Fed Transcripts: Why Was Congress In The Dark During The Crafting Of Dodd-Frank?

Records of the Fed’s meetings at the height of the housing bubble provide more evidence that our central bankers need to be held accountable.

The latest release of the Federal Reserve’s Open Market Committee transcripts is a doozy. Binyamin Appelbaum read through the transcripts and wrote a great article on what he found. The people on the FOMC straight up did not understand the economy, and that becomes very obvious when you parse their nonchalance through the pivotal year of 2006. That’s true as far as it goes, but there’s a political angle here as well.

My question is, why don’t we have the transcript for 2007? Or 2008? Or beyond that? Why didn’t Congress have the evidence that Bernanke was an incompetent central banker when he was up for reconfirmation in late 2009? Why didn’t Congress know any of what was revealed yesterday while it was tasked with rewriting the rules governing our entire financial architecture?!? It might have been useful to know that the Fed was staffed by an inept, embarrassing group of fools fiddling over inflation while Rome was being set ablaze.

I wrote a piece on this back in May of 2011:

There’s an easy way, however, for the Federal Reserve to lose its aura of undemocratic secrecy. It could release transcripts of its Federal Open Market Committee meetings within one year — or be compelled to do so with a congressional subpoena.

These committee meetings are the real guts of U.S. economic policymaking. You can already get a summary of each meeting within three weeks. But the actual transcripts — the debates among Fed policymakers at those meetings — are released with a minimum lag time of five years.

Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform, had pledged last year to look into this issue. But he has not acted.

So, we still do not know what top Fed officials were debating from 2006 through 2010 as the housing bubble ballooned and the banking system collapsed. Were Fed officials privately worrying about the housing market? Were they aware of leverage in the system? Did they understand the dangers of credit default swaps?

The democratically elected Congress should have known these things before attempting to fix the financial system. Several congressional postmortems on the crisis should have had access to these records. And as Congress debates Rep. Mike Pence’s bill to change the Fed’s mandate, it should have access to this information.

Why doesn’t Congress issue a subpoena to get the information about FOMC meetings from 2007-2010, so that we know what the Fed is thinking? They do not deserve the presumption of competence anymore. Darryl Issa promised this during the transition to GOP congressional rule in 2010 but he has not followed through. Perhaps he should.

Many people did get what was happening — 2006 was the year that the big banks began cutting warehouse lines of credit to mortgage originators, which would eventually topple the whole housing ponzi scheme. Dean Baker had been trying to sound the alarm about a housing bubble as early as 2003. Yves Smith started her site Naked Capitalism in 2006 and Josh Rosner began noticing what was going on that year; moreover, the dangers of leverage had been recognized as far back as the early 1990s by such economic luminaries as Jane D’Arista.

It’s not just that the people on the Federal Reserve’s Open Market Committee — the real rulers of America — are insultingly out of touch with reality. It’s also that the public does not even get to see what they are doing and that Congress doesn’t really want to know. This, more than anything else, is animating figures like Ron Paul, who accuses the Federal Reserve of foisting an unwanted monetary system on the American public.

The reality of our times is that the people in charge of powerful institutions are driven by nothing so much as a desire to be the maintainers of consensus. That is what the FOMC participants were. And if we don’t fix this state of affairs and hold powerful people accountable for being incompetent and wrong at least some of the time, America is done for.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Mortgage Servicers: Getting Away With The Perfect Crime?

Without prosecutions, there’s nothing keeping fraud from becoming a standard business practice.

In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had “air in the marks” in its valuations of asset-backed securities, as the bankruptcy examiner’s report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. There’s a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

A lack of criminal prosecutions means that unethical business practices like this one drive out ethical business practices. After all, why should a bank hire an ethical default servicer that charges a high price for its product when it can pay nothing to one that simply extracts from investors and homeowners?

The joke that is the U.S. Attorney network has become very old and very stale. And unfortunately, because of Attorney General Eric Holder, that joke is on us.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.