State AGs Warn OCC in 2004 About Subprimes

triciaeOctober 12, 2008

This is a very interesting article appearing on MSNBC's website this evening (Sunday)...worth reading, IMO.

/tricia (who is reading the news because the Pats are being pounded by the Chargers..aargh)

"More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism.

Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of "predatory" lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. "People out there are struggling with oppressive loans," Cooper recalls saying.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West," Cooper says.

This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis. Federal officials brushed aside their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders. The beneficiaries ranged from now-defunct subprime factories, such as First Franklin Financial, to a savings and loan owned by Lehman Brothers, the collapsed investment bank.

Some states, including North Carolina and Georgia, passed laws aimed at deterring rash loans only to have federal authorities undercut them. In Iowa and other states, mortgage mills arranged to be acquired by nationally regulated banks and in the process fended off more-assertive state supervision. In Ohio the story took a different twist: State lawmakers acting at the behest of lenders squelched an attempt by the Cleveland City Council to slow the subprime frenzy.

A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute.

One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.

The Bush Administration and many banks clung to what is known as "preemption." It is a legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail even if it means little or no regulation.

ÂFundamental disagreementÂ

"There is no question that preemption was a significant contributor to the subprime meltdown," says Kathleen E. Keest, a former assistant attorney general in Iowa who now works for the Center for Responsible Lending, a nonprofit in Durham, N.C. "It pushed aside state laws and state law enforcement that would have sent the message that there were still standards in place, and it was a big part of the message to the industry that it could regulate itself without rules."

"That's bull----," says Hawke, the former comptroller. He returned to private law practice in late 2004 with the prominent Washington firm Arnold & Porter. Once again representing lenders as clients, he confirms the substance and tone of the April 2003 meeting with the state AGs, saying they "simply had a fundamental disagreement." But he denies that federal preemption played a role in the subprime debacle.

Hawke blames much of the mess on mortgage brokers and originators who, he says, were the responsibility of states. "I can understand why state AGs would try to offload some responsibility here," he adds. "It's important to remember when people are trying to assign blame here that the courts uniformly upheld our position."

His arguments have some merit. The federal judiciary has bolstered preemption in the name of uniform national rules, not just for banks but also for manufacturers of drugs and consumer products. And state oversight alone is no panacea, as the chaotic state-regulated insurance market illustrates. Inadequate supervision of mortgage companies in some states contributed to the subprime explosion. But the hands-off signals sent from Washington only invited complacency. When some state officials fired warning flares, the Administration doused them.

Consider a clash in 2004 between the OCC and regulators in Michigan. In January of that year attorneys working for Hawke filed a brief in federal court in Grand Rapids on behalf of Wachovia, the national bank with $800 billion in assets based in Charlotte, N.C. Michigan wanted to continue to examine a Wachovia-controlled mortgage unit in the state, which the bank had converted to a wholly owned subsidiary. The parent bank sued, claiming Michigan could no longer look at the mortgage lender's books. Citing the threat of unspecified "hostile state interests," the OCC argued in its brief that "states are not at liberty to obstruct, impair, or condition the exercise of national bank powers, including those powers exercised through an operating subsidiary."

Michigan countered that Wachovia Mortgage was not itself a national bank. The Constitution preserves state authority to protect its residents when federal statutes don't explicitly bar such regulation, Michigan contended. Ken Ross, the state's top financial regulator, says his department fought Wachovia all the way to the U.S. Supreme Court in part because it feared a growing subprime mortgage problem: "We knew there needed to be [state] regulation in place or there could be gaps." The OCC, he adds, "did not have robust regulatory provisions over these operating subsidiaries."

The nation's highest court sided with the Bush Administration, ruling in April 2007 that the OCC had exclusive authority over Wachovia Mortgage. Justice Ruth Bader Ginsburg, writing for a five-member majority, pointed to the potential burdens on mortgage lending if there were "duplicative state examination, supervision, and regulation." In a dissenting opinion, Justice John Paul Stevens said that it is "especially troubling that the court so blithely preempts Michigan laws designed to protect consumers."

By the time of the Supreme Court decision last year, Wachovia and its mortgage operations in Michigan and elsewhere were feeling the ill effects of unwise lending. As real estate prices continued to fall this year, pushing many borrowers into default, Wachovia teetered on the edge of failure. In late September the federal government stepped in to arrange a fire sale. On Friday, federal antitrust regulators cleared Wells Fargo's $11.7 billion acquisition of Wachovia, a day after Citigroup Inc. walked away from its own efforts to buy the Charlotte, N.C.-based bank.

Confrontations such as Michigan's battle with Wachovia became far more common after George W. Bush took over the White House in 2001 and instituted a broad deregulatory agenda. The OCC, an arm of the Treasury Dept., has adhered closely to it. The agency oversees more than 1,700 federally chartered banks, controlling two-thirds of all U.S. commercial bank assets. Historically, its examiners have monitored bank capital levels and lending to corporations more attentively than they have the treatment of individual borrowers. "Consumer protection has always been an orphan [among federal bank regulators]," says Adam J. Levitin, a commercial law scholar at Georgetown University Law Center.

The OCC brought 495 enforcement actions against national banks from 2000 through 2006. Thirteen of those actions were consumer-related. Only one involved subprime mortgage lending. OCC spokesman Robert Garsson says the figures could be misinterpreted because the agency addresses many problems informally during bank examinations. He declined to provide any examples.

Beyond the influence of free-market theory, turf concerns have reinforced the Administration's determination to exercise responsibility for as many lenders as possible  and prevent state incursions, notes Arthur E. Wilmarth Jr., a professor at George Washington University Law School. Almost all of the funding for the OCC and OTS comes from fees paid by nationally chartered institutions."

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The title of my post should be: State AGs Warn OCC in 2003 About Subprimes. Sorry.


    Bookmark   October 12, 2008 at 10:03PM
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Where was the Fourth Estate when all this was happening? Mmaybe they reported but 'we' just didn't want to know.

I am ashamed to say that I have been *frightened* to protest the Constitutional wrongs of the Bush White House and their appointees.

    Bookmark   October 13, 2008 at 10:36AM
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Why am I not surprised by this article. It's not just the White House, but Congress as well that deserves to take some serious heat for this stupidity.

And forget the major news media. The political partisanship of Washington is just as bad in the media.

And now they have over $700 billion of our money going to God knows where to bail out God knows who.

This is not a pretty site. People are angry and it could be a very interesting November election.

Enjoy the journey.
eal51 in western CT

    Bookmark   October 13, 2008 at 11:16AM
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No surpise at all. I have always maintained that Wall St. could not have conducted themsleves as they did without complicity from the supposed regulatory authorities.

    Bookmark   October 13, 2008 at 1:27PM
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Here's a story from that time period that is also worth reading. History continues to repeat itself!

The Limits of Madness
by Martin D. Weiss, Ph.D. 12-01-03

For the first time in many years, I was speechless. I didnât know what to say.

It was Thursday evening, on Thanksgiving. My wife Elisabeth, my son Anthony, plus other family members stood around the dinner table, gazing at me patiently, waiting for me to open my mouth. But I was mute.

My problem was simple: Elisabeth had asked each of us to say a few words about what weâre thankful for. But by the time my turn came around, all the more important things in life �" health, happiness, and love �" had already been covered by the others.

Little did they realize, during those moments of silence, that a torrent of thoughts was flashing through my mind, most of which I will share with you now â¦


Some people on Wall Street seem to think Iâm a die-hard pessimist �" that I have nothing to be thankful for.

They call me a âperma-bearâ for ânever recommending stocksâ or âChicken Littleâ for âpredicting one disaster after another.â

Well, I have news for them: Iâve been recommending stocks throughout the bear market and throughout the recent recovery. The main difference is my stocks went up; most of theirs went down and are STILL way down from their peaks.

As to the disasters �" the bust, tech wreck, bankruptcy crisis, accounting scandals, and broker scandals �" guess what! They happened. But thatâs all water under the bridge. Right now â¦


The so-called âoptimistsâ say Fed Chairman Greenspan will continue holding down interest rates, and Congress will continue spending us into prosperity.

They say no one has to worry about �" or deal with �" the ballooning federal budget deficit, the record trade deficit, or the huge debt burden of millions of consumers.

They think the sinking dollar is âno big deal,â and we should âjust let it fall.â

They donât seem to give a darn that your interest income has been reduced to a pittance. Nor do they seem to care very much about the havoc inflation can wreck on your retirement.

They tell you ânot to worryâ about the threat to your Medicare or the danger to your Social Security �" let alone to the other retirement benefits that were promised to you.

Worst of all, they seem to think thereâs no significant connection between the shaky pillars of our economy and the equally shaky pillars of our society �" falling educational standards, deteriorating public health, broken families.

And they say âMartin Weiss is a pessimistâ?! Give me a break!


A few seconds had gone by, and I could smell the Thanksgiving dinner spread out before me on the table, still steaming from the oven. Anthony looked at me expecting a profound �" or humorous �" statement. But I kept my words to myself and pursued my thoughts in silence â¦

I am an optimist because I love my country. Yes, I see trouble ahead, but I disagree vehemently with the idea that our society is going down the tubes.

All of the trends we are witnessing today �" fiscal irresponsibility, massive debt build-ups, and social malaise �" are part of a single, growth-at-any-cost megatrend. But theyâre coming to a head. And when they do, we will confront them. We will resolve them. And we will move on to better and safer times.

Admittedly, we are half mad, always pushing ourselves to extremes, to the limits of our technological and economic capacity.

This week, for example, the U.S. Commerce Department announced that the economy spurted forward at a breakneck speed of 8.2% per year �" a phenomenon largely driven by government tax cuts and spending.

Sounds great, right? But at the very same time, Moodyâs, one of the worldâs leading credit rating services, announced that, if our government continues cutting taxes and spending without restraint, the United States of America could lose its triple-a credit rating! Thatâs not good. Not even close.


Fact is we are NOT on the right path. But there is a LIMIT to how far we can go down this path, and, sooner or later, we WILL reach that limit. Thatâs when we will rise to the occasion, make the sacrifices, and move on.

Take the budget deficit and inflation, for example.

In other lands and in previous times, deficits and inflation could run amuck, almost without limitation. Kings or queens �" presidents or prime ministers �" had almost unlimited power to temporarily inflate their economies. They could print paper money to their heartâs content. They could destroy their currency, drive millions of citizens into abject poverty, invite wars of ruin ⦠even threaten the world.

Youâve probably heard the stories about the German hyperinflation during the Weimar Republic, before Adolph Hitler rose to power. Thatâs when it took three TRILLION German realmarks to buy just one U.S. dollar. Thatâs when their paper money was so utterly devalued people needed wheelbarrows to cart their cash around.

Once, a man parked his wheelbarrow of money in front of a store while he shopped. When he returned, he was shocked to discover that it had been stolen. More shocking, however, was the fact that all the money bundles were left behind, stacked neatly on the ground. Even the thief knew that the wheelbarrow had more value than the worthless bank notes.

Plus, last week, I told you about the currency destruction that I personally experienced in Brazil as a young boy �" and how, over the years, their money was devalued by a factor of one quadrillion (a thousand trillion) to one.

These are vital lessons from history we must learn, and we seem doomed to learn them the hard way: Our government today is running up its debt at a rapid pace, just like the previous governments of Brazil and pre-Nazi Germany. Our leaders seem willing to sacrifice our strong dollar in order to keep the people happy and stay alive politically, much like the leaders did back then.

But, as I also told you last week, the United States is not Brazil. Nor is it Weimar Germany. Indeed, there is one, all-important, structural difference that separates those episodes of hyperinflation from the United States of today:


Unlike Brazil and Weimar Germany, we have a huge, powerful, fully developed debt market. They didnât.

A debt market is where investors buy and sell government bonds, corporate bonds, mortgages, bank loans, and other debts �" much like investors buy and sell stocks.

As in any market, when sellers are more numerous or aggressive, prices go down. When buyers have the upper hand, prices go up.

You probably know this already. But bear with me. You may not be aware of its ultimate implications.

The primary hub of our huge debt market is downtown Manhattan �" in the large, cavernous trading rooms of major broker-dealers and banks like Merrill Lynch, Salomon Smith Barney, J.P. Morgan Chase, Citigroup, Credit Suisse First Boston, and a few dozen others.

Plus, thereâs a secondary hub �" in Chicago. Between Jackson Boulevard and Van Buren Street, the Chicago Board of Trade runs a 32,000-square-foot trading floor where, every day, they buy and sell futures contracts representing billions of dollars in U.S. government debt �" Treasury bonds and Treasury notes.

About nine blocks to the north-northwest, the Chicago Mercantile Exchange operates two state-of-the-art trading floors for futures on Eurodollar deposits, Treasury bills, and other debt instruments �" also with billions of dollars changing hands each day.

My point is this: The U.S. debt market is not just a small entity that exists on the periphery of our society. Itâs embodied in massive, tangible structures of concrete, marble, steel, and glass ⦠housing tens of thousands of staff ⦠and handling far more money than all the worldâs stock exchanges put together.

Every day, millions of investors �" individuals, companies, cities, states, pension funds, universities, churches, and foreign countries �" buy and sell the debts in these huge markets.

And every day, the market value of these debts goes up or down, depending on the supply of new debts being offered ⦠depending on the willingness of investors to buy them ⦠or ⦠contingent on the zeal of investors to get rid of their old ones.

This goes far beyond the realm of money and finance. The debt market �" particularly the market for U.S. government bonds �" also serves as a de-facto POLITICAL FORUM, a place where U.S. government officials must ultimately answer for their sins.

How? Itâs similar to what you saw recently in the stock market.

Remember how wayward CEOs and CFOs faced their day of reckoning? Remember what happened to THEM when major accounting scandals were revealed? Investors dumped their shares like hot potatoes. Almost immediately, the companies either changed their ways or were smashed by the market forces. Heads rolled. Some CEOs were even marched off in handcuffs.

A similar fate awaits wayward officials of the U.S. government �" but for them, it will be in the bond market.

Sounds bad, doesnât it? But actually itâs a very good thing. Because it means there IS a LIMIT to their madness.

You see, in other eras and other places, if you were unfortunate enough to lend your money to a reckless, irresponsible government, your choices were minimal: Youâd usually have to wait years until the bond matured. Then, if they paid you back in worthless money, tough luck! Unless you wanted to join a revolution, there was really nothing you could do about it.

Today, thanks to the giant debt market, itâs another story entirely.

FIRST, YOU DONâT HAVE TO WAIT. If youâre angry as all heck about the ballooning federal deficit, the threat of inflation, the sinking dollar, Medicare, Social Security, and anything else for that matter ⦠or ⦠if youâre worried the clowns in Washington are going to stiff you with cheaper money ⦠you donât have to just sit around and gripe about it. You can sell your bonds and get all or most of your money back at almost any time, almost any day.

SECOND, POLITICS IS NO ISSUE. You donât have to hire a lobbyist. You donât have to run down to Washington to bang an angry fist on the desk of some faceless bureaucrat. You donât even have to wait for the next election. All you have to do is pick up the phone, call your broker, and utter one four-letter word: âSell!â

THIRD, THE CENTER OF POWER HAS SHIFTED. Millions of people own bonds today. They own them directly in their IRAs, brokerage accounts, or trust accounts. Or they own them indirectly through a mutual fund, an insurance policy, a pension fund, or even a bank account. Any one of these investors or institutions has the power to utter that same four-letter word. SELL!

This is so, so important. If you get nothing else out of my weekly âMartin on Monday,â you must get this. Because it means that â¦


This ultimate power is more powerful than laws, even more powerful than the now-defunct gold standard which, in the old days, used to restrain how much paper money governments could print. And if youâre thinking the American people have never exercised that power, think again!


The president was up for re-election, just as he is now. The economy was shaky, much as it is today. Except â¦. instead of a Republican in the White House, we had a Democrat �" Jimmy Carter.

Whether Democrat or Republican, however, you would have expected him to do everything in his power to pump up the economy, make the people happy and get himself re-elected, right? Youâd think heâd do very much the same kinds of things President Bush is doing now, right?

Indeed, the LAST thing youâd expect from Washington �" then or now �" is a hard right jab to the underbelly of the economy.

Yet thatâs exactly what Carter gave us. He called in Fed Chairman Paul Volcker. Volcker slapped Draconian controls on virtually all forms of debt and credit created in America. They imposed stiff controls on credit cards, making it difficult for the average cash-poor American to spend a dime. They slapped controls on bank lending and business borrowing, making it hard for most companies to invest, hire, or buy raw materials. They even slapped controls on money market mutual funds, making it impossible for them to sell any more shares in existing funds.

Within just a few short weeks, the economy was plunging. Gross national product nosedived. And Carterâs chances for re-election were forever doomed. Ronald Reagan became our next president. And the rest is history.

âBut why,â you ask? What invisible, mysterious force could have possibly driven a Democratic president ⦠up for re-election just months away ⦠desperate to pursue his vision of the world for another four years ⦠to suddenly and deliberately sabotage an already-shaky economy? Was he possessed by aliens from outer space? Did he go bananas? Not quite.

Hereâs how it happened: In 1979, the government was pumping up the economy with easy money and rampant government spending. Inflation was heating up. So, millions of people who had invested in U.S. government bonds were spooked ⦠and angry.

They called their brokers. They uttered that powerful, four-letter word. And the market price of U.S. government bonds �" especially long-term bonds �" crashed.

It all came to a head in February of 1980. The Soviets had invaded Afghanistan. There were rampant fears of another expensive arms race. Inflation was soaring into double digits. And the bond market crashed again.

In desperation, a delegation of major New York bond dealers �" including Merrill Lynch and Salomon Brothers �" made a pilgrimage to the White House. A few hours later, a dozen powerful Wall Street men in three-piece suits sat before the president in the Oval Office.

I donât know exactly what they said, but hereâs the gist: âWe have a message for you,â they declared to Carter. âThe message is from the millions of government bond investors in America and all over the world. You know �" the people who have been loaning you the money you desperately need to run this country.â

âOh, really?â Carter asked solemnly. âWhat are they saying?â

âTheyâre saying theyâre fed up with the governmentâs reckless spending and with the inflation thatâs destroying the value of their bonds. Theyâre saying theyâre not patsies and they wonât sit back passively when theyâre paid back with worthless dollars. Their message to you is simple: âEither you end the inflation now �" RIGHT now �" or weâre not lending you any more of our money.ââ

Carter was stunned. âIs it really that bad?â

âNo. Itâs worse. Now, these investors arenât just refusing to buy your new bonds. Theyâre also SELLING back the OLD bonds they bought previously ⦠dumping âem on the market in torrents. That drives their prices down and the interest rates you have to pay through the roof! Thatâs why your 30-year Treasury bond has plunged to a meager 50 cents on the dollar! Thatâs why youâre going to have to a whopping 13% interest for long-term money, over 16% for short-term money!â

Carter still didnât get it. So the delegation from Wall Street explained further. âLook! Your Treasury bonds are crashing in value. No oneâs buying âem and everyoneâs selling âem. Weâre having trouble selling even a small lot of $5 million. Itâs getting so bad, bond dealers like us are getting ready to quit.â

âWhy should I care?â

âBecause you canât survive without us. We are the ONLY ones in the world who can sell your bonds to the public ⦠to raise the cash you need. And now WE ARE SHUTTING DOWN. Weâve lost so much money holding inventories of your Treasury bonds weâre running out of capital. We canât afford to be your dealers any more. Weâre going broke!â

âBut what do you want me to do?â

âYouâve got to stop the value of the dollar from falling, end the inflation �" even if that sabotages the recovery.â

âBut what about the election next November?â Carter asked under his breath.

âForget about next November. Unless you can convince bond investors that youâre going to end this inflation, you wonât be able to borrow the cash you need to meet government payroll next WEEK! The entire government will have to shut down �" right now.â


Finally, Carter got the message. And thatâs when he gave Fed Chairman Volcker the green light to do whatever he needed to squash the inflation �" even if that meant squashing the economy too.

Can something like this happen again? You bet it can!

Fast forward two decades and three years �" to December 2003.

Once again, government spending is running amuck â¦

Once again, Wall Street is beginning to worry about the consequences (remember what Moodyâs has just announced!) â¦

Once again, bond investors are getting ready to start selling â¦


Ultimately, the president and the Fed Chairman will face the same stark choices that Carter and Volcker did in 1980: Stop the fiscal madness ⦠or ⦠shut down the government!

I have no doubt they will choose the former. I am also very hopeful that it will be just the first of many steps to confront and resolve the Medicare crisis, Social Security crisis, and others that loom in the not-too-distant future.

But alas, our leaders will probably not start to make the right choices until AFTER theyâre up against a major, life-threatening crisis. Thatâs the nature of the beast. They push it to the limit, and then they change their ways only under extreme duress â¦

* when inflation is already surging toward double digits â¦

* when the dollar has been beaten down to painfully low levels â¦

* when foreign investors are dumping their U.S. investments by the boatload â¦

* when sky-high interest rates are strangling the U.S. economy â¦

* And when the bond market has been beaten down so dramatically, the market mechanism itself is on the brink of shutting down.

Itâs a frightening, maddening scenario. But be thankful that there is a limit to the madness. It WILL end �" and for the better.

In the meantime, be sure youâre protected �"

And hold onto your hat. Itâs going to be one heck of a ride. "

A link that might be useful:

    Bookmark   October 13, 2008 at 1:33PM
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Where does the $700 Billion -- $1 Trillion -- $2 Trillion (WhatEVER!) come from? Devalued dollars? (We print more money?) Loans from other countries? Increased taxes?

Wouldn't selling out only increase the individual's problems? (Dr. Weiss' instructions.)

    Bookmark   October 13, 2008 at 2:52PM
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It comes from the national debt.

    Bookmark   October 13, 2008 at 11:08PM
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And..IMO..they are printing it...if not all of it, a good deal of it.

    Bookmark   October 14, 2008 at 3:52PM
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Doesn't it amount to the same thing: National Debt/Printing It/Borrowing It?

    Bookmark   October 14, 2008 at 4:59PM
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