The Subprime Mortgage Market Mess and what it Means to you

Who Is Responsible For The Mortgage And Credit Crisis and What It Means To The Average

I received many comments on a previous article that I wrote and submitted to a number of sites concerning my theory about who may be responsible for the sub-prime mortgage mess. The article can be viewed at:

One person commented about the article the following: “An interesting take – but I don’t think the blame for this lies with lawyers (though some of them will be beneficiaries). A government structure that did away with much regulation of banking, finance, real estate licensing, brokerages, title companies, etc. is to blame as well as a boom and bust economic strategy built on windfall profit scenarios.”

So, who would propose the deregulation of financial and real estate firms such as these as well as develop an economic strategy that would seek profit off the hardships of minority and low-income individuals?

According to the statistics, “law” has long been the dominant profession for members of Congress with 228 of the 535 members of the 109th Congress having law degrees and 235 of the 534 members of the 108th Congress. That is a pretty high figure when you take into account that according to the 2000 U.S. Census only 1.1 percent of the total United States population stated that they worked in the legal occupations. Many of those that did state that they were in the legal occupations would not have been lawyers but would have been law clerks or paralegals.

The commentary also describes the problem as the fault of “Lenders were using irrational formulas and making irresponsible claims to buyers about continuing high prices. They built the bubble and they knew it for what it was and they used it to jump start the economy by spurring home starts, etc. Look at the economy now… When something as essential as housing becomes unaffordable to a majority of Americans (which it was in 2005/2006) it creates a sense of panic and urgency that is pounced upon by speculators – a little regulation would have quelled the panic and kept prices down longer, preserving affordability and avoiding all the but most irresponsible foreclosures…”

Now, when you are a poor, struggling lawyer and you have a few bucks to tuck away where has the soundest investment always been? That’s right, think about it. Financials have always been the safest place to invest your dollars and financial institutions invest heavily in the real estate market, but the real estate market, as you say, had been little on the downside in the 1970s. Keep in mind that financial stocks tend to be more than $100 per share.

Key Banking Legislation

Glass-Steagall Act (GSA)

During the “Great Depression,” a determination was made that improper banking activity was the cause of the 1929 stock market crash. Commercial banks were accused of being too speculative in the pre-Depression era. Questionable loans were issued to companies in that the bank invested in, and then the clients of the bank would be encouraged to invest in those same stocks. As a result of this determination, laws were enacted that blocked banks, stockbrokers, and insurance companies from entering each other’s line of business. This law was called the Glass-Steagall Act (GSA). This established a regulatory firewall between the commercial and investment banking institutions.

The firewall aimed at protecting the consumer by limiting underwriting activities with the use of consumer deposits. Commercial banks could however underwrite government-issued bonds. In addition, out of concern for banks amassing too much power, further policies were initiated in 1956 limiting the ability of the banks to underwrite insurance policies. A bank could own an insurance company, but could not underwrite the insurance. Over the years lawmakers have debated requests by the aforementioned industries to repeal this legislation in its entirety.

Community Reinvestment Act of 1977

In response to the practice of racially-motivated denial of credit and with considerable opposition from the mainstream banking community, further legislation was proposed that would prohibit a bank from targeting and offering services to only the wealthier neighborhoods in their service area. This practice was known as “redlining.

The Community Reinvestment Act of 1977 (CRA) was a law that required banks to provide services for the lower-income customers in their service areas. The purpose of the CRA was to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses. Many institutions did not want to comply with the provisions of the CRA so in 1989, Congress passed additional legislation that required regulators to oversee, evaluate and make public an institution’s CRA performance. This change, along with increased Congressional attention to the law’s enforcement forced compliance.

Additional legislation was reviewed and changed in 1995 to include allowing sub-prime mortgages to be acquired, classified and offered as collateral for a third-party investment. This was called securitization. The first public securitization of CRA loans started in 1997. Meanwhile, millions of dollars was spent by the banking, securities and investment and insurance interests to lobby members of Congress, political parties and finally the Clinton Administration for the repeal of the GSA.

Timeline Of A Well-Known, Large-Scale Sub-prime Lender

Let’s review the historical timeline of the actions of one of the major players in both the 1929 stock market crash and coincidently, what has become known as the “Sub-prime Loan Mess” Citigroup.

1812 to 1921 – On June 16, 1812, with $2 million of capital, City Bank of New York (now Citibank) opened for business in New York City. In 1822, Farmers’ Fire Insurance and Loan Company is founded. By 1894 the bank becomes the largest bank in the U.S. The bank then becomes the first major American bank to offer unsecured personal loans to its depositors and opens a personal loan department. In 1921 Charles E. Mitchell is elected President of the National City Bank.

1929 National City Bank becomes the largest commercial bank in the world. Expansion is accelerated with a merger: the Farmers’ Loan and Trust Company becomes the City Bank Farmers Trust Company. Charles E. Mitchell becomes chairman of the bank, the investment company and the trust. Mitchell, the presidents of the three companies and five other men became the executive committee for the overall company.

In a November 1929 interview U.S. Senator, Carter Glass declared that “Mitchell, more than any 50 men is responsible for this stock crash.” Despite this claim, Mitchell’s career in banking did not end after the crash.

1933 – The Senate Pecora Commission looks into the stock market crash and investigates Mitchell for his part in the tens of millions dollars in losses, excessive pay, and tax avoidance.
Before the Pecora Commission, Mitchell testified that:

Between 1927 and 1929 he was compensated $3,556,732 by the bank, a pretty nice paycheck for the time. In 1929, the National City Bank salesmen, under the direction of Mitchell, had sold 1,900,000 shares of National City stock to the public for some $650,000,000. After the crash, National City loaned $2,400,000 to its own officers to help them carry their stock (largely National City stock). In addition, to avoid payment of his 1929 Federal income tax, Mitchell sold 18,000 shares of his National City stock to a member of his family at a $2,800,000 loss. When questioned by one Senator about how many securities that had been sold to the public were in default, Mitchell answered that “during a ten-year period our sales were about $20,000,000,000 and I think there has been difficulty . . . in something under $1,000,000,000.”

Mitchell was not immediately dismissed by the directors of the bank and when he was finally dismissed, it was with reluctance. The bank directors allowed their personal affiliations with

Mitchell to override their responsibility to the public and they also denied that his actions were even culpable. Even though Mitchell was acquitted at trial, he later repaid the government more than a million dollars in back taxes.

After the findings of the Pecora Commission were made public, many bankers claimed that the greater villains were those that had placed the scandal in the headlines thereby risking the confidence of the American people in the United States banking system.

Many bankers to this day remain steadfast that Charles E. Mitchell was a genius in his time and he is currently listed on the Harvard Business School website as one of the 20th Century Great American Business Leaders.

1955 to1970 – The bank changes its name to The First National City Bank of New York. The negotiable certificate of deposit (CD) is invented by the bank and they enter the leasing business. The bank also enters the credit card business by introducing the “Everything” card. The “Everything” card is converted to Master Charge (today’s MasterCard).

1974 to 1992 – The First National City Corporation holding company changes its name to Citicorp and introduces the floating-rate note into the U.S. financial market. First National City Bank becomes Citibank, N.A. (for National Association) and by 1992 becomes the largest bank in the United States.

1993 to 1998 Citibank becomes the largest credit card and charge card issuer and servicer in the world and by 1998 merges the savings banks acquired in the 1980s and all Citicorp and Travelers Group divisions into Citigroup, Inc. Charles O. Prince III (lawyer) is named Chief Administrative Officer.

The following are excerpts from the April 7, 1998 transcript of “The NewsHour with Jim Lehrer” touting the “Largest Merger in History.”

In the largest proposed corporate merger in history, the banking giant Citicorp and insurance titan Travelers will join forces. The new company, to be called Citigroup, would be the largest financial services company in the world. Two financial analysts discuss the proposed deal with Phil Ponce.

Phil Ponce is national correspondent for the NewsHour with Jim Lehrer. Prior to his arrival at The NewsHour, Ponce spent five years at Chicago PBS station WTTW, where he was a correspondent for Chicago Tonight, a 30-minute nightly news analysis program.

PHIL PONCE: “Citicorps is the second largest commercial bank in the United States and the world’s leading distributor of credit cards, issuing some 60 million bank cards. Travelers Group is a financial conglomerate that offers insurance and investment banking services. It became the nation’s third-largest brokerage firm when it bought out the New York investment firm Salomon Brothers last year. The merger comes as Congress once again considers changes to banking law. The 1993 Glass-Steagall Act prevented banks, insurance companies, and brokerage firms from joining forces. Travelers head Weill said yesterday he hopes the proposed merger will push Congress to remove those barriers.”

SANFORD WEILL: “Maybe what we’re doing will cause that legislation to change, because I think that if you look to Europe, or you look to Asia, organizations like ours already exist, where banks and insurance companies and investment companies are all part of what they call universal banks. And what we are doing here is creating a company headquartered in the U.S. that will be able to compete very effectively all over the world.”

PHIL PONCE: “Joining us now are Marcus Alexis, who teaches economics and management at Northwestern University. He’s a former chairman of the board of the Federal Reserve Bank of Chicago. And Rodgin Cohen, a partner with Sullivan and Cromwell, a New York law firm. He’s advised several major mergers of financial institutions. Gentlemen, welcome both.”

The Rationale For The Merger.

RODGIN COHEN: “I think there are a number of drivers which lead to mergers such as this. One is the demands of technology, which are ever increasing. A second is competitive pressures domestically. A third is globalization of the financial markets. A fourth is what you might call the homogenization of financial products, with products being similar at various segments of the markets. And then finally you have the demands of customers, both retail customers and commercial customers, who want to obtain a full range of financial services from a single institution.”

PHIL PONCE: “Mr. Alexis, what do you think is in it for the respective parties? Why are they “getting married” like this?”

MARCUS ALEXIS: “Well, as Mr. Cohen said, they have competitive issues. There are certain synergies. Not only do customers like to get a full range of services from a single vendor but also there are certain economies in cross selling by them. American banks have not been able to maintain a dominant role in financial markets because of the restrictions imposed upon them by Glass-Steagall, and our holding bank legislation. This gives our banks a chance to play on a level field with banks in Europe and in Asia.”

Will This Merger Change The Face Of Banking?

PHIL PONCE: “How about that, Mr. Alexis, has the banking industry sort of outgrown, out-evolved the legislation that controls it?”

MARCUS ALEXIS: “Well, I think you’ve asked the right question. Has it outgrown or out-evolved? It wasn’t necessarily a mistake to set up the kind of regime that was done in the 1930’s. We didn’t know a lot. The country was in crisis. There was a need to do something quickly and to do something dramatically. And so a series of banking laws were passed with the attempt of trying to give the public confidence in banking. Now, this regime worked fairly well until the late 1960’s, and then it ran into difficulty as interest rates got into the double digits, then the system that had been planned didn’t work. And, after that, the banks saw that their best markets were beginning to be eroded by bank-by institutions which were not banks in the regulatory sense but performed many of the functions of banks and did so in ways that made them more attractive to bank customers. And you had money market mutual funds that came along and took some of their best depositors and little by little the banks found that they were being nibbled at, and humbled.”


Changes in Banking Legislation

Financial Services Act of 1999

The intent of this legislation was to “modernize” banking laws. The proposed Financial Services Act of 1999 would:

a) Permit affiliations of banking, securities, and insurance companies.
b) Amend the Federal Deposit Insurance Act preventing the use of deposit insurance funds to assist affiliates or subsidiaries of insured financial institutions.
c) Require clear disclosure of fees for privacy policies and on transaction fees for use of ATMs.
d) Reform the Federal Home Loan Bank System into making membership voluntary and replaces the annual payment made by those banks for interest on bonds issued by the Resolution Funding Corporation with an percentage assessment of the bank’s net income.
e) Eliminate the requirement that the Federal Deposit Insurance Corporation (FDIC) retain a “special reserve” for the Savings Association Insurance Fund.
f) Require General Accounting Office to prepare six reports that are available to the public unless restricted or classified.
g) Require affiliates of bank holding companies and bank subsidiaries to obtain the approval of the Federal Reserve and the Treasury before engaging in any new activities.
h) Institutions that conduct banking, securities, or insurance activities would be regulated by the agency responsible for each such activity and this legislation would also bar judges from deferring to the expertise of the Office of the Comptroller of the Currency.
i) Terminate the authority of the Office of Thrift Supervision to grant new charters for unitary savings and loan holding companies for all applications other than those approved or pending as of March 4, 1999.
j) Create a new, uninsured charter for national or state banks known as “wholesale financial institutions.”
k) Require federal banking agencies to develop regulations governing retail sales of insurance products and securities by depository institutions.

The House did approve the Financial Services Act of 1999 with the requirement that financial institutions allow customers to opt out of information-sharing activities and tougher penalties could be applied to banks that were out of compliance with the CRA.

President Clinton (lawyer) signed the legislation in late 1999.

Revision of the Community Reinvestment Act

The next hurdle for the banking industry was the CRA and it was up for review and revision beginning in 2002. The first step was a public commentary period. Among the banking community, there was a consensus that the collection of data, and the recordkeeping and reporting requirements were a burden on the smaller community institutions, so changes in those requirements were requested in order to reduce some of those requirements.

In addition, there were proposed changes that removed holding company affiliations as a factor in determining which CRA evaluation standards would apply to a bank. The asset size of the holding company no longer had a bearing on which test applies to a bank.

Another major change in CRA relates to how evidence of discrimination or other illegal credit practices would affect a bank’s CRA rating. Banks would not only be responsible for their own compliance but would also be assessed on the compliance of affiliates within the assessment area. Senior management and compliance officials at the financial institutions would need to know the status of an affiliate’s record with regard to the laws and regulations before deciding to include its CRA loan data as a part of the performance evaluation.

Revision of the CRA was published in August 2005 and became effective in September 2005.

The Citigroup Legacy

Citigroup, along with Ameriquest has long been accused of predatory lending practices and on at least two occasions Citigroup has paid their way out of lawsuits with Federal agencies, one for $240 million with the Federal Trade Commission, and the other for $70 million in 2004 with the Federal Reserve. Additionally, on July 24, 2007 Citigroup was fined $50 million by the New York Stock Exchange’s regulatory arm for using deceptive market-timing practices on behalf of hedge funds. The market-timing was reportedly widespread, involving more than 150 financial consultants in 60 branches in about 250,000 marketing-timing exchanges on behalf of more than 1,100 customers…

Inner City Press is non-profit community, consumers’ and human rights organization headquartered in the South Bronx of New York City, engaged in cutting-edge advocacy, reporting and organizing in the fields of community reinvestment, fair access to credit, insurance and telecommunications, environmental justice and government and corporate human rights accountability. The organization closely monitors the actions of Citigroup. The following excerpts are from an article that was published by Inner City Press commenting on the acquisition of Ameriquest by Citigroup:

With Subprime Hot Air in DC, Cold-Blooded Citigroup Buys Ameriquest

Byline: Matthew R. Lee of Inner City Press

“As President George W. Bush and Federal Reserve chairman Ben Bernanke Friday wrung their hands in Washington about the sub-prime mortgage meltdown, New York-based Citigroup announced it was buying a chunk of admitted predatory lender Ameriquest. Citigroup is a meta-predator, taking advantage of the foreclosure boom to scoop up one of the most abusive lenders at a temporarily reduced price. The head of Citigroup’s “global securitized markets” unit, Jeffrey Perlowitz, said the takeover “allows Citigroup to secure valuable and scalable platforms in a market undergoing significant change.” Some thought predatory lending was a market being discredited and shrinking. To Citigroup, it’s just change that can be scaled up.”

“The founder of Ameriquest, Roland Arnall, who has made billions from predatory lending, was nominated by President Bush as Ambassador to the Netherlands. While a few U.S. Senators delayed his confirmation until Ameriquest finalized a settlement with state attorneys general, now Arnall will profit again, selling the remainder of the company to Citigroup. The losers in the deal are the borrowers from whom Citigroup will even more ruthlessly squeeze payments on loans that were misleading and abusive from the start, and future borrowers whom Citigroup will target with the ex-Ameriquest “scalable platform.”

“2006 was the third year in which the data distinguishes which loans are higher cost, over the federally-defined rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens. Citigroup in 2006, in its headquarters Metropolitan Statistical Area of New York City, confined African Americans to higher-cost loans above this rate spread 4.41 times more frequently than whites, according to Fair Finance Watch. Citi’s disparity to Latinos was 2.38. Meanwhile Citigroup is now buying a unit of Ameriquest, 91.65% of whose loans in 2006 were sub-prime.”

“Citigroup loves sub-prime, and has no scruples in this field. Its corporate DNA goes back to a Baltimore-based predatory lender called Commercial Credit, which Sandy Weill and Charles “Chuck” Prince took over in the 1980s. After their company, by then called Travelers, acquired Citicorp in 1998, the next big deal was to scale up sub-prime lending, by taking over Associates First Capital Corporation, which was being sued for fraud all over the country.”

“And now, while others wring their hands to come off as concerned, Citigroup is rushing headlong with Ameriquest further down the road
of predatory lending.”


October 29, 2007: Citigroup has reported $6.5 billion in credit-related losses, write downs and extra costs, on its $2.4 trillion in assets… Meanwhile, it’s reported that Hungary’s Office of Economic Competition (GVH) has fined Citigroup HUF $12 million, saying it misled its customers in advertisements regarding the interest-free usage of credit cards. Citigroup failed to note in its ads that the interest-free usage was only valid when the cards were used for purchases but not for cash withdrawals. The ads also failed to inform customers that the entire debt had to be paid by the given deadline for interest-free usage…

Chuck Prince released this statement in November 2007: “Given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down.” Prince walked away with an estimated $99 million in vested stock holdings and a pension, according to an analysis by New York-based compensation consultant James Reda. Prince had already pocketed $53.1 million in salary and bonuses over the last four years, Reda said.

Citigroup Stock price dropped 47.11% in 2007

The Lawyer Connection

It is very difficult to attain information about the finances of attorneys. Attorneys absolutely do not want anyone to know what they might be making on a lawsuit, even if you are the one paying the bill. It is even more complicated to obtain an itemized statement from an attorney requiring that you pay attorney’s fees during litigations when you are not his client, amazingly they think this is none of your business. You are just expected to pay whatever the attorney reports to the court as “attorney’s fees” without questioning how they actually earned the money.

In an article written by Jill Nawrocki and dated September 12, 2006 on the “Corporate Counsel” website there appears an article about Citigroup attorneys lending a help to Katrina Victims. The article reports that “associate GC David Goldberg began knocking on the doors of New Orleans’ small businesses this winter, he found local store owners who were left with nothing after Hurricane Katrina. Many of the people he spoke with were skeptical of legal assistance and confused by the idea of pro bono help. But seven months and several trips later, Goldberg and other attorneys have assisted nearly 1,000 small businesses in securing relief. And that’s just for starters.”

It goes on to say that “Since January, about 25 of Citigroup’s roughly 500 U.S.-based attorneys have logged 350 hours on Katrina-related pro bono work.” And “Even staff lawyers at the New York-based financial services giant who couldn’t travel to the Gulf Coast pitched in by working on appeals to the Federal Emergency Management Agency.”

Surely everyone knows that these attorneys didn’t do this purely out of the goodness of their hearts? Pro bono simply means that the small business owners didn’t directly pay for the lawyer’s services. Pro bono means that tax payers paid for the services of these lawyers and most likely, at a shockingly exaggerated rate. In addition to their hourly rates, these firms wrote off all their expenses such as hotels, air fare, etc and then some.

One of the firms associated with Citigroup in the past is: Stroock & Stroock & Lavan. Contained on the website for this firm under sub-prime is the following information:

“In addition to our litigation expertise, Stroock is a recognized market leader in the securitization of prime, sub-prime and revolving home equity loans. Stroock was among the first firms to advise on mortgage-backed bond issuances, and in the last year alone, our Structured Finance and Real Estate attorneys have represented clients in the origination of over $8 billion of commercial real estate financings. We have served as deal counsel for issuances by Bear, Stearns & Co. Inc. and many of its affiliates, issuers counsel for, among others, GRP/AG Capital, LLC and Thornburg Mortgage Home Loans Inc., a REIT, and underwriters counsel for issuances by Wells Fargo Home Mortgage and GMAC Mortgage Corporation. We represent underwriters each month in connection with REMIC and other securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. Our mortgage lending practice is also one component of a large, national commercial real estate practice. We represent institutional and private owner and investor clients in virtually all aspects of commercial real estate law, including sales and acquisitions, joint ventures, real estate development, commercial leasing, condominium and cooperative plans, land use and tax certiorari.”

This is one, only one, of Citigroup’s attorneys. Citigroup has more than 500 law firms representing them and if only half of those are investing in their clients and, if each of the other sub-prime lenders has just as many lawyers who happen to invest in them, then lawyers are not only benefiting; they are benefiting BIG.

Lawyers are not required to make their financials public. Indeed, there is very little that prevents lawyers from doing absolutely anything they want to. There is a standard of “innocent until proven guilty” in this country however, everyone knows that this standard does not seem to be applied equally to the lower-income classes or minorities. With lawyers, there is a sense that they are above reproach and should be given any benefit of a doubt. They have surely enjoyed that status.

There are consumers out there that are in mortgage foreclosure who only owe $1000 in back payments to their mortgage lender, but $4000 in fees to the mortgage lender’s attorneys. When the foreclosure is filed, the attorneys begin charging fees on a daily basis. Of course, the attorney is not actually working on that case daily, but they are charging fees daily. If you ask for a detailed statement of how the attorney comes up with what is owed you will simply not get one. What you might get, if you insist by a motion to the court, is a 3-4 line paragraph that outlines: what you owe to the lender in back payments and interest, an entry for an appraisal and property inspection (even though they don’t actually do an appraisal or inspection), and then two other entries which will probably amount to more than what you owe the lender for “Foreclosure Fees” and “Foreclosure Costs.” These are lump sum figures.

Additionally, if you are in foreclosure and you obtain the funds to catch up the mortgage payments, the mortgage company will not accept the payments. The lawyer must be paid first. When you contact the lawyer to find out how much to pay, it could take them up to two weeks to answer that question and you can’t simply request the information by telephone you must fax them a request. In the two weeks you are waiting to find out what to pay, you continue to get charged daily attorney’s fees. Then, there is the question of how to pay. There can be many rules that the attorney has regarding how they will accept the funds.

Some attorney’s have a practice of telling you what funds to send and how to send them by snail mail but, by the time you get the information you are past the date for sending the funds because the required date for payment was the day they sent out the mail. Therefore, it will take another two weeks to establish another date for sending the funds. This cute trick is practiced by at least one law firm, Castle Meinhold & Stawiarski of Colorado Springs, CO who represents Wells Fargo Bank who services loans for Washington Mutual.

In Conclusion

Who is responsible for the sub-prime mortgage?

Let’s see, the majority of our Congress are lawyers by profession. It took Congress and the Presidents (both of whom were lawyers) to deregulate laws that protected us from the banks becoming involved in stocks. Many law firms have a vested interest in the bank stock. Law firms also profit from foreclosure. Conclusion: Lawyers.

The law profession is in dire need of regulation for the public good. Caps should be placed on what a lawyer is able to charge. Financials and affiliations should be made public.

It is not sufficient anymore for the average person to just graduate high school with general studies. In order to protect ourselves, we need to be able to recognize the predators that we are dealing with in everyday life. Rather than trying to shuffle our kids off to trade schools, “Law and How It Applies To Our Everyday Lives” should be the main course of study during the last year or two of high school.