April 18, 2024

DealBook Column: For Pawlenty as Wall Street Lobbyist, an About-Face May Be Needed

Tim Pawlenty, who will lead the Financial Services Roundtable, giving a speech during the Republicans' convention last month.Damon Winter/The New York TimesTim Pawlenty, who will lead the Financial Services Roundtable, giving a speech during the Republicans’ convention last month.

“I went to Wall Street and told them to get their snout out of the trough because they are some of the worst offenders when it comes to bailouts and carve-outs and special deals.”

That was Tim Pawlenty, the former Republican governor of Minnesota, just over a year ago while running for president, railing against big banks.

So what’s he up to now?

DealBook Column
View all posts


Last week, he was named president of the Financial Services Roundtable, one of Wall Street’s most influential lobbying organizations. In his new job, in which his predecessor was paid $1.8 million annually, Mr. Pawlenty will spend his days shuttling around Washington, trying to convince lawmakers that those “carve-outs and special deals” really are beneficial for the nation’s banking system, though presumably without putting his “snout in the trough.”

To say that the choice of Mr. Pawlenty to represent the banking industry is odd would be an understatement, but his appointment is the clearest sign yet of the flexible ethic that makes the revolving door in Washington spin faster.

Consider many of Mr. Pawlenty’s previously espoused views, which are likely to need to change when his new job begins in November:

Mr. Pawlenty has repeatedly said he was against the bank bailouts that some say helped save many of the member firms of the lobbying organization he just joined. “I don’t think the government should bail out Wall Street or the mortgage industry or for that matter any other industry,” he told Fox News in January 2011 when questioned about his final position on the matter, which appeared to shift at times.

Last summer, when the banking industry — and the Financial Services Roundtable, specifically — was lobbying Washington to raise the debt ceiling to avert a default, Mr. Pawlenty was taking a different tack.

Jamie Dimon of JPMorgan Chase had called a potential default “catastrophic.” Mr. Pawlenty’s view? “Well, we don’t know that,” he said when asked on MSNBC about the many dire predictions of the fallout of a default. He suggested that Republicans play chicken with the Democrats, questioning the very premise that the country was on the verge of default. “I hope and pray and believe they should not raise the debt ceiling,” he told voters in Iowa.

And while Wall Street may like — some say love — the Federal Reserve chairman, Ben S. Bernanke, Mr. Pawlenty has a starkly different view.

“I opposed his appointment last time, so it wouldn’t be hard for me to oppose his reappointment next time, and I don’t think he should continue in that position,” he told CNBC in June 2011.

And then there is his public view of President Obama, who, depending on which poll you believe, has a chance of still being president and regulating the industry that Mr. Pawlenty now represents. “President Obama isn’t as bad as people say, he’s actually worse,” Mr. Pawlenty declared at the Republican National Convention as national co-chairman of Mitt Romney’s presidential campaign. He is leaving that post to take the new job. Now, in his new role representing the banking industry, there are even odds, if not better, that Mr. Pawlenty will have to work with an Obama administration. Those will be some fun meetings.

So how exactly was it that Mr. Pawlenty, who has no financial industry background, got the job?

He declined to comment for this column.

Despite Mr. Pawlenty’s thinking on certain Wall Street issues, he has become a banking favorite over the last two years, speaking out against government regulation, and in particular, President Obama. According to Open Secrets, the top five donors to his presidential run, grouped by company, were Goldman Sachs, Moelis Company, Wells Fargo, Capital Group Companies and Morgan Stanley. In total, he raised just over $5 million. His name recognition alone will most likely open doors in Congress, which, in the world of lobbying, is half the battle.

Steve Bartlett, the current president of the Financial Services Roundtable, who will be retiring and handing over the reins to Mr. Pawlenty, said he believed his successor was “a consensus builder,” with “integrity” and was “bipartisan.” He paused for a moment before acknowledging that “bipartisan certainly isn’t the first word to come to mind” given the last two years ahead of the presidential election, but that Mr. Pawlenty is “bipartisan-minded.” He said that “this is not a selection about who is going to be in office in the next four years.”

He also pointed out that, with some important exceptions, “the fact is that the issues we deal with typically don’t get up to the presidential level.” (That may be true of lobbying that goes on for small amendments, but the overhaul reforms of Wall Street that were recently passed and many of which still must be enacted are on the radar of the White House, if they are not indeed driven by it.)

Before getting too far into the conversation, Mr. Bartlett warned that he was not intimately involved in the hiring process. “I was N.I.F.O. — nose in, fingers out.” He described a rigorous hiring process, saying that more than 100 people had been considered for the job and at least 30 people were interviewed.

When I asked how he felt about Mr. Pawlenty’s comments about the bailouts, which seem at odds with his organization, he said: “Our views are totally consistent. I don’t find those views to be at odds.”

But then he said, “different time, different context.” He continued by describing Mr. Pawlenty as “a guy sitting outside the Beltway,” who had the luxury and freedom to say how he felt.

How about Mr. Pawlenty’s views on Mr. Bernanke?

“I haven’t heard Tim Pawlenty on that,” he said.

And what about Mr. Pawlenty’s views of defaulting on the debt ceiling?

“In Washington there is an old saying, ‘Where you stand depends on where you sit.’ ”

Sadly, no truer words have ever been said about the influence of money on our nation’s capital.

Article source: http://dealbook.nytimes.com/2012/09/24/about-face-for-bankers-new-lobbyist/?partner=rss&emc=rss

Fair Game: Hazard Insurance With Its Own Perils

It’s about time.

 Investigators are training their sights on a type of hazard insurance policy known as force-placed insurance, a type of policy that has driven up costs for homeowners and pushed some into foreclosure. People who buy certain mortgage securities may be getting hurt, too.

Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services, is investigating institutions that underwrite and sell force-placed insurance. Last fall, his office began sending subpoenas to insurance agents and brokers. Requests for information also went out to insurance companies that write such policies.

Working his way up the chain, Mr. Lawsky’s office issued a new set of subpoenas late last week. According to a person briefed on the matter who was not authorized to discuss it, the subpoenas went to loan servicers that imposed force-placed insurance on borrowers, as well as to insurers affiliated with those servicers.

Among the servicers that received the subpoenas were Morgan Stanley Mortgage Capital Holdings and CitiMortgage. Insurer affiliates that received requests for information include BancOne Insurance, a unit of JPMorgan Chase, and Alpine Indemnity, an affiliate of PNC.

“Force-placed insurance appears to be the dirty little secret of the mortgage industry,” Mr. Lawsky said in an interview last week. “It is a silent killer harming both consumer and investors while enriching the banks and their affiliates.” 

Representatives of PNC and JPMorgan Chase declined to comment. Mark Rodgers, a spokesman for Citigroup, said the bank was working with Mr. Lawsky’s office. “CitiMortgage does not sell homeowner’s insurance to consumers,” he said. “If a homeowner does not provide an insurance policy, CitiMortgage secures a policy to protect the interest of the investor. Whenever the homeowner submits proof they have obtained insurance on their own, the lender-placed insurance is canceled.” 

A spokesman for Morgan Stanley said its mortgage company “does not have an affiliated agent, broker or insurance company to procure force-placed insurance.”

Force-placed insurance has exploded during the foreclosure crisis. Once a backwater that generated $1 billion a year, it is now a $6 billion-a-year business. Much of its growth has come on the backs of homeowners.

When homeowners run into financial trouble, they often let their hazard insurance lapse. Because lenders require homeowners to be insured against damage or total loss — say, from a fire — policies are then forced on the borrowers and added to their monthly mortgage payments.

There is a lot to love about force-placed insurance — if you sell it. The policies typically cost at least three times as much as ordinary property insurance. Some borrowers have been charged much more — up to 10 times the prevailing rate — according to people knowledgeable about these practices who spoke on condition of anonymity to maintain business relationships.

Mind you, force-placed policies do not protect homeowners from loss. Only lenders are covered. But homeowners must pay the freight. And lender-placed insurance typically does not carry deductibles, as typical policies do.

Borrowers have also complained of being forced to buy this high-priced insurance even when it is unnecessary. Back in 2007, a borrower with a mortgage serviced by Countrywide Financial described how the lender automatically signed her up for flood insurance even though she had proved that such insurance was unnecessary. Not being able to meet the extra payments, she fell behind on her mortgage. Countrywide then began foreclosure proceedings. 

All in all, force-placed insurance represents a major profit center for mortgage servicers and the companies that write the policies. In many cases, you will not be surprised to learn, the servicers and the insurers are affiliated. This sets up the potential for conflicts of interest among loan servicers that are often supposed to represent investors owning mortgage loans bundled into securities.  

Many banks have set up affiliates that provide this insurance or take on some of the risks that other companies have insured, known as reinsurance. These cozy relationships are a focus of investigators.

Consider the potential for mischief when a mortgage servicer administers a loan owned by an investor. If a loss is incurred on the property that is insured by an affiliate of the servicer, it is not in the servicer’s interest to file a claim on behalf of the investor to cover the loss.

Because such relationships are not typically disclosed, investors may be unaware that these conflicts exist. Faced with a loss on the property, the investor may simply accept it without protest.

Insurers that are not affiliated with lenders have paid fees from 15 to 20 percent of the policy to the banks that place the insurance, according to former industry executives. This indicates how lucrative the business is. 

A more consumer-friendly way to deal with insurance lapses would be for servicers to advance money to the borrower’s existing carrier to keep the policy current. Then, the servicer could bill the borrower for the coverage.

But that would stop the lush profits generated by forcing high-cost insurance on borrowers.  

Insurers that provide this kind of insurance say they must charge higher rates because homeowners who allow their policies to lapse are riskier. But these policies are not typically money-losers. According to data from the National Association of Insurance Commissioners, the average loss ratios on lender-placed insurance are about 22 percent. This compares with loss ratios of 65 percent on traditional homeowners insurance.

AMONG the tricks of this trade that investigators may examine is one that sometimes coincides with a mortgage refinancing. During the bubble years and to a lesser extent even today, lenders can add new coverage to existing policies if a property has increased in value. If a homeowner has, say, coverage for a $200,000 home that she refinances for $225,000, the amount of insurance she might be forced to finance is $425,000.

 Mr. Lawsky’s office has recently struck agreements with some servicers that protect against common abuses in this coverage. Last fall, for example, when Goldman Sachs sold Litton Loan Servicing to Ocwen Financial, Mr. Lawsky’s office had to approve the transaction. That approval was conditional upon Ocwen agreeing not to place this type of insurance with affiliates and requiring that it impose only competitively priced policies. 

Adding to homeowners’ troubles by forcing them to buy overpriced insurance is yet another ugly aspect of the mortgage servicing business. Let’s hope that shedding light on these practices will begin the process of eliminating them.

Article source: http://feeds.nytimes.com/click.phdo?i=551b809763479c812cdd7d283c5e997e

DealBook: Mortgage Executive Receives 30-Year Sentence

A federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.Bruce Ackerman/Ocala Star-BannerA federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.

A federal judge sentenced Lee B. Farkas, a former mortgage industry executive, to 30 years in prison, far short of the 385-year penalty sought by prosecutors.

The case against Mr. Farkas, who was convicted of masterminding one of the largest bank fraud schemes in history, stands as the single biggest prosecution stemming from the financial crisis.

As chairman of mortgage firm Taylor, Bean Whitaker, Mr. Farkas orchestrated a plot that caused the demise of Colonial Bank and cheated investors and the government out of billions of dollars, prosecutors say.

Mr. Farkas led a minor financial firm based in Florida, and his crimes began well before the crisis struck. So while the case is a defining moment for the government, its relative obscurity also highlights the continued struggle to prosecute financial fraud in the wake of the crisis.

Other than Mr. Farkas and a string of small fry mortgage fraud prosecutions, no senior financial executives have been imprisoned. Even now, federal prosecutors have yet to bring charges against an executive who ran a large Wall Street institution leading up to the crisis.

A 2009 case against hedge fund managers at Bear Stearns ended in acquittal. Prosecutors also recently dropped perhaps their biggest case related to the crisis, an investigation into Angelo R. Mozilo, the former head of the subprime lending giant Countrywide Financial.

Mr. Farkas, 58, appeared in federal court in Alexandria, Va., on Thursday, wearing a green prison jumpsuit.

His sentence, while steep, falls short of the 150 years given to Bernard L. Madoff for running a huge Ponzi scheme.

Mr. Farkas’s fellow Taylor Bean executives fared far better. The firm’s former chief executive and treasurer, among others, pleaded guilty and cooperated in the case against Mr. Farkas. The executives received sentences ranging from three months to eight years.

The government, aiming to send a message to the financial industry, had asked the judge to impose the maximum penalty on Mr. Farkas, a 385-year sentence.

“Sentencing him to the maximum penalty allowed by law will send the most forceful and unequivocal message to senior corporate executives that engaging in fraud and deceit in order to pump up your company or line your own pockets is unacceptable and will have severe consequences,” prosecutors said in a recent court filing.

Mr. Farkas’s lawyers had asked for a 15-year sentence, saying his actions were intended to keep Taylor Bean and Colonial Bank in business. Mr. Farkas took the stand during the trial to deny any wrongdoing.

In recent weeks, his friends and supporters sent letters to the judge that painted Mr. Farkas as a kindhearted humanitarian, someone who always “displayed integrity.” Mr. Farkas once paid a stranger’s medical bills, often donated to the local salvation army’s Christmas fund-raiser and even offered up his private jet to transport a mother and her baby to New York for cancer treatment, they said.

A federal jury in Virginia was unmoved. In April, after a 10-day trial and little more than a day of deliberations, the jurors found Mr. Farkas guilty on 14 counts of securities, bank and wire fraud and conspiracy to commit fraud.

Mr. Farkas’s $2.9 billion scheme began in 2002, prosecutors say, when Taylor Bean was facing mounting losses. To hide the losses, Taylor Bean executives secretly overdrew the firm’s accounts with Colonial Bank. The lender, aiming to cover up the overdrafts, sold Colonial about $1.5 billion in “worthless” and “fake” mortgages. The government, in turn, guaranteed the bogus loans.

When Colonial started to struggle, Mr. Farkas helped convince the bank to apply for $570 million in taxpayer bailout funds. The Treasury Department initially approved the rescue loan, but ultimately withdrew the offer.

Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures during the crisis.

Mr. Farkas, meanwhile, diverted more than $40 million from Taylor Bean and Colonial to “finance his lifestyle,” prosecutors said. He used the funds, according to the government, to buy a private jet, vacation homes and a collection of vintage cars.

Article source: http://feeds.nytimes.com/click.phdo?i=7c82d7417c11106e1b56a117fa364752