degrees or hefty résumés but made fortunes anyway.
By now, the notion of getting rich by flipping houses is entrenched. I searched Amazon for books on “flipping houses”and came up with 328 hits, most written in the past few years. Buying and rehabbing existing houses for resale is a legitimate business. But many of these books make extravagant pitches and seem aimed at inspiring amateurs to plunge into risky ventures.
The public fascination with speculating in housing has been held in check by regulators empowered by the 2010 Dodd-Frank Act, but that restraint is tenuous with the election as president of a real estate promoter intent on reducing regulators’ power. These narratives are still potent and could easily spur further spirals in the housing market.
Robert J. Shiller is Sterling Professor of Economics at Yale.
A version of this article appears in print on May 21, 2017, on Page BU3 of the New York edition with the headline: How Tales of ‘Flippers’ Led to a Housing Bubble.
“In high school English, most of us were taught to write essays by developing a thesis and providing three or more facts, to support this thesis. I’m not sure, but I suspect this has created a huge problem and a lot of fake news. Today, there were articles in my LA and NY Times discussing individual “victims” of the Trump Administration enforcing our existing immigration laws (which Congress, the people’s representatives, can change at anytime and has chosen not to). The “spin” was negative for Trump and his immigration policies…
…So the conservative article below, has similar individual facts, that clearly support the President and his policies. Yes, these individual facts are all true, but they distort the truth, because the truth on matters that affect large populations, is that anything that is not an entire population or statistically-valid sample, of such…is just an anecdote (an example, no matter how rare)…it’s like citing three facts to support your thesis statement in high school. Professional journalism should be better than this. How do we fix it? Courts just need to rule that with articles not based on entire populations or statistically-valid samples, the reporters and news groups can be sued for libel/defamation, even if the individual facts (anecdotes) are all true, if the overall thesis is false. And all of us need to read articles like this, whether supporting our views or not, and understand that they are not accurate, if they only cite examples and not entire populations or statistically-valid samples. mp. p.s. I came to see this as a BIG issue, as a result of all the anti-banker articles published in the media re. individual mortgage “victims” (by the way, every mortgage “victim” I checked out, they were not a “victim” in my view!), where they almost never mentioned the entire population of mortgages and never mentioned the concept of statistically-valid samples. Taleb raises this exact issue, re. journalists, in his books and its why he despises them and does not read newspapers.”, Mike Perry, former Chairman and CEO, IndyMac Bank, July 5, 2017
June 27, 2017, Peter J. Patrisi, The Daily Signal
SOCIETY / COMMENTARY
Open Borders and Missing Adjectives in the Liberal Media
The open-borders lobby long has sought to muddy the issue of immigration by deliberately—and dishonestly—omitting the word “illegal” whenever possible and conflating all immigrants, legal and otherwise.
“Human beings can’t be illegal,” they insist.
The liberal media all too often have been complicit in the effort to sidestep the distinction, but it’s a distinction with a very big difference. (Substituting the euphemism “undocumented” for “illegal,” as they often do when including an adjective at all, doesn’t change that.)
The phenomenon was on dishonest display when a young Muslim woman, Nabra Hassanen, 17, was fatally beaten with a baseball bat in the wee hours of Father’s Day morning in what police determined was a “road rage” incident.
Police arrested and charged a suspect, Darwin Martinez Torres, 22, an illegal alien from El Salvador. But The Washington Post buried the detail of Martinez Torres’ immigration status in the 24th paragraph of an article on the crime published online June 19.
Even then, the suspect’s illegal status was referenced only indirectly, with The Post reporting: “U.S. immigration officials requested a ‘detainer’ be placed on him at the county jail, meaning they are interested in possible future deportation proceedings.”
The words “illegal immigrant” were noticeable only by their absence, as they were also from a follow-up article June 21.
Now, six days later, The Washington Post reports that Martinez Torres had been accused the week before Nabra’s slaying of sexually assaulting and battering a young woman he knew. (She asked, however, that no charges be brought against him.)
This latest report in one of the nation’s top newspapers also omits any mention of Martinez Torres’ status as an illegal immigrant.
Then there was the case of the sexual assault charges brought and subsequently dropped against two young illegal immigrants in neighboring Maryland in mid-March.
The case drew national headlines after a 14-year-old girl said she had been raped by the young men, ages 17 and 18, in a restroom of Rockville High School.
Before Nabra’s slaying, it was the worst PR nightmare for the apologists for illegal immigration since a San Francisco woman, Kate Steinle, was fatally shot by a five-times-deported illegal alien in July 2015.
After prosecutors announced May 5 that they were dropping rape and other sex offense charges “due to the lack of corroboration and substantial inconsistencies” in the girl’s initial statements to police, the open-borders lobby and their water carriers in the liberal, mainstream media sought to redirect attention from the suspects’ immigration status, throwing the girl under the bus in the process.
Why did conservative media outlets that had made such a cause célèbre of the case go mute after the charges were dropped, apologists for illegal immigrants demanded to know in an effort to change the subject.
For the record, the dropping of the charges was duly reported, just not as sensationally. The reason why is no more complicated than the “man-bites-dog” formulation of what constitutes news—but the apologists knew that.
The editorial board of The Washington Post weighed in under the headlines “Immigrant-bashing over a crime that didn’t happen” (print edition) and “The Rockville rape charges have been dropped. Will anti-immigration fervor abate?” (online version).
Again, note the consistent, deliberate omission of “illegal.”
“Shouting the allegation, and when it doesn’t add up, whispering the update,” CNN senior media correspondent Brian Stelter tut-tutted and tsk-tsked on the cable outlet’s “Reliable Sources,” taking rival Fox News Channel to task.
So what if it did? This is nothing more than a liberal media “trompe l’oeil,” an illusion designed to take the public’s eye off the ball.
For one thing, the sexual assault charges may have been dropped, but the two young men—Henry Sanchez Milian, 18, and Jose Montano, 17—are hardly off the hook. They might still face child pornography charges over receiving and forwarding nude “selfies” the girl apparently sent to one of them over her cellphone.
But even if those charges are also dropped, the two surely face deportation as illegal immigrants. So does Sanchez Milian’s father, Adolfo Sanchez-Reyes, who is also in the country illegally.
The Post’s editorial to the contrary notwithstanding, “immigration-bashing” didn’t occur in the sensational coverage the case deservedly garnered. Illegal immigrant-bashing, perhaps; immigrant-bashing, no.
Most Americans aren’t against immigration when those coming into the country follow the proper legal procedures, but by wide margins they oppose illegal immigration.
Omitting the adjective doesn’t change that fact. What part of “illegal” do the advocates of uncontrolled immigration not understand?
Nor are those who demand respect for U.S. national sovereignty “nativists” and “bigots,” as The Post’s editorial maligned those who cited the Rockville incident in underscoring the need for greater border security. And no, their “quick-draw condemnation” did not stem from what The Post called the two men’s “otherness”—whatever that means.
All of the cover smoke laid down by the open-borders crowd and its media mouthpieces cannot obscure the real bottom line here.
Regardless of what really happened in that Rockville High School restroom that day, whether the sex was entirely consensual or not, this sordid episode would not—and could not—have happened had Sanchez Milian and Montano not been in the country illegally.
Even more regrettably, had Martinez Torres been deported to El Salvador, police allege, Nabra Hassanen would be alive today.