F.D.I.C. had seized Silverton last month, creating a bridge bank to run the institution while it sought a buyer

TO BE NOTED:

No Buyout for Silverton as Bank Is Closed

Update | 8:29 a.m. Federal banking regulators have shuttered Silverton Bank, a small, failed Atlanta “bank of banks,” instead of selling it to a group of private equity firms, a person briefed on the matter told DealBook.

The Federal Deposit Insurance Corporation sent a letter to Silverton’s customers — mainly small community banks — on Thursday, telling them it had closed the institution down, this person said.

The move represents a bump in the road for buyout firms seeking to move into the banking sector, a push that seemed to be underway this year. A group of private equity firms, led by the Carlyle Group, had been in talks with the F.D.I.C. to acquire Silverton.

“We have to do what is least costly to our insurance fund and to shut it down for good was less costly than the bids we received,” a spokesman for the Federal Deposit Insurance Corporation told The Financial Times.

Earlier this year, IndyMac and BankUnited Financial were taken over by groups of private equity investors.

The closure of Silverton is likely to be less disruptive than those of other institutions. It accepts only deposits from other banks, not retail deposits. Those banks, primarily small community institutions, can move their deposits elsewhere with relatively less fuss.

The F.D.I.C. had seized Silverton last month, creating a bridge bank to run the institution while it sought a buyer.

– Michael J. de la Merced"

High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions

TO BE NOTED: Via Alea From Reuters:

"UPDATE 2-U.S. bank regulators directed capital backdating

Thu May 21, 2009 5:00pm EDT

* Regulators were aware of practice and allowed it-report

* In one case, regulators directed backdating-report (Adds Grassley, Delmar comments)

By Karey Wutkowski and John Poirier

WASHINGTON, May 21 (Reuters) - High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions, allowing the institutions to appear healthier, and in one case directed a thrift to engage in the practice, according to a U.S. government watchdog report released on Thursday.

The Treasury's Office of Inspector General report said it was "alarming" that high-level officials at the U.S. Office of Thrift Supervision approved or directed the backdating of capital at six thrifts, including failed lender IndyMac Bank.

Allegations of capital backdating have tarnished the reputation of the agency, a division of Treasury that largely regulates mortgage lenders.

In March, the inspector general placed acting OTS Director Scott Polakoff on leave pending a review of allegations of capital backdating in 2008. The report released on Thursday did not indicate the progress of that review.

The capital backdating allowed IndyMac to maintain its "well capitalized" status and avoid a requirement that could have made it more difficult for the thrift to keep taking risky brokered deposits -- a big source of funding for some banks, the report said.

"We consider these matters very serious and find it alarming that such high-level OTS officials were not only aware of the backdating at two thrifts, but either directed or authorized the thrifts to backdate the capital contribution," the report said.

It said the OTS senior deputy director directed the backdating of capital at a thrift in the agency's Southeast region, but not IndyMac.

Polakoff was senior deputy director before becoming the OTS acting director in February. He did not immediately respond to a request for comment.

"We have taken the necessary actions to remedy the situation," OTS spokesman William Ruberry said, adding that the OTS's error was in not making sure a valid note receivable existed.

"Each of these transactions would have been acceptable if such a note had been recorded. So, we're talking about a piece of paper in a file. That's what these cases amount to," he said.

Senator Chuck Grassley, the top Republican on the Senate Finance Committee, said the OTS needed to hold the appropriate people accountable.

"This report paints the disturbing picture of a regulatory agency being much too cozy with the industry it's supposed to be regulating," Grassley said in a statement.

Rich Delmar, counsel to the inspector general for Treasury, said the office planned "to review the other corrective actions taken" at OTS.

The Treasury audit report released on Thursday follows the inspector general's "material loss review" of IndyMac, which was seized in July after loan defaults mounted and tight capital markets caused losses on mortgages it could not sell.

That material loss review uncovered the capital backdating at IndyMac and other thrifts, prompting the audit report.

The report does not name the five other thrifts but notes that the capital contributions that were backdated occurred at the institutions from January 2007 through August 2008.

BankUnited Financial Corp (BKUNA.O: Quote, Profile, Research, Stock Buzz) is among the institutions that were included in the report but not named, according to a source familiar with the matter. The troubled Florida lender is in the process of being sold and has drawn at least one bid from a private equity consortium, according to a source familiar with the matter.

The OTS submitted a letter in response to the inspector general report, saying it has focused "extensive resources" on the issue of backdated capital contributions. It said it has provided detailed guidance to its staff and the institutions it supervises about proper recognition of capital contributions. (Reporting by Karey Wutkowski and John Poirier; additional reporting by Paritosh Bansal; editing by John Wallace)"

"You cannot prevent this from happening again in the future without doing an autopsy," she says.

TO BE NOTED: From The American Prospect:

"Going After the Perpetrators of the Housing Bubble
State attorneys general, like Massachusetts' Martha Coakley, are leading the charge to hold accountable the lenders behind the current economic crisis.
Tim Fernholz | May 20, 2009 | web only

Talk to almost anyone about the financial crisis -- or at least anyone who doesn't work in the financial sector -- and sooner or later you'll hear it: "How come nobody's in jail for this stuff yet?"

It's not an absurd question. Most people recall the criminal charges associated with the Enron and WorldCom frauds a decade ago. Already, investigators of our current crisis have been able to determine that fraud was rampant in the sub-prime mortgage bubble that catalyzed the current recession.

But we still haven't seen major charges of white-collar crime. This is in part because, at the federal level, resources for those kinds of criminal investigations were gutted during the Bush administration -- more focus was placed on national security, and budgets were cut at the Department of Housing and Urban Development. Though federal regulators often have close ties to industry, their jurisdiction prevents action by officials more likely to respond to consumers. But the main problem, as described by officials who are looking to change this, is that so much of what was done is legal that it's hard to pinpoint criminal intent.

"So many people were doing just what the industry allowed," Massachusetts Attorney General Martha Coakley told me. "When everybody is doing it on such a large scale, it becomes somewhat of a norm."

Coakley's work today, though, is anything but the norm – she's still finding ways to hold lenders accountable for predatory loans. Her office issued emergency regulations last year to prevent criminals from taking advantage of troubled borrowers with schemes that rob of them of their cash and their homes while offering to protect them from foreclosure. Her team has also investigated mortgage lenders, securing a $50 million settlement from Goldman Sachs to modify predatory loans owned by the bank, along with a $10 million payment to the commonwealth. Her team also secured an injunction to prevent Fremont Investment & Loan, a lender that offered predatory loans, from foreclosing on its customers.

The Goldman Sachs settlement disappointed some because it doesn't include an admission of wrongdoing on the part of the bank, but such judgment would be cold comfort to borrowers who might have been left without homes if litigation dragged out over years. Investigations into other lenders continue.

"When you're looking at what is a widespread, major crisis, we think the civil regulatory tools are more effective in the short run to mitigate the damages," Coakley says. "And from those investigations you do start to see if there are individuals or businesses with that specific intent that should be indicted and charged."

Coakley, a long-time state prosecutor, is one of few law enforcement officials on any level to take such substantive action against mortgage lenders who made loans they knew -- or should have known -- would never be repaid. It isn't an easy task, either. Massachusetts has no predatory mortgage lending laws -- only seven states do -- and Coakley's office doesn't have jurisdiction over Massachusetts's banks or securities sales; she's also federally preempted from any kind of oversight of national banks and credit card companies.

But in 2007, shortly after she was sworn in, Coakley's office received numerous complaints from people who felt they were being taken advantage of by lenders. Her team, who had been looking into these abuses even before Coakley became attorney general, hit upon a way to go after those responsible. They were able to draw on their own resources, including a retired bankruptcy judge who worked on staff. They also consulted with local academics, including widely lauded law professor Elizabeth Warren, then of Harvard and now in charge of Congress' financial rescue oversight board. Warren's key insight was that loans ought to be regulated as consumer products, and that's exactly how Coakley's office approached predatory lending -- as a consumer problem.

Her office issued emergency regulations designed to prevent common foreclosure rescue schemes under the authority of the Massachusetts' Consumer Protection Act, which Coakley calls the "little FTC" because it is analogous to the authority underlying the Federal Trade Commission. The team also launched investigations into mortgage lenders and securitizers under similar auspices.

"We became intrigued with how this system worked," Coakley says. "There were plenty of people profiting from this, as the loans were sold sooner rather than later. We started to do an investigation, which is ongoing, around what role securitizers played in providing a market for [mortgage loans], in some instances providing financing for loans. They should at a minimum be responsible for mitigating the damage these loans caused."

Although Coakley has had the largest early returns on her investigations, a few other state law enforcement officials are involved in the paper chase as well. Richard Cordray, Ohio's attorney general, is also taking action against foreclosure rescue schemers and recently hired an attorney who formerly headed up the Cuyahoga County Foreclosure Prevention Program, a group dedicated to helping consumers avoid foreclosures that has become a national model. Iowa Attorney General Tom Miller launched a hotline to provide consumers access to fair loan modifications, and led an investigation by 49 state attorneys general into now-defunct mortgage broker Ameriquest that netted a $325 million settlement in 2006. Similar efforts are on-going in Florida and North Carolina.

But Coakley also makes clear that despite the ability of law enforcement to play a role mitigating the damage of white-collar crime on consumers, it's not a substitute for effective regulation; a point she has also made testifying before Congress in support of federal legislation to prevent bad lending practices and foreclosure rescue schemes.

"It's much cheaper to build in the safeguards than to try and send out subpoenas and bring out a criminal charge against someone who had violated the law," she says. She doesn't buy the argument that smart regulations prevent an efficient financial system; when her office issued consumer protection regulations in 2007, a number of banks protested, but only one stopped doing business in the state altogether because of the new requirements. That bank was Indymac, which would soon go under completely as a result of its bad practices and risky mortgage portfolio.

Though Coakley and her fellow attorney generals are focused on figuring out exactly how lenders did business and hope to mitigate the damage caused by risky mortgage lending through regulatory enforcement and investigation, their efforts don't rule out criminal prosecution, either. The discovery of criminal intent in the course of those investigations could lead to indictments. Coakley's office has charged small-time mortgage schemers, but it's much more difficult to battle the pernicious institutional structures at the top of the system. But like the rest of the country -- Congress seems ready to authorize a special commission to investigate the financial crisis -- she wants, more than anything, to get to the bottom of this mess.

"You cannot prevent this from happening again in the future without doing an autopsy," she says."

“I am enjoying this.”

Since I hold the S & L Debacle responsible for this current fiasco, this post from the NY Times interests me:

"By ERIC LIPTON and DAVID D. KIRKPATRICK

Published: December 28, 2008

WASHINGTON — A tight-knit group of former senior government officials who were central players in the savings and loan bailout of the 1990s are seeking to capitalize on the latest economic meltdown, enjoying a surge in new business in their work now as private lawyers, investors and lobbyists.

Skip to next paragraph

Enlarge This Image

Dimas Ardian/Bloomberg News

L. William Seidman, former chairman of the Resolution Trust Corporation, sees an “enormous market” in distressed assets.

Multimedia

Graphic

Profiting From the Crash

Enlarge This Image

Manuel Balce Ceneta/Associated Press

Eugene Ludwig, former comptroller of the currency, says people are seeking his advice on “How do we contain the flames?”

With $700 billion in bailout money up for grabs, and billions of dollars worth of bad debt or failed bank assets most likely headed for sale or auction, these former officials are helping their clients get a piece of the bailout money or the chance to buy, at fire-sale prices, some of the bank assets taken over by the federal government.

“It is a good time to be me,” said John L. Douglas, a partner in Atlanta at the law firm Paul Hastings and a former lawyer for bank regulators who helped create the agency that administered the last federal bailout, the Resolution Trust Corporation.

Some of these former federal officials, like L. William Seidman, the first chairman of the R.T.C., are serving as advisers — sharing ideas with Treasury Secretary Henry M. Paulson Jr. and the transition team for President-elect Barack Obama — even while they are separately directing investors or banks on how to best profit from this advice.

“It is an enormous market,” said Mr. Seidman, who has already joined two such potential money-making efforts and is evaluating proposals to participate in a third. “I am enjoying this.”( GOOD FOR YOU )

David B. Iannarone, a former R.T.C. lawyer who is managing partner at a firm that handles defaulted commercial real estate loans, said, “The people who worked on this back in the early 1990s are back in vogue.”

The agency was set up by the government in 1989 to sell off what ultimately grew to $450 billion worth of real estate and other assets assembled from 747 collapsed savings banks.

What is obvious to former R.T.C. officials is that, like the last go around, a great deal of money will be made by a select group of investors and business operators, particularly those with government contacts. The former government officials said in interviews that much of what is motivating them is a desire to help the nation recover from this latest stumble. But they acknowledge they intend to be among the winners who emerge( CONFLICT OF INTEREST AGAIN ).

“Fortunes will be made here, no doubt about it,” said Gary J. Silversmith, one of more than a dozen former R.T.C. officials interviewed who now are involved in enterprises seeking to profit from bank bailouts.

The busiest money-making arena so far for these R.T.C. alumni is in helping distressed banks line up cash infusions from the Treasury, as they seek a piece of the bailout( HOW NICE ).

Robert L. Clarke, controller of the currency under the first President Bush and a former Resolution Trust board member, has been advising banks throughout the South on how to get their share of the bailout money.

“I have been absolutely inundated,” said Mr. Clarke, who now works at Bracewell & Giuliani, the law firm based in Houston affiliated with the former New York mayor and presidential candidate Rudolph W. Giuliani.

Mr. Clarke’s labor on behalf of his clients has included calling federal regulators to urge them to reconsider plans to reject applications for federal bailout money. He would not identify the banks, saying it might undermine public confidence in them.

But Mr. Clarke said his intervention, in at least some cases, has been successful( GOOD FOR YOU ).

Eugene Ludwig, the comptroller of the currency under President Bill Clinton during the final stages of the savings-and-loan cleanup, runs Promontory Financial Group, a banking consultant group whose clients include struggling banks.

“I must get an e-mail a day from people who I worked with back then about what to do about the current mess,” Mr. Ludwig said. “It is not so much capitalizing on it as really just, how do we contain the flames?”

Many of the former federal officials like Mr. Ludwig have stayed in the field, working as lawyers or contractors who buy up and resell seized bank properties. What is remarkable now is just how busy they are.

“It is a great time to be a banking lawyer,” said Thomas P. Vartanian, a partner in the Washington office of Fried Frank, who is the former general counsel to the Federal Savings and Loan Insurance Corporation, which led a bank bailout effort in the 1980s.

The planned sale by the F.D.I.C of the assets of IndyMac, the failed bank, has turned into an alumni event of sorts for veterans of the R.T.C. era, including John J. Oros, who was chairman of a financial industry council that advised bank regulators during the savings and loan crisis. Now he is a partner in J. C. Flowers, one of the private equity firms negotiating to buy part of IndyMac.

In the space of one weekend in September he explored buying out the troubled insurer A.I.G. and worked with Bank of America on an aborted acquisition of Lehman Brothers. Then he advised Bank of America on its last-minute switch to buy Merrill Lynch before Lehman’s collapse hammered Wall Street.

Although the financial meltdown is a disaster for the country, Mr. Oros said, “the opportunity going forward is unprecedented. It is fantastic.( FOR PEOPLE WITH GOVERNMENT CONTACTS ) It is as if I had been training for this for the last 40 years of my career.”

The biggest profits will most likely be made, the former federal bank officials agreed, by those who figure out a way to benefit from what could turn into one of the greatest fire sales of bad debt and bank assets in American history( THAT'S TRUE ).

Through September of this year, 25( AS REBBECA WILDER HAS SHOWN, IT'S 20 ) banks had failed, compared with three in 2007. An additional 171 are on the Federal Deposit Insurance Corporation’s list of troubled banks, more than double( STILL NOT THAT BAD ) the watch list at the end of last year.

As a result of these failures, and other related industry troubles, billions of dollars’ worth of real estate or at least mortgage-backed securities and other “illiquid” financial instruments will most likely need to be sold off at discounted prices to investors who stand to profit if they can sell the assets at a higher price once the economy recovers.( THAT'S THE PLAN )

The question right now is just how this unloading of bad debt will take place.( UM, YES )

So far, the federal government is relying on financial institutions to find a way on their own to sell off bad debts or assets they end up with as a result of foreclosures. But some financial industry players are arguing that a modern-day R.T.C. should be established, to help set prices for this bad debt, and speed the move toward a recovery( I WONDER WHY ? ).

The R.T.C. alumni are prepared to profit through either route( GOOD FOR THEM ).

Mr. Seidman, for example, has been hired as an adviser to SecondMarket, a company based in New York that early next year will start a virtual marketplace that intends to resell some of the trillions of dollars worth of distressed mortgage-backed securities, the financial instruments that helped fuel the surge in housing prices.

Mr. Seidman has already set up meetings between company executives and federal regulators, including at the F.D.I.C., said Barry E. Silbert, the company’s founder.

Mr. Silversmith, meanwhile, who during the savings and loan crisis helped arrange the sale of thrift assets, has teamed with Barry Fromm, the chief executive of Value Recovery Holding, one of the big government contractors who handled these sales. The two in recent weeks have held meetings with some of Mr. Silverstein’s former colleagues, including James Wigand, the deputy director in charge of the F.D.I.C. division that sells seized assets, to work on a plan to get ahold of some of the new wave of properties the federal government intends to put on the market as a result of recent bank failures.

Many of the investors who built legendary fortunes during the savings and loan crisis — like Sam Zell, the chief executive of the Tribune Company, and Joseph E. Robert Jr., the chief executive of J. E. Robert Companies — are also looking for ways to get back into or expand their distressed assets trade.( GOOD FOR THEM )

Mr. Zell, who has fared less well in his Tribune investment, recalled the instinct for capitalizing on the misfortune of others that earned him the sobriquet “the grave dancer” when he started buying up properties from failed savings and loans.

“When I started the first opportunity fund in 1988, I was the only one bidding — if they didn’t sell to me, they didn’t sell to anyone,” Mr. Zell recalled.

Now, he said, “The best opportunity right now is in the debt area, mortgages. We have been buying all along.”( HOW, IF THEY'RE NOT PRICED? )

R.T.C. experience is certainly no guarantee of success, the agency veterans acknowledge.

Peter Monroe, who was president of the R.T.C. oversight board from 1990 to 1993, has already bought about 300 distressed properties in Detroit, through a venture capital company he formed called Wilherst Oxford. Figuring out a way to profit from the investment — even though some of the houses cost him only a few hundred dollars — has proven to be a challenge.

“It is like a high-hurdle race: you can get going fast, but you have to jump over one hurdle after the other,” Mr. Monroe said. “It has turned out to be more complicated than even I expected.”

As I've said, that's our system. Can anyone doubt that we have a Hybrid system?

"federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan"

Expect more of this, if the government does its job. From the Washington Post:

"Senior Federal Banking Regulator Removed

By Binyamin Appelbaum
Washington Post Staff Writer
Monday, December 22, 2008; 3:24 PM

A senior federal banking regulator has been removed from his job after government investigators concluded that he knowingly permitted IndyMac Bancorp to present a misleading picture of its financial health in a federal filing only months before the California thrift was seized by regulators( FRAUD, NEGLIGENCE, FIDUCIARY MISMANAGEMENT, AND COLLUSION ).

The Office of Thrift Supervision removed Darrel Dochow as director of its western region, where he was responsible for regulating several of the largest banks that failed or were sold in the past year, including Washington Mutual, Countrywide Financial, IndyMac and Downey Savings and Loan.

Dochow allowed IndyMac to count money it got in May in a report describing its financial condition at the end of March, according to an investigation by the Treasury Department's inspector general, Eric Thorson, which was described in a letter from Thorson.

Thorson wrote that OTS, one of four federal agencies that regulates banks, allowed other companies that it oversees to perform a similar legerdemain( FRAUD ), though he did not name those companies.

Dochow did not immediately respond to requests for comments.

An OTS spokesman did not immediately return a call or an e-mail. In a letter to the inspector general, the head of OTS, John Reich, described Dochow's actions as a "relatively small factor in the events leading to the failure of IndyMac." Reich said he had assigned Dochow to work on "special projects and administrative issues" while Thorson completes his investigation.

The findings raise new questions about OTS's regulation of the thrift industry, made up of banks that concentrate on mortgage lending. Last month, The Washington Post reported that close ties between regulators and companies played a role in the collapses of several of the largest thrifts, including IndyMac. Regulators allowed companies wide latitude and failed to insist on changes even when problems became apparent( COLLUSION ).

"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them( GEE WHIZ ). Capitalization requirements are there for a reason( REALLY ? WHAT MIGHT THOSE BE ? ), and the failure of IndyMac cost the federal deposit insurance system $8.9 billion," said Sen. Charles Grassley (R-Iowa), who was briefed on the findings by Thorson. "It's good the inspector general has opened a full-blown audit as a result of this case. Everyone ought to be paying very close attention( HEAR HEAR )."

Dochow was appointed regional director in September 2007 after serving as the No. 2 in the western region. He was paid $230,000( PLEASE DON'T TELL ME THAT ) in 2007, according to government records. Dochow got the job shortly after playing a leading role in persuading( COLLUSION ) Countrywide to move under OTS supervision, a major coup for the agency, which is funded by fees from the companies it oversees( SAY THAT AGAIN ).

In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations( I KEEP SAYING THAT THE S & L CRISIS WAS KEY ).

Dochow was shunted aside in the aftermath and eventually sent to the agency's Seattle office. Several of his former colleagues and superiors have said that he gradually reestablished himself as a credible regulator and again rose in the organization.

Thorson is investigating the failure of IndyMac as part of his routine responsibilities. OTS is a part of the Treasury Department, and the inspector general reviews the failure of all large OTS-regulated thrifts.

Thorson learned about Dochow's actions in reviewing documents provided by IndyMac's accounting firm, Ernst & Young.

Thrifts are required to file a report with regulators every three months detailing their financial condition. IndyMac's initial filing for the first quarter showed the company's capital cushion was just large enough to meet regulatory requirements. But days after it submitted the filing, IndyMac executives were told by the company's accountants, Ernst & Young, that some of the numbers needed to be adjusted. The changes would drop the company below the capital threshold. Instead of "well capitalized," IndyMac would be categorized as "adequately capitalized," according to the inspector general's report.

The downgrade threatened IndyMac's survival. Thrifts classed as "adequately capitalized" need special permission from regulators to gather deposits through third-party brokers. At the time, 36 percent of IndyMac's $18.7 billion deposit base had been gathered through brokers, according to the report.

On May 9, Dochow met with IndyMac executives. The executives said they wanted to inject $18 million from the holding company into the thrift subsidiary, and to count that money as if it was already in hand at the end of the first quarter, according to the inspector general's report. It said that Dochow agreed.

On May 12, IndyMac filed its revised documents, showing the company was still well capitalized.

Thorson noted such a revision could be permissible if the company had intended to make the infusion as of the end of March.

"In our work thus far, we have neither found nor been shown any indication that this intent existed( KEEP LOOKING FOR EL DORADO WHILE YOU'RE AT IT )," he wrote.

Thorson's office is continuing to investigate why OTS allowed the revision, and planned to issue a report when the work is completed.

Staff writers Ellen Nakashima and Amit Paley contributed to this report.

"it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time"

Calculated Risk on the failure of HUDs Hope For Homeowners:

"From the WaPo: HUD Chief Calls Aid on Mortgages A Failure

Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government's effort to help struggling homeowners has been a failure and he's blaming Congress. ( OF COURSE HE IS )
...
The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike ( WELL DONE ), Preston said in an interview.
...
One of several federal and state foreclosure prevention initiatives facing difficulties, HUD's Hope for Homeowners program has been especially hamstrung. For instance, a program launched by the Federal Deposit Insurance Corp. on behalf of IndyMac Bank customers has modified more than 3,500 mortgages ( THE PROGRAM SHOULD BE COMPLETED BY THE TURN OF THE CENTURY. THE 23rd CENTURY ) in two months of operation.

I don't if Congress is to blame, or if the program was implemented poorly, but it is funny ( TRY TRAGIC ) that they hold up the IndyMac program (with just 3,500 mods) as being more successful.

Here was Tanta on IndyMac in October: IndyMac-FDIC Mortgage Modification Plan: Still in the Real World

I wrote a snotty post at the end of August after Sheila Bair's plan for "affordability modifications" of the former IndyMac loans was announced, the burden of snot wisdom of which was my prediction that Bair was going to discover that it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time. However, I did express the hope that the Bair plan would prove remarkably successful and indicated my willingness to eat my words should it prove necessary.

Looks like I'll have to stick to my usual dry toast and bananas after all.

Read it all! I think more people are discovering that successful mortgage mods are hard to do. "

I believe that borrowers and lenders are both holding out for better deals from the government. These programs don't work because they don't offer enough incentives, otherwise people would cut through the red tape with their teeth.

"executives at the giant mortgage lender simply switched regulators in the spring of 2007."

Here's a post in the Washington Post by Binyamin Appelbaum and Ellen Nakashima that a number of people are mentioning. I like it because it validates my Human Agency view that fraud, negligence, and fiduciary misconduct are among the most important causes of this crisis:

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide's new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank's mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

Hello. Didn't we just see this with Shopping Credit Rating Agencies? Also, the conflict of interest between the the companies needing their products rated and paying the businesses that give the rating?

"But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual -- the largest bank in U.S. history to go bust -- and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.

In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out."

That must have been quite a parade. I'm sorry I missed it. Is it on YouTube?

"OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents."

Now, since I blame the way that the S & L debacle was handled for prpetuating the system of implicit and explicit government guarantees, and since, well, it was a debacle, this is just painful to read.

"Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low. When the housing market turned downward, the thrifts were left vulnerable. As borrowers defaulted on loans, the companies were unable to replace the money they had expected to collect.

The decline and fall of these thrifts further rattled a shaky economy, making it harder and more expensive for people to get mortgages and disrupting businesses that relied on the banks for loans. Although federal insurance covered the deposits, investors lost money, employees lost jobs and the public lost faith in financial institutions."

And regulations work? How about the Human Agency problem of Regulators? Ever heard of them?

"As Congress and the incoming Obama administration prepare to revamp federal financial oversight, the collapse of the thrift industry offers a lesson in how regulation can fail. It happened over several years, a product of the regulator's overly close identification with its banks, which it referred to as "customers," and of the agency managers' appetite for deregulation, new lending products and expanded homeownership sometimes at the expense of traditional oversight. Tough measures, like tighter lending standards, were not employed until after borrowers began defaulting in large numbers."

This model of businesses paying the people who oversee them is silly. I'm sure someone thinks that they should pay these bills, since they're the ones needing the rating, but the conflict of interest and shopping dilemma is almost impossible to overcome. I've said that it can only be overcome when standards are easy and clear to evaluate, but Cate assures me that my Human Agency model doesn't even allow that. She could be correct. In that case, I would need a totally revamped system, that doesn't even allow this simple exception.

"The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech.

At the same time, the agency allowed the banks to project minimal losses and, as a result, reduce the share of revenue they were setting aside to cover them. By September 2006, when the housing market began declining, the capital reserves held by OTS-regulated firms had declined to their lowest level in two decades, less than a third of their historical average, according to financial records."

Here we go again. I see no excuse for this. It's either fraud, negligence, or fiduciary mismanagement, and it's possible to comprehend. It's called lowering the standards. Can you say "riskier"?

"Scott M. Polakoff, the agency's senior deputy director, said OTS had closely monitored allowances for loan losses and considered them sufficient, but added that the actual losses exceeded what reasonably could have been expected.

"Are banks going to fail when events occur well beyond the confines of reasonable expectation or modeling? The answer is yes," he said in an interview."

Pardon me? When events go well beyond the confines of reasonable expectation or modeling. What does that mean? The loosening of standards is risky. Is that even beyond the confines, or well inside?

"But critics said the agency had neglected its obligation to police the thrift industry and instead became more of a consultant."

What you had here is a regulatory motif that was too accommodating to private-sector interests," said Jim Leach, a former Republican lawmaker who led what was then the House Banking Committee and now lectures in public affairs at Princeton University. "In this case, the end result is chaos for the industry, their customers and the national interest."

Yep.

"In testimony before Congress in the fall of 2001, Reich listed what he considered the lessons of Superior's failure. Among them, he said, "we must see to it that institutions engaging in risky lending . . . hold sufficient capital to protect against sudden insolvency."

But instead of increasing oversight, OTS shrank dramatically over the next four years.'

They must have been closed hearings.

"Gilleran was an impassioned advocate of deregulation. He cut a quarter of the agency's 1,200 employees between 2001 and 2004, even though the value of loans and other assets of the firms regulated by OTS increased by half over the same period. The result was a mismatch between a short-handed agency and a burgeoning thrift industry.'

First mismatched loans, now mismatched regulations.

"He also reduced consumer protections. The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam. '

Sounds like he also handed out the answer sheet.

"John Taylor, chief executive of the National Community Reinvestment Coalition, and other advocates say better enforcement of consumer protections, such as rules against predatory lending, could have kept thrifts healthy because consumer complaints are an early warning of unsustainable business practices. "

Not in a nation of whiners.

"The long delay in issuing the guidance allowed companies to keep making billions of dollars in loans without verifying that borrowers could afford them. One of the largest banks, Countrywide Financial, said in an investor presentation after the guidance was released that most of the borrowers who received loans in the previous two years would not have qualified under the new standards. Countrywide said it would have refused 89 percent of its 2006 borrowers and 83 percent of its 2005 borrowers. That represents $138 billion in mortgage loans the company would not have made if regulators had acted sooner. "

This is where I believe that the implicit government guarantees to intervene in a financial crisis come in. I simply believe that any intelligent person, who knew these loans were risky, who understood that they had been employing lax standards, could justify this terrible risk only by assuming government backing. Otherwise, the fact that regulators didn't stop these loans doesn't mean that the loans made sense, in and of itself. Surely Countrywide had to have a modus to determine the sensibility of loans on its own?

"Even after the guidance was issued, some banks interpreted it as permission to maintain old habits because the regulatory agencies had stopped short of issuing a binding rule. "

So what? Can't you spot a bad loan on your own? That's your business, for heaven's sake. They simply must have understood a government blessing as a government guarantee.

"In addition to taking more risks, Washington Mutual was setting aside a smaller share of revenue to cover future losses. The reserves had steadily declined relative to new loans since 2002. By June 2005, the bank held $45 to cover losses on every $10,000 in outstanding loans, according to financial records filed with federal regulators. Average reserves at OTS-regulated institutions had declined by about a third since June 2002, but Washington Mutual's reserves had fallen even further. They were 25 percent lower than the average for OTS-regulated thrifts.

OTS did not force the company to address the problem with reserves, though agency examiners worked full-time inside Washington Mutual's Seattle headquarters.'

Did regulators have to tell them how to breathe? This is Riskier 101.

"But the agency did not fix a basic problem with how Washington Mutual predicted future losses. According to a confidential internal review in September 2005, the company had not adjusted its prediction of future losses to reflect the larger risks associated with option ARM loans. The review described those loans as "a major and growing risk factor in our portfolio." As a result, the company was not setting aside enough money to cover future losses. '

It's your fault. No, it's your fault. But you didn't tell me. But you should have known. Calling a Restoration Wit.

"But critics in government and industry said Countrywide's shift from OCC oversight to that of OTS was evidence of a "competition in laxity" among regulators eager to attract business. "Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator," said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode. "

And for this obvious bon mot she'll probably be canonized.

"the problem is not the fact that so many subprime mortgages are trapped in securitization pools."

Joe Nocera in the NY Times on the problem of bunched mortgages, and how to renegotiate them:

"The F.D.I.C., however, begs to differ. As you’ll recall, the agency took over the California bank, IndyMac, which had, as Ms. Bair put it, “a pretty impaired portfolio.” It has since instituted a broad mortgage modification effort that also serves as a laboratory for what can and cannot be done. What the agency has discovered, said Mr. Krimminger, is that the contracts are rarely as constricting as investors and servicers have been portraying them. They do not allow principal reduction, for sure, but they almost never disallow interest rate reduction — or delaying principal payments for a short time. What’s more, Mr. Krimminger said, the servicer agreement simply says that the servicer’s job is to maximize the investment — which often means avoiding foreclosure."

Here's my comment:

“Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing. Jawboning bondholders and fiduciaries has not and will not work.”

From last week. Today:

“They do not allow principal reduction, for sure, but they almost never disallow interest rate reduction — or delaying principal payments for a short time.”

Not allowing principal reduction would seem to be a big problem. All the lowering interest rates would do it seems is lower the payments, but it might not be enough. And the legal problems do seem to apply.

I think you’re right back where you started. If it were a clear financial gain to renegotiate these mortgages, it would be done. You still need incentives for the servicers and lenders, and obviously they want a better deal. I thought that you showed why last week. Namely, as an earlier poster said, they want the government to intervene in some way, incentives, subsidies, tax breaks, legislation, to sweeten the deal for them.

For one thing, if servicers get legislation that allows them more room to cut better deals for themselves in the future, that would be a win. How about we just call some of these people and ask them what’s up?

— Don the libertarian Democrat