subprime

Foreclosuregate Fallout: How Bad Can It Get For Wall Street?

Zach Carter — Wed, 20 Oct 2010 15:37:06 -0400

Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multi-billion-dollar disaster, not just a set of minor paperwork headaches.

So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill.

JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of "process-oriented problems that can be fixed." That puts them in the rosy optimist camp for this crisis, and they're projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years.

But take a look at the analysts' methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.

JPMorgan's analysts look at about $6 trillion in mortgages issued between 2005 and 2007—this is the height of the bubble, but it excludes plenty of lousy loans issued in 2003, 2004 and 2008. They then estimate defaults of $2 trillion and losses of $1.1 trillion on those defaults.

So far, these estimates are reasonable. According to Valparaiso University Law School Professor Alan White, banks lose about 58 percent of the value of a subprime loan at foreclosure. JPMorgan is estimating 55 percent. The notion that one-third of mortgages issued at the height of the bubble will default may seem extreme, but the analysis includes both first-lien mortgages and second-lien mortgages (home equity loans). For houses with multiple mortgages, there's going to be a double-hit when the first lien goes bad. Right now, the official statistics from Mortgage Bankers Association indicate that 14 percent of first mortgages are delinquent or in foreclosure. The longer unemployment stays near 10 percent, the higher that figure will go.

Things don't get out of control until JPMorgan's analysts start deploying their assumptions. First, they assume that Fannie and Freddie will attempt to sack banks with losses from 25 percent of the defaults they see. Of those 25 percent, they assume Fannie and Freddie will successfully force banks to eat losses on 40 percent, leading to total losses of 10 percent. Why 25 percent? Why 40 percent? The analysts don't say. JPMorgan expects private-sector investors to be able to saddle banks with just 5 percent of foreclosure losses, citing a host of technical legal hurdles that make it hard for investors to have their cases heard in court.

So JPMorgan's loss projections are nothing more than a guess—and a low-ball guess at that. JPMorgan is assuming that only five to 10 percent of looming foreclosure losses will actually hit big banks. Change that assumption—20 percent, 60 percent, 80 percent—and things get far worse for Wall Street than JPMorgan's "worst-case" scenario predicts.

Let's consider the exposures of a single bank to put things in context, and let's pick Bank of America, since analysts seem to agree that BofA has the most to worry about right now. They were a big issuer of mortgages themselves, but they also purchased the notoriously predatory Countrywide Financial and also picked up securitization behemoth Merrill Lynch in 2008, giving them far more problems (hilariously, BofA actually paid cash to acquire these balance-sheet-busters).

The most dire estimates for losses on Fannie and Freddie loans at BofA have come from Christopher Whalen at Institutional Risk Analytics and Branch Hill Capital. Whalen has estimated $50 billion in Fannie and Freddie losses for the megabank, while Branch Hill has estimated $70 billion.

The trick is, BofA has $2.1 trillion in total exposure to Fannie and Freddie, according to Whalen. That means even Branch Hill's massive loss projection only amounts to a loss rate of about 3.5 percent.

As of July 2010, Fannie Mae had a serious delinquency rate of 4.82 percent—these are loans where families have missed at least three payments, but haven't been evicted. For Freddie Mac, the number is 3.83 percent. Not all of those losses can be pushed back on the banks, but those numbers will go up as the unemployment rate stays high. Tip the scales just a few percentage points and it's easy to envision catastrophic losses for banks.

But there's reason to believe that Bank of America is in even worse shape with regard to Fannie and Freddie than any of its peers. Countrywide was the single largest provider of loans to Fannie Mae during the housing bubble. Literally 28 percent of the loans Fannie Mae bought up in 2007 came from Countrywide. Fannie even featured a full-page, smiling photograph of Countrywide CEO Angelo Mozilo in their 2003 Annual Report (.pdf, see page 16).

It's much easier for banks to lose money on bad loans they sold to the GSEs than it is for them to lose money on securities they sold to purely private-sector investors. The fact that Bank of America's most notorious wing was the top provider to Fannie Mae during the peak years of the housing bubble does not bode well for the bank's balance sheet.

But this is just exposure to Fannie and Freddie. The private sector is angry about all kinds of things—from wronged borrowers to deceived investors. Investors are already organizing against both mortgage servicers—for improperly handling troubled loans—and against investment banks—for selling them garbage. They aren't just angry about fraudulent foreclosures—evidence is mounting that mortgage servicers can't even handle the profits from mortgages correctly, and aren't sending investors reliable, verifiable payments.

Yesterday investors sent a letter pressuring Countrywide's servicing arm to push losses from bad mortgage bonds back on the bank that sold them. Legally, it's a complicated maneuver, since Countrywide itself issued those bonds—but that just shows the multiple levels at which megabanks like BofA are exposed to fraud losses. Their original sale of mortgages to borrowers, the packaging of those mortgages into securities, the handling of payments and foreclosures, and the accounting for all of these activities—all of this is about to be subjected to serious fraud examinations by people who are trying to make money.

Up until yesterday, big banks thought they had a get-out-of-jail free card on investor lawsuits. Investors have to bring together 25 percent of the buyers of any mortgage bond in order to sue the bank that issued it—even if the actual lawsuit is an open-and-shut fraud case. Investors had not been cooperating. But yesterday's letter to Countrywide is a big deal—even though it's not (yet) a lawsuit, some of the biggest names in finance were going after Countrywide's cash: BlackRock, PIMCO and even the New York Federal Reserve.

Bill Frey, who runs the hedge fund Greenwich Capital, has organized a massive clearinghouse of mortgage investors for the express purpose of bringing lawsuits against big banks that issued bogus mortgage-backed securities. He told me this afternoon that he's about to move: In the next couple of weeks Greenwich and other investors will bring big lawsuits against major banks.

Will these combined troubles be enough to sink any big banks? If investors can win a couple of lawsuits, easily.

Banker-Run Third Way Opposes Foreclosure Moratorium On Banks

Zach Carter — Wed, 20 Oct 2010 12:28:16 -0400

The so-called “centrists” at Third Way Foundation have come out against a national foreclosure moratorium, but like many of Third Way’s policies, there’s nothing centrist about their opposition. Third Way is simply throwing American homeowners under the bus in the service of Wall Street profits. That sellout isn’t surprising when you examine the membership of Third Way’s Board of Trustees. Fully two-thirds of the think tank’s board work in finance, including some of the nation’s largest financial firms: JPMorgan Chase, Morgan Stanley, Fortress Investment Group and other Wall Street titans who stand to lose big bucks in the foreclosure fraud fallout.

Third Way Vice Chairman David Heller is the Global Head of Equity Trading for Goldman Sachs, and sits on the firm’s risk-committee. Goldman Sachs has placed enormous bets on the housing market, and other Third Way board members face similar sraits: William Daley works for JPMorgan Chase—a bank that has already suspended foreclosures in order to sort out its own problems. Derek Kirkland is global co-Head of Morgan Stanley’s Financial Institutions Group, and Michael Novogratz is President of Fortress Investment Group, one of the largest hedge funds in the world.

Daniel Loeb has a spot on the board. Yes, that Daniel Loeb, the whining Wall Street hedge fund manager who infamously complained that President Barack Obama wanted to violate American protections against "nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination"-- because Obama favored raising the capital gains tax. All of these people, and dozens of others on the Third Way board, stand to lose or gain enormous amounts of money from the foreclosure fraud outbreak and the federal response.

Even the author of the memo, Jason Gold, used to work for bailed-out banks First Horizon, Bank of America and Merrill Lynch. All of this information is available on Third Way’s website, but not one word of the think tank’s memo on a foreclosure moratorium mentions any possible conflict of interest, nor are any actual conflicts of interest detailed.

Independent think tanks shouldn’t be promoting policies that their board members stand to financially benefit from without explaining their financial interests. If Jason Gold and Third Way want to oppose a foreclosure moratorium, fine—but they should demonstrate exactly what they have to gain from such a policy in their memo.

Third Way and other centrist groups like to claim they’re staking out political middle ground, when in fact they’re just advocating policies that funnel money to entrenched corporate interests. Wall Street is very good at this game, as evidenced by the fact that 20 of the 30 members of Third Way’s board work for Wall Street. These aren’t policies that create jobs or improve the economy—they’re just giveaways for special interests. As one Democratic policymaker who requested anonymity told me, "Third Way's policy model is an utter catastrophe. They are basically Weimar Democrats."

Aside from the glaring conflicts-of-interest, Third Way’s argument against a foreclosure moratorium is totally incoherent. None of the points made stand up to even cursory levels of economic scrutiny—it’s the sort of thing you’d expect to see from the Mortgage Bankers Association, not an independent think tank. Third Way claim that a moratorium will scare buyers away from the market and put downward pressure on home prices. It’s a nice talking point, but any sane buyer should already be spooked by the facts that have emerged on bank documentation policies. The moratorium isn’t going to reduce confidence—years of banker abuse already has. Banks skimped on their paperwork to cut costs, and are now resorting to systematic fraud to cover-up very big problems. They’ve charged borrowers illegal fees, foreclosed on the wrong homes, and sold the same mortgage to different investment banks to be packaged into different securities. That kind of behavior scares borrowers. Repairing the damage isn’t nearly as frightening.

Third Way also claims that a moratorium would hurt community banks and credit unions. Hard to see how that’s the case if the moratorium only “forestalls” foreclosures, rather than preventing them, as Third Way claims, but if this is really a huge problem, just exempt credit unions and banks with less than $1 billion in assets from the moratorium. Illusory problem solved.

Third Way also argues that a moratorium is unfair to taxpayers—but taxpayers are likely to be the single largest party defrauded in the documentation scam. Taxpayers own trillions of dollars in mortgage-backed securities through the Federal Reserve, Fannie Mae and Freddie Mac. A moratorium can help us indentify problems and make claims against banks who have acted inappropriately.

This reasoning is not simply divorced from economic reality—it’s internally inconsistent. Third Way says that a foreclosure moratorium would only “forestall” foreclosures, not prevent them—and then turns around and insists that a moratorium would encourage people not to pay their mortgages. If it’s not a permanent solution, no sane borrower is going to stop paying.

Unless it already makes sense for borrowers to stop paying their mortgages. Third Way board member Derek Kirkland is a bigwig at Morgan Stanley. Last year, Morgan Stanley realized that a handful of properties it had purchased in San Francisco were not worth what Morgan Stanley owed on the mortgages. So Morgan Stanley made a rational decision: instead of wasting its money on payments for a devalued property, it walked away from the mortgages. This is called a “strategic default,” and Third Way explicitly comes out against it in their memo. But iff the board members of Third Way are okay with strategic defaults, what right do they have to hold American homeowners to a different standard?

Helping homeowners isn’t part of some radical leftist agenda—it’s a basic prerequisite for economic recovery. When homeowners are burdened with unnecessary, predatory, and even fraudulent debt, they don’t have money to spend on productive economic activities that create jobs. Punishing borrowers for fraud committed by bankers simply doesn’t make sense. A foreclosure moratorium won’t solve all of our problems, but it can help us sort them out so that homeowners who deserve help can be identified, along with bankers who have committed fraud.

Calls to Third Way were not immediately returned.

Don't Believe The Bank Lobby: Foreclosure Fraud Is Bad For Homeowners And The Economy

Zach Carter — Mon, 18 Oct 2010 16:51:40 -0400

The bank lobby is spreading a host of silly myths about the foreclosure fraud outbreak in an effort to downplay the scandal and minimize concerns over potential bank losses that have emerged in the blogosphere. Housing Wire’s Paul Jackson spouts most of them in his post today. Jackson does acknowledge a host of major problems for banks that have been recently highlighted by the blogosphere, but he’s still spreading serious misinformation on foreclosure fraud and its potential effects. Banks routinely rip-off borrowers in the foreclosure process, and the blogosphere's uproar over foreclosure fraud is more than justified.

First, the agreement. Jackson agrees that there is enormous potential for investors to bring fraud cases against banks and win them. He calls them “real concerns, many hundreds of billions of dollars worth of concerns.” The blogosphere has done a terrific job highlighting this, with Felix Salmon shouldering most of the burden.

Jackson’s real critiques are pretty weak:

“‘Robo-signing’ is a procedural issue. Period . . . . Until someone can provide consistent and repeated evidence suggesting that the information contained within ‘robo-signed’ affidavits is factually incorrect — not just some of the time, but most of the time — the end result of this mess is nothing more than a very public, brand-damaging, headline-making procedural blip . . . . If false debt amounts were being pushed by banks onto the courts en masse, you can bet all the apple pie in America that every single one of us would have heard about it by now, too.”

First, we have heard about false debt amounts being pushed by banks onto the courts en masse. The best account is a 2008 paper by Harvard University Law Professor Katherine Porter (she was at Iowa then), examining mortgage servicing documentation in bankruptcy. Banks demand illegal fees from borrowers all the time, and resort to shoddy documentation to get away with it. How bad can this get? Ask Porter:

“In one egregious case, a mortgage company filed a proof of claim for more than $1 million when the principal balance on the note was $60,000.”

Take a look at some of Porter’s other findings: More than 18 percent of the time, servicers don’t even bother to file proofs of claim documenting the mortgage debt owed or the fees charged. Of the proofs-of-claim filed, 41 percent of the time, servicers don’t even supply the note, while 16 percent of the time, they don’t bother to itemize the fees they charge, much less justify the amount. Of the itemized fees, 43 percent were assigned to categories that didn’t fit the servicing industry’s own standards.

In many cases, these fees are so high that borrowers lose their homes thanks to the fees, not trouble meeting the monthly payment.

Let me emphasize that Porter’s study applies to foreclosure costs reviewed by a judge in bankruptcy—the most vigilant legal arena available for troubled borrowers. The robo-signing scandal is not playing out in bankruptcy court, it’s playing out in ordinary courts with much less rigorous standards. Banks simply try to prove that they have the necessary documentation to foreclose and are charge appropriate fees. They don’t have the actual document laying out this information, so banks are robo-signing fraudulent affidavits swearing that they really do have the right to foreclose and charge every fee they’re levying.

Given Porter’s findings in bankruptcy courts, this activity is very likely covering up widespread abuses in ordinary court. Note Jackson’s bizarre commitment to a majoritarian threshold for scandal. If 15 percent of foreclosures in the United States since the housing bubble burst have been unnecessary and fraudulent rip-offs, that is a scandal of monstrous proportions. We’ve already witnessed more than 6 million foreclosures this cycle—a 15 percent scam rate is nearly 1 million defrauded borrowers. That should be an outrage.

Jackson also claims that “Commentators have hopelessly conflated ‘robo-signing’ with other long-standing and/or played-out mortgage issues.”

Nope. Commenators have used the robo-signing outbreak to highlight other documentation problems that banks have created for themselves. Servicer misconduct has indeed been well-covered, as is the outbreak of fraud in the sale of mortgages to borrowers. Even the staggeringly dishonest due diligence operations that banks deployed to rip-off investors has been public for months. We know that banks have used robo-signers to cover their tracks in some arenas, there's a natural interest in investigating other areas of documentation trouble (especially Felix Salmon's mortgage bond fraud story).

Jackson does the best job of defusing these related scandals with his argument that the fate of the Mortgage Electronic Registration System (MERS) has already been decided in court. In effect, banks have been using the electronic MERS system to show their right to foreclose instead of paper documents, and several courts have upheld their right to do so (though others have not). But it's hard to understand Jackson's out-0f-hand dismissal of MERS trouble when the legal standing of MERS was raised on a Citigroup conference call with investors last week. This is not yet resolved.

But what I find most ridiculous is Jackson’s claim that commentary on the scandal has obscured other real problems:

“The real brewing issue in the markets right now currently is one of investor confidence, borne most lately of horrible remittance reporting from servicers. Investors have had it with inaccurate reports from servicers, and some are threatening to ditch MBS markets altogether.”

“Remittance reporting” means “profits that mortgage servicers detail and forward to investors.” Shoddy documentation in the foreclosure end have been the focus of much of the commentary thus far. In that element of the scandal, banks are trying to minimize potential losses from shoddy documentation. But Jackson makes a very good point: documentation problems are so bad that servicers aren’t forwarding the right profits either, or documenting them.

Why this is indicative of some blogosphere-wide over-reaction is beyond me. Jackson is effectively saying that the problem is much broader than the blogosphere has so far reported, and made an excellent point regarding the scope of potential problems.

Jackson also makes a good point about investor lawsuits. There are indeed significant technical hurdles that make it difficult for investors to sue banks over fraud in the mortgage-backed securities process, and this has been underreported. But that is far from the end of the story. When hundreds of billions of dollars are at stake, investors usually try to get their hands on it. And what’s more, it’s an appeal to a technicality on an issue where banks (and Jackson’s parroting of banks) are pretending to take the substantive high-road. Don’t worry, robo-signing is just a ‘procedural’ issue! Investor lawsuits are probably going to gut us on the merits, but technicalities will make it difficult for the cases to be heard!

The Breakdown: Zach Carter and The Nation's Chris Hayes Talk Wall Street Fraud

Zach Carter — Fri, 15 Oct 2010 14:29:07 -0400

Chris Hayes from The Nation talked to me for his excellent weekly podcast, The Breakdown. We're talking about foreclosure fraud, mortgage-backed securities fraud, illegal mortgage fees, and all kinds of really nasty things happening on Wall Street. Give it a listen:

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Also note that the intro music for The Breakdown is superior to all other music intros in audio journalism.

Yes, Fortune, Wall Street Fraud is a Problem

Zach Carter — Fri, 15 Oct 2010 12:01:07 -0400

A lot of frequently credible publications have been pumping out drivel lately blaming borrowers for the ever-widening foreclosure fraud scandal. Fortune Magazine has the latest of these blame-the-borrower narratives. It would be nice to be able to dismiss this kind of nonsense as mere journalistic laziness, but at this point in the crisis, blaming the borrowers is an act of willful ignorance.

The Fortune scribe resorting to this grotesque journalistic vice is Fortune's Duff McDonald. McDonald's argument? Pretty lousy. He openly acknowledges that he hasn't done his homework:

"I find it very hard to process the notion that the onslaught of foreclosures in this country does not have more to do with a failure of conservative financial planning than with some insidious criminality by lenders . . . . I'm amazed that the country has congealed into the belief that every single borrower who signed a mortgage document has an escape hatch that somehow puts blame on their lender when they can't pay their debts . . . . I am at a loss to understand how so many individual homeowners signing loan documents for debt they could ultimately not afford were somehow the victims of a crime."

Four years after the subprime meltdown began, Duff McDonald still hasn't bothered to investigate fraud in the selling of mortgages. I'm getting pretty tired of writing this statement: In 2004, the FBI warned of an "epidemic" in mortgage fraud, 80 percent of which is committed by lenders. There was an entire Congressional hearing devoted to fraud at Washington Mutual. Loan officers and mortgage brokers are perfectly capable of falsifying a borrower's loan application, and they're perfectly capable of telling a borrower they're getting a great 30-year fixed-rate mortgage while selling them a subprime mortgage with exploding payments, adding a zero to the value of the house, or anything else. That's fraud, it's illegal, it happened all the time, and it was perpetrated by handsomely paid financial professionals.

To be clear, this does not mean that "every single borrower who signed a mortgage contract" should be eligible for unlimited government giveaways. But to be equally clear, I haven't seen anybody make that argument, and I don't know why anyone would. It was an $8 trillion housing bubble—there are plenty of scuzzy borrowers out there, like the 20 percent from the FBI statistic.

Do Americans buy big, ugly, expensive things? Yes. Does that mean banks who defraud and deceive people should be let off the hook? No.

The document fraud currently being uncovered in foreclosure proceedings represents just a tiny fraction of the legal mess that bankers have made for themselves. Any half-decent investigation into the document troubles in the securitization of mortgages is very likely to show that investment banks routinely defrauded their investors. Any investigation into the sale of mortgages to borrowers is all but certain to show that banks routinely defrauded homeowners.

McDonald also throws in a pretty sad defense of JPMorgan CEO Jamie Dimon's wonderful "sense of ethics," glossing over all the horrible things JPMorgan did under Dimon's watch. JPMorgan is currently hiring thugs to illegally break into people's homes. The bank issued over $30 billion in subprime mortgages during the housing bubble. It bribed public officials into fleecing their own communities. It may very well be the case that Dimon is a better guy than other big finance execs. That's not saying much.

The entire piece reads like a stereotype of the captured-financial-journalist-in-awe-of-his-subjects. Which is disappointing, because Duff McDonald frequently writes good stuff.

The Subprime Swindle And The Foreclosure Fraud Cover-Up

Zach Carter — Tue, 12 Oct 2010 17:00:39 -0400

There are plenty of reasons why the foreclosure fraud crisis sweeping the nation's housing market is an economic disaster. Banks are charging borrowers illegal fees, kicking the wrong people out of their homes and even hiring thugs to illegally break into houses. But the fundamental scam is much worse than these shameful acts. Fraud in the foreclosure process conceals a second, more massive fraud: the astonishing levels of mortgage fraud perpetrated by subprime lenders during the housing bubble. These frauds don't just expose big banks to epic losses, they expose bigwig bankers to prison time.

Clearly, we're dealing with a lot of different frauds here. Tomorrow, I'll detail one of the smaller-bore problems with foreclosure fraud: providing cover for illegal fees that lenders charge to troubled borrowers. But today I'll discuss a much different and much bigger scandal. During the housing bubble, banks falsified documents on a massive scale in order to issue as many toxic subprime loans as possible. This was straightforward mortgage fraud, and the current wave of fraud in the foreclosure process is covering it up.

In 2004, the FBI sounded the alarm about an "epidemic" in mortgage fraud. This was right at the beginning of the real subprime explosion—things got much worse as the housing bubble inflated. What's more, according to the FBI, 80 percent of mortgage fraud is committed by lenders.

Bankers and mortgage brokers didn't just make reckless loans to borrowers who couldn't afford them. They also illegally falsified documentation in order to push borrowers into loans they could not afford. This was not a con perpetrated by irrational poor people attempting to live beyond their means—it was committed by perfectly rational lenders, who knew they could make a handsome profit by selling these garbage mortgages off to investors.

We know about how these frauds were incentivized at specific lenders thanks to anecdotes collected banks that actually went under during the crisis. When Washington Mutual collapsed in September 2008, it was one of the largest banks on the West Coast, with $350 billion in assets. It wasn't a small-time specialty shop operating off the grid—it was a regulated bank, overseen by the Office of Thrift Supervision, subject to standard consumer protection regulations and federal anti-fraud statutes. Yet the bank engaged in systematic, knowing fraud which its executives allowed to continue unpunished. As Sen. Carl Levin, D-Mich., emphasized in a hearing this April, the company even rewarded some of its employees who committed fraud by promoting them.

Why all the dodgy dealing? Bigger bonuses. During the housing bubble, Washington Mutual CEO Kerry Killinger took home between $11 million and $20 million every year.

This type of mortgage fraud is not the scam that consumer advocates are currently sounding the alarm about. That's a much different fraud. When banks go to foreclose on borrowers, they do not have the documentation necessary to prove they actually own the mortgage. Banks can't document their right to foreclose, so they're fabricating documents, forging signatures and lying to judges to push them through. So how are the two frauds related?

Fraudulent mortgages are, by definition, illegal. Banks that issue them can be sued, and the bankers involved can be tried in court and sent to prison. Bankers very much want to avoid both of these scenarios.

But it's also illegal to package fraudulent loans into securities and sell them to investors—especially if you don't tell investors that the security is full of fraudulent loans. It's securities fraud, and bankers also don't want to lose huge amounts of money on that line of business.

If you're a bank that packages mortgages into securities and sells them to investors, and you know your securities are full of fraudulent loans, you might not want to transfer all the necessary documents detailing the loans. Those documents, after all, would reveal that your securities were completely illegal—and that you are responsible for any losses stemming from them.

For intermediaries like securitizers, fraudulent loans are the best kind of loans—they're literally too good to be true. So long as nobody ever pins the legal liability on you, you can make a lot more money from fraudulent loans than you can make on loans that actually make financial sense. Fraud-packed securities fetched much higher prices than mortgage securities packed full of boring, legal mortgages, and led to much bigger bonuses.

In today's foreclosure fraud scandal, mortgage servicers—the housing industry's debt collectors—don't have the legal documents necessary to move on a foreclosure. They don't have the documents because the banks who created the securities never handed them over. And without those documents, it's far more difficult to prove that the securities and the underlying mortgages are illegal.

So this isn't about "paperwork" or technicalities. This is about preventing the basic fraud at the heart of the financial crisis and the Great Recession from being prosecuted.

That, ultimately, is the big danger for Wall Street, and for the policymakers who have provided economic cover for megabanks. Wall Street banks aren't worried that their mortgage servicing costs may increase while the "track down" paperwork—they're worried that the entire $2.6 trillion mortgage-backed security market is about to land on their doorstep, with punitive damages and prison sentences tacked on.

Apologists for CEOs spent much of the summer complaining about the "uncertainty" that new regulations and tax policies supposedly create for businesses and investors. If potential taxes were an economic problem, just wait to see how financial markets respond to a fresh $2.6 trillion hole in the banking system created by fraud.

Worst of all, U.S. taxpayers own a huge portion of these securities. Fannie Mae and Freddie Mac have enormous portfolios of subprime-mortgage backed securities, and the Federal Reserve purchased large volumes of mortgage securities in order to sustain the housing market as it collapsed. The government has no choice but to deal with this mess, if only to cut its own losses. Whatever the policy the government pursues, Rick Santelli and his friends will be sure to complain about a bailout for "losers," but something has to be done. It's not a question of bleeding hearts, it's a question of basic justice for homeowners, investors and taxpayers.

Too-Big-For-Paperwork: Fixing Wall Street's Foreclosure Fraud Disaster

Zach Carter — Fri, 08 Oct 2010 14:43:51 -0400

Anybody looking for a primer explaining why the current foreclosure fraud issue is a major systemic risk for the financial system should check out Mike Konczal's new post for the Roosevelt Institute. I'm going to try and simplify it even further here, and present the only serious avenue available to solve the problem.

Three parties stand to lose big. The most obvious is homeowners—they're being slapped with enormous, illegal fees invented by fraudulent documents, and frequently being illegally exiled from their homes.

Next are the mortgage servicers. These are the mortgage industry's debt collectors, and their mere existence often creates huge conflicts of interest that have made the foreclosure mess much harder to clean-up. The dominant servicers are owned by megabanks—Bank of America, JPMorgan Chase, Wells Fargo, Citibank and GMAC control the vast majority of this work. A massive loss for a mortgage servicer means a massive loss for a massive bank.

Mortgage servicers are supposed to collect payments and negotiate with troubled borrowers in order to maximize the returns to investors. Who are these investors? Hedge funds and banks that bought mortgage-backed securities during the housing bubble.

The basic job of a mortgage servicer is to collect payments from borrowers, and pass them on to investors. If borrowers stop paying, servicers have to make those payments to investors out of their own pocket—until they actually foreclose. At foreclosure, the servicer gets to recoup its costs. So in many cases, servicers have a very strong incentive to cut whatever corners they can in order to recoup their costs and avoid forwarding more money to investors (This is only part of the story—since the servicers are megabanks, the other assets of the servicer bank can give the servicer wing an incentive to stall the foreclosure process like crazy—more on that in another post).

The point is, in many cases, servicers have a clear incentive to cut corners to speed up the foreclosure process, and stand to lose a lot of money if they don't.

Servicers should have a set of key documents for every mortgage that has been bundled into the securities they operate. But they don't. Why? Because the original bank who sold the original mortgages to homeowners never handed over the documents when the security was created.

That brings us to the investors. Mortgage-backed securities involve different levels of risk—investors don't just buy one security composed of lots of mortgages. Instead, the pool of mortgages is cut into different pieces according to how risky they are. The riskiest bits fetch the highest monthly payments for investors, but are the first to take losses if the mortgages go bad. The safest parts bring in lower monthly payments, but are the last to take losses.

Investors who have the safe parts of the security want to see the foreclosure process burn through as fast as possible. The faster it goes, the lower the expenses for the servicer, and the more these investors will be able to recoup after foreclosure.

But investors who have the risky parts of the security have the exact opposite incentives. They want foreclosures stalled for as long as possible, so that the servicer has to keep forwarding them payments for as long as possible. The servicer doesn't take its cut from the investors after foreclosure, it takes them from the sale of the house. So the risky investors (junior bondholders in finance-speak) are hoping to delay foreclosures, while the safer investors (senior bondholders) are hoping to stall for time, since time means more payments.

So there's a war going on right now between risky and safe investors, many of which have different risk positions in different securities.

But servicers don't have the necessary documents, and they can't get them. The Florida bank lobby says that destroying mortgage documents was standard operating procedure during the bubble years. If you can't provide the documents, then in many cases, you simply do not have the right to foreclose at all. That means catastrophic losses for both safe investors and servicers, since they never get to recoup any losses.

So no matter what happens, the most obvious, immediate losses and the most serious long-term legal liability are at the big mortgage servicers. These are all megabanks. And investors of all stripes are going to do everything in their power to stick the investment banks who created these securities with the bill. These are also megabanks.

As Mike emphasizes, there are $2.6 trillion worth of mortgage-backed securities out there. That's more than enough in potential losses to sink every major bank and hedge fund in the United States.

There are two ways to deal with this. One is to bailout the banks for engaging in systematic, documented fraud, and further screw over the homeowners they're defrauding by changing the legal standards for mortgage documentation. This is what the bank lobby wants, and it is obviously unacceptable. This won't only hammer homeowners, it'll also blast investors who hold the risky end of mortgage-backed securities.

The other is to adopt a massive principal-reduction program which creates new, real documents for every troubled borrower in the country, and reduces their debt burden so that they don't end up in foreclosure. This solution means catastrophic losses for investors, but not as catastrophic as being unable to foreclose.

But barring another massive bailout, our biggest banks are right back up against the wall again, no matter what happens. And they'll keep coming back to the brink of insolvency so long as they remain too-big-to-even-file-their-damned-paperwork.

Break up the banks.

Robbing The Middle Class: Republican 'Pledge' Lets Wall Street Off The Hook

Zach Carter — Tue, 05 Oct 2010 13:29:23 -0400

I didn't expect to see serious economic policy discussions in the "Republican Pledge To America," but even by Washington, D.C. standards, this document is staggeringly disingenuous. Not once in the entire 48-page screed do Republicans mention the words "Wall Street," "subprime," or "foreclosure." It's a deliberate effort to obscure the fact that today's economic mess is the direct result of financial malpractice on Wall Street—and that Republican economic policies would encourage more of it.

As my CAF colleague Richad Eskow has noted, this Pact to Rob The Middle Class has plenty of other problems—but fundamentally, it's supposed to be a discussion about government spending and the federal budget deficit. For anyone to even pretend to discuss those issues without mentioning the past decade's Wall Street excess is simply laughable. The increases in government spending under President Barack Obama have been an attempt to counter economic damage wreaked by Wall Street under President George W. Bush. They haven't been enough, but they've helped—just ask economist Mark Zandi, former adviser to Sen. John McCain's presidential campaign (.pdf file).

But after watching a deregulated Wall Street pump out trillions of dollars worth of ridiculous predatory mortgages and then amplify their bets tenfold in the unregulated derivatives market, Republicans now promise to hold up any new government regulation that "costs" the economy more than $100 million.

This is pure insanity. Any serious Wall Street regulation will cost every megabank far more than $100 million over the 10-year span devoted to budget projections-- that's the whole point of serious financial regulation. Republicans are defending the basic housing bubble accounting scam: book huge, illusory short-term profits with reckless lending and gambling-- when those bets blow up, stick taxpayers with the bill. You can measure the short-term costs to bank profitability, but you can't measure the costs of future financial collapse. Plenty of free-market activists thought decades of deregulation had worked until markets cratered in 2008. At that point, we lost eight million jobs, and the amount of government debt held by the private sector increased by 40 percent of GDP. Without Obama's stimulus package, the cost in jobs would have been far higher.

This rabid deregulatory agenda applies to every rule yet to be written under the Wall Street reform legislation that Congress approved this summer. Since the basic strategy of that bill was to kick all major decisions to regulatory agencies, the Republicans are sending a clear signal to their Wall Street friends: Republicans will work with bank lobbyists to dismantle the entire Wall Street reform bill. They even pledge to freeze federal hiring to prevent regulators from putting more cops on the beat fighting Wall Street fraud.

As for further, stronger reforms? Nothing. A promise to "permanently" end bailouts. These promises are always empty. They mean nothing without serious regulations to rein in financial excess. The United States bailed out banks and their creditors prior to 2008 (under Republican regimes), and will do so again the next time megabanks get into trouble. Without strong regulations, smaller banks, or both, the bailout cycle is inevitable.

But Republicans have not only pledged to set Wall Street loose, they've vowed not to clean-up the economic mess that megabanks create. That's what their much-ballyhooed cap on federal spending means. When Wall Street sets the economy on fire, we'll let it burn—if that means your home, your job, or your retirement, then so be it.

Both political parties court Wall Street campaign cash, and Republicans have been extremely successful at securing that funding. Take a look at the 90 most flagrant Wall Street Cronies in Congress—everyone who voted for the bank bailout in 2008, but opposed reforming Big Finance in 2010 (full table at the end of the post). The list doesn't include every Wall Street servant on Capitol Hill, only the most obvious offenders.

This Coalition of Wall Street Cronies includes 81 Republicans, and just about every member of the Republican leadership who showed up to roll out the "Pledge To America." In the House, it includes Minority Leader John Boehner, R-Ohio, and Minority Whip Eric Cantor, R-Va., while the Senate brings in Minority Leader Mitch McConnell, R-Ky., Minority Whip Jon Kyl, R-Az., Republican Conference Chairman Lamar Alexander, R-Tenn., Republican Policy Committee Chairman John Thune, R-S.D., and National Republican Senatorial Committee Chairman John Cornyn, R-Texas. The full list of Financial Miscreants is at the end of this post.

What does "The Pledge" actually say about the financial crisis? Repeatedly disproven drivel:

"Fannie Mae and Freddie Mac . . . triggered the financial meltdown by giving too many high risk loans to people who couldn't afford them."

That's not what happened. Private-sector banks issued subprime loans. Private-sector investors bought up these garbage mortgages in the form of mortgage-backed securities and collateralized debt obligations (CDOs). They lobbied hard to keep consumer protections at bay and to lift leverage limits that prevented them from betting too much on the housing market. After a few years of crazy, irrational profits in the private sector, Fannie and Freddie caught on to the scam, lobbied the Bush administration to adjust their regulations, and began buying up mortgage-backed securities in order to compete with Wall Street.

This behavior was disgusting, but it did not cause the subprime crisis, the housing bubble or the Wall Street crash. All of those were created and catalyzed by Wall Street. Fannie and Freddie's basic function—buying up mortgages and securities—made them totally divorced from any losses at big banks. They didn't push the crisis onto the banks, they belatedly chose to take part in the crisis created by banks. Even today, only about 14 percent of seriously delinquent mortgages at Fannie and Freddie are subprime.

None of this turns Fannie and Freddie executives into good guys—they were reckless scumbags who cost taxpayers billions. But if you're going to demand major structural reform of Fannie and Freddie (and you should), then you should demand much further-reaching reform of the Wall Street casino that actually wrecked the economy.

Best of all, Republicans pledge to "fight efforts to use a national crisis for political gain." If the Republican "Pledge" isn't a cynical exploitation of a national jobs crisis for political gain, I don't know what could possibly qualify as cynical exploitation. Conservatives created the crisis with deregulatory economic policies, and now want to use the crisis not to fix things, but to deregulate further.

I've been very critical of both President Obama and Congressional Democrats for being overly timid about financial reform and refusing to take the prospect of another near-term crash seriously. This is not a partisan defense of Democrats-- to be sure, some of them are still behaving very badly. This is a defense of financial sanity, something that the Republican Party has just pledged to erase.

Wall Street's Cronies are listed below.

Senator	2010 Wall Street Cash	Career Wall Street Cash
Sen. Lamar Alexander (R-TN)	$1,600,000	$4,900,000
Sen. Robert Bennett (R-UT)	$1,500,000	$2,600,000
Sen. Kit Bond (R-MO)	$333,600	$3,300,000
Sen. Richard Burr (R-NC)	$1,500,000	$3,300,000
Sen. Saxby Chambliss (R-GA)	$2,500,000	$3,500,000
Sen. Tom Coburn (R-OK)	$451,700	$1,200,000
Sen. Bob Corker (R-TN)	$3,100,000	$3,300,000
Sen. John Cornyn (R-TX)	$3,200,000	$4,700,000
Sen. John Ensign (R-NV)	$1,300,000	$2,600,000
Sen. Lindsey Graham (R-SC)	$1,100,000	$2,000,000
Sen. Judd Gregg (R-NH)	$233,200	$1,100,000
Sen. Orrin Hatch (R-UT)	$1,400,000	$2,600,000
Sen. Kay Bailey Hutchison (R-TX)	$1,400,000	$4,700,000
Sen. Johnny Isakson (R-GA)	$1,500,000	$4,200,000
Sen. John Kyl (R-AZ)	$2,800,000	$3,800,000
Sen. Dick Lugar (R-IN)	$412,200	$2,500,000
Sen. John McCain (R-AZ)	$947,600	$34,000,000
Sen. Mitch McConnell (R-KY)	$4,300,000	$5,300,000
Sen. Lisa Murkowski (R-AK)	$268,200	$909,700
Sen. John Thune (R-SD)	$1,600,000	$3,900,000
Sen. George Voinovich (R-OH)	$435,200	$2,800,000
21 Republicans
0 Democrats
Senate Total	$31,881,700	97,209,700

House Member	2010 Wall Street Cash	Career Wall Street Cash
Rep. Rodney Alexander, R-La.	$106,500	$422,300
Rep. Spencer Bachus, R-Ala.	$611,600	$4,400,000
Rep. Gresham Barrett, R-S.C.	$20,400	$806,700
Rep. Marion Berry, D-Ark.	$24,900	$663,700
Rep. Judy Biggert, R-Ill.	$395,000	$1,900,000
Rep. Roy Blunt, R-Mo.	$1,200,000	$3,800,000
Rep. John Boehner, R-Ohio	$1,300,000	$3,700,000
Rep. Jo Bonner, R-Ala.	$90,400	$702,200
Rep. Mary Bono Mack, R-Calif.	$190,000	$733,400
Rep. John Boozman, R-Ark.	$257,700	$491,000
Rep. Dan Boren, D-Okla.	$123,100	$722,200
Rep. Rick Boucher, D-Va.	$92,700	$1,400,000
Rep. Charles Boustany Jr, R-La.	$226,300	$934,600
Rep. Kevin Brady, R-Texas	$157,000	$840,500
Rep. Henry Brown, R-S.C.	$35,700	$494,000
Rep. Vernon Buchanan, R-Fla.	$336,800	$1,400,000
Rep. Ken Calvert, R-Calif.	$180,300	$940,300
Rep. Dave Camp, R-Mich.	$588,000	$1,700,000
Rep. John Campbell, R-Calif.	$413,400	$1,200,000
Rep. Eric Cantor, R-Va.	$2,100,000	$4,400,000
Rep. Mike Castle, R-Del.	$749,100	$3,200,000
Rep. Howard Coble, R-N.C.	$23,400	$502,500
Rep. Tom Cole, R-Okla.	$110,000	$686,000
Rep. Mike Conaway, R-Texas	$161,500	$711,800
Rep. Ander Crenshaw, R-Fla.	$86,100	$717,000
Rep. Henry Cuellar, D-Texas	$90,600	$606,900
Rep. Charlie Dent, R-Pa.	$177,900	$881,000
Rep. Chet Edwards, D-Texas	$324,200	$1,900,000
Rep.Vernon Ehlers, R-Mich.	$8,500	$292,200
Rep. Jo Ann Emerson, R-Mo.	$143,900	$904,400
Rep. Mary Fallin, R-Okla	($1,000)	$340,700
Rep. Rodney Frelinghuysen, R-N.J.	$86,200	$840,300
Rep. Jim Gerlach, R-Pa.	$251,600	$1,800,000
Rep. Kay Granger, R-Texas	$140,000	$1,100,000
Rep. Wally Herger, R-Calif.	$171,500	$1,100,000
Rep. Peter Hoekstra, R-Mich.	($1,000)	$300,600
Rep. Bob Inglis, R-S.C.	0	$572,800
Rep. Peter King, R-N.Y.	$173,900	$1,600,000
Rep. Mark Kirk, R-Ill.	$1,900,000	$4,200,000
Rep. John Kline, R-Minn	$170,900	$989,100
Rep. Jerry Lewis, R-Calif.	$31,800	$748,000
Rep. Daniel E. Lungren, R-Calif.	$147,700	$622,500
Rep. Howard McKeon, R-Calif.	$132,100	$1,100,000
Rep. Gary Miller, R-Calif.	$144,500	$902,000
Rep. Harry Mitchell, D-Ariz.	$130,900	$558,000
Rep. Sue Myrick, R-S.C.	$93,600	$1,200,000
Rep. Soloman Ortiz, D-Texas	$40,200	$381,700
Rep. George Radanovich, R-Calif.	$24,900	$462,000
Rep. Mike Rogers, R-Ala.	$128,200	$1,000,000
Rep. Hal Rogers, R-Ky.	$50,200	$468,000
Rep. Ileana Ros-Lehtinen, R-Fla.	$127,000	$986,000
Rep. Paul Ryan, R-Wis.	$531,500	$1,900,000
Rep. Jean Schmidt, R-Ohio	$121,900	$519,700
Rep. John Shadegg, R-Ariz.	$39,700	$1,200,000
Rep. Bill Shuster, R-Pa.	$30,700	$403,600
Rep. Mike Simpson, R-Ind.	$20,500	$266,900
Rep. Ike Skelton, D-Mo.	$112,500	$524,200
Rep. Lamar Smith, R-Texas	$258,900	$1,300,000
Rep. Mark Souder, R-Ind.	$40,500	$405,800
Rep. Zack Space, D-Ohio	$169,300	$476,300
Rep. John Sullivan, R-Okla.	$79,200	$494,800
Rep. Lee Terry, R-Neb.	$202,600	$1,400,000
Rep. Mac Thornberry, R-Texas	$42,500	$603,400
Rep. Patrick Tiberi, R-Ohio	$555,500	$2,800,000
Rep. Fred Upton, R-Mich.	$81,700	$929,400
Rep. Greg Walden, R-Ore.	$180,700	$732,400
Rep. Zach Wamp, R-Tenn.	0	$715,700
Rep. Joe Wilson, R-S.C.	$155,500	$580,200
Rep. Frank Wolf, R-Va.	$90,400	$1,100,000
60 Republicans	$15,873,400	$72,443,800
9 Democrats	$1,108,400	$7,233,000
House Total	$16,981,800	$79,676,800

Bankers Broke The Economy And Got Rich Doing It

Zach Carter — Fri, 01 Oct 2010 14:38:47 -0400

Today’s absurd William Cohan column actually argues that we don’t need consumer protections in banking—nevermind the subprime explosion, the $8 trillion dollar housing bubble or the 1.2 million foreclosures expected this year. Nevermind the $38 billion in overdraft fees the banking industry reaped in 2009, or the ridiculous fine-print on credit cards. Nope, in William Cohan’s crazy world, the mortgage crisis was basically a problem caused by idiot consumers who—according to Cohan-- don’t even deserve basic legal protections.

Cohan makes only two real points in his column, both of them profoundly stupid. The silliest objection is his obviously disingenuous sticker-shock at the $500-million-a-year budget the new Consumer Financial Protection Bureau will have:

“In an era of huge budget deficits and a depleted treasury, that’s a lot of money for taxpayers to fork over every year to support a new government bureaucracy designed to protect us from our own worst impulses.”

Nobody who knows anything about budgets could be appalled by this number. Even by the standards of government bureaucracy, the CFPB’s funding is paltry. It’s only 10% of the Fed’s annual budget, and about half of the SEC’s. Eliminating or quintupling the CFPB’s funding would be totally insignificant to the overall federal budget. But even if this number did matter, Cohan’s analysis is preposterously short-sighted.

Employing a police force seems like a waste of taxpayer dollars until you get robbed, and so it is with financial regulation. Right now the U.S. economy struggling through a horrible recession, which has included significant government expenditures to bailout Wall Street and keep the job market afloat. All of this was caused by a predatory lending binge financed and implemented by Wall Street. Decent consumer protections would have prevented the housing bubble from getting totally out of control, and would have prevented Wall Street from destroying itself. If it costs us $500 million a year to save 8 million jobs, $8 trillion in household wealth, and $4 trillion in bailout money, that seems like a pretty good deal to me.

This budgetary argument holds no matter who is responsible for the mortgage crisis, be they banks or borrowers, predatory or pristine. But Cohan doubles down on his idiocy, saying that actually, borrowers don’t deserve to be protected from predatory banks.

Like virtually every senseless diatribe against the CFPB written over the past two years, this attack isn’t directed against the CFPB itself, but against the very idea of consumer protection—something that has been a common-sense element of bank regulation for centuries. Things got off track over the past thirty years (with accelerating aggressiveness during the Bush years) as bank regulators simply stopped enforcing consumer protection laws.

The CFPB does not create some wild new standard of regulation—it’s just an effort to ensure that somebody actually enforces the basic consumer protection mandate that existing regulators have ignored. The existing regulators failed, because they’re more worried about short-term bank profitability—the more money a bank makes, the less likely it is to fail, and the less likely that the regulator will be embarrassed by a disastrous bank failure. To existing agencies, it doesn’t matter where that profitability comes from—if it’s from predatory lending, they’ll just look the other way. The CFPB breaks this perverse incentive structure by establishing an agency that only works with consumer protection issues—not bank profitability.

Cohan waits until the final paragraph of his column to deliver the “evidence” for why we don’t need a CFPB, and he gets it completely, horribly wrong.

“Yes, some people who have lost their homes were victims of fraudulent mortgage brokers and shady lenders. But the vast majority of those who held the billions of dollars in mortgages now foreclosed on knew exactly what they were doing. And one of the dirty little secrets of the financial crisis is that one homeowner after another signed mortgage-loan documents that were filled with inaccurate information about his or her net worth, assets, salaries and ability to make monthly mortgage payments. Why would someone sign a loan document knowing full well the information on it was inaccurate and the mortgage could never be repaid?”

The only real statistic on mortgage fraud comes from the FBI, and it doesn’t back up Cohan’s claims at all. As early as 2004, the FBI was warning about an “epidemic” in mortgage fraud—not a few bad apples, not “some people,” but an epidemic . We know that mortgage fraud was standard operating procedure at Washington Mutual, now part of JPMorgan Chase, and they weren’t alone—for five years, rampantfraud was a basic component of the U.S. mortgage machine. And according to the FBI, 80 percent—repeat, 80 percent—of this fraud was perpetrated by the lender.

So, let’s answer Cohan’s question. Why would people knowingly set themselves up for foreclosure? They wouldn’t! The key incentives for fraud and deception do not apply to rational borrowers who want to live in their homes. They apply to lenders, who were being paid very well to push borrowers into unaffordable mortgages. Bankers and brokers were paid kickbacks to steer borrowers into subprime loans, when those same borrowers would have qualified for ordinary mortgages. With heavy demand for mortgage-backed securities on Wall Street, banks knew they could issue garbage loans and stick other investors with the tab—so they did. The list of lenders who pawned their crappy loans off onto other people includes many of the biggest names in finance: Wells Fargo, Wachovia, Citigroup Bank of America, Countrywide, Washington Mutual and more. Banks stood to make a lot of money from fraud. Borrowers, by contrast, could count on foreclosure. Who do you think is going to falsify the income on loan applications?

Sure, there were borrowers who tried to game the system. But the story of mortgage fraud in the housing bubble is overwhelmingly a story of malpractice by bonus-crazed bankers, not borrowers. We need Elizabeth Warren and the CFPB to protect our economy from such abuses. This is a question of basic law enforcement, something Cohan apparently believes should not apply to ordinary citizens looking to buy a home.

What's the Hold-up on Elizabeth Warren?

Zach Carter — Tue, 14 Sep 2010 15:07:35 -0400

Nobody seriously disputes whether Elizabeth Warren is the best-qualified candidate to head the Consumer Financial Protection Bureau. Everybody recognizes the bipartisan political appeal that Warren has with voters, and Democratic strategists know that no action in their power would play better to the party's base than a Warren nomination—a vital maneuver ahead of the November elections. President Barack Obama has no less than three procedural options to get Warren on the job. So: What's the hold-up?

The bank lobby has been doing everything it can to block Warren's nomination, but there are simply no good reasons to bypass her. In the field of finance, there is simply no consumer advocate more accomplished than Warren. She's quite possibly the finest bankruptcy scholar in the country, she came up with the idea for a Consumer Financial Protection Bureau in the first place, and as Chair of the Oversight Panel for the Wall Street bailout, she has proven that she is willing to ask tough questions and hold powerful people accountable for their actions (she has also been profoundly non-partisan, critiquing Democrats and Republicans alike). Warren has even authored a terrific book on managing household budgets, one which is not only full of excellent advice, but which proves she understands the economic pressures facing everyday Americans.

Wall Street bankers say this kind of record is grounds to question her "impartiality," but after decades of regulatory appointments that came straight from the banking industry, this cry rings hollow. John Dugan, the top bank regulator appointed by President George W. Bush was a bank lobbyist before Bush got him the job—I don't remember bankers worrying about his impartiality.

Moreover, the CFPB is supposed to advocate for consumers by design. That's the whole point of the agency. It's supposed to do so in a nuanced and sophisticated manner, but Warren's entire career shows evidence of exactly these characteristics. You don't have to read through academic law papers for proof, just read her blogs on consumer credit..

So what is Obama waiting for? Outside the offices of Wall Street CEOs, Warren enjoys extremely broad appeal among the general public. She's a former Republican from Oklahoma who fights for working people, not for Democrats or leftists or any other political group or special interest agenda. She wants to see the middle class protected from financial predation. That's not a radical ideology—it's common-sense economics and basic business ethics. Senators would find it very difficult to explain a vote against Warren to their constituents.

But if Obama really doesn't believe Warren can muster the votes in the Senate, he has two other options. He can appoint her during a Congressional recess, or, thanks to a provision of the bill that established the CFPB, he can name her "interim" head of the agency, neither of which require confirmation. There's no reason to be ashamed of such a move, as Warren would easily garner the 50 votes mandated by the Constitution. The only question is whether she could clear 60 votes to get around contemporary Senate rules, and we're only really asking that question because one bank-lobby-friendly Senator asked it, without offering any evidence of confirmation hurdles, while acknowledging that he himself would vote for her.

Obama could even combine these options, naming Warren interim head of the CFPB right now, while simultaneously submitting her nomination for the permanent post to the Senate. This move would allow Warren to begin her work at the agency immediately, as Congress goes through the confirmation process.

Any of these strategies could be perfectly acceptable, depending on the details. Nobody wants to see a fake-out, where Obama puts Warren in the post for a few months, only to replace her with a bank-lobby pick after the election. But there's plenty of evidence that the president sincerely wants to get Warren the job—he fought hard to create the CFPB, and he has praised both Warren and her work repeatedly. He has several options for getting Warren on the job right now and keeping her there for years. So what's the hold-up?