Tag Archives: Goldman Sachs

Mnuchin, When No One Is Watching

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Alexander Hamilton

My latest column for The Hill is Hamilton Acted in Good Faith. Will Steven Mnuchin Do The Same? It reads:

UCLA’s legendary basketball coach John Wooden famously said, “The true test of a man’s character is what he does when no one is watching.”

Steven Mnuchin, another leading citizen of Los Angeles, is now in the spotlight as President-elect Donald Trump’s nominee to lead the U.S. Department of the Treasury.

Running the Treasury Department requires financial know-how, which this former Goldman Sachs banker has in spades. But it also requires character, as a large part of the Treasury secretary’s job is to embody the good faith that the American people want the rest of the world to have in us.

In Alexander Hamilton’s Report Relative to a Provision for the Support of Public Credit, written just after he became the first U.S. Treasury secretary, he notes that the government must maintain public credit “by good faith, by a punctual performance of contracts. States, like individuals, who observe their engagements, are respected and trusted, while the reverse is the fate of those, who pursue an opposite conduct.”

OneWest’s actions during Mnuchin’s tenure as chief executive officer raise questions about whether Mnuchin has demonstrated the character necessary to be a worthy successor to Hamilton.

A recently disclosed memo by lawyers at California’s Office of the Attorney General documents a pattern of bad faith toward homeowners with OneWest mortgages. The memo documents evidence of widespread wrongdoing that helped the bank and hurt the homeowners. The evidence includes the backdating of notarized and recorded documents in 99.6 percent of the examined mortgage files and unlawful credit bids and substitutions of trustees in 16.0 percent of those files.

These are not merely technical violations. They shortened the time that homeowners had to get their mortgages back in good standing and they violated a number of procedural protections for homeowners facing non-judicial foreclosures.

Non-judicial foreclosures give lenders the ability to bypass the courts so long as they strictly abide by the procedural protections set forth by statute. Non-judicial foreclosures can only maintain their legitimacy if lenders respect those procedural protections. This is because there is no judge to make sure that the procedural protections are being adhered to. Without them, a homeowner can be no more than a sheep being led to the financial slaughterhouse of an improper foreclosure.

Some bankers have argued that focusing on violations of mortgage terms is overly legalistic, and beside the point given the widespread defaults during the financial crisis. It isn’t. The violations documented in the memo benefited the bank and harmed homeowners by allowing foreclosures to occur faster than they would if the formalities were followed.

They also allowed the bank to avoid paying various taxes relating to the sale of foreclosed properties. Some of the violations documented in the memo can result in felony convictions, which shows just how seriously California views the procedural requirements relating to non-judicial foreclosures. Ultimately, California’s then-Attorney General (and now U.S. Senator) Kamala Harris, chose not to file this complex lawsuit, but the memo’s findings are disturbing nonetheless.

As Hamilton knew, acting in good faith, performing agreements as they are written and keeping promises lead to respect and trust, “while the reverse is the fate of those, who pursue an opposite conduct.” The American people deserve a leader at Treasury with those traits, one who cherishes the rule of law as the basis of a both a healthy market economy and a well-functioning democratic government.

Other nations expect that we meet this standard, too. If they see us as just another bully on the world stage, we will lose our ability to lead by example. Members of the Senate Finance Committee should ask Mnuchin whether his actions at OneWest met the standard set forth by Hamilton.

We won’t be in the rooms where important decisions happen, so we need to have confidence in how Mnuchin will act when he thinks that no one is watching.

The Cost of Selling Trump’s Empire

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photo by KylaBorgPolitico quoted me in Selling His Empire Would Cost Trump Money. A Lot of It. It opens,

Donald Trump’s critics say the only way for him to keep his business interests separate from the public’s interest is to simply get out of business entirely, selling his companies and putting the proceeds into anonymous assets that someone else can manage.

But there’s nothing simple about it: unloading a real estate empire as large as Trump’s is a lengthy, complicated process fraught with ethical pitfalls, one that could end up costing a fortune.

“He has to make a choice,” said David Reiss, director of Brooklyn Law’s Center for Urban Business Entrepreneurship. “How much pain is he willing to take?”

Trump, who’s expected to lay out a plan to address conflicts of interest at a press conference Wednesday, heads a particularly difficult estate to unwind. Forbes has pegged his net worth at $3.7 billion in September, attributing most of that to real property holdings tangled in debt, partnership agreements, management contracts, branding deals and tax deferrals.

Ethics watchdogs say Trump’s cleanest break would be to sell his company to the public, but an initial public offering — especially one that folds in most or all of Trump’s scattered businesses — would be complicated, costly and time-consuming.

“The nature of the business doesn’t lend itself to going public,” said Jan Baran, co-chair of Wiley Rein’s election law and government ethics practice. “Rolling in all the real estate and the royalty contracts and all the other orphans like wineries and steaks, it’s a little hard to imagine any public companies that resemble what his business is, because it’s such a hodgepodge of things. It would take a while, it would take at least a year.”

What’s more, Baran noted, an IPO would require underwriters to raise capital and pull together an offering — raising new concerns about investment firms potentially currying favor with the new administration.

“Are the ethics complainers willing to let Goldman Sachs do the underwriting on this public offering?” he said. “Somebody’s got to put it together.”

Even if Trump chose to skip the IPO and just liquidate his assets via direct sales, he’d face a complex task — and a costly one.

“This would be an extraordinarily difficult situation,” said Neil Shapiro, a law partner at Herrick Feinstein in New York. “It would certainly be unprecedented in terms of somebody liquidating a portfolio of this size. We’re in uncharted territories here.”

The problems start with finding a buyer. The pool of people shopping for, say, a Fifth Avenue skyscraper is small, and only the buyer and seller can say for sure whether the price paid is fair. As such, selling a property raises nearly as many ethical quandaries for Trump as owning it. A buyer looking to curry favor with the next president might pay too much. Another might do Trump a favor by making a quick deal while paying too little.

Goldman’s $5B Mortgage Settlement: If They Only Knew

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The news reports about Goldman’s $5 billion settlement over its boom-time securitization practices have focused on whether Goldman would really have to pay all $5 billion at the end of the day. It is important to focus on the size of the deal: does it do justice? I am not sure whether I have an answer to that question though. With these billion dollar settlements, it is hard to tell whether the punishment fits.  Should it have been a billion more? A billion less? What is the right metric?

I leave these questions for others to wrestle with and turn to something a bit more prosaic: what exactly did Goldman do that was so wrong? The Settlement Agreement incorporates a Statement of Facts, attached as Annex 1 to the agreement. The answer, contained in the Statement of Facts, is that “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized, and Goldman also received certain negative information regarding the originators’ business practices.” (1) More specifically,

In various RMBS offerings, Goldman provided representations, or otherwise disclosed information, in certain offering documents, about the loans it securitized, telling investors that:

  • Certain loan originators applied underwriting guidelines that were intended primarily to assess the borrower’s ability and, in some cases, willingness to repay the debt and the adequacy of the mortgage property as collateral for the loans;
  • Loans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines;
  • Exceptions to those underwriting guidelines had been made when the originator identified “compensating factors” at the time of origination; and
  • The securitization sponsor or originator (which, in many instances, was Goldman) represented that the loans had been originated in compliance with federal, state, and local laws and regulations. (2, emphasis added)

This is what it told investors, but in fact, Goldman was accepting many, many mortgages that were rated EV3 — an unacceptable risk — into its mortgage-backed securities. In one proposed MBS transaction,

Although Goldman dropped 25 percent of the loans in the due diligence sample because they were graded as EV3s, including all the loans graded as EV3s for unreasonable stated income, which comprised at least 2.5 percent of the loans in the due diligence sample, Goldman did not review the portion of the pool not sampled for credit or compliance due diligence, which comprised approximately 70 percent of the total pool, to determine whether there were similar exceptions in the unsampled portion. (8)

In other words, Goldman knew that it had serious problems in the sample mortgage files it reviewed, but ignored the fact that those same problems were likely to be found in the files that were not sampled. That amounts to willful ignorance if the problem.

It seems that every big financial crisis lawsuit has that embarrassing note that management wishes had never seen the light of day. Here, “Goldman’s head of due diligence, who had just overseen Goldman’s due diligence on six Countrywide pools that closed during a two-day period at the end of March, responded to [a] research report by saying: “If they only knew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .” (11) Turns out, they did find out — just much later than the Goldman folks.

 

Monday’s Adjudication Roundup

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Bank Settlements and the Arc of Justice

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Ron Cogswell

MLK Memorial in DC

Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.

SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.

In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)

Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times?  I don’t think I have my own answer to that question yet, but it is certainly worth considering.

On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.

On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression.  It also wreaked havoc on so many individuals, directly and indirectly.

I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.

Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed.  We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.

 

Monday’s Adjudication Roundup

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Monday’s Adjudication Roundup

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