[THS] Mike Whitney: The Case against Greenspan and Bernanke

[Peter Webster]

http://www.informationclearinghouse.info/article24887.htm

The Case against Greenspan and Bernanke

By Mike Whitney

March 01, 2010 "Information Clearing House" - -Is there enough evidence to indict
Ben Bernanke and Alan Greenspan on charges that they aided and abetted the
banks and other financial institutions in the sale of fraudulent loans to investors?

That depends on whether there is sufficient proof to show whether the two men
KNEW that the nation's lenders were engaged in large-scale predatory lending and
chose to do nothing. As we'll see, both Greenspan and Bernanke were warned
repeatedly about the mortgage/derivatives scam by credible professionals and
industry regulators, but failed to act.

Here's a definition of "aided and abetted" from the 'Lectric Law Library:

"The guilt of a person in a criminal case may be proved without evidence that he
personally did every act involved in the commission of the crime charged. ...if the
acts or conduct of an agent, employee or other associate of the person are willfully
directed or authorized by the person, or if the person aids and abets another person
by willfully joining together with that person in the commission of a crime, then the
law holds the person responsible for the conduct of that other person just as though
the person had engaged in such conduct himself." Excerpt from The 'Lectric Law
Library http://www.lectlaw.com/def/a033.htm

Bernanke denies culpability in the meltdown--but at the same time-- eagerly points
out that the Federal Reserve is the chief regulator responsible for overseeing the
"large complex financial firms that pose a threat to the stability of the financial
system." So, which is it? Does he accept responsibility or not? Here is a statement
Bernanke made earlier in the week during an appearance before the Senate Banking
Committee which may help to clarify the point.

“I think that stripping the Federal Reserve of supervisory authorities in the light of the
recent crisis would be a grave mistake... we’ve learned from the crisis large complex
financial firms that pose a threat to the stability of the financial system need strong
consolidated supervision.... You need an institution that has a breadth of skills. It’s
hard for me to understand why in the face of a crisis that was so complex and
covered so many markets and institutions, you would want to take out of the
regulatory system the one institution that has the full breadth and range of those
skills to address those issues.”

Bernanke admits that the Fed is the 'primary regulator' that is responsible for "strong
consolidated supervision" over "large complex financial firms that pose a threat to the
stability." If we accept his definition, than we must also accept that the Fed should
be held accountable when it abuses its authority and puts the system at risk. The
record will show that, at the very least, the Fed is guilty of criminal negligence in its
role of facilitating the sale of fraudulent loans to homeowners and investors. The Fed
consistently refused to use its authority to reign in the banks even when their
activities pushed the system towards catastrophe.

I have put together a short list of the regulators and agencies that warned Bernanke
and Greenspan prior to the Lehman meltdown. (There's bound to be many I have
missed) But, first, here is a brief summary of what caused the crisis by economist and
author James K. Galbraith in a recent interview on New deal 2.0:

"The principal cause of the crisis was the dismantling of the system of regulation and
supervision in the financial sector which had for much of the post-war period kept
the most dangerous elements of that sector in check. In the absence of an
appropriate system of effective supervision and regulation, what happens is that the
actors in the system, who are intent upon taking the greatest degree of risk —
including actors who are intent upon using fraudulent methods to increase their
returns — come to dominate parts of the system. As they do that, the general
methods of assessing performance in the market, specifically stock-market valuations,
become counter-productive. That is to say, they invariably reward the worst actors,
while they force more traditional actors, who are still respecting the old norms of
conduct, into a competitively disadvantaged position. Thus the bad actors, the
fraudulent actors, and the speculative extremists quickly take over.

That is what happened specifically in the origination of mortgages in the United
States in the middle part of the last decade. You had a transition from a traditional
method of issuing mortgages to people who could be reasonably expected to service
them, to a method of originating mortgages that were sold off immediately, that were
rated in a way that permitted them to be bundled and sold to fiduciaries, and where
the issuer had no interest in whether the borrowers could pay or not. In fact, in some
ways the lenders actively preferred people who did not intend to pay, because they
could then inflate the value of the loan and earn a larger fee upfront for doing it.
And in this way, not only was there a large segment of the market that was explicitly
corrupt, but the equity value of homes all across the country was compromised.
When these practices collapsed, so too did the home values not only of people who
had bad mortgages, but also those for many people who had good mortgages, good
incomes and perfectly good credit.

The result of that was a general slump in activity. The wealth and financial security of
much of the American middle class disappeared. So far about a quarter of the
measured wealth of the American middle class has disappeared - about $15 trillion of
$60 trillion. That’s bound to have a fantastically traumatic effect on people’s
consumption behavior and on their ability to get new good credit. Even if they wish
to continue to extend the past pattern of borrowing in order to finance activity, they
can’t do it. So, this is a very big problem. It starts with a failure to supervise and
regulate the financial system, and flows on to the reaction of the broader population,
which is to protect their remaining assets, to become extremely adverse to taking
ordinary business and consumer risks." http://www.newdeal20.org/?p=7981

So, Galbraith believes that the main problem was "the dismantling of the system of
regulation and supervision" over the last quarter century. This view is now widely
shared by industry experts and economists. ( That means that deregulation was a
more significant factor in the crisis than the Fed's low interest rates.) The problem
with this theory is that it tends to obscure the fact that the Fed STILL had the
authority to step in and prevent people from getting ripped-off. Thus, "deregulation"
was not the problem as much as the "failure to regulate". (which Galbraith also
notes) This is an important distinction. The financial crisis was not caused by a system
malfunction; it was caused by men perpetrating a crime.

Bernanke and Greenspan had a birds-eye view of everything that was going on in
the market, that is, mortgage origination, off-balance sheet operations and
securitization. They knew that homes were being sold to applicants who had no way
of servicing the debt. They knew that hybrid mortgages were developed with the
clear intention of increasing the quantity of mortgages without regard for the
creditworthiness of the borrower. They knew that the lenders didn't care whether the
loans blew up or not since they made their profits on upfront fees. They knew
everything, and refused to act.

As it happens, many other people knew what was going on, too, but either kept quiet
or were ignored by the media. Even now, when we have a much better
understanding of what really took place, the media still frames the crisis-narrative in
terms of a natural disaster--like an earthquake--that no one could have anticipated or
prevented. This is nonsense. The housing bubble was 100% man-made. The Fed
could have taken action at any time to stop the bubble from getting bigger but,
instead, became the biggest cheerleader for dodgy loans and garbage mortgage-
backed securities.

The media has succeeded in concealing the facts and deflecting the blame from the
real perpetrators. As former bank regulator Bill Black said in a recent interview with
Paul Solman on PBS News Hour, what is most shocking about this particular crisis is
the appalling lack of accountability.

ZERO INDICTMENTS, ZERO CONVICTIONS

William Black: "In the savings and loan crisis... we had over 1,000 convictions of
senior insiders.... At this stage among the subprime lending specialists, we have zero
convictions. We have zero indictments."..."In September 2004, the FBI began
publicly warning that there was an "epidemic" of mortgage fraud, and it predicted
that it would produce an economic crisis, if it were not dealt with. The FBI has also
said that 80 percent of the mortgage fraud losses occur when lender personnel are
involved. So, Fitch looks at a small sample of these loans, finally, in November
2007....And what did they find? They said...that there was the appearance of fraud
in nearly every file we examined. And they said that normal underwriting would have
detected all of those frauds.

So, this is coming from the lenders overwhelmingly. They created incentive systems
for the loan brokers and the loan officers that were based overwhelmingly on volume,
and nothing on quality. We know that they gutted their underwriting standards. We
know that you got in trouble if you were moral and tried to be a good officer and
protect the organization from loss." (PBS News Hour)

Repeat: The FBI KNEW there was an "epidemic" of mortgage fraud as early as 2004.
Ergo: The Fed knew. Greenspan knew. Bernanke knew. And both chose not to
perform their regulatory duties to stop the swindle from continuing.

And the FBI wasn't the only one who knew either. In testimony just last month before
the Financial Crisis Inquiry Commission (Jan 14, 2010) FDIC chairman Sheila Bair
confirmed that she not only warned the Fed of what was going on, but cited
particular regulations under which the Fed could stop the "unfair, abusive and
deceptive practices" by the banks. Here is a excerpt from her damning testimony:

"PROBLEMS IN THE SUBPRIME MORTGAGE MARKET WERE IDENTIFIED WELL
BEFORE MANY OF THE ABUSIVE MORTGAGE LOANS WERE MADE. A joint report
issued in 2000 by HUD and the Department of the Treasury entitled Curbing
Predatory Home Mortgage Lending noted that a very limited number of borrowers
benefit from HOEPA's protections because of the high thresholds that a loan must
exceed in order for the protections to apply. THE REPORT ALSO FOUND THAT
CERTAIN TYPES OF SUBPRIME LOANS APPEAR TO BE HARMFUL OR ABUSIVE IN
PRACTICALLY ALL CASES. To address these issues, THE REPORT MADE A NUMBER
OF RECOMMENDATIONS INCLUDING THAT THE FEDERAL RESERVE USE ITS HOEPA
AUTHORITY TO PROHIBIT CERTAIN UNFAIR DECEPTIVE AND ABUSIVE PRACTICES
BY LENDERS AND THIRD PARTIES. During hearings held in 2000, consumer groups
urged the Federal Reserve to use its HOEPA rulemaking authority to address
concerns about predatory lending. Both the House and Senate held hearings on
predatory abuses in the subprime market in May 2000 and July 2001, respectively...."

Naturally, Bair's testimony was ignored by the media.

So, the FBI knew, the FDIC knew, Fitch ratings knew, the Fed and Treasury knew.
Was their anyone else who warned Greenspan and Bernanke about what was going
on?

Yes, ex-Fed chairman Alan Greenspan's good friend Ed Gramlich cautioned him on
the surge in predatory lending that was apparent as early as 2000. Here's an excerpt
from the Wall Street Journal:

“Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to
Mr. Greenspan in or around 2000, when predatory lending was a growing concern,
that the Fed use its discretionary authority to send examiners into the offices of
consumer-finance lenders that were units of Fed-regulated bank holding companies.

"I would have liked the Fed to be a leader" in cracking down on predatory lending,
Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past
week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory
philosophy is well known, Mr. Gramlich broached it to him personally rather than take
it to the full board.

"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich. (Wall Street
Journal)

So, Greenspan was even warned by a close friend and fellow Fed governor and
STILL refused to act? And Congress still hasn't launched an investigation?

And, then there is this from Elizabeth MacDonald at Fox News in an article titled
"Housing Red flags Ignored":

"One of the nation’s biggest mortgage industry players repeatedly warned the
Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators
during the housing bubble that the U.S. faced an imminent housing crash....But
bank regulators not only ignored the group's warnings, top Fed officials also went on
the airwaves to say the economy was "building on a sturdy foundation" and a
housing crash was "unlikely."

The letters, obtained by Fox Business, were sent in 2005 and 2006 before the
housing bubble burst.

As it pleaded with bank regulators to stop subprime lending abuses, the Mortgage
Insurance Companies of America [MICA] pointed out the red flags in analysis from
the bank regulators' own staffers as well as the likes of Bear Stearns and Lehman
Brothers, three years before these two Wall Street giants collapsed under the weight
of bad mortgage bets.

Mortgage insurers are “deeply concerned about increased mortgage market fragility,
which, combined with growing bank portfolios in high-risk products, pose serious
potential problems that could occur with dramatic suddenness,” warned Suzanne
Hutchinson, top executive at the Mortgage Insurance Companies of America, in 2005.
Failure to adjust bank underwriting, reserves and capital to account for this growing
risk “means that downturns from credit and/or interest rate events–let alone
shocks–will be far more severe than” if precautions are taken, Hutchinson noted,
adding that what is “disturbing to us is the fact that recent trends could lead to
sudden increases in foreclosures.” ( Elizabeth MacDonald, "Housing Red flags
Ignored", FOX Business News)

Even the mortgage insurance companies knew what was going on. Everyone knew.
The biggest mortgage-looting operation in history, and no one even bothered to
cover their tracks. What incredible arrogance.

Finally, there's this tidbit from an op-ed published in the Washington Post in 2008 by
former New York governor Eliot Spitzer who accused the Bush Administration of
being a ‘partner in crime’ in the subprime mortgage fiasco. Spitzer avers that the
OCC launched “an unprecedented assault on state legislatures, as well as on state
attorneys general and anyone else on the side of consumers.” Here's a clip from
Spitzer's article:

"In 2003, during the height of the predatory lending crisis, the Office of the
Comptroller of the Currency (OCC) invoked a clause from the 1863 National Bank Act
to issue formal opinions preempting all state predatory lending laws, thereby
rendering them inoperative. The OCC also promulgated new rules that prevented
states from enforcing any of their own consumer protection laws against national
banks. The federal government’s actions were so egregious and so unprecedented
that all 50 state attorneys general, and all 50 state banking superintendents, actively
fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush
administration in its goal of protecting the banks. In fact, when my office opened an
investigation of possible discrimination in mortgage lending by a number of banks,
the OCC filed a federal lawsuit to stop the investigation."(Washington Post)

Is there any doubt that the Fed knew exactly what the Bush administration was up
to? Is there any doubt that the OCC's actions resulted in tens of thousands--if not
millions--of homeowners losing their homes to foreclosure?

There's no doubt at all. People were getting fleeced in broad daylight. As the primary
regulator responsible for overseeing the financial system an preventing "unfair,
abusive and deceptive practices", the Fed could have intervened at any time and
stopped the predatory lending and exploitation. Instead, they sat on their hands and
let the larceny continue uninterrupted, which proves that Greenspan and Bernanke
are either criminally negligent in failing to execute their regulatory duties or complicit
in aiding and abetting the banks and other financial institutions in the sale of
fraudulent loans to investors and homeowners. Which is it? There needs to be an
investigation to find out.