Greetings

Foreclosures continue to plague main street Americans. Working to resolve the continuing foreclosure crisis, Bank of America has rolled out a new program that it thinks might help remedy the crisis: a deed-for-lease program, called “Mortgage to Lease.” This program, allows homeowners who face foreclosure to give/return their mortgage deeds to the bank, and then, in turn, sign leases to remain in their homes as renters. Although the program remains small—and invite-only—Bank of America is attempting to create alternatives by reaching out to homeowners rather than act adversarially. BofA does not expect the “deed-in-lieu” to continue forever. If however, the deed-for-lease program proves less costly than eviction, is less costly to the bank and does not hurt the homeowner’s credit as much as a traditional foreclosure, the program may be expanded. BofA maintains that it remains optimistic, yet realistic. Owners, after giving up the deed, would be offered one-year leases with the option to renew, at a rate the banks determines to be at or below the current market price. And if this small program works, BofA plans to broaden the program beyond the 1,000 or so homes in Nevada, Arizona, and New York that it has initially targeted. Because of increased foreclosures resulting from the big banks fraudulent “robo-signing,” banks are looking for alternatives to foreclosure, including this Mortgage to Lease program. According to the Wall Street Journal: “One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose [now]. . . .It’s more worthwhile for the banks to pursue alternatives.”

Corporate Justic

A Failure of Capitalism?

In 2008 testimony to the House Committee on Oversight and Government Reform in the days following the failure of Lehman Brothers, former Federal Bank
chair Alan Greenspan told Congress, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included,
are in a state of shocked disbelief.” Law and economics icon Judge Richard Posner wrote in his 2009 book entitled “The Failure of Capitalism” that “we are learning from [the crisis] that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.”

How did the economy run off the rails in 2008? New revelations have just surfaced that should add additional “shocked disbelief” to Greenspan’s admittedly flawed worldview. Last Wednesday, news from Congressional interrogation shows that Washington Mutual, once the nation’s largest savings and loan association, was deliberatelynpackaging mortgages they knew were delinquent or strongly believed would become delinquent, and securitized them as CDOs
to pass the risk of known or sure default on to investors. The bank admittedly and purposefully "used shoddy lending practices . . . to make tens of thousands of high-risk home loans that too often contained excessive risk, fraudulent information orerrors” according to the congressional report. The bank, in its
reckless pursuit of profits, in the face of competition that had materially minimized its returns resorted to innovative new financial instruments that instead of freeing up capital caused a financial collapse.

In light of this purported failure of capitalism, have Wall Street investment banks and national commercial banks changed their practices—reined in the reckless pursuit of profits at the expense of consumers and shareholders? It appears that the answer is no. Eighteen banks, including Goldman Sachs, JPMorgan and Citigroup, "understated their debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods." The very banks that needed bailout money from the U.S. taxpayers in 2008, have for the past five quarters in 2009 and 2010 manipulated their balance sheets by hiding their true risk exposure directly before required quarterly disclosures are due to investors. While these banks argue that this manipulation of balance sheets falls within GAAP (generally accepted accounting principles), that is also the argument that Lehman Brothers makes in response to its “repo 105” practice that has been slammed in the recent Valukas Report.

The incentives inherent in a deregulated market, the private market discipline mantra of Alan Greenspan and the insatiable greed exhibited by Wall Street bank executives clearly do not promote the public welfare. Un-regulated markets that incentivize failure for profit rather than sustainable growth are not beneficial no matter how “free.”

Cross-posted on the SALT Law Blog.

More Cowbell

Shareholder Angst.

Citigroup Shareholders Reject Executive Compensation Plan

Eight More Banks Fined for Abusive Foreclosure Practices