Category: Philosophy of Business

Do The Banks Have Proof Of Ownership?

On By southwerkIn business ethics, ethics, Government Failure, Philosophy of Business, White Collar Crime

I’m not the only one who has suspicions that the banks might not have the necessary proof of ownership. Read the following from the Wall Street Journal –

Under a far gloomier scenario, the problems created by using robo-signers may be irrelevant if, instead of being lost, mortgage documents weren’t ever properly transferred during each step of the securitization process, says Adam Levitin, a professor of law at Georgetown University. If that happens, “the whole system comes to a halt,” he says. Investors could argue in court that they never owned the mortgages backing their money-losing securities.

Banks and their attorneys say such fears are overblown. Procedures for transferring loans into mortgage-backed securities “are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage market,” said Tom Deutsch, the executive director of the American Securitization Forum, in a statement Friday.

I love that second paragraph. Here look at the key phrase, “Procedures for transferring loans into mortgage backed securities are sound and based on well established law…” Wow, you’d think the founding fathers were doing it! Well, this vast body of jurisprudence has existed since that grand old year of history, 2002? I doubt if any of it has been tested in court. His statement is more hopeful than true. You see the transfer of property is one of the most important procedures in the law. It’s surrounded over and over again by legal protections many of them requiring specific procedures. Now, you might ask me if during the Go Go years of financial mismanagement, the mid years of the first decade of this century, that the banks and their mortgage creating boiler rooms did all that proper procedure? Not a chance. Not even a little chance.

Some of the mortgage companies were giving out mortgages with NO capital of their own and Wall Street still bought them. If you’re giving people mortgages with not a single cent of your money on the line, how much do you care about good paperwork?

James Pilant

Tax Breaks to Encourage Individual Poverty-Fighters? (via Get Aktiv)

On By southwerkIn business ethics, Capitalism, Philosophy of Business2 Comments

Get Aktiv is out there with a different kind of idea. He wants domestic tax deductions in return for investing in the developing countries. This would re-distribute money from the first world to the third on a voluntary basis. It’s an interesting idea. Give it a read.

Tax Breaks to Encourage Individual Poverty-Fighters? Extreme poverty is, well, an extreme issue – and it requires extreme commitment and creativity to address it. I'm always reading other people's works, visiting developing countries, and basically trying to soak up and synthesise as much knowledge and experience as I can. In continuing my reading of Creative Capitalism, edited by Michael Kinsley, I've just encountered a fresh idea I hadn't considered before and I believe it warrants serious consid … Read More

via Get Aktiv

Will Congress Save The Banks By Dismissing The Ownership Rights Of Homeowners? – Senior Editor, John Carney Says They Will

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, Philosophy of Business, Uncategorized

I’m cynical. You can’t have much to do with the field of business ethics and be anything else. I was outraged for days after Congress passed the act that would have legalized much of the mortgage industry’s wrong doing. When Obama vetoed it, I had a rare moment of gratitude. But I’m still cynical always waiting for the knife in the back, a sell out, a deal behind close doors … There is always someone waiting to make a deal no matter what crawling excreted maggot they have to deal with. Always someone.

But this guy is more cynical than I am. And he might be right. John Carney in an article entitled, “Sorry Folks, The Put-Back Apocalypse Ain’t Gonna Happen,” says that Congress will not let Bank of American get in real trouble.

Here’s an excerpt from this article –

But Bank of America’s recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I’m pretty sure that is not going to happen.

Why not?

Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there’s an easy fix available that won’t cost taxpayers a dime.

Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

He may be right. I’ll bet the other way. Fifty state Attorney Generals and countless other officials are on the prowl right now and bad stuff is coming out every minute. The Public is in a bad mood. Saving the banks under these circumstances could delegitimize our system of government in a way we haven’t seen before. It is true that people have virtually no faith in Congress and only somewhat more in the President. But that is different from active hate. It’s different because the government will essentially be putting a sign on its front lawn, “You have a dispute with a bank and you’re right – WRONG, bank wins. You’re less than nothing. Go home and suck it up.”

I don’t think that’s going to go over well. Further, I don’t think it will go away in time for 2012.

We’re about to see how much power public opinion has. John Carney says it does not have the power to stop Congress from saving the bank by abrogating their legal rights. Carney hopes he’s wrong about this. From his work, it is easy to see that he is no defender of the banking industry and, is probably, one of those people I speak of as a ally in the “good fight.” But I hope he is wrong too.

The possibilities of the results of such an action by the federal government offer only two possibilities, acceptance by the public or another kind of response. I am not happy with my speculations on what that response might be.

James Pilant

Banks Could Lose $80 Billion

On By southwerkIn business ethics, ethics, Government Failure, Philosophy of Business, White Collar Crime

Analyst Dick Bove says the mortgage foreclosure crisis could cost the banks as much as $80 billion dollars. He is quoted in an article by Jeff Cox from CNBC.

Banks could face losses of over $80 billion from the foreclosure mess—not so much from the moratorium on home seizures but from the flood of homeowner and investor lawsuits likely to follow, analyst Dick Bove said Friday.

The lawsuits are likely to focus on “fraud at every level of the process”—from packaging mortgages into bonds to selling them to investors, the Rochdale Securities analyst said in a note to clients.

The legal fallout could cost the industry more than $80 billion, about 10 times the amount that Bove sees banks losing from the foreclosure halt itself.

I really like that phrase, “fraud at every level of the process.” It’s a beaut. It also sums up what has been going on for the last two years, and industry run amok.

James Pilant

The Human Touch

On By southwerkIn business ethics, Capitalism, Government Failure, Philosophy of Business, White Collar Crime

The word, home, has powerful meanings for Americans. Who can forget, Dorothy in the Wizard of Oz, saying over and over, “There’s no place like home.” How many of us “want to go home?” How many of us when overseas, look back at the U.S. and think about going “home.”

Home is a human concept life love, caring, kindness,.. those kinds of things.

It’s hard to quantify.

For most of American history, homes were very simple, often one room, generally little more than shacks. But as time went by and with urbanization, homes became larger and more complex … and more expensive.

For most Americans, purchasing a home all at once became impossible. A market for mortgages developed and people bought their homes over time.

Banks were small and deeply embedded into the fabric of the community. Social fabric is a fancy word for multiple relationships. A local bank with small resources depended heavily on the success of its loans, even the smallest, for its continued success. So, the bank exploited its connections, it knew a great deal about a creditor, may have known him personally, probably his family as well. They knew what he did for a living, not in the sense of the job title on the application, they knew what he did.

The bank was also well known. It’s officials were church goers, customers, friends, etc. The locals knew the bank by its continuously developing reputation.

Thus, there was social pressure both ways. For the homeowner, it was a disgrace to fall behind on payments. For the bank, it was dangerous to its moral authority to foreclose without consideration of many factors. Generally, speaking there was a great deal of pressure, rightfully so, to work out the problem rather than seize the home.

That’s gone. Beginning roughly in 1999, banks began selling their loans as assignments to investment banks to be bundled into “securities” to be sold to the foolish and the more foolish.

There is no knowledge of the community or the borrower beyond the thinnest veneer of computer data. The bank might as well be orbiting Pluto for all the effect of public opinion.

Human and business are both relegated to key strokes.

This limited knowledge is probably entirely adequate for “World for Warcraft.”

Taking a process developed from a community developed series of relationships has been disastrous. Banks were given the benefit of the doubt because as community citizens they could be trusted. This made the process of mortgage foreclosure easier for the banks, streamlining a difficult problem in the community to be as painless as possible.

Maintaining that level of trust in bank integrity has been disastrous in an age where banking has become more a world of bonus obsessed, financial buccaneers than respectable community bankers.

The human recipients of the mortgages have suffered terribly. They have very often expected that their loans could be modified as since they were making what in the past were reasonable offers only to be tossed from “the gates of the temple.” What was reasonable no longer mattered. What was the best decision no longer mattered.

The only thing that mattered was the process. Humans need not apply.

We can no longer pretend that banks are reasonable, that they will act intelligently, or that they have the interest of the community or their nation in mind, when they make decisions.

James Pilant

Foreclosure Speed Made Loan Modifications Impossible

On By southwerkIn Philosophy of Business1 Comment

Why would a bank modify a loan rather than foreclosing? Loan modification is usually more profitable.

Let me explain. Take a typical home mortgage that has run into trouble. The purchaser owns a home that he bought at a price of 350,000 dollars in early 2006. He has fallen behind on the mortgage. He can pay each month but not as much as the mortgage is worth. However and it is a big however, the real estate boom has collapsed. The home valued now is worth only 270,000 dollars. His mortgage payments, his salary and the other facts point to him being able to pay a mortgage of that size. So, the bank would accept a loss on the mortgage reducing it to 270,000 in value. The bank now has a workable agreement with the homeowner. He can now pay on the loan regularly.

There is a 80,000 dollar loss for the bank. That would be a big deal if the bank had any way of getting it. If they foreclose on the house, they will be attempting to resell quickly a home now valued at 270k, and at the additional expense of the time and money of the foreclosure process. That 80,000 is not recoverable. Why not renegotiate a lower mortgage with the current owner who is already making payments?

This key questions here are, “How much is this property worth?” and “Can I get as much by foreclosure as I can by modifying the mortgage?”

Everyone watching the process of foreclosures over the last few years has been struck by one fact – there have been very few loan modifications. Almost every homeowner was foreclosed on. It did not seem to matter whether a modification was profitable or not.

As a society, we had never seen that before. People had been foreclosed on before in every kind of economic crisis. But in all these situations if the banks profited more by modifying the mortgage, the mortgage got modified. Now, it doesn’t matter if the bank profits from a loan modification or not. It’s easier and quicker to foreclose.

Also, it was easier to measure success by foreclosure rather than by re-negotiations. You could count the scalps on the wall. Negotiations that resulted in greater profits over longer periods of time didn’t count well.

The system is tilted against homeowners. The speed and number of foreclosures made it impossible for lenders to renegotiate.

From the Washington Post –

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved – loan servicers, law firms, document processing companies and others – made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.

“This was a systemic problem. It’s not like a few renegade employees made mistakes,” said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. “It was industry-wide and pervasive, and everyone knew about it.”

The need for speed neutralized any attempt at judgment. No human intelligence could be allowed to interfere with number and speed, a total victory of the abstract over the concrete and real. Loan modifications are better for long term profits but they are not fast.

Understand this. In any long term profit making analysis, you have to apply human judgment, and from that you can maximise profit. The foreclosure system we have now does only one thing well – foreclose quickly. Everything else is does badly.

James Pilant

Could A Foreclosure Freeze Damage The Housing Market?

On By southwerkIn business ethics, Capitalism, ethics, Philosophy of Business, Teaching, White Collar Crime

Well, of course, it will. Massive wrong doing has consequences for the innocent. That is the nature of illegal acts. That is the nature of speculation and greed. People without fault are injured.

So, we have competing values here. Should the health of the economy and the suffering of the innocent be a bar on prosecuting thousands upon thousands of mortgages done outside the rules of the law.

I’m going to come down on the side of the rule of law.

I teach business ethics. You can’t have business ethics just through teaching and exhortation. They have to be backed up by penalties. If the suffering of the innocent is a bar to prosecution, it sends a clear signal that cutting corners, skirting the law, deliberately disobeying the law, have little or no consequences as long as the perpetrators can point at economic hostages and say, “Oh, but we can’t harm them.”

You cannot avoid prosecuting the guilty in the business community over and over again without them getting the message that there are no consequences. They will realize (or have realized) that the law does not apply to them.

Once they know this, what will happen to the rest of us?

Here’s the CBS News Story – Beware it has a commercial.

James Pilant

Narcissistic Mindset in Financial Institutions (via Sonia Jaspal’s RiskBoard)

On By southwerkIn business ethics, Capitalism, ethics, Philosophy of Business1 Comment

I exchanged e-mails with Alain Sherter and asked him what he thought about the amazing sense of entitlement among Wall Street executives. Although, he replied very politely and tactfully, there was a certain element of “What planet have you been on?” And he was right, I should have picked up on it a long time ago. Once I did, I encountered more and more examples of this phenomenon. It was astonishing. These individuals who had every advantage from birth could swear on a Bible that every last atom of their success had been earned through their hard labor. They knew that they were the important producers of value in this society and flew in unimaginable higher intellectual circles than the poor ingrates beneath them. They know that everyone who is not in their class is lazy and undeserving. They know that any, down to the tiniest amount, of taxation is a blow to their productive capability, totally unfair, and an unearned charity to the great mass of lazy, unmotivated citizenry.

Sonia Jaspal blogs on this mindset. It’s a fine article. She writes a blog from an extremely well educated background, not an assumed or pretentious academic style, but an educated approach as hard as stone. You know that her evidence is strong and her facts correct.

I recommend the article to your attention.

James Pilant

Financial institutions are again grabbing headlines for the wrong reasons. This time it is because of the foreclosure of mortgages without adequate due diligence.  As Senator Robert Menendez wrote to the heads of JPMorgan Chase and Co, Bank of America Corp and Ally Financial Inc- “It is simply inexcusable that proper oversight proceedings were not in place, especially when dealing with matters as monumental as the seizure of a family’s home.”  Wh … Read More

via Sonia Jaspal's RiskBoard

President Obama Is Lagging Behind Public Opinion

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, Philosophy of Business, White Collar Crime

I’ve been saying this for several days. The public, the states, the courts, are all moving toward a consensus that a foreclosure freeze is necessary. The President does not think so and he has sent his minions to be sure we understand his position.

Andrew Leonard writing in Salon, an article entitled “Obama’s foreclosure nightmare,” describes the situation in terms very similar to mine.

Once again, the President lines up with the financial industry and the banks against the interest of middle class Americans.

Drawing on Leonard’s article and adding my own spin, the situation is like this. Now, generally speaking, I do not waste my time on the Wall Street Journal Editorial Page, but have heard a rumor that their take on this situation is that all this stuff about not having the proper documents is just a matter of procedure and is really not something to get that excited about.

This is the United States. In this country you cannot transfer any land whatsoever without a written contract, that’s LAW 101, the statute of frauds. If you can’t produce your paperwork, you don’t get the property. Why? Because in Western Civilization, land has been considered the primary measure of wealth and status for hundreds of years. Therefore, the law was made to protect those interests.

How come the banks don’t have good records of who owns the property? Well, that has to do with the enormous speculation(casino capitalism) of the latter part of this decade. The great wall street investment houses were buying and packaging mortgages into packages of securities. But if they followed careful procedures they wouldn’t have had as much as they wanted. So, they “cut some corners,” “skipped a few steps,” “overlooked a rule here or there,” to get those mortgages as quickly as possible. What was the result? Incomplete paperwork, missing documents, and general confusion were the result of that speculative era. So, the banks had a problem with foreclosures. If they followed proper procedures they were hit with a double whammy. First, there was no way they could process the number of mortgages they wanted foreclosed without hiring a lot more staff and spending a lot more time doing the work right. Second, if they examined the documents carefully they would run across all the problems bequeathed them by the previous financial speculators. So, they solved both problems. They processed the mortgages without looking at them. It was an elegant solution. It was thrifty, cost effective almost beyond belief, and not legal.

I am outraged. I’m not the only one. The general public is only at the edge of this issue. It’s only been running hot in the media for almost two weeks. This issue has built up power in a politically brief period of time. But it’s not hard to tell the direction that public opinion is going. On one side we have banks refusing to obey the rules, while on the other we have story after story of homeowners tossed from their homes without legal justification. How do you think it’s going to go? If this were a Western, who’s wearing the black hats and bushwhacking their enemies?

The President should declare a moratorium on mortgage foreclosures. It does not have to be a blanket ban. He could ban the ones where it is known that there have been problems with a provision to extend it to other firms if similar wrongdoing is found. That would be adequate. In my opinion, a full blanket ban is the smarter move politically but that’s really not important.

I know the President is worried that this will stall the recovery. Of course, if you follow my blog, you know that I believe this is a lull before more serious problems appear and not a recovery at all.

To the President I would say, “This nation can handle a steeper economic downturn better than the continued wrong doing by some of the most important and most influential people in the financial industry. At some point, justice has to take priority over economics.”

I might add.

“Mr. President, I can feel the anger out there. How much more can people take? The basic facts appear to be out. The financial industry breaks the rules and knows that nothing will be done. The money will continue to flow. Their stock will go up. The bonuses will get bigger. The great mass of American citizens do not believe that if they did these things that they would be handled so gently and rewarded so thoroughly.”

“So, what’s it gonna’ be. Are you going to confirm to the great majority of Americans that there are two kinds of law, one for them and another for the foreclosure industry?”

“At what point, will you decide to enforce the law, seek out the guilty and bring them to justice?”

James Pilant

Robot Trading – Money Maker Or Formula For Disaster?

On By southwerkIn business ethics, Economic measurement, ethics, Philosophy of Business

I went to You Tube and ran the search, “robot trading.” I was looking for a journalistic take on the dangers of this kind of trading. I didn’t get it. There are innumerable sales pitches for just such trading mechanisms. I watched one and they are “exuberant.” They appear absolutely convinced that these things will make you rich. Apparently this is similar in the trading world to the “second coming.”

I found an actual news story by getting a link from a blog. I just couldn’t get one off You Tube. I have virtually never had difficulty finding an appropriate video for an economic comment. The sales pitches simply dominate the results of the search. I haven’t seen that before.

The CBS news program, Sixty Minutes, has a report on the subject. It is a daunting report on the implications of robot trading. It can be very dangerous to whole system. If one robot goes in one direction. It is possible that they will all go in that direction. You should hope that they are all buying because selling could be painful. I recommend you watch the program.

I warn you, there are commercials. However, the report is elegantly done and will maintain your interest.

Let me ask a question –

Is it ethical to use super computers to get a fraction of a second (sometimes, hundreds of a second or less) advantage over your competition?

I want you to understand that only a very few people can afford a “super” computer. Generally speaking, that is probably not you. If you, as a human, attempt to compete with one of these machines (and you’re not, you’re competing with dozens or hundreds of them), are you on a level playing field.

As a society, we might find the costs of this trading to be higher than the benefits, if one is willing to think of the interests of the nation as a whole, something currently not in fashion.

But it should be.

James Pilant