‘Too Little Too Late’: Bankruptcy Booms Among Older Americans

From today’s New York Times:

For a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.

The signs of potential trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years. Now, new research sheds light on the scope of the problem: The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers.

Driving the surge, the study suggests, is a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks.

The transfer has come in the form of, among other things, longer waits for full Social Security benefits, the replacement of employer-provided pensions with 401(k) savings plans and more out-of-pocket spending on health care. Declining incomes, whether in retirement or leading up to it, compound the challenge.

Cheryl Mcleod of Las Vegas filed for bankruptcy in January after struggling to keep up with her mortgage payments and other expenses. “I am 70, and I am working for less money than I ever did in my life,” she said. “This life stuff happens.”

As the study, from the Consumer Bankruptcy Project, explains, older people whose finances are precarious have few places to turn. “When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” the study says, “and older Americans turn to what little is left of the social safety net — bankruptcy court.”

Read the complete article here.

How Wells Fargo and Federal Reserve Struck Deal to Hold Board Accountable

From today’s New York Times:

On a Thursday evening in mid-January, a group of top Wells Fargo executives sat down for dinner in an upscale surf-and-turf restaurant near the White House. At nearby tables, power brokers ate seafood on ice and sipped cocktails out of copper mugs.

The Wells Fargo executives — including the chief executive, Timothy J. Sloan, and the finance chief, John R. Shrewsberry — enjoyed their crab legs, but they were in Washington on unpleasant business. The Federal Reserve planned to impose tough sanctions on the San Francisco-based bank for years of misconduct and the shoddy governance that allowed it.

The executives’ mission, according to three people directly involved in the negotiations, was to avoid further shaking investor confidence in the bank and its management team.

Officials at the central bank had a different goal, according to people familiar with their thinking. They wanted to send a message to the Wells board that it would be held responsible for the company’s behavior.

After three weeks of frenzied negotiations, deal was announced on Friday night that represented a milestone in the evolving relationship between regulators and banks. Wells Fargo, one of the country’s largest banks, was banned from getting bigger until it can convince regulators that it has cleaned up its act.

Read the complete article here.

Five regulatory agencies approve Volcker Rule, curbing risky banking

Five federal regulatory agencies approved the so-called “Volcker Rule” today, restricting commercial banks from trading stocks and derivatives for their own gain and limits their ability to invest in hedge funds. The five agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency:  all five agencies approved the Volcker rule, named after former Fed Chair Paul Volcker who championed restrictions on proprietary trading by banks, which puts into effect the centerpiece of the Dodd-Frank Act’s attempt to reign in financial corruption on Wall Street.

Congress passed and regulators approved the legislation despite the lobbying efforts of Wall Street banks, and the rule itself includes new wording aimed at curbing the risky practices responsible for the $6 billion trading loss, known as the so-called “London Whale,” at JPMorgan Chase last year. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed into law by President Obama in July 2010, but the complex nature of financial regulation and the lobbying efforts of Wall Street slowed down the process of enacting the law.

The outgoing Fed Chair Ben S. Bernanke stated that “getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”

Consumer advocacy groups praised the spirit of the rule as much needed reform of the greed and corruption that have become synonymous with Wall Street’s practices in the last decade, which led to the catastrophic consequences of the Great Recession including trillions of dollars and millions of jobs lost.

Dennis Kelleher, the head of Better Markets, said:  “The rule recognizes that compliance must be robust, that C.E.O.’s are responsible for ensuring a compliance program that works, that compensation must be limited, and that banned proprietary trading cannot legally be disguised, as market making, risk mitigating hedging or otherwise…Those requirements will not end all gambling activities on Wall Street, but should limit them and reduce the risk to Main Street.”

For a good summary of the Volcker Rule watch this video.

 

Moody’s to downgrade large banks

FROM THE NYT DEAL BOOK BLOG:  If true, this is an important step by the market to correct for false advertising. One question is whether it will make a difference cleaning up corporate malfeasance and fraud.

Believing that the government is now more likely to let large banks fail in a crisis, Moody’s Investors Service threatened on Thursday to downgrade the credit ratings of several big financial firms.

If it follows through, Moody’s could reduce the ratings of Wall Street giants like Goldman SachsMorgan Stanley and JPMorgan Chase as much as two grades.

Such a move might weigh most heavily on Morgan Stanley because a two-notch downgrade would leave the company just above a junk credit rating. But the effects on the bank may also be muted. Confidence in large banks, judging by their stock prices and other financial indicators, appears to have risen since Moody’s cut their ratings last year.

Banks, more than other types of corporations, borrow huge sums of money to finance their activities. As a result, a lower credit rating can make it harder for them to find buyers for their debt, pushing up their borrowing costs. A lower rating can also deter trading partners from entering certain types of lucrative transactions with a bank.

Financial companies’ reliance on borrowed money is what made them so unstable in the 2008 financial crisis. The government has introduced measures, many of which are contained in the 2010 Dodd-Frank financial overhaul law, that are intended to put banks on a firmer financial footing.

Dodd-Frank also tries to set up a process for an orderly winding down of failing banks. Lawmakers wanted to avoid a repetition of the 2008 situation, where taxpayers were effectively forced to bail out banks to prevent their failure from hurting the wider economy.

The orderly wind-downs envisioned in Dodd-Frank could lead to big losses for creditors to banks. In recent months, regulators have started to flesh out how they might liquidate a collapsing bank. This progress prompted Moody’s to consider the downgrades now to reflect the lower possibility of government support.

“The conviction on this subject is clear, even growing,” David Fanger, a bank analyst at Moody’s, said. “This could lead to a one- or two-notch downgrade for some of these firms.”

Goldman, whose rating is A3, and JPMorgan Chase, whose rating is one notch higher at A2, declined to comment.

Many critics of the Dodd-Frank liquidation provisions doubt that the government would have the stomach to inflict losses on bank creditors in times of systemic stress. In April, Paul Volcker, a former chairman of the Federal Reserve, expressed skepticism about Dodd-Frank’s wind-down approach. “No one in the market believes it,” he said.

Still, Moody’s thinks the efforts have credibility, in part because regulators have started to describe the exact steps they might take in a liquidation. Under the plans, the government would seize the parent company of a bank and turn its debt into equity capital to make it stronger financially. In the process, regulators would most likely not seize the affected bank’s subsidiaries. That is why Moody’s on Thursday threatened to downgrade parent company ratings but not always those of bank subsidiaries.

Moody’s decision to review the ratings will reinforce the beliefs of those who say Dodd-Frank’s measures are sufficient to deal with the “too big to fail” issue. But the actions of lawmakers who do not feel the act is adequate may have also contributed to Moody’s actions. In recent months, lawmakers have introduced two bills that aim to do more to rein in large banks.

“They simply indicate the conviction within the United States government to solve the ‘too big to fail’ problem,” Mr. Fanger said. “They clearly put pressure on regulators to make the current law work.”

Mr. Fanger added that the Dodd-Frank liquidation process might lead to lower losses for creditors than a potentially less orderly approach. To reflect that possibility, any downgrades may be less severe, he said.

Citigroup and Bank of America, large banks that have relatively low ratings, may not have to worry about Moody’s latest action. The agency said their ratings had been placed on review “direction uncertain.” Moody’s perceives improved financial health at the two banks’ subsidiaries. That could offset the downward pressure on ratings from the Dodd-Frank liquidation process, Moody’s said.

Despite huge losses banks continue subprime mortgage securities fraud

There is an interesting article in today’s New York Times business blog about the reverberation of subprime mortgage securities that are still being peddled by banks and financial institutions. Below is an excerpt of the article, which tracks GSAMP Trust 2007 NC1, a subprime mortgage securities bond that has enriched various Goldman Sachs executives despite the fact that 3/4 of mortgages that bond covers are in default.

A subprime deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.

He is not the only one feeling the pain of a subprime transaction six years on.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.

Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

This is the story of one of those bonds, GSAMP Trust 2007 NC1.

Read the entire story here.

Economists worry financial lessons from last recession are ignored

There is an interesting article in today’s New York Times by Adam Davidson of NPR’s “Planet Money” that explores both sides of the economic spectrum about whether more or less regulation is an essential lesson we have failed to learn from the Great Recession. Below is an excerpt:

Five years ago this month, before Lehman Brothers imploded and the global economy lurched to a halt, Fannie Mae issued a report that encapsulated the financial system’s biggest problem. The mortgage-finance company, which was wobbling on account of rising defaults, tried to reassure investors that it had $47 billion in capital, which was considerably more than the $30 million required by law. At the time, the report’s authors seemed to fear that some investors might think Fannie was too cautious. In any event, a month later, that protection seemed like a joke. Fannie may have conformed to the rules, but the rules didn’t conform to reality. The lender and its brother company, Freddie Mac, were declared insolvent and handed over to the U.S. government.

Remarkably, five years after the crisis, the health of the financial industry is just as hard to determine. A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I’ve spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates.

Economists have also been locked in their own long-running arguments about how to make the banking industry safer. These disagreements, which are generally split between the left and the right, can have the certainty and anger of religious wars: the right accuses the left of hobbling banks and undermining prosperity; the left counters that the relatively lax regulation advocated by the right will lead to a corrupt oligarchy. But there actually is consensus on one of the most important issues. Paul Schultz, director of the Center for the Study of Financial Regulation at the University of Notre Dame, led a project that brought together scholars of financial regulation from the left, the right and the center to figure out what caused the financial crisis and how to prevent a sequel. They couldn’t agree on anything, he told me. But a great majority favored higher equity requirements, which is bankerspeak for the notion that banks shouldn’t be allowed to borrow so much.

Read the entire article here.

Citibank to eliminate 11,000 workers

In a shake up last month Citi’s executive board ousted its former CEO Vikram Pandit, paving the way for today’s announcement that the country’s second largest bank would cut 11,000 jobs in exchange for a $1 billion charge. The bank has been slow to bounce back from the recession despite cutting its workforce by 33 percent since 2007.

JP Morgan’s Dimon lies to Congress

Today marks the second day of testimony before Congress from JP Morgan’s CEO and chief financial officer Jamie Dimon regarding a multi-billion trading loss the bank recently disclosed to investors.

Despite an increasingly heated debate about financial regulation and banking reform Dimon and other CEOs from the nation’s largest banks have insisted all along that oversight is not necessary, that financial institutions are capable of policing themselves. His testimony before the Senate Banking Committee today included the same naïve assessment—or is it “bad faith”?—despite the fact that risky investments with massive social and economic consequences has become standard operating procedure in the unchecked derivatives markets.

Dimon claimed the loss was an “isolated incident” and spent much of his time defending a pipe-dream vision of the economy called the “free market.” When Sen. Jeff Merkeley (D-OR) asserted that the government had already bailed out Chase Bank in 2008 from similar risky ventures, Dimon (falsely) asserted, “You’re factually wrong.”

Maybe Dimon’s wealth has insulated him from reality and the truth because he is dead wrong, and someone should put his impromptu lying in its context.

  • Fact:  JP Morgan/Chase was on the verge of bankruptcy in 2008 after it colluded with other banks, insurers, and credit agencies in packaging toxic assets and selling them on the derivatives market, all the while betting against its own toxic assets as a form of insurance fraud.
  • Fact:  The U.S. taxpayer bailout of its risky and unethical behavior amounted to $25 billion.
  • Fact:  The recent disclosure of a trading loss on he same derivatives market is likely to reach $5 billion, proving beyond a reasonable doubt that JP Morgan continues its pattern of risky and unethical behavior.
  • Fact:  The U.S. needs serious financial regulation and banking reform. Without such efforts financial institutions like JP Morgan and their lying-for-a-living CEOs will continue to erode the economy, our trust in one another, and the social fabric as well.