Financial Crisis - Treasury Secretary Henry M. Paulson, Jr. and the Cause

Former Secretary of Treasury Henry M. Paulson, Jr. has written a book entitled ON THE BRINK; Inside the Race to Stop the Collapse of the Global Financial System. His account is revealing. He clearly had no concept of any oversight function, although he had a background and employment exposure to investment banking opportunities and risks.

Of particular note is that he dealt with the crisis -- as it came to a head in the 48 hours (48 hours!) preceding the bankruptcy of Lehman Brothers in September 13, 2008 -- by seeking to find another lender to cover the obligations which were due. In other words, he was trying to solve a situation created by bad loans (securities tied to defaulting mortgages) by finding a bank willing to chase good money after bad. Knowing the nature of the toxic assets, he looked for a sucker.

When Barclays (President Bob Diamond) was unwilling to make the deal because the British Financial Services Authority (Finance Minister Alistair Darling) did not support it, "we were beside ourselves". To the group of CEO's he had assembled in his lobby, he blurted, "The British screwed us!" I'll bet he used other words. He was "stunned" that Mr. Darling was unwilling to permit him to unload the problem "on the British tax payer".

In the book, Mr. Paulson falls upon his faith (Christian Science). He asks his wife "to pray for me". She immediately quotes Timothy II, 1:7 : "For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind".

The problem is that he admits he kept bottles of pills -- sleeping pills -- which is medication prohibited by his invoked religion and contrary to the Scientist belief that he cannot sleep. In addition, exactly WHAT is he fearing? For his failure to find a sucker to be the last one holding the bag of increasingly toxic assets? Does he understand that the only "risks", the only thing at stake, is the collapse of Lehman, and of course, with that, the spiraling problems that would hit the insurer, AIG.

However, the real danger was that the failure of large financial institutions would cause all of his chums to lose their shirts. All of his associations were with investment bankers. (He had been Chairman of Goldman Sachs).

In Spring 2007, Secretary Paulson told an audience at the Shanghai Futures Exchange that "An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention."[19] He actively lobbied to remove all regulatory oversight from the financial industry while at the same time subjecting consumer rights organizations (lawyers, loan modification consultants, etc) to increased and burdensome regulation).

In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades.[20] The economy was already tanking and was way down from the levels reached during Clinton.

On July 20, 2008, after the failure of Indymac Bank, Paulson reassured the public by saying, “it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”[21] He had to know that the people pretending to be "our regulators" were in fact the predators who had already scammed homeowner-borrowers by placing them into inappropriate loans and OptionARMS.

On August 10, 2008, Secretary Paulson told NBC’s Meet the Press that he had no plans to inject any capital into Fannie Mae or Freddie Mac.[22] On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.[23]

Quoted from Wikipedia.

Verbs and Loan Modification (not modifying lending)

I pulled over to think about the month. In mid-September my Office Manager and Department Heads met with me to brain-storm solutions to the fact that the income into our Practice had fallen off a cliff. It occurred to me that we had all become nouns, and we now needed to be verbs. Law Firms can become remarkably complacent.

It is our geography. Lawyers are isolated. We live on an archipelago populated by a fractious and internecine tribe, with its own language which we frankly boast is unintelligible. We are willing to change, to twist a word, so that it has no place at the table, or means the opposite. Contract is a type of breach. Negligence is never accidental. Proof is a mirage. Process is substance to us, our meat.

What our Clients really need, should be obvious. But what is that need when viewed through the lens of the Law?

For example, in Ojibway, many nouns can be turned into verbs. The tongue is filled with the possibility of action. In law, we turn verbs into nouns. We don't really "argue", we make "arguments". Ideas become things.

In 2008, most of the real estate lawyers in Orange County had home loan clients coming to us asking what they could do about the fact that they were faced with loan obligations secured by their homes. Most of the recent loan terms were predatory -- the monthly repayments were triggered to double or even triple, and borrowers could never ever pay off such loans.

The Lenders, not content with placing homeowners into inappropriate obligations, proceeded to offer the mortgages to investors, in layers of securitization. The amount of money seeking investments in the world doubled (Global Money Supply), but the places to invest did not. Bankers sought to service this expanding "market" (for investments) with "new" securities, and mortgages looked attractive. Since Bankers needed more mortgages, with the same number of people, they made the mortgages easier to obtain.

Curiously, however, the Bankers also made the "easier" mortgages impossible to pay off. The Bankers lobbied for laws removing restrictions on Pre-Payment Penalties. (The California Field Code had a provision outlawing penalties in excess of actual costs.) The Financial Industry re-introduced Option-ARM terms and credit default swaps that had been abolished since the 1930s. And to make these new loan forms easier to market, the Banks offered "teaser rates" and promised to "re-finance" the balloon payments. In most States, the Finance Industry eliminated lawyers -- on the consumer's side -- from the loan origination process.

When the Option-ARMS began to trigger -- when the loan repayments doubled or tripled -- the consumer borrowers appeared in lawyers' offices. Lawyers assisted the consumers in seeking "modifications" for the loans. Ideally, this would eliminate the predatory terms, but leave the obligation otherwise intact. The borrowers would be able to keep their homes, and the investment pools (the retirement plans, etc.) would still have cash flow from the income.

However, the Banks are not content with having sold loans to consumers who will never ever be able to pay them off. Nor are Banks content with having sold mortgage securities to investors in forms which have no marketable value (toxic). Nor are the large Banks content with taking tax payer bail out money.

Bankers have foreclosed on huge swaths of homes in neighborhoods across the country, and the benefits of home-ownership are compromised. The victimized families are torn by financial stresses. When the consumers to go lawyers, we tell them that the best of all the bad alternatives is to try to "modify" the loans. The Obama Plan provides guidelines and "commissions" to Lenders who modify the predatory loans. HUD and Fannie Mae provide "free" assistance to consumers.

However, the Banks are taking the Obama Plan commissions, and then they are refusing or delaying the Loan Modifications. They place the borrowers in a Twilight Zone of delay. One tactic is to offer the consumers a three-month "trial mod", after which they require another round of documents because the previous financials are "stale dated". More delays.

Almost all "loan modifications" done by homeowners without law firm assistance go into default within six months. The banks are not really modifying their predation. No one is modifying Lending. We only have bail outs and laws written by the Loan Industry, and consumers losing their homes.