Who Did it in 2008?
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely. And they’re deliberately leaving in place the people that caused the problem because they don’t want the facts.
This is the second in a series on the people in government who ensure that any legislation to reduce economic inequality is ineffective. The first can be found here.
• In September 2008, Bush was president, but Congress, controlled by the Democrats, passed a bill allocating $700 billion for mortgage foreclosure relief.
• Little of it got there. First 350 billion went to the banks.
• Of the remainder only $56 billion was allocated to help with mortgage relief
• Less than 1 billion of the $56 billion trickled down to homeowners.
This is the story ignored by the mainstream media of how the predatory capitalists were able to bring this about and buy the millions of homes foreclosed at fire sale prices, converting owners into renters.
The Big Switch
In a quick response to help troubled homeowners, Congress passed the Legislative Proposal for Treasury Authority to Purchase Mortgage Related Assets. The bill allocated $700 billion to purchase troubled mortgages. But when the Treasury Department got the allocation in its budget, Newsweek reported that Treasury Secretary Hank, Paulson (recall he is an ex-Goldman Sachs CEO) thumbed his nose at Congress and said he was going to give 350 billion in cash to the banks secured by bank preference shares. Furthermore, there would be no strings attached to the money. Bankers could take their bonuses out of it. There would be no claw back of banker’s bonuses for the time they screwed up so badly that they put the financial system in jeopardy.
House speaker Nancy Pelosi (D — CA) was livid. A MarketWatch report quoted her:
“It was very clearly spelled out in the initial legislation that funds would be used for mortgage foreclosure forbearance.”
Pelosi’s complaint went nowhere. When Obama assumed the presidency, he created the Home Loan Modification Program (HAMP) funded only to the extent of $56 of the original 700 billion..
Obama gave responsibility for implementing HAMP to his new Treasury Secretary Timothy Geithner. We have Neil Barofsky to thank for disclosing what Geithner did. Barofsky was special counsel appointed to oversee the spending of the bailout money. At a meeting with Geithner and Elizabeth Warren, Barofsky relates that Geithner proudly announced that he had successfully slowed the flow of money to the homeowners, letting only enough dribble down to “foam the runway” for the banks.
‘Foaming the runway’ is a bankruptcy term by which the trustee in bankruptcy pays only the necessary expenses to preserve property for secured creditors, who are usually the banks. The trustee would pay electricity and heating charges on buildings, for example, to give the banks time to organize seizure and sale of the properties.
Geithner added that with the bailout money at his disposal, he could slow the foreclosure process down to allow the banks to organize the processing of up to 10 million foreclosures.
And so he did.
How Did He Do It?
Banks today don’t keep mortgages on their books. They pile them into packages of about $1 billion worth and sell that collection to investors like pension funds. Of course, pension funds can’t run a mortgage business, so the package includes a corporation that does all the administration by collecting the installment payments, deciding when to foreclose and carrying out the foreclosures. These are called Mortgage Servicers. They are either controlled by the banks themselves as subsidiary corporations or created by bankers who get into this business. No surprise, who understands it better.
These Servicers had massive financial conflicts of interest.
Writing in the Intercept on December 28, 2018, David Dayan explained how using the Servicers necessarily undermined HAMP. Servicers make some of their profit based on a percentage of the principal. If it’s reduced by HAMP, their own commission is reduced. They also are paid more on a foreclosure out of the sale proceeds than seeing a mortgage to its completion. HAMP did a little but not enough to counter these perverse financial incentives.
In a July article in the New York Times, Gretchen Morgenson detailed the tactics that the Servicers used to delay and deny valid applications. In one case the Servicer that Wells Fargo’s incorporated, a court found that it improperly denied a borrower’s loan modification request four times over two years adding $40,000 to the amount he owed.
Bank Staff Bonuses for Denials
David Dayen reported in Salon of evidence that many banks’ main objective was using HAMP to the banks’ advantage. Several former Bank of America employees — rare people with a conscience in banking — swore affidavits in support of a class action against that bank. They deposed as to how they were paid bonuses for denials. Bank of America used HAMP as a tool to squeeze as much money as possible out of struggling borrowers before eventually foreclosing on them, these former employees said.
Bank of America was able to prevent this evidence from being heard at a trial, attracting major publicity and having a court decide on the truth of the former employees’ allegations. It moved to dismiss the class action on the basis that technically it did not conform to the requirements to be a class action. A judge agreed and killed the class-action.
Bank of America denied all of what the former employees were saying, pointing to how many mortgages it had in fact modified. As there was no trial, you will have to decide whether you believe the denials by management of the Bank of America or the claims by its former employees.
The Foreclosure King: The Making of a Secretary of the Treasury
But there was far greater perversity at work.
It doesn’t take a financial genius to see that if all of these mortgages continued to failll, they would have to be sold at fire sale prices — and there are valuable houses to be seized. A person with the means could scoop them up, evict the homeowners and become an immense corporate landlord.
Of course, that’s exactly what happened. One of those several foresightful entrepreneurs was Steve Mnuchin. He founded a company called One West to buy colossal private mortgage lender Indy Mac at the expected fire sale value. Ignoring that the banks created this sludge pile of mortgages by undermining HAMP, the Wall Street Journal praised Mnuchin for stepping up to take on this mess and saving further harm to the economy when no one else would.
With an efficiency that would’ve impressed Henry Ford, Mnuchin set up an assembly-line procedure to evict homeowners earning the title, the Foreclosure King.
Mnuchin was not the only shrewd entrepreneur. In March 2021, Business Insider reported that before the 2008 crisis, corporate landlords owned 20% of rental properties, post crisis, that leapt to 50%.
Mnuchin and his elite colleagues were able to buy these mortgages at a serious discount. That discount could have been given as a reduction of principal to the homeowners that would have allowed many to afford the monthly payments and keep their homes. But it was given to the already super rich investors.
Why Did Geithner Do It?
In August, 2012, a Reuters opinion article entitled, Tim Geithner’s principal hypocrisy, repeated how Geithner revealed his rationale: Giving homeowners aid would create a “moral hazard” — it would teach them that they didn’t have to pay their debts.
He was not alone the article said. At the same time, the head of the Federal Housing Finance Agency, Ed DeMarco, made the same argument.
What Was in It For Geithner
Geithner went to his reward on Wall Street. The German private equity firm Warburg Pincus appointed him managing director in 2014. His take home pay went from six figures to seven overnight.
The message for all government regulators: Wall Street generously rewards all its faithful servants when they leave their former government positions.
How The Hell Did a Guy with a Poor Record as a Regulator Get Into This Position?
As lawyer economist Bill Black, who oversaw the prosecution and conviction of 1000 bankers in the S&L crisis, explained to Bill Moyers, Geithner was a failed regulator. He was the head of the New York Fed , which regulates Wall Street, at the time the banks were making all the risky and fraudulent loans. He didn’t have a clue that it was happening. So, who would want such a failure to head the US Treasury Department?
Citibank wanted him there.
John Podesta was a co-chairman of the Obama-Biden Transition Project. Michael Froman, an executive of Citibank, sent an email on October 6, 2008 setting out a list of who he wanted in Obama’s cabinet. He practically selected the cabinet: he got 30 of 33 of his wishes including Timothy Geithner.
Citibank also got its reward. Under Geithner’s administration, Citibank would ultimately become the recipient of the largest bailout from the federal government during the financial crisis.
Acknowledgement: Image by Geralt on pixabay.
