Bailout

On Punishing The Job Creators, Or, “The Poor Have It So Good Today”

fake consultant — Thu, 10 Nov 2011 07:54:40 -0500

You know what the problem is with America?
The poor don’t get just how great they have it.

I’ve been hearing this a lot lately; the basic thrust of the discussion is that all those cars, TVs, DVD players, refrigerators, and stoves that have found their way into the homes of the economic underclass are proof there’s really no such thing as “poor” in America.

If they were truly poor, the argument goes, well…think recycled corn.

And if the poor want things to get better, let ‘em pull themselves up by their own bootstraps – and if they can’t, then let ‘em rot, because that’s the best thing for the economy.

But I don’t buy all that, and by the time we’re done today, I hope to have given you a whole new perspective on how jobs get created in this country.

There isn't a rich man in your vast city who doesn't perjure himself every year before the tax board. They are all caked with perjury, many layers thick. Iron-clad, so to speak. If there is one that isn't, I desire to acquire him for my museum, and will pay Dinosaur rates.

--From the letter "A Humane Word From Satan", by Sam Clemens

We must have completely misjudged how many Americans live here about 15 years ago, because everywhere I go I see vacant buildings.

Empty retail space, empty office buildings, empty factories, and all of it apparently just thrown up for no reason whatsoever.

But then I recently saw some historical pictures from the 1990s, and it turns out a lot of those buildings used to have businesses operating within their now-abandoned walls – businesses which have since gone away.

And that’s when I began to get confused.

You see I’ve always known, just as you have, that it’s all about capital; that’s why it’s only the very wealthiest people who can create jobs in this country.

And I’ve always known that they can only do that when they are 100% certain that nothing was going to hurt their current economic condition, and that any sacrifice on our part, no matter how large, was crucially important to keep this very special source of economic vitality full and happy and creating jobs for America’s future.

And when I look at the statistics, I know we’ve been doing our part: the wealthy have been getting wealthier, faster, over the past 30 years than at any time in memory…and yet, for some reason, all those businesses were closing down.

So many, in fact, that I began to question whether America actually understands how jobs get created. It even began to cross my mind that maybe we’ve been coddling the wrong people.

I mean, what if the actual job creators…are the people who no longer work in those empty buildings?

It makes sense, if you think about it.

The common argument is that those with capital make investments, which creates jobs.

But why would anyone invest capital unless there was perceived demand for a product, or a need to do research to meet perceived future demands?

That seems to suggest demand drives investment; a good way to “prove” the point would be to consider what happens to capital without demand: building factories and ships and warehouses does no good if there are no buyers at the store.

Of course, I’m not the first to think workers drive demand: Henry Ford famously paid his workers double the prevailing wage; part of the idea was to create demand for all those Model Ts he was cranking out in his new factories.

So now that we know who the job creators really are, and we established years ago that we have to do every single possible thing on the face of the Earth to keep the job creators happy, happy, happy…how do we get started?

Well, here’s an idea: the Fed willingly gave more than $1.5 trillion to banks for bailouts, mostly by simply “creating” money; now I’m proposing we do the same for homeowners.

If you have a loan backed by Fannie Mae or Freddy Mac, let’s allow you to apply for a one-time $200,000 markdown on your mortgage – and let’s allow the first “tranche” of any markdown to apply to any back-due loan payments.

The amount of “haircut” (fancy technical term) you might impose on each loan could vary, but $1.5 trillion would allow 7.5 million writedowns at $200,000 each; if you limited the haircut to 50% of the loan value many would be less than $200,000. (It’s estimated that 11 million homes in the USA from are underwater; $2.5 trillion or less would cover all underwater loans.)

Since Fannie and Freddy back $10 trillion or so in mortgages, and you probably won’t be able to write down every loan, how would you decide who gets writedowns?

One way would be to create a “triage score” that incorporates things like the odds an applicant/borrower can pay off a restructured loan and the amount of foreclosed or underwater homes in any given community; the 7.5 million highest (or lowest) scores get the writedowns.

(One caveat: many who are having trouble today with home loans are also laid off; unless we can find ways to keep those folks in homes until they can find work, we’ll still have a substantial foreclosure problem.)

Writing down mortgages does several things: it quickly applies a “moral hazard cost” to those who deliberately lent to unqualified borrowers, it turns millions of “underwater” loans into homes with equity, it turns millions of “nonperforming” loans into “performing” loans, keeping millions out of foreclosure, it gives communities a chance to either stabilize or recover from “mass foreclosure-itis”, and it finally breaks the deadlock between banks and regulators over who will blink first on loan “haircuts” versus bank recapitalizations.

Wait? What was that last one?

Banks are scared to death that if they write down all these loans they will have to find new capital to make up the losses – and they probably won’t be able to raise that new capital by charging a $5 fee to have a debit card.

That could mean a few things: it could mean big banks are going to have to more sneakily raise lots of other fees and sell things to raise capital, or, perhaps, the Feds ease back a bit on capital requirements.

Or…it may mean that the banks end up having to get smaller. Consider this scenario: a forced haircut of significant size, followed by regulators who stand firm on capital requirements, followed by a less-than-stellar round of stock offerings or asset sales; next thing you know, “too big to fail” becomes “we have to spin off some part of the retail business for reasons related to the rules governing capital requirements”.

This could happen without the passage of new regulations or legislation beyond the initial bailout authorization – and even that might be within the power of Federal regulators already, since Fannie and Freddy, as the owners of many of these loans, have the power to forgive some or all of that debt, and capital requirements are not set by legislation.

And where does all that leave you?

Well, you’d have 7.5 million families that could more easily afford to make house payments than before, and those folks will probably take that money and spend it on things they haven’t been buying for several years: home improvements, cars, appliances, and the travel and entertainment markets could all see substantial bumps in sales.

Many, if not most of those families, would immediately go from being “underwater” to having equity, which always helps turn reluctant consumers into willing consumers.

Cities could begin to recover as well, as the number of foreclosures bottoms out; once banks are forced to write those properties down from “2006 value” to today’s market value they’ll be looking to sell ‘em at bargain prices; that’ll help soak up today’s housing supply “overhang”. All of this is good for beleaguered new home builders, who are today in a holding pattern.

And here’s the best part: if you get a handle on foreclosures, and put some cash back in some pockets, and start selling stuff…well, that looks like a bit of a jobs program, even if Congress might not be willing to sign up for one just at the moment.

So how about that?

If we make an effort to give to the actual job creators the same level of incentives that we gave to the “demand responders” since November of ‘08, we could actually find ourselves creating actual jobs with our money – and doing it by the millions, just when we need ‘em.

Considering how fast we were able to find ways to create TARP, QE1, QE2, an alternative auto industry bailout, and anything else a banker could ask for, including, I’m sure, partridges in pear trees…well, we should be able to knock this out over a weekend, assuming we can either make a really convincing argument – or do like the banks do, and lay out a million a day for lobbyists until it gets convincing enough to get things done.

Of course, if we have to we could also start Occupying the Offices of reluctant Members of Congress to help make the point; as long as the end result is some serious pampering of the real job creators, I’m all good.

Barney Frank and the Fed Bailout Fallacy

Zach Carter — Thu, 09 Dec 2010 10:05:49 -0500

Mike Stark has posted a provocative on-the-street interview with Barney Frank about the recently released Fed data. Frank offers what is now a standard defense of the Fed's bailout operations: Without them, the economy would have collapsed, so critics should just quit whining. But Frank takes this line a step further, accusing liberal Fed critics of playing into the hands of right-wingers who don't want to extend any economic relief to anybody for anything, ever. It's all hooey.

Here's Frank:

"On the whole, frankly, those who were looking for conspiracies and scandals were disappointed. I think the fact is, what you saw was a series of events that worked pretty well and helped the economy . . . . Would you have had the Fed do nothing? At a time when there was no credit available, would you have had the Fed do nothing? That's what the right-wing wants."

First, the "disappointed" critics line massages away the fact that the Fed failed to disclose an enormous amount of information. We still don't know the credit ratings of collateral accepted at some facilities, and we don't know the trading prices of securities they accepted as collateral at any of the facilities. Without that information, we can't determine whether many of these actions were scandalous.

Second, yes-- without major government intervention, the economy would indeed have collapsed. Really, the economy collapsed anyway—two years later unemployment is near double-digits—but it's safe to say the collapse would have been worse had the Fed failed to act. But just because the Fed had to do something doesn't mean it had to do exactly what it did. There were always other alternatives, and the most obvious would have involved attaching some strings to the bailout facilities.

If you want this money, you have to help homeowners avoid foreclosure, or your executives have to take a hike, or you all have to spend the next month wearing a shirt that reads, "I hijacked the U.S. economy and all I got was this lousy t-shirt." Just about anything to make clear that aid from the U.S. government came at a price would have been better than, well, nothing.

Frank spends a good deal of the discussion arguing that liberal Fed critics are catering to right-wing agendas:

"My friends on the liberal side shouldn't always focus on the negative. You're playing into the hands of the right-wing. You know, it's the right wing that thinks this is some terrible conspiracy. This was a case of government intervention. The Federal Reserve is a government entity. It intervened substantially to stave off worse damage than we would have gotten, and I think it's a great mistake for people on the liberal side to engage in this kind of Fed-bashing."

The Fed had extraordinary powers and was not faced with the choice of whether to intervene, but of how to intervene. I fail to see what is so ultraconservative about objecting to free money for fabulously wealthy criminals/fools who wrecked the economy with predatory loans.

Indeed, it seems to me that the ideological pressure here is really on Frank's shoulders. When a traditional liberal icon like Frank endorses a bankers-and-brokers-first policy, the public starts to believe that all Democratic policies are just handouts for Wall Street. This was the biggest reason why voters abandoned Democrats at the polls last month. The stimulus and the bailout were all mushed together in peoples' minds.

But things get really interesting when Stark proposes cutting checks to individuals instead of making loans to the banks. Frank responds:

"You understand how fallacious that is because the money was paid back . . . You acknowledge the money was paid back. Doing what you're suggesting, cutting everybody a check, they wouldn't have paid the money back . . . You're saying instead of lending the banks money, why don't we give it to individuals? Because then you would have had that much more deficit!"

Frank gets the best of this argument because Stark proposes cutting checks instead of making loans. But what if the Fed had offered everyone in the country a loan at zero or near-zero percent interest, on the condition that individuals put up sufficient collateral? This is a (very) charitable way of describing what the Fed did to support the banking system. If the same courtesy had been extended to individuals, I'm sure plenty of people would have defaulted. But certainly not everybody-- zero percent loans are actually pretty easy to pay back. And for those people who did in fact default, the Fed could have simply held onto the collateral to avoid taking a loss.

It's not obvious that this policy ends up working wonders—plenty of people would have been unable to post collateral, and for many who could, the risk of losing the lawnmower in order to pay the heating bill for another couple of months isn't really a great deal. There's no way to gauge whether the additional spending generated could have brought the unemployment rate down very much. And of course, personal loans wouldn't have helped debt-burdened homeowners very much. But then again, neither did any of the policies the Fed actually implemented!

And it is obvious that the government wouldn't end up taking a big loss on a big direct-lending-to-actual-people policy. As a result, crowing about the government turning a profit on the Fed's bailout facilities is really very silly. That doesn't stop Frank from doing it, however:

"It came back with interest! . . . The Fed is making money off that."

In short, you don't have to endorse Michelle-Bachmann-dystopia to object to the Fed's bailouts. Watch the whole thing:

Fed Audit-- Liveblog on Data Dig

Zach Carter — Wed, 01 Dec 2010 12:23:17 -0500

Just starting to parse through the Fed audit data. Looks like the Primary Dealer Credit Facility is predominantly a bailout for Citigroup and Bank of America. More to come . . .

UPDATE:

Looks like in the early days the Primary Dealer Credit Facility was almost exclusively used by Bear Stearns, Countrywide, Barclays and Cantor Fitzgerald. At this point, Bear and Countrywide were JPMorgan Chase and Bank of America, respectively. From April 16, 2008 through July 30, 2008, these four firms were the only ones to access the PDCF, and they did it every day the facility was open.

UPDATE 2:

Until September 15, 2008, the collateral accepted by the Fed at the Primary Dealer Credit Facility remained relatively robust, in terms of credit ratings.

On September 15, as Lehman Brothers and everything else hit the fan, the Fed began accepting total garbage as collateral. Including CCC-rated (beyond junk bond status) collateral from JPMorgan Chase, Citigroup, Lehman Brothers, Goldman Sachs and Morgan Stanley.

UPDATE 3:

The Fed accepted CCC-or-lower collateral under the Primary Dealer Credit Facility from September 15, 2008 until May 12, 2009. A total of $490.9576 billion in such collateral was accepted. That's billion, with a "b." And you thought TARP was a bailout.

UPDATE 4:

The Fed began accepting a wide variety of junk bonds-- securities rated BB and below-- as collateral beginning September 15, 2008. Totals to come.

UPDATE 5:

The Fed accepted a total of $1.31 trillion in junk-rated collateral between Sept. 15, 2008 and May 12, 2009 through the Primary Dealer Credit Facility. TARP was nothing compared to this.

UPDATE 6:

Anyone suggesting that the Fed's "emergency lending" facilities are just part of macro or monetary policy is kidding themselves. The Fed refused to accept junk-rated collateral until Sept. 15, 2008. When it became clear that Lehman was going off the rails, they started accepting junk-rated collateral-- even from Lehman Brothers itself!

That makes it very clear that the Fed was bailing out these firms in the midst of a crisis. They made a conscious decision to lower their lending standards in order to save big Wall Street firms with no strings attached.

UPDATE 7:

From ~~February 24, 2009~~ March 4, 2009 through May 12, 2009, Citigroup and Bank of America were the sole companies to borrow through the Fed's Primary Dealer Credit Facility, and they used it every single day. A total of 16 firms were eligible for the facility.

UPDATE 8:

This Fed Audit data should shame all of the conventional-wisdom Democrats out there declaring TARP a success because of the recent CBO score. To put it mildly, these folks are totally missing the point. TARP was a "success" in large part because of the Fed's no-strings-attached efforts. And we now know that the Fed was willing to accept junk-- literally junk bonds-- as collateral for its no-strings-attached loans.

TARP and the stress tests only "worked" insofar as they convinced banks that the government would shoulder infinite future losses from the banking sector. We're now paying the price for that commitment in the form of massive foreclosure fraud, in which untold numbers of borrowers are being improperly kicked out of their homes in the name of bank profits.

TARP failed. Its losses are so low because the Fed stood behind the banks, allowing them to play one arm of the government against the other. Even if we had "turned a profit" on TARP at its formal interest rate without Fed malfeasance, look what we got in return. In the Depression, FDR secured massive national foreclosure relief and still turned a profit. Today, we have a predatory program called HAM

UPDATE 9:

When crisis goes nova in Sept. 2008, two Merrill Lynch facilities start borrowing everything they can from the Fed. They're called "Merrill Lynch Government Securities Inc." and "Merrill Lynch Government Securities Inc. -- London"

So far as I can tell, the distinction between London and the U.S. is just an excuse for Merrill to take double advantage of the Fed's bailout facilities. Both borrow every single day once the crisis sets in, and both pledge loads of junk bonds as collateral.

UPDATE 3:30

Goldman Sachs also used foreign subsidiaries to double-down on Fed bailout facilities. Just like Merrill, they hae a U.S. unit taking out loans, and a London unit.

UPDATE 3:45

Morgan Stanley also opened a London subsidiary to double-down on Fed bailout facilities, although it appears they caught onto the scam later than Goldman and Merrill.

UPDATE 3:51

Nope, my mistake. Morgan, Merrill and Goldman all came to the foreign sub conclusion at about the same time. Morgan Stanley and Goldman Sachs began simultaneously begging from the Fed from New York and London on Sept. 22, 2008, while Merrill Lynch got the idea on Sept. 23, 2008.

4:10

Moderately funny. Citigroup, home of Clinton Treasury Secretary Robert Rubin, didn't figure out the foreign subsidiary scam until Nov. 24, 2008, a month after its competitors.

4:17

By Nov. 28, 2008, only Citi, BofA/Merrill and Morgan Stanley/Mizuho were accessing the Fed's Primary Dealer Credit Facility. By March 4, Morgan/Mizuho had bowed out, and the bailout program was used exclusively by Citi and BofA.

4:50

BofA and its predecessors Countrywide and Merrill Lynch accessed the Fed's Primary Dealer Credit Facility 416 times, for a total of $2.783 trillion. A full $476 billion in junk bonds were pledged as collateral for the loans, or roughly 17 percent. The PDCF is an overnight facility, so a lot of these loans are simply being rolled over day-to-day. Nevertheless, it's a staggering amount of money, with an enormous degree of totally worthless collateral being pledged to justify it.

The Fed and Treasury had to do something in 2008 to keep the financial system from falling off a cliff. But by treating the problem as a liquidity issue with no strings attached, they didn't solve the underlying problem: lots of very big banks were simply insolvent.

Now, over two years after TARP, it's clear that many of our largest banks are only "solvent" due to accounting irregularities being approved by regulators that are terrified of letting big banks go under. As a result of this fear, we aren't really regulating our banks.

So Paul Krugman's prediction of zombie banks creating a drag on the economy has not come true. The reality is, in fact, much worse. Krugman foresaw zombie banks that didn't lend due to capital concerns, preventing the recovery from getting off the ground. We're seeing plenty of that, but we're also seeing zombie banks actively prey on the economy through the foreclosure process in an effort to repair their balance sheets. The zombie banks aren't just failing to boost the economy, they're actively sabotaging it.

I need to eat.

9:30

Mike Konczal deserves a citation here. Everything I said above about liquidity vs. solvency comes straight out of his financial analysis playbook.

Will The Fed Withdraw Its Foreclosure Predator Bailout?

Zach Carter — Tue, 30 Nov 2010 13:17:48 -0500

Yesterday, The New York Times ran an editorial opposing a new Federal Reserve proposal to eliminate predatory lending penalties. The rule under consideration is the same obscure regulation I blogged about a couple of weeks back, and it's very encouraging to see major publications paying close attention to the technical workings of regulatory policy. Usually even important rules like this slide right by under the media radar, but this particular rule is a major signal as to how policymakers will deal with the ever-escalating foreclosure fraud problem. Will the Fed and it's allies stand up for homeowners and the rule of law, even if it means sticking it to the banks? Or will they continue to screw homeowners to preserve capital at too-big-to-fail behemoths?

The Times editorial makes essentially the same argument I did, and it's totally correct, if I do say so myself. Right now, when a bank is found guilty of illegally withholding information about a mortgage from a borrower, the borrower can "rescind" the loan. They still have to pay off the principal balance, but all profits that the bank would have reaped from the loan—interest, fees, etc.—are nullified, and the bank loses its right to foreclose on the borrower.

This process is called "rescission," and it reflects a standard feature of contract law that dates back several centuries. If a contract is fraudulent, the minimum proper remedy is to undo the contract. With mortgages, this means the bank gets its money back, but it doesn't get to keep the profits it would have made from an illegal loan. Restricting borrower access to information is a key tactic in predatory lending, and as The Times notes, rescission is essentially the only federal remedy available to homeowners who have been defrauded.

The Fed is now attempting to eliminate this remedy due to "concern over banks’ compliance costs," as The Times describes it. This is a rather generous description of the proposal, given the depth and severity of the foreclosure fraud outbreak currently sweeping the country. There are three key places that banks can commit fraud in the mortgage process—when the mortgage is pushed on a borrower, when the mortgage is sold to an investor, and when a bank is collecting payments or foreclosing. Much of the fraudulent activity we see among investors and in the foreclosure process helps cover-up fraud at the original sale of the mortgage to a borrower.

If borrowers cannot obtain relief through rescission, then they have little reason to press claims about fraud in other parts of the mortgage process. This is an enormous gift to the nation's four largest banks, with major public policy implications that go beyond the very critical problem of rampant, illegal foreclosures. If borrowers don't press claims about foreclosure fraud, investors will not be able to access key information for filing lawsuits.

The single gravest threat to bank balance sheets (and bonuses) is a slew of lawsuits from mortgage bond investors. Banks packaged lousy mortgages into bonds and sold them off to investors, often without making proper disclosures to the investors, who subsequently lost a ton of money. Investors are currently organizing to take action against the banks, and in many cases have obvious, open-and-shut fraud claims against Wall Street titans if their cases come to court. But the key is actually getting their case before a judge. To do that, 25 percent of the investors in any bond have to file a lawsuit together. For multi-billion-dollar bond issues, that requires coordination among dozens of different institutions, often from different countries. That's a difficult technical feat, but investors will be much more likely to participate if they have lots of evidence of fraud before them. That evidence is produced by homeowners pressing their own individual cases. If homeowners don't go to court because they can't get anything out of it, the investors will have a harder time organizing.

So the Fed isn't really concerned about "compliance costs." This is, in fact, a rather absurd notion. Predatory lending is a form of theft. Imagine if the shoe were on the other foot, and the bank was being robbed. Can you imagine bank robbers complaining about the "compliance costs" of having to give back stolen cash? They would be laughed out of any courtroom. But the Fed is not only seriously considering such an argument from bankers, it is actively promoting it as official public policy.

The Fed's proposal is itself illegal. Regulators like the Fed have the right to make rules that enforce laws passed by Congress. When Congress passed the Truth in Lending Act in 1968, it explicitly granted borrowers the right of rescission as a remedy for predatory lending. The Fed is now attempting to interpret that statute to mean that, actually, borrowers have no such right. If the Fed's proposal is enacted, it will be a 180-degree reversal of the law on the books.

It's hard to imagine a way for the Fed to disgrace itself any further than it did by failing to rein in the mortgage mess over the past decade. But if it proceeds with this effort to protect banks that engaged in predatory lending, it will not only be guilty of falling down on the job and looking the other way, but of actively encouraging illegal mortgage lending.

Whether the Fed withdraws its proposal or not, this is not what bank regulators are supposed to do, especially in the middle of a foreclosure fraud crisis. Elizabeth Warren and the Consumer Financial Protection Bureau will get formal jurisdiction over these issues in July 2011, and it won't come a moment too soon. The Fed is proving, once again, that it cannot be trusted to protect the middle class from illegal abuses. Or even simply follow the law itself.

House Tries to Bail Out Foreclosure Fraudsters, Again

Zach Carter — Wed, 17 Nov 2010 08:01:02 -0500

A month ago, President Barack Obama vetoed a bill that would have made it far more difficult for borrowers to prove that banks were engaging in foreclosure fraud. The bill was a complex, highly technical bailout for megabanks that have defrauded millions of borrowers, flaunted the rule of law and and driven our economy off a cliff. The legislation passed both houses of Congress quietly and without much attention, but once consumer advocates sounded the alarm, Obama rejected the legislation, and the bill appeared dead.

Not anymore. Despite widespread public anger and presidential rejection, the House will vote on the issue again today in an attempt to override Obama's veto. The legislation was reintroduced by Rep. Bobby Scott, D-Va. The bill would require every state to accept notary signatures from any other state. This essentially defeats the purpose of notarization itself, since a notary is supposed to attest to having first-hand knowledge of a specific case. If two parties sign a mortgage contract in Ohio, a notary from New York probably wasn't there to watch it happen.

In foreclosure fraud, this is important because banks are robo-signing documents in order to cover-up problems with their loan documentation. In the GMAC scandal that ignited the recent controversy, a robo-signer named Jeffrey Stephan had hundreds of thousands of these documents notarized in Pennsylvania, even though they concerned foreclosure cases all over the country. If courts have to accept out-of-state notarizations, it becomes much more difficult to demonstrate that GMAC is committing rampant fraud.

The bill would also allow notaries to sign-off on electronic documents-- something that also defeats the basic purpose of a notary. A notary is essentially a credible witness, but if they can sign off on electronic documents, they don’t have to be present at the signing of documents to collect fees. Somebody can forge a document, scan it into a computer, and ship it off to a notary for approval, replicating the GMAC scam online. Banks have been using electronic tricks to get around technicalities like "signatures" on "contracts" of late-- they scan a signature from one document and electronically copy it to others.

I don't have much more to say about this issue than I did in October. It's despicable for Congress to be contemplating a bailout like this for openly criminal activity.

Policymakers in Washington, D.C. are moving all over the place on the foreclosure crisis. Yesterday, key officials from Bank of America and JPMorgan Chase were grilled before the Senate Banking Committee. Consumer advocates and academics repeatedly caught the bank officials lying or misleading Senators about the way banks treat borrowers, and the incentives currently in place that encourage banks to illegally foreclose on borrowers. Committee members clearly wanted to appear angry-- Sen. John Tester, D-Mt., even said "some heads will roll" when he heard that banks actually encouraged borrowers to miss payments in order to qualify for loan modifications. This kind of thing happens all the time, and once the borrower actually misses a payment-- after being encouraged to do so by the bank-- the borrower gets foreclosed on.

But at the same time, the Federal Reserve is pushing a new regulation that would effectively strip borrowers of their only federal remedy to fight illegal predatory lending. Now the House is considering bailing out Wall Street again, directly on the backs of the borrowers they've defrauded. We'll be counting the votes.

UPDATE:

Rep. Scott's PR guy just told me the Congressman just happened to be around to make a procedural vote. He says Scott "was in the wrong place at the wrong time" and does not support the legislation. David Dayen at Firedoglake argues that this entire reconsideration of the bill is likely a separation of powers dispute between Congress and President Obama regarding the technical procedure Obama used to veto the bill. The legislation may not even come up for a vote. Or it might, for separation of powers purposes, and the result might be bad.

Obama's Top Priority Must Be Jobs, Not Republican Appeasement

Zach Carter — Wed, 03 Nov 2010 12:08:31 -0400

Economic policy has faced grave challenges over the past two years, hamstrung by obstructionist Republicans in the U.S. Senate and Wall Street-friendly advisers in the Obama administration. With the Republican Party now in control of the House, it seems certain that any major action to create jobs will face tremendous obstacles. This is a global calamity. But the political lesson of the past two years should be clear: all the good PR in the world can't whitewash a terrible economy. For the next two years, President Obama and his Congressional allies must do everything they can to actually improve the job market. Without a better economy for ordinary Americans, Democrats are doomed in 2012.

Ezra Klein presents what he thinks is a rosy view of how policy could proceed after last night. To me, it looks like exactly the sort of empty political gesture that Democrats should be fighting. Ezra envisions Obama and new House Speaker John Boehner, R-Ohio, reaching a grand bargain on economic policy: the payroll tax is lifted for a year, $50 billion in infrastructure spending is approved, the unspent 2009 stimulus money is abandoned, and $400 billion in spending cuts over 10 years are approved.

Ezra calls this the next chapter in an imaginary "universe where the government works." It's more like the next chapter in an imaginary world where the government works, and every policymaker is completely insane. Sure, the deal would convince voters that Democrats and Republicans can pass legislation (if it passed). But the result would be a neutral to negative impact on the job market. Continuing today's avoidable economic suffering is bad enough in its own right, but it's also a political disaster for Democrats.

If Obama heads into 2012 with double-digit unemployment, he will lose. End of story. Voters have a terrible view of Republicans, and they just sent over 60 new Republicans to Washington because Obama didn't bring down the unemployment rate. Those results prove that Democrats' backs are already up against the wall on 2012. Fixing the economy takes time, and we need strong, serious action as soon as possible, or we are headed for political calamity.

Why won't Ezra's policy package work? It has two useful elements—a tax cut to hire more workers, and $50 billion in infrastructure spending. Both of these would help some—if the tax cut was really wildly effective, they might combine to take the unemployment rate down by half a percentage point. But these useful policies would be offset by other spending cuts. And unless we're only cutting $600 hammers in the Pentagon budget, those spending cuts are going to kill jobs. To get $400 billion in cuts, we'd have to find 667 million of those hammers.

Lifting the payroll tax really might help create jobs. We don't know how many, but it surely wouldn't be as effective as simply hiring people outright, and that's what government spending—"stimulus" or otherwise—does. In other words, Ezra has outlined a proposal to kill jobs in order to maybe create some.

Showing that they can work with Republicans won't save Democrats in 2012. Only real economic results will. Aggressive PR about how you really actually did fix things won't convince people who are out of a job or in foreclosure. They know the economy still sucks, and even worse, they know you're not telling the truth.

So Obama also has to get his messaging in order. It may very well prove to be the case that Republicans block all but the most modest of steps to create jobs. Obama can't pretend that these steps are enough, and he cannot hesitate to attack Republicans, holding out hope that maybe, someday they will magically come to their senses and start approving policies that promote growth. He can't keep repeating the Republican talking points Rahm Emmanuel fed him over the past two years—the government can create jobs. Right now, it's the only entity that can.

Getting past "partisanship" doesn't mean cutting whatever crappy deal you can with your political adversaries. It means eschewing political grandstanding for good policy. Without good policy, bipartisanship is a pyrrhic victory.

So Obama has to fight hard for policies that actually bring the unemployment rate down, and he must be willing to defend his policy proposals from Republican attacks, making a clear moral case for why spending to support jobs is a good idea. Republicans know that they can win the White House in 2012 by simply blocking Obama and letting the economy fall apart. They'll do it. They already have. Obama has to hold Republicans rhetorically accountable so they fear the electoral consequences of obstruction enough to vote in favor of policies that actually work.

If Republicans refuse to cooperate, Democrats must at least demonstrate to voters that they are working for voters, not for bigwig bankers. The stimulus package approved in 2009 was too small for a variety of reasons, but one of them was due to the fact that Larry Summers and Timothy Geithner expected the financial system to help revive the economy. It didn't, because the system is dominated by too-big-to-fail behemoths with massive losses embedded in their balance sheets.

It's been very fashionable in D.C. to say that the bank bailouts "worked," even though they were unpopular. But they didn't work—banks aren't lending. And they didn't work because banks are still saddled with hundreds of billions of dollars worth of lousy assets. Regulators are allowing banks to account for those assets at inflated values, which protects the banks from losses. So banks trade securities instead of lending, and slowly recognize losses as they rake in gambling profits. This is why the foreclosure fraud scandal has sent bank stock prices on a downward trend—investors know that enough documentation will spark a new wave of losses, causing big trouble for Wall Street.

So we still need to fix the financial system. Banks must be forced to recognize their losses. Where those losses render a bank insolvent, the bank has to be restructured—shareholders wiped out, creditors taking a hit, and taxpayers putting up money only where doing so prevents a cascade of defaults. This will be painful, but no more painful than watching a recovery without credit.

And if Obama can't get these policies, he needs to at least fight for them. Prosecute the deep fraud in the financial system that is being uncovered every day. Explain to voters that Republicans are blocking job-creation.

These policies will be extremely difficult to secure in the face of anything close to the Republican obstruction we've seen over the past two years. But Democrats simply have no other choice. Without major action on the economy very soon, the White House is already gone.

AIG Redux: Wall Street Presses Regulators To Repeal New Derivatives Rules

Zach Carter — Thu, 28 Oct 2010 09:47:05 -0400

It's been pretty well-documented that the ultimate fate of Wall Street reform will depend on a series of highly technical proceedings at federal regulatory agencies. If regulators adopt tough new rules, the financial overhaul could succeed well beyond the expectations of optimistic reformers. But there is a very real danger that banks will be able to roll regulators during these quiet and technical affairs, without any real public oversight. One of the most important areas to watch are the rules surrounding derivatives—the shadowy market that brought down AIG. The battle is already under way, and the bank lobby isn't pulling its punches.

Wall Street reform basically did two things unquestionably well. It created a new Consumer Financial Protection Bureau to curb bank abuses, and it reined in the derivatives market, which is currently a hotbed for fraud, abuse and systemic risk. There are dozens of smaller-bore accomplishments in the Dodd-Frank bill, but derivatives and the CFPB are the two major wins.

Take a look at this 7-page letter from The American Bankers Association—the bank lobby—and this 10-page letter from the International Swaps and Derivatives Association (ISDA)—another Wall Street lobby group. See if you can spot where they regulators to completely erase the legislative progress on derivatives.

You probably can't-- unless you're a bank lobbyist, a finance lawyer or a nerdy blogger. And the bank lobby loves it that way, because there are only a few nerdy bloggers out there, even fewer financially literate mainstream reporters, and hundreds and hundreds of bank lobbyists. Here are the critical passages from page 6 of the ISDA letter, and page 4 of the ABA letter. I'll explain why it's so destructive below. ISDA:

Financial" risks are "commercial risks." The dictionary definition of "commercial" is "of, pertaining to, or characteristic of commerce." The term "commercial risk" should be defined against this background.

ABA:

It is very important for our members that the term "commercial risk" be interpreted broadly enough to include financial risk for depository institutions.

In the years leading up to the financial crash of 2008, banks could trade complex derivatives completely in the dark. If Goldman Sachs wanted to make a deal with AIG, all they had to do was make a phone call (or just as frequently, type out an AOL instant message). No government regulator looked at this trade, and nobody in the market evaluated whether either party could possibly make good on it.

And so AIG built up literally trillions of dollars in exposure to the housing market by betting money it didn't have with big Wall Street banks. And banks, eager to dump the risks posed by crappy mortgages onto AIG, didn't bother to figure out if AIG could ever possibly make good on all of its derivatives contracts.

Ultimately, AIG got burned badly, and the banks came crying to Washington for help. The Federal Reserve acquiesced, and funneled billions of dollars to AIG, which in turn went directly to major banks—most notably Goldman, which scored $12 billion from the first round of payments alone.

One way to fix this problem is to give the market some scrutiny over derivatives trading—the same kind of scrutiny it has over ordinary stock trades. This is a minimum step—as we've seen with flash crashes and naked short sales, market scrutiny isn't a guarantee against fraud, abuse or excess. But it's a lot better than nothing.

So the Wall Street reform legislation required all derivatives contracts to be traded through what's known as a "central clearinghouse." This is basically a third company that serves as an intermediary between the two firms that want to trade—the way the New York Stock Exchange stands between two companies trading a stock.

When Goldman calls up AIG, the clearinghouse forces both companies to post margin on the trade, verifies their ability to make good on it, and agrees to foot the bill of one party can't pony up.

But the big banks, operating primarily through the U.S. Chamber of Commerce, were able to carve-out a big loophole in this process. Surely not every trade needed to be centrally cleared, they argued. Plenty of farmers and manufacturers ink derivatives contracts in order to insure themselves against ordinary, non-financial commercial business risks. If a farmer is worried that the price of wheat might go up or down, he can go to JPMorgan Chase and ink a trade. The farmer pays JPMorgan a few dollars every month, and if the price of wheat goes too high or too low, JPMorgan agrees to pay the difference to the farmer. We don't want to punish poor farmers for excesses committed on Wall Street.

This argument was always stupid for lots of reasons, but it ultimately won the day. "End-users" like airlines and farmers that wanted to hedge "commercial risks" were not required to trade through a clearinghouse.

Fast forward to September 20, and the bank lobby is trying to pull a fast one by redefining the word "commercial." The bank lobby is trying to convince regulators that the business risks of financial institutions—banks, hedge funds and companies like AIG—ought to count as "commercial risks." If the bank lobby succeeds, they'll allow all kinds of huge financial firms to keep their derivatives trading in the dark, and leave the economy open to another AIG-style calamity.

That would directly benefit major Wall Street banks like Goldman Sachs, JPMorgan Chase and Bank of America. Remember, it's not just the farmer who avoids the clearinghouse when she hedges a "commercial" risk—it's the trade itself. That means that the bank on the other side of the trade gets to deal off the grid, as well. So long as the too-big-to-fail Wall Street banks conduct their riskiest, most abusive deals with hedge funds, insurance companies or anybody except another too-big-to-fail Wall Street bank, they could keep their trading totally secret. That is exactly what happened with AIG, and with these two letters, the bank lobby is pressuring regulators to maintain that status quo. If the TBTF derivatives dealers get into trouble again, after all, they can always come to taxpayers for a bailout, just as they did with AIG.

So there you have it. A full 900 words of blogging to explain why a single word in a letter from bank lobbyists threatened to undo one of the most significant accomplishments from the Wall Street reform bill.

There are literally hundreds of rules like this coming. And Republicans are already vowing to hamstring regulators if they gain control of the House next year.

Banker-Run Third Way Opposes Foreclosure Moratorium On Banks

Zach Carter — Wed, 20 Oct 2010 12:28:16 -0400

The so-called “centrists” at Third Way Foundation have come out against a national foreclosure moratorium, but like many of Third Way’s policies, there’s nothing centrist about their opposition. Third Way is simply throwing American homeowners under the bus in the service of Wall Street profits. That sellout isn’t surprising when you examine the membership of Third Way’s Board of Trustees. Fully two-thirds of the think tank’s board work in finance, including some of the nation’s largest financial firms: JPMorgan Chase, Morgan Stanley, Fortress Investment Group and other Wall Street titans who stand to lose big bucks in the foreclosure fraud fallout.

Third Way Vice Chairman David Heller is the Global Head of Equity Trading for Goldman Sachs, and sits on the firm’s risk-committee. Goldman Sachs has placed enormous bets on the housing market, and other Third Way board members face similar sraits: William Daley works for JPMorgan Chase—a bank that has already suspended foreclosures in order to sort out its own problems. Derek Kirkland is global co-Head of Morgan Stanley’s Financial Institutions Group, and Michael Novogratz is President of Fortress Investment Group, one of the largest hedge funds in the world.

Daniel Loeb has a spot on the board. Yes, that Daniel Loeb, the whining Wall Street hedge fund manager who infamously complained that President Barack Obama wanted to violate American protections against "nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination"-- because Obama favored raising the capital gains tax. All of these people, and dozens of others on the Third Way board, stand to lose or gain enormous amounts of money from the foreclosure fraud outbreak and the federal response.

Even the author of the memo, Jason Gold, used to work for bailed-out banks First Horizon, Bank of America and Merrill Lynch. All of this information is available on Third Way’s website, but not one word of the think tank’s memo on a foreclosure moratorium mentions any possible conflict of interest, nor are any actual conflicts of interest detailed.

Independent think tanks shouldn’t be promoting policies that their board members stand to financially benefit from without explaining their financial interests. If Jason Gold and Third Way want to oppose a foreclosure moratorium, fine—but they should demonstrate exactly what they have to gain from such a policy in their memo.

Third Way and other centrist groups like to claim they’re staking out political middle ground, when in fact they’re just advocating policies that funnel money to entrenched corporate interests. Wall Street is very good at this game, as evidenced by the fact that 20 of the 30 members of Third Way’s board work for Wall Street. These aren’t policies that create jobs or improve the economy—they’re just giveaways for special interests. As one Democratic policymaker who requested anonymity told me, "Third Way's policy model is an utter catastrophe. They are basically Weimar Democrats."

Aside from the glaring conflicts-of-interest, Third Way’s argument against a foreclosure moratorium is totally incoherent. None of the points made stand up to even cursory levels of economic scrutiny—it’s the sort of thing you’d expect to see from the Mortgage Bankers Association, not an independent think tank. Third Way claim that a moratorium will scare buyers away from the market and put downward pressure on home prices. It’s a nice talking point, but any sane buyer should already be spooked by the facts that have emerged on bank documentation policies. The moratorium isn’t going to reduce confidence—years of banker abuse already has. Banks skimped on their paperwork to cut costs, and are now resorting to systematic fraud to cover-up very big problems. They’ve charged borrowers illegal fees, foreclosed on the wrong homes, and sold the same mortgage to different investment banks to be packaged into different securities. That kind of behavior scares borrowers. Repairing the damage isn’t nearly as frightening.

Third Way also claims that a moratorium would hurt community banks and credit unions. Hard to see how that’s the case if the moratorium only “forestalls” foreclosures, rather than preventing them, as Third Way claims, but if this is really a huge problem, just exempt credit unions and banks with less than $1 billion in assets from the moratorium. Illusory problem solved.

Third Way also argues that a moratorium is unfair to taxpayers—but taxpayers are likely to be the single largest party defrauded in the documentation scam. Taxpayers own trillions of dollars in mortgage-backed securities through the Federal Reserve, Fannie Mae and Freddie Mac. A moratorium can help us indentify problems and make claims against banks who have acted inappropriately.

This reasoning is not simply divorced from economic reality—it’s internally inconsistent. Third Way says that a foreclosure moratorium would only “forestall” foreclosures, not prevent them—and then turns around and insists that a moratorium would encourage people not to pay their mortgages. If it’s not a permanent solution, no sane borrower is going to stop paying.

Unless it already makes sense for borrowers to stop paying their mortgages. Third Way board member Derek Kirkland is a bigwig at Morgan Stanley. Last year, Morgan Stanley realized that a handful of properties it had purchased in San Francisco were not worth what Morgan Stanley owed on the mortgages. So Morgan Stanley made a rational decision: instead of wasting its money on payments for a devalued property, it walked away from the mortgages. This is called a “strategic default,” and Third Way explicitly comes out against it in their memo. But iff the board members of Third Way are okay with strategic defaults, what right do they have to hold American homeowners to a different standard?

Helping homeowners isn’t part of some radical leftist agenda—it’s a basic prerequisite for economic recovery. When homeowners are burdened with unnecessary, predatory, and even fraudulent debt, they don’t have money to spend on productive economic activities that create jobs. Punishing borrowers for fraud committed by bankers simply doesn’t make sense. A foreclosure moratorium won’t solve all of our problems, but it can help us sort them out so that homeowners who deserve help can be identified, along with bankers who have committed fraud.

Calls to Third Way were not immediately returned.

Axelrod Is Wrong: Obama Must Protect American Families From Wall Street Fraud

Zach Carter — Mon, 11 Oct 2010 13:32:56 -0400

If senior White House adviser David Axelrod’s comments this weekend are any indication, the Obama administration is woefully misreading the foreclosure fraud crisis currently gripping the U.S. economy. Axelrod refused to commit the administration to a national moratorium on foreclosures, and mischaracterized a massive, systematic fraud perpetrated by Wall Street banks as a set of unfortunate “mistakes.” This is not a minor scandal and it will not simply go away. President Barack Obama needs to stand up for the middle class and protect our economy from Wall Street theft. If he doesn’t, the economic and political price will be devastating.

The full transcript of Axelrod’s appearance on CBS’ Face the Nation with Bob Shieffer is here, but here are his key comments, emphasis mine:

“It’s bad for the housing market and it’s bad for these institutions which is why they’re scrambling now to-- to go back through and-- and-- and through their documentation for all of this as they should. The President was concerned enough to veto a bill that came to him last Thursday, that would have unintentionally made it perhaps easier to make mistakes. . . . I’m not sure about a national moratorium because there are, in fact, valid foreclosures that-- that-- that probably should go forward. And where the documentation and paperwork is-- is proper, but we are working closely with these institutions to make sure that they expedite the process of going back and reconstructing these and throwing out those that don’t work . . . . Our hope is that this moves rapidly and that this gets unwound very, very quickly.”

Let’s straighten some facts out first. Lenders aren’t just making “mistakes”—they’re fabricating documents, forging signatures and lying to judges in order to illegally throw people out of their homes and slap them with thousands of dollars in illegal fees. Consumer advocates were not worried that the bill Obama vetoed on Friday would make it easier for lenders to make “mistakes”—they were worried it would make it harder to expose rampant, systematic fraud committed by Wall Street banks against American families.

Nor is this a problem that can be resolved quickly. Banks are resorting to fraud for a reason—they don’t have the documents that prove they have the right to foreclose. It’s not like JPMorgan Chase or GMAC need to dig through a filing cabinet to find the right form—the form doesn’t exist. Banks willfully, knowingly destroyed key documentation in order to cut costs and boost bonuses. Other banks that bundled these mortgages into complex securities didn’t ask for this documentation for the same reasons.

This creates legal liabilities for the banks that can push them into failure. A lot of these securities were packed with fraudulent mortgages—loans where banks falsified borrower information in order to push them into predatory loans. Investors who bought these mortgages have been trying to force banks to repurchase the fraudulent loans. But now that banks cannot even document which loans they own, the entire fraudulent mortgage securitization framework may land on the banks’ doorstep. If that happens, we’re going to see some very big banks go under.

What does all this mean for borrowers? We’ve already seen plenty of cases in which banks are foreclosing on the wrong homes—kicking out borrowers who haven’t missed any payments, or borrowers who are working with the bank on receiving a loan modification to keep them in their homes. But even for borrowers who have stopped paying their mortgages, the fraud process creates serious dangers. Banks charge all kinds of fees on borrowers when they foreclose—fees that often amount to thousands of dollars. The current wave of fraud is enabling an onslaught of grotesque, illegal fees. When you create new documents and forge signatures, you can claim people agreed to ridiculous things they never agreed to, tell ridiculous lies about the house being foreclosed on, and generate thousands of dollars in improper fees.

In other words, banks and their lawyers are breaking the law to steal from borrowers facing financial hardship. This impropriety may create losses so big that megabanks are going to fail. Smart political leaders need to get out there right now and prove that they are backing American families, not Wall Street elites. A foreclosure moratorium is the first step, the second is a major new initiative to reduce mortgage debt to a level that borrowers can afford—that prevents foreclosures and keeps this mess from spiraling into a financial calamity. The mortgage market needs to reflect economic reality, not inflated banker dreams.

Other leaders have figured this out. If Obama refuses to stand up for the middle class, he’ll be hanging many embattled Democratic members of Congress out to dry, politically undercutting them on an issue of household financial security in the middle of a brutal recession. Swing-state Democrats like Senate Majority Leader Harry Reid, D-Nevada, Rep. Debbie Wasserman-Schultz, D-Fla., and Rep. Alan Grayson, D-Fla., Rep. John Conyers, D-Mich., and Carolyn Kirkpatrick, D-Mich., have already endorsed foreclosure moratoriums. Attorneys general in Connecticut, Massachusetts, Illinois, California, Iowa, Texas, and Ohio have either imposed state-wide moratoriums or investigations into foreclosure fraud, and Ohio is already suing GMAC. Why does the president want to kneecap members of his own party?

What’s more, Axelrod’s comments put the White House on the same side as Republican Whip Eric Cantor, R-Va., a Wall Street crony who voted to bailout the big banks with no strings attached, but refused to support Wall Street reform. For his services, Wall Street rewarded Cantor with $2.1 million in campaign contributions for the 2010 elections. Here’s what Cantor said on Fox News Sunday:

“If you impose a moratorium on foreclosures, what you're telling people and institutions that lend money is they do not have the protection to take the risk they need to, to extend credit so people can get a mortgage . . . . You're going to shut down the housing industry if that's the case . . . . People have to take responsibility for themselves.”

Cantor’s reasoning is, of course, complete nonsense. People do need to take responsibility for themselves, which is why the government has a responsibility to stop banks from systematically defrauding borrowers on an epic scale. But note Cantor’s positioning on the issue. He claims that if the government does anything to help troubled borrowers, that assistance will cause a financial catastrophe. It's a phony story that completely ignores the financial catastrophe already brewing, one created by massive Wall Street fraud, not the government's big, bleeding heart. Cantor is peddling a monstrous lie, but if Obama doesn’t push-back against it, he will politically hamstring any opportunity to fend off the economic fallout from this mess, and leave troubled borrowers at the mercy of Wall Street predators.

Obama Must Reject The Foreclosure Fraud Bailout

Zach Carter — Thu, 07 Oct 2010 13:05:02 -0400

UPDATE: President Obama vetoed the foreclosure fraud bailout this afternoon, but plenty of other battles are already raging. Rep. Alan Grayson, D-Fla., is calling for Treasury Secretary Timothy Geithner and the newly-established Financial Stability Oversight Council to investigate the foreclosure fraud scandal as a systemic risk to the U.S. economy.

That's a major step. Thus far, Geithner has been hostile to efforts that would provide foreclosure relief to troubled borrowers. But given the fact that the current scandal involves straightforward fraud, the absolutely massive scope of this fraud, and the potential havoc it stands to wreak on banks' bottom lines, the government may finally step in to help homeowners. Obama made clear today that he will not support a stealth bailout for foreclosure fraud. With the right pressure, the administration may very well act to help borrowers, not bankers.

Meanwhile, state attorneys general are filing lawsuits against big banks left and right, and calling for a major moratorium on foreclosures.

ORIGINAL POST:

Unbelievably, the U.S. Senate has approved legislation making it easier for banks to get away with foreclosure fraud. The bill would make it much harder for consumer advocates to show that banks are engaging in fraud, bailing out megabanks who cut corners in order to boost bonuses and slap borrowers with massive, illegal fees. The political fight between big banks and troubled homeowners is on, and President Barack Obama must take a side.

If President Obama signs this legislation into law, he’s sending a clear signal that his administration stands ready to bailout the banks again, whatever the consequences for American homeowners. The new legislation is a clear attempt to provide legal cover to GMAC’s robo-signing scandal, and should be firmly opposed by Obama.

Banks are running into big trouble in foreclosure courts right now because they have kept shoddy mortgage records for years in order to cut costs and boost bonuses. Those records are so bad that banks routinely cannot prove that they have the legal right to foreclose on the homes they attempt to foreclose on. That’s a major problem, because banks have repeatedly demonstrated that they cannot be trusted to figure out their own foreclosures for themselves. They’ve foreclosed on people who haven’t missed any mortgage payments, and even on borrowers who have fully paid off their loans.

So banks and their lawyers have been fabricating documents, forging signatures, and lying to judges in order to go through with foreclosures. All of this is fraud-- especially when committed systematically, en masse by large corporations and their clients. It gets even worse when banks try to use fraudulent documents to slap borrowers with thousands of dollars in illegal fees.

The legislation currently awaiting President Obama’s signature tries to bailout banks on one aspect of this documentation problem. Banks push through a lot of bogus documents with the help of corrupt notaries. Notaries are people who witness some legal event, like the signing of a contract, and then testify in print that they saw the contract being signed. It’s one way for courts and lawyers to show that documents have not been forged.

But the major foreclosure fraud scandal at bailout behemoth GMAC that ignited the current furor involved what appear to be totally bogus notaries. One GMAC employee, Jeffrey Stephan, signed thousands of affidavits and had them all notarized in Pennsylvania, even though they were being used in foreclosure cases in many different states. Since different states have different standards for notary approval, these documents should have been unacceptable in the vast majority of state courts.

That made the GMAC scandal illegal in most states. But the GMAC scandal got much worse once Stephan acknowledged that he had never actually examined the affidavits before approving them. All of Pennsylvania’s notaries who signed off on the Stephans Documents were totally unreliable. They were approving fraudulent documents en masse.

So for the Stephens Documents, there are two levels of impropriety—the notaries who didn’t do their homework, and Stephens, who illegally robo-signed hundreds of thousands of documents.

The bill approved by the Senate on September 30 addresses the notary side of things. It says that all states must accept a notary from any other state, and even allows notaries to sign-off on electronic documents. That means notaries don’t have to be present at the signing of documents—somebody can forge a document, scan it into a computer, and ship it off to a notary for approval, replicating the GMAC scam online.

The good news is that the GMAC documents were still illegal even without the false notarizations. The fact that Stephans robo-signed these without examining them was itself an act of fraud (barring other extenuating circumstances). So even if this bill is signed by Obama, wronged homeowners have some hope for redress.

But the legislation would still create a major new hurdle for borrowers seeking relief. If a bogus notarization is deemed legal, it’s much harder to prove that the document itself is just a big fat fraud. Most states only accept notarizations from their own state—this makes perfect sense for mortgages. Nobody from Pennsylvania needs to fly-in to witness my mortgage closing in Virginia—a Virginian notary will do just fine.

By requiring any state’s notarizations to be acceptable nationwide, the bill establishes a new race-to-the-bottom in standards: Whichever state has the weakest notary rules gets all the business. It means all of the crap Pennsylvania notaries on the GMAC robo-signings would be deemed acceptable in any state. Borrowers could still challenge the GMAC robo-signings, but it would be much harder to win the challenge, since an official, authorized notary had stated that the fraudulent robo-signings were in fact legitimate.

The bill is an obvious attempt to bailout banks from the consequences of their own bonus-fueled shortcuts—shortcuts which are being used to slap individual American families with tens of thousands of dollars in illegal fees. President Obama has no business bailing out our biggest banks again—especially on the backs of troubled borrowers those banks are attempting to defraud.

And the future political ramifications are dire. If this bill proves insufficient to bailout GMAC, JPMorgan, Bank of America, and the other major banks implicated in the foreclosure fraud scandal, there will be future legislative efforts to help them. If this bill becomes law, then politicians will have created political cover for the next round of bailouts, which will be characterized as a mere “technical fix” to this attempt.

President Obama must veto this bill. American homeowners deserve to be protected from fraud. The American government shouldn’t be bailing out fraud.