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Home > Blogs > Ian Fraser > Banks who bend the law are serving capitalism ill

Banks who bend the law are serving capitalism ill

Finance Blogger: Ian Fraser Ian Fraser

Alan Sloan is one of America’s most respected business and financial columnists; he is also a man who genuinely loves capitalism. So when Sloan starts suggesting US banks risk destroying the capitalist system with their cavalier disregard for the law, one really ought to sit up and take notice.

Two years ago Sloan won the Gerald Loeb Award, America's most prestigious award for business and financial journalism, for the seventh time. Sloan, 66, received the award for Junk Mortgages Under the Microscope, an article published in Fortune in October 2007 (which I referred to in this earlier blog).

In the article Sloan lifted the lid on the process by which Goldman Sachs transformed lead into gold in the US subprime mortgages market. The New York-based investment bank basically took a towering pile of toxic debt - including some $494m of US liar loans and subprime mortgages - and reinvented it as the impressive sounding Goldman Sachs Alternative Mortgage Products (GSAMP) Trust 2006-S3.

As Goldman Sachs scrambled to "de-risk its portfolio" in 2006-07, the investment bank successfully sold GSAMP to gullible institutional investors including European pension funds and German banks. It was the financial equivalent of distilling toxic waste into spring water, said Sloan. (And remember GSAMP was one of thousands of similar products with which Goldman Sachs and other Wall Street institutions polluted the global financial system).

Sloan has now written another devastating indictment of US bank practice. In The real foreclosure mess: Lack of accountability for banks, Sloan suggested that the breathtaking double standards of US banks including Bank of America, GMAC and JP Morgan in the “foreclosure-gate” scandal could bring down the capitalist system.

In particular Sloan said he is appalled that US banks should have used, and continue to use, "misleading affadavits" in order to evict people from their homes, whilst at the same time seemingly assuming that they (the banks) are above the law.

"The biggest danger to the US capitalist system doesn't come from communists or community activists or left-wing academics. It comes from some of the nation's biggest financial institutions. These companies, which helped create the financial meltdown that touched off the Great Recession, have found yet another way to undermine the public's faith in capitalism and markets: the foreclosure fiasco."

Sloan said he is disgusted by the double standards of the US banking industry:

"If you mess up big-time when you deal with a giant bank, you're toast. If the giant bank messes up when it deals with you, it gets a do-over. Sure, many - probably most - of the people whose mortgages are being foreclosed got in trouble because they overreached or lost their jobs, not because anyone cheated them. But if we're going to have rules, they ought to be binding for everyone. If I'm supposed to obey the law and pay my bills, the people I'm paying ought to have to obey the law, too.

It's utterly shocking, even to a congenital skeptic like me, to see that giant institutions such as Bank of America, GMAC and J.P. Morgan were allegedly using misleading affidavits to oust people from their homes. Employees of these institutions - the "robo-signers" - repeatedly misled courts by saying they had examined documents they hadn't examined.

If you or I did that, we'd be kicked to the curb by the legal system in about two seconds. If we said that we hadn't wanted to spend the money to do things right - the real reason that robo-signers exist - it would take only one second for the system to come down on us."

He added that, even though banks that have filed false information in court will be “attacked, sued and investigated” and their “chief executives will be hauled in front of Congress for public show trials by posturing politicians", they will ultimately get let off the hook. That is in sharp contrast to the justice likely to meted out on 'ordinary Joes' who have had the temerity to behave in the way the banks have done.

Sloan concludes by making a heartfelt plea to the US banking industry:

"I hope the bankers won't be as tone-deaf as they've been lately and blame their problems on the Obama administration or plaintiffs' lawyers or the news media rather than on themselves.

We're already starting to hear the whining about how the big guys are being mistreated for minor paperwork errors. Poor babies. With friends like these, the capitalist system doesn't need enemies."

The Fortune columnist is completely on song here. The banking industry is never going to regain people’s trust if it continues to behave in roguish ways. Who knows, Sloan might even walk off with the Gerald Loeb Award for an eighth time!

Further reading on US foreclosure and the subprime mortgage crisis

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Tags: banking , financial crisis , foreclosure , foreclosure fraud , subprime , subprime mortgages , US
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  1. Bill Sharon says:
    Mon Nov 08 16:50:01 GMT 2010

    Dear Mr. Fraser,

    No doubt you and Mr. Sloan are accurate in your assessments of astonishing behavior on the part of the major banks in their foreclosure efforts. I would suggest, however, that you are both addressing a symptom and not a cause. We might want to consider that greed, for lack of a better word, is an insufficient explanation. If it were truly the cause of our problems then we have an insoluble problem, a dilemma if you will. As there will always be greedy people then we are left with the unsatisfying task of chasing after them and catching a few once they have broken the rules – except now we find that they actually make the rules.

    I think we might want to look for a more systemic cause. The fundamentals of our system, the creation of money through debt and the imbalances it creates, are under tremendous stress. If you view the behavior of the banks from this perspective it can be understood as an effort to preserve the financial system (as opposed to the economic system – capitalism). That is certainly not to excuse the behavior but it helps us understand why the mortgage fraud is happening and why we will likely see more and more fraud appear in the system. One might want to look at the short positions in precious metals that many major banks are up to their eyeballs in as well as the fraud investigations into the mortgage backed securities sold to investors (that is likely the bigger problem for the banks than the robo-signers).

    We have yet to really address the underlying questions of the nature of money and its purpose. It’s easy to dismiss this as too ethereal and abstract but, in a way, that’s the problem. Money has long since changed from a means of exchange into something almost incomprehensible. Its complexity results in volatility; the more we try to control the volatility, the more we exacerbate it.

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