March 28, 2024

High & Low Finance: Court Ruling Against Banks Lets MBIA Benefit From Splitting Up

Imagine, for a moment, what a court might say if state regulators allowed an insurance company, facing huge losses because of Hurricane Sandy, to separate itself into two companies. One, thinly capitalized and in clear danger of not being able to pay all claims, would insure the areas hit by the hurricane, like the beach towns of New Jersey and the Rockaway area of Queens. The other, with plenty of capital, would carry all the policies that were not likely to have large claims.

Of course, no regulator would do that. And any court confronted with such an act would search for reasons to overturn it.

Now imagine an insurance company split up with the clear purpose of discriminating against a set of policyholders who were the subject of overwhelming public scorn rather than public sympathy — perhaps the people who had caused the catastrophe that led to the losses.

Just such a case was decided this week. And the state regulator’s decision was upheld by a judge who concluded that the regulator was entitled to the widest possible latitude in making its decisions. If the regulator had not bothered to verify calculations in the insurance company’s financial projections, and those calculations turned out to be wildly inaccurate, that was fine with the judge.

That case did not concern a hurricane, of course. It instead concerned the financial storm that sent the world into recession and led countries to bail out the banks that had made bad loans that led to the disaster.

The insurance company was MBIA, a company that prospered insuring municipal bonds, almost all of which were safe anyway. It then made the huge mistake of deciding to also insure structured financial products, like collateralized debt obligations and commercial mortgage-backed securities. It did little investigation of what actually backed those securities, explaining later that its low fees made such investigations too expensive. Instead it relied on the ratings agencies and on the banks that had put the securities together.

That reliance was misplaced, and MBIA is now in danger of being unable to pay claims on those securities.

In 2009, with the blessing of its regulator, the New York State Insurance Department, MBIA decided to split in two. On one side, fully protected, were the insurance policies issued to muni bond investors in the United States. On the other side were the structured finance policies, which would mostly benefit the banks that had bought such products. A group of banks sued to overturn the breakup.

Justice Barbara R. Kapnick of the New York State Supreme Court — a trial court despite the lofty title — listened to lawyers argue for 13 days over whether the case should proceed to trial. She decided there was no reason for a trial. The insurance department had wide latitude to approve the split with or without much investigation, and she would not second-guess it.

Anyone from the Securities and Exchange Commission who might read Justice Kapnick’s opinion will be envious. The S.E.C. has to contend with a court — the United States Court of Appeals for the District of Columbia Circuit — that instinctively throws up roadblocks to any rule the commission passes. The S.E.C. jumps through whatever hoops the court established in its last decision but, somehow, it never quite manages to live up to what the D.C. circuit requires in its next ruling.

Justice Kapnick, on the other hand, is not bothered by the fact that the state insurance department relied on MBIA financial filings that turned out to be very inaccurate — not just later but at the time that the filings were made.

The banks, she said, “fail to provide any legal authority to support their argument that this court can annul the department’s decision based on claims that MBIA concealed or withheld potentially damaging information” from the department.

She quotes from a deposition by Michael Moriarty, the deputy superintendent of the department and the man who signed the letter approving the split. When considering MBIA’s request, he said, “the department did not, nor do they usually, verify the financial condition of a company.” Since that was the policy, the judge concluded she had no authority to question it.

The New York Insurance Department has since been combined with the state banking regulator in a new body, called the Department of Financial Services, and that body seems to be very worried about MBIA’s ability to meet its obligations in the structured finance unit.

An interest payment that MBIA owed on a junior security it had sold to investors was not paid in January, because the department would not allow it.

Floyd Norris comments on

finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/03/08/business/court-ruling-against-banks-lets-mbia-benefit-from-splitting-up.html?partner=rss&emc=rss

Fair Game: 2011, a Year of Me-Firsts in Business — Fair Game

Some of this stuff we already knew. Like the fact that banks love the perks that come with being too big to fail. They will lobby shamelessly to hang on to their riskiest businesses and stay perilously large. No surprise, really. A heads-we-win, tails-the-taxpayers-lose model has a lot going for it, at least for executives atop these institutions.

Here’s another lesson we didn’t need to relearn: Penalties levied on corporate miscreants, and the legal bills they rack up defending themselves, never come out of their own pockets. Insurance policies and shareholders wind up paying. Another win for the me-firsters.

And what if you run a company so far into the ground that the federal government has to take it over? Not to worry: the taxpayers may even pay your legal bills. Consider Fannie Mae and Freddie Mac. Since the two companies collapsed into conservatorship in 2008, taxpayers have advanced about $73 million to pay the legal bills of former executives who are fighting fraud suits and investigations dating back to 2005.

Isn’t America great?

Another unfortunate lesson we keep learning over and over is that policy makers always put off tough decisions for another day. Kicking the can down the road is so much more fun and profitable, especially for politicians worried about re-election.

But last year also provided some truly illuminating moments. A favorite was the pronouncement that if Greece were to default on its debts, it wouldn’t really count as a default at all. That determination meant that investors who had bought insurance against a possible default would be out of luck. Their policies wouldn’t pay off as expected.

Who ginned up this nondefault default? A secret committee of bankers who call the shots in the world of credit default swaps. These people happen to work for big banks that probably sold the insurance and, as a result, would be on the losing end if a Greek default were actually called a default.

It sure is good to run the Wall Street branch of the Ministry of Truth.

Another eye-opener came courtesy of the folks at MF Global, the trading house and derivatives dealer overseen by Jon S. Corzine, the former New Jersey senator and governor and former chief executive of Goldman Sachs. Investors were shocked to learn that MF Global, a supposedly legitimate brokerage firm, was so lax about its affairs that hundreds of millions of customer dollars simply vanished. Months after MF Global failed, an army of investigators is still searching for the missing money.

Washington politicians can usually be relied upon to educate the citizenry — again and again. Last year was no exception. One telling moment came late in the year, when Democrats and Republicans agreed to extend an existing payroll tax cut for two months. Helping to defray the cost was $36 billion generated through an increase in mortgage guarantee fees charged by Fannie Mae and Freddie Mac.

That $36 billion will come out of borrowers’ hides, of course. But using Fannie and Freddie as a money spigot sent a powerful message: Never mind that losses at these mortgage giants have cost taxpayers $150 billion so far. Or that many Americans would prefer these toxic twins to go out of business sooner rather than later. As long as Fannie and Freddie are viewed as piggy banks, there is little chance that Congress will dissolve them. It looks as if these taxpayer-owned zombies, which did so much damage to our economy, are poised to live on and on.

Finally, it was in 2011 that the ugliest paradox of the financial crisis became clearer. That is, some of the very people our government had pushed to embrace the American dream of homeownership — minority groups, lower-income borrowers, immigrants and others previously shut out of the market — were the very people hurt the most by the foreclosure mess. Washington’s push to increase homeownership opened the door for companies to sell poisonous and tricky loans that have now imperiled many of the most vulnerable.

This became painfully evident in a discrimination suit filed by the Justice Department against Countrywide, once the country’s largest mortgage lender. The suit, filed in December, was based on investigators’ findings that more than 200,000 minority borrowers had been charged higher fees and rates by Countrywide than white borrowers of similar financial standing.

The Justice Department also said that Countrywide steered more than 10,000 minority borrowers into high-cost subprime mortgages even as white borrowers received standard, lower-cost loans. The company’s systems, investigators said, allowed loan officers and mortgage brokers to change the terms of mortgages without complying with fair-lending rules.

Bank of America, which bought Countrywide in 2008, agreed to pay $335 million to settle the suit. The events cited in the lawsuit occurred before its purchase of Countrywide.

But the facts assembled by the Justice Department certainly shed new light on Countrywide’s boasts of eliminating barriers to minority homeownership. Its House America program, which committed $600 billion in loans for low-income borrowers in 2003, won plaudits for Angelo R. Mozilo, Countrywide’s co-founder.

The next year, Mr. Mozilo was named Housing Person of the Year by the National Housing Council Conference. “We commend his leadership,” said G. Allan Kingston, the group’s chairman at the time, adding that it “led to the company becoming one of the top lenders to African-Americans and Hispanics, a direct result of his clear understanding that we must do more to ensure affordable homeownership opportunities throughout the nation.”

As I said: live and learn.

Article source: http://feeds.nytimes.com/click.phdo?i=9b0a501680e5cb6376ffad2ffd75c1ed

Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal

In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

But Mr. Donovan and others in the administration have been contacting not only Mr. Schneiderman but his allies, including consumer groups and advocates for borrowers, seeking help to secure the attorney general’s participation in the deal, these people said. One recipient described the calls from Mr. Donovan, but asked not to be identified for fear of retaliation.

Not surprising, the large banks, which are eager to reach a settlement, have grown increasingly frustrated with Mr. Schneiderman. Bank officials recently discussed asking Mr. Donovan for help in changing the attorney general’s mind, according to a person briefed on those talks.

In an interview on Friday, Mr. Donovan defended his discussions with the attorney general, saying they were motivated by a desire to speed up help for troubled homeowners. But he said he had not spoken to bank officials or their representatives about trying to persuade Mr. Schneiderman to get on board with the deal.

“Eric and I agree on a tremendous amount here,” Mr. Donovan said. “The disagreement is around whether we should wait to settle and resolve the issues around the servicing practices for him — and potentially other A.G.’s and other federal agencies — to complete investigations on the securitization side. He might argue that he has more leverage that way, but our view is we have the immediate opportunity to help a huge number of borrowers to stay in their homes, to help their neighborhoods and the housing market.”

And Alisa Finelli, a spokeswoman for the Justice Department. said: “The Justice Department, along with our federal agency partners and state attorneys general, are committed to achieving a resolution that will hold servicers accountable for the harm they have done consumers and bring billions of dollars of relief to struggling homeowners — and bring relief swiftly because homeowners continue to suffer more each day that these issues are not resolved.”

Terms of the possible settlement under consideration center on foreclosure improprieties like so-called robo-signing and submitting apparently forged documents to the courts to speed up the process of removing troubled borrowers from homes. Negotiations on this deal have been led by Thomas J. Perrelli, associate attorney general of the United States, and Tom Miller, the attorney general of Iowa.

An initial term sheet outlining a possible settlement emerged in March, with institutions including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo being asked to pay about $20 billion that would go toward loan modifications and possibly counseling for homeowners.

In exchange, the attorneys general participating in the deal would have agreed to sign broad releases preventing them from bringing further litigation on matters relating to the improper bank practices.

The banks balked at the $20 billion figure. And the talks seemed to stall over the summer, as Mr. Schneiderman and a few other attorneys general — Beau Biden of Delaware and Catherine Cortez Masto of Nevada, for example — questioned aspects of the deal.

Mr. Schneiderman began objecting a few months ago to the proposed releases barring future litigation, declining to participate as long as they were included.

“The attorney general remains concerned by any attempt at a global settlement that would shut down ongoing investigations of wrongdoing related to the mortgage crisis,” said Danny Kanner, the spokesman for Mr. Schneiderman. His office has opened several inquiries into mortgage practices during the credit boom.

Article source: http://feeds.nytimes.com/click.phdo?i=93aec5ea21c6b8d95f25d22ec8604924