The U.S. Financial Crisis: Is Legislative Action the Right Approach?

by Gary Klinger March 3 2009, 14:35
Introduction


[A few short years ago, there was a country experiencing significant prosperity. The flow of credit within the economy was fluid, stock prices were at all time highs, and many people were becoming wealthy in due part to real estate speculation and appreciation. As the economic outlook in the real estate market was bright, banks began granting increasingly risky loans. Eventually the bubble burst. Inflated real estate market values began to decline, lendees found themselves unable to pay back their risky loans, and the credit markets froze. As a result, government intervention came in the form of subsidizing failing banks and businesses.]


In the middle of this financial crisis facing our country, one would assume this passage is referring to the United State of America. However, this is the very similar story of the Japanese housing bubble that burst and led to what is known as the “the lost decade.” This article will briefly describe the legislative responses taken by the Japanese government to address their crisis, compare those to any similar one’s being taken by the US government in response to its own, and comment which legislative actions may succeed or fail, and why. [More]

Weekend at Bernie's

by Patrick Schuette February 18 2009, 01:32
I. Introduction



The past few months have seen numerous financial frauds uncovered. Two of these frauds are particularly noteworthy. On December 11th, 2008, the largest of these financial frauds was unveiled when Bernard Madoff admitted to a $50 billion fraud through his firm, Madoff Securities.[1] On February 17th, the Securities and Exchange Commission (SEC) filed charges against Stanford International Bank relating to an allegedly fraudulent $8 billion certificate of deposit (CD) scheme.[2] Other alleged frauds have come to light, often in highly publicized and dramatic fashion.[3] These frauds suggest something is amiss in the markets. [More]

The Wall Street Bonus Culture: Well-Deserved Benefit or Unnecessary Waste?

by Rayna Gokli February 17 2009, 17:37
Introduction


Recent headlines that Wall Street investment banking executives have received billions of dollars in bonuses, just months after the federal government has given these same firms billions of dollars in bailout money, has greatly increased skepticism about acceptable methods of awarding bonuses. [1] President Obama condemned the awarding of these exhobirtant bonuses. "That is the height of irresponsibility. It is shameful. And part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility." [2] However, many individuals on the flip side of the coin believe these bonses are imperative to the success of the banking business. [3] This article will discuss the arguments for and against seemingly inflated bonus plans by delving into the most common types of compensation plans and their relation to the current economic crisis on Wall Street. [More]

And the Walls Came Tumbling Down: Deregulation & the Current Financial Crisis

by Samuel Esan November 10 2008, 12:14
I. Introduction



While intellectuals, economists, bankers, and pundits try to explain the ins and outs of the economic downturn we are currently facing, many on "main street" are asking "what happened to make my 401k retirement savings account diminish so much in value since I looked at it in August?" The fact is that many hard working individuals have no idea what happened to cause the global economic downturn we are currently facing, and the explanations being put forth by most media outlets simply do not make sense to many people.



In trying to understand the situation, there are without question many factors that played a role. Trying to identify one overwhelming factor would be futile, however, this article will look specifically at the role deregulation played in the financial crisis. [More]

Primary Dealers Credit Facility: Changes for Market Liquidity

by Yuri Kim April 22 2008, 02:43
I. Introduction



On March 17, 2008, Bear Stearns, one of the oldest and largest global investment firms on Wall Street unexpectedly collapsed and was sold to J.P. Morgan Chase & Co at a fire-sale price of $2 a share in stock, approximately $236 million.[1] With the rumors about Bear Stearns' losses in the mortgage industry circulating in the market, investors pulled their money out, the firm was short on cash, and the deepening losses left Bear Stearns with no other choice but to sell to their white knight, J.P. Morgan Chase & Co.[2] With the help of the Federal Reserve, the acquisition price was later revised to approximately $10 per share, totaling $1 billion; however, even the revised deal was still much lower than the company's value of $20 billion in January 2007.[3]



In response to the ongoing credit crisis and the sudden crash of Bear Stearns, the Federal Reserve ("Fed") took several measures to help ease the market. Wanting to ensure that other investment banks can avoid a crash like Bear Stearns, on March 16, 2008, the Fed Board of Governors announced a new loan program and established the "Primary Dealer Credit Facility" ("PDCF").[4] This new program is designed to help struggling investment banks avoid a liquidity crisis.[5]

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The Roberts Court and the Neutralization of McCain-Feingold's Corporate

by Daniel Lohse April 17 2008, 08:44
I. Introduction



For over a century legislatures have struggled with the issue of how to curtail the efforts of corporations seeking to substantially influence political campaigns. [1] Although campaign finance regulation has taken numerous forms throughout the years, loopholes and exceptions inevitably surface despite the intentions of Congress. [2] Corporations have also wrestled with the conflict of advancing their own political interests at the expense of alienating potential consumers. [3] Congress and the courts have sent ambiguous and, at times, contradictory messages regarding the proper role of industry in the political arena--at times conspicuously leaving a route open for corporations to fund candidates and sometimes expressly speaking out against those very same methods. [4] The enactment of the Federal Election Campaign Act ("FECA") in 1971 [5] (and subsequent amendments in 1974, 1976, and 1979) [6] along with the Supreme Court's landmark 1976 decision in Buckley v. Valeo [7] drastically changed the permissibility of corporate involvement in political campaigns. [8] The controversial decision by the Buckley court to allow certain soft money "issue advocacy" while disallowing "express advocacy" [9] along with the Internal Revenue Service's ("IRS") lack of campaign contribution disclosure requirements for certain tax exempt organizations [10] created a safe haven for corporations to anonymously donate to political campaigns. [11] In 2002, Congress attempted to close the corporate campaign finance loophole left open by issue advocacy with the Bipartisan Campaign Reform Act ("BCRA" or "McCain-Feingold"). [12] The BCRA withstood initial judicial review, [13] but the appointments of Chief Justice John Roberts and Justice Samuel Alito to the Supreme Court in 2005 and 2006 [14] created a shift in the Court, which has re-opened the loopholes created by the Internal Revenue Code ("IRC"). [15] The Roberts Court should defer to Congress and disallow issue advocacy by tax exempt trade organizations, creating greater campaign transparency and closing this loophole which facilitates corporate political financing. [More]

Unauthorized Aliens and Credit Cards: Are Banks Violating Federal Law?

by Daniel Lohse April 14 2008, 08:33
I. Introduction



An estimated 11.6 million unauthorized aliens [1] are currently in the United States. [2] This growing population has not gone unnoticed by American financial institutions. For years banks have offered checking and some savings accounts to aliens without requiring them to prove valid immigration status. [3] In recent years, however, banks have widened the scope of financial products available to aliens who do not have a Social Security Number. [4] While the intent of these products was to provide services to green card holders and legal nonimmigrants, fairly relaxed identification requirements and the overly general specifications of the USA PATRIOT Act ("Patriot Act") allow unauthorized aliens to take advantage of these products in many situations. [5] Although some have argued that banks are violating the Patriot Act's Customer Identification Program ("CIP") requirement by agreeing to accept non-traditional identification to establish new accounts, this argument does not appear to be consistent with the language of the statute. [6] A more intriguing legal argument is the possibility that banks are violating the Immigration and Nationality Act ("INA") by offering these products that are, at least in theory, available to unauthorized immigrants. Specifically, some have asserted that banks are unlawfully encouraging and inducing aliens to reside in the United States in violation of section 274 of the INA. [7] Regardless of whether or not banks are acting in violation of immigration law, legislation has been proposed that would close the loophole allowing unauthorized aliens to take advantage of these products. [8] By requiring proof of a valid visa by way of an identification card issued by the Department of Homeland Security ("DHS"), Congress can allow the enormous population of legal immigrants and nonimmigrants access to financial products without also extending these benefits to unauthorized aliens. [More]

Shades of Gray: A Perspective Behind the Skrobot Indictment

by Scott B. Wilson April 12 2008, 23:20
    The old legal maxim proceeds, ignorantia juris non excusat or, "ignorance of the law, is no excuse!" This ancient truism, thought to have its origins in Roman law, was eventually folded into the American legal system through the early English colonialists. The maxim reflected a common reality that much of law, particularly criminal law, was understood to be based on the natural and eventually, Canon law. A knowledge of such laws was thought to be held generally by all in common, the law written on the heart, so they have no excuse, as St. Paul refers to it.[1] However, much of that common traditional understanding, and particularly the natural law, has been jettisoned by modernity. To fill the void for our pluralistic and disjointed world, we have adopted a sterile, strict, and exclusive form of legal positivism. Reams and reams of state and federal statutes, municipal codes, administrative decisions, executive decisions--and yet the maxim, ignorantia juris non excusat, lurks in the shadowy background like a phantom from the past. Congress, state legislatures, and even hoards of bureaucrats all tinker with or develop laws and rules that are potentially enforceable against people who have presumed knowledge of the law, as well as its interpretation through case law.      Such a conundrum poses a truly interesting question about the reasonableness, indeed fairness, of holding on to the classic maxim in our modern world. However interesting that academic question may be, in reality the situation becomes terrifying quickly when the state bears its full weight of resources and monopoly on power down on you for violating one of these laws. Such is the hand that a one Lawrence Skrobot has been dealt. He, along with eighteen others, was recently indicted by a federal grand jury for various counts of mortgage-related fraud. This article will examine the indictment and the case that the FBI claims it has against these defendants.        On February 8, 2008 the Federal Bureau of Investigation (FBI) announced that it had "unveiled" a massive mortgage fraud scheme in the Chicagoland area.[2] The FBI announced three separate indictments, but this article will focus mainly on the third indictment, which is the particular indictment involving Mr. Skrobot, et al. Despite being labeled as "one of the largest mortgage fraud schemes ever prosecuted in [the Chicago] district", there has been scant reporting of this story in the local and national press.[3] Some of the reporting thus far, however, has mistakenly lumped all three indictments together under the moniker, "the Skrobot indictment", which infers Mr. Skrobot is allegedly involved in illegal gang activity and money laundering schemes found in the first indictment. However, a reading of the third indictment, which is the only indictment in which Mr. Skrobot is named, breeds a more accurate depiction.     The FBI filed the 22-count indictment against Mr. Skrobot along with eighteen others on February 5, 2008 at the United States District Court for the Northern District of Illinois located in Chicago.[4] Mr. Skrobot himself is facing eighteen counts in violation of four federal laws.[5] The other eighteen individuals named on the indictment include, "loan officers and processors, a Certified Public Accountant, a licensed real estate agent, a tax practitioner, a property manager, numerous property developers, and several property buyers."[6] They are accused of "devising and operating a scheme to defraud numerous lending institutions by means of false and fraudulent mortgage applications."[7]     Mr. Skrobot is the alleged "ring leader" of this scheme whereby, through his land trust, he would purchase blighted properties in the Chicagoland area.[8] With these properties in hand, Mr. Skrobot  along with others named on the indictment, would in turn recruit so-called "straw buyers" to purchase the properties.[9] These buyers, allegedly, were unqualified for financing to purchase the properties, so Mr. Skrobot allegedly directed them to specific loan officers for favorable treatment.[10] Several of these loan officers, Varena McCloud and Joseph Miller, as well as others, are named in the indictment.[11] They are charged with aiding these straw buyers to obtain mortgages by using forged or false W-2 employment statements, false rental histories, and inaccurate statements describing the buyers' assets and income.[12]     The indictment further alleges that it was part of this master "scheme" led by Mr. Skrobot to issue second mortgages for the buyers to go towards the properties on the guise of being later repaid, "when in fact [defendants] and the buyers had an agreement that neither the seller second mortgage or note would be repaid in any part."[13] Moreover, it is alleged that Mr. Skrobot provided the buyers with down payment and earnest money checks that listed the buyers as the remitters.[14] Rather, the buyers were not remitters and had not contributed any money toward a down payment or earnest money and caused these false down payment and earnest money checks to be presented at closings to deceive lenders by creating the false impression that the buyers had made down payments and had paid earnest money."[15]     The culmination of this "scheme", allegedly masterminded by the ever-deft Mr. Skrobot, is that he along with other named defendants "received the proceeds of mortgage loans that lenders issued to buyers of the [properties]...and used these loan proceeds to enrich themselves and to keep the scheme going by using the funds to buy and sell more property."[16] When the real estate market declined over the past year, and borrowers did not repay the mortgage loans or simply abandoned the properties, the lenders were faced with losses totaling more than $7 million.[17] Some of these lenders included some of the nation's largest commercial banks, such as a mortgage lending division of Washington Mutual as well as BNC Mortgage, a wholly-owned subsidiary of Lehman Brothers.[18] Additionally, there are various counts of wire and mail fraud alleged against Mr. Skrobot and various other named defendants that involved the transfer of monies related to the property financing "scheme."     There is a possible alternative perspective behind this third indictment and its accusations. Since around August of last year, certain financing institutions, and most particularly the big commercial and investment banks, have been struggling due to the subprime mortgage fallout. Nearly every one of these banks has posted enormous losses and announced impending writedowns. As a result, and since so many other institutions and groups had exposure to the subprime risk, there are serious fears of an economic recession. But before too many tears are shed and empty exhortations are exclaimed by self-interested politicians concerning the fault of the credit crunch, it would only be proper to scrutinize the big banks' role and shedding of responsibility for the mess.     Formerly, if a bank was to extend credit to an individual, it either needed to have significant collateral from the borrower or be assured by his or her stellar reputation and credit worthiness. In times much older than the present, a person could be subtly coerced into being honest and up front with the bank (and others in society) out of fear that a potential scandal would ruin his reputation before the public. Thus, there was a sense of public virtue and commonly held mores. Likewise, the bank had an incentive to know its customers and in many cases (think: It's a Wonderful Life) did take risks and actions based on its personal first-hand knowledge of its customers. Such a simple idyllic life is now, alas, virtually past; however, banks continued to exercise due diligence when extending credit to individuals or institutions out of self-protection.     Enter the main villain, in the form of Wall Street and big New York banks. Like the situation that befell Eve in the Garden, this serpent offered a tantalizing temptation: "you have such potential but you are being denied this glory and wealth; why limit yourself to such woefully low margins when we can help you realize your true profitable potential with minimal risk exposure?" Thus unveiled the proposition for small banks and mortgage financing institutions to sell their mortgage loan debt to Wall Street, which would in turn securitize the loan portfolios into equities to be sold on the international markets. Considering human behavior, this provided a subtle incentive for lenders to make as many loans as possible. Likewise, the lenders had little incentive to uphold their due diligence lending standards. After all, the loans were being immediately sold and re-packaged to investment banks; why bother about reputation when third parties claim to take on all the risk? Thus, the match made in Heaven between the little-lenders-that-could and Wall Street strolled blissfully down the path of moral hazard, which is where we find ourselves picking up the pieces today.     Consider again those nineteen people named on the third indictment and imagine them operating in the marketplace scenario described above. An alternative explanation may be plausible. What if, for instance, the supposed "ring leader", Mr. Skrobot, is a humble generous man who simply wanted to perform works of mercy for those less fortunate? For instance, many of the buyers listed on the indictment were no-asset lower income earners who formerly lived in rental properties. What if, for example, one of these buyers rented for $800/month, and if he wanted to buy the same property, it would cost him $1000/month in mortgage payments. That is a small difference considering the benefits that come with achieving the "American dream" of homeownership.     The crux of the matter may have been though that many of these buyers would meet difficulty qualifying for the mortgage loan because they have insufficient or irregular income and insubstantial assets available for collateral. Suppose Mr. Skrobot or one of the defendants were to make these buyers a gift to cover the earnest money in order to help him qualify. In the past, lenders wanted to see a non-resource non-seasoned deposit to hold until closing. That is, the lenders wanted to see that the source of the funds was from the buyer himself and that the funds were available for a set period of time. This procedure was another way of measuring and insuring the buyer's reputation. However, over the past several years, lenders had incentives to take more risk, so such standards for potential borrowers diminished. Ordinarily, Mr. Skrobot or one of the other defendants, would need to tell the lender that the buyer received the money as a gift. However, if lenders did not care as to the source or season of the money, is it just for the FBI to now charge the defendants with mortgage fraud when the lenders did not care to begin with?     As to the alleged false documents, it is unknown whether the defendants actively engaged in their misrepresentation or the buyers simply acted with indiscretion to lenders who were more than willing to accommodate them. The larger point of this indictment and alleged "scheme" is that it is possible to be prosecuted by the state for doing works of charity to those less fortunate. This is possible first, because the American legal system retains ignorantia juris non excusat as an enforceable maxim. Thus, many of the defendants may have acted out of charity unaware that the standards of mortgage fraud had changed. Typically, one would think mortgage fraud would constitute an intentional straight forward act to directly deceive the lender, such as claiming improvements were made on the property when in fact they were not.     Second, the indictment illustrates the price middle America may have to pay to bail out and take the heat for Wall Street's risk-taking. Millions of Americans are already bailing out the big banks through high inflation, at the behest of the Federal Reserve's inflationary policies, which are aimed at, "help[ing] struggling banks and mortgage providers." Perhaps a similar situation is occurring here with this indictment: instead of lenders taking responsibility for excess risk and poor standards, it should be little guys, like Mr. Skrobot, who should take the forty lashes less one. Unfortunately, we may never learn the true details of the legitimacy of this alleged "scheme." Because the federal government has an abundance of resources and a monopoly on power, Mr. Skrobot and the other defendants may be forced to accept a plea agreement, despite being potentially innocent from any wrongdoing. Such may be the consequences we endure in our modern world to achieve order: a dominant total state with an abundance of laws most of which its citizens are expected to have a natural knowledge of. However, such a compromise provides little comfort for the possibly innocent among those named on the third indictment. [1] Epistle of St. Paul to the Romans 2:15. [2] Press Release, Chicago FBI Press Office, Charges Unveiled in Massive Mortgage Fraud Scheme (Feb. 8, 2008) (on file with author) available at http://chicago.fbi.gov/pressrel/2008/feb08_08.htm.  [3] Id. [4] Indictment of Lawrence Skrobot, United States v. Lawrence J. Skrobot, No. 08CR-0107 (N.D.IL Feb. 5, 2008) available at http://www.mortgagefraudblog.com/images/uploads/ILSkrobotIndictment.pdf. [5] Id.; See 18 U.S.C. § 1343  (2000);  18  U.S.C. § 1957 (2000); 18 U.S.C. § 1341 (2000); 18 U.S.C. § 2 (2000). [6] Press Release, supra note 2. [7] Id. [8] Id. [9] Id. [10] Id. [11] Indictment of Lawrence Skrobot, supra note 4. [12] Press Release, supra note 2. [13] Indictment of Lawrence Skrobot, supra note 4, at 5. [14] Id. at 6. [15] Id. [16] Id. at 7. [17] Id. [18] Id. at 2. [19] Joe Bel Bruno, Stocks Rise on Fed Lifeline to Wall Street, YAHOO! NEWS, March 11, 2008,  http://news.yahoo.com/s/ap/20080311/ap_on_bi_st_ma_re/wall_street.

Fannie Mae and Freddie Mac: Setting the Industry Standard

by Yuri Kim April 2 2008, 02:47
I. Introduction



After the six year housing boom ended in the summer of 2006, home sales and prices have fallen dramatically.[1] Overall home sales in 2007 dropped 26.4% from 2006, making it the biggest drop since the Commerce Department began keeping track in 1963.[2] New home sales fell 18.1% in 2006 and by the end of 2007, sales dropped 56.5% from July 2005's peak home sales.[3] In 2007, new home sales dropped 26.4%: 32.2% in the West, 26.7% in the Midwest, and 26.3% in the South.[4] Aside from lacking sales, in areas like Las Vegas and San Diego, more than 40% of home sales in recent months were related to foreclosures.[5] Over the past couple of years, the number of forclosures increased, home building declined, the number of empty homes increased, and the domino effect is now spreading to other areas of consumer spending.[6] With a depressed housing market, many believe that changes in the financial and lending industry can help the market get back on track.



Fannie Mae and Freddie Mac, the two mortgage investment giants, have undergone many changes in the past few months. Many are relying on these regulatory changes to help ease the current housing crisis. Three major changes projected to have a positive impact on the housing market and other financial institutions are: the new appraisal rules, the lowered capital surplus requirement, and the the temporary increase in loan limits.[7]

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Payday Lenders: Luring the Elderly into the Debt Trap

by Yuri Kim February 27 2008, 02:49
I. Introduction



During the past few months, the credit crunch has spread to all areas of the credit market, including: commercial real estate mortgages, student loans, and even auction-rate securities that are considered as safe as cash.[1] In attempt to prevent further loss, many lending industries have tightened lending standards to the extend that some consumers have found obtaining a loan or even a credit card more difficult.[2] At a time where borrowing money has become harder, people with bad credit and low income are flocking to lenders that are willing to fill their wallets with no questions asked. The “payday” loan industry is growing rapidly and is known for its quick and easy lending.[3] Although the quick and easy money may seem attractive, the outrageously high interest rates are leading payday loan users into an inescapable debt trap.[4] Aside from high interest rates, another critical problem surrounding the payday loan industry is its practice of targeting the elderly and other recipients of government benefits.[5] The elderly falling victim to these predatory lenders has only grown over the years, and this exploitation calls the need for regulation and strict enforcement.

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